IGAMBIT INC.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 2013 and 2012
Note 1 - Organization and Basis of Presentation
The consolidated financial statements presented are those of iGambit Inc., (the
“Company”) and its wholly-owned subsidiary, Gotham Innovation Lab Inc. (“Gotham”).
The Company was incorporated under the laws of the State of Delaware on April 13,
2000. The Company was originally incorporated as Compusations Inc. under the laws of
the State of New York on October 2, 1996. The Company changed its name to
BigVault.com Inc. upon changing its state of domicile on April 13, 2000. The Company
changed its name again to bigVault Storage Technologies Inc. on December 21, 2000
before changing to iGambit Inc. on April 5, 2006. Gotham was incorporated under the
laws of the state of New York on September 23, 2009. The Company is a holding
company which seeks out acquisitions of operating companies in technology markets.
Gotham is in the business of providing media technology services to real estate agents
and brokers in the New York metropolitan area.
Interim Financial Statements
The following (a) condensed consolidated balance sheet as of December 31, 2012, which
has been derived from audited financial statements, and (b) the unaudited condensed
consolidated interim financial statements of the Company have been prepared in
accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30, 2013 are
not necessarily indicative of results that may be expected for the year ending December
31, 2013. 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, 2012 included in the Company’s Annual Report on Form 10-K,
filed with the Securities and Exchange Commission (“SEC”) on June 20, 2013.
Note 2 – Discontinued Operations
Sale of Business
On February 28, 2006, the Company entered into an asset purchase agreement with Digi-
Data Corporation (“Digi-Data”), whereby Digi-Data acquired the Company’s assets and
its online digital vaulting business operations in exchange for $1,500,000, which was
deposited into an escrow account for payment of the Company’s outstanding liabilities.
In addition, as part of the sales agreement, the Company received payments from Digi-
Data based on 10% of the net vaulting revenue payable quarterly over five years. The
Company was also entitled to an additional 5% of the increase in net vaulting revenue
over the prior year’s revenue. These adjustments to the sales price were included in the
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discontinued operations line of the statements of operations for the year ended December
31, 2011, the last year of payments.
The assets of the discontinued operations are presented in the balance sheets under the
captions “Assets from discontinued operations”. The underlying assets of the
discontinued operations consist of accounts receivable of $320,590 as of September 30,
2013 and December 31, 2012, respectively.
Accounts Receivable
Accounts receivable includes 50% of contingency payments earned for the previous
quarters and are stated net of an allowance for bad debts of $250,000.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Gotham Innovation Lab, Inc. All intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and amounts due to related parties, the carrying
amounts approximate fair value due to their short maturities. Additionally, there are no
assets or liabilities for which fair value is remeasured on a recurring basis.
Revenue Recognition
The Company’s revenues are derived primarily from the sale of products and services
rendered to real estate brokers. Revenues are recognized upon delivery of the products or
services.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the nine
months ended September 30, 2013 and 2012 were $4,292 and $23,946, respectively.
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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. There was no bad debt expense charged to operations for the nine
months ended September 30, 2013 and 2012, respectively.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation for both financial reporting and
income tax purposes is computed using combinations of the straight line and accelerated
methods over the estimated lives of the respective assets. Computer equipment is
depreciated over 5 years and furniture and fixtures are depreciated over 7 years.
Maintenance and repairs are charged to expense when incurred. When property and
equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is credited or
charged to income.
Depreciation expense of $4,885 and $6,373 was charged to operations for the nine
months ended September 30, 2013 and 2012, respectively.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the
net assets acquired in a business combination, specifically the acquisition of Jekyll by the
Company’s subsidiary, Gotham. In accordance with ASC Topic No. 350 “Intangibles –
Goodwill and Other”, goodwill is not amortized, but instead is subject to an annual
assessment of impairment by applying a fair-value based test, and is reviewed more
frequently if current events and circumstances indicate a possible impairment. If
indicators of impairment are present and future cash flows are not expected to be
sufficient to recover the asset’s carrying amount, an impairment loss is charged to
expense in the period identified. A lack of projected future operating results from
Gotham’s operations may cause impairment. At December 31, 2012, the Company
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performed its annual impairment study and determined that present and future cash flows
were not expected to be sufficient to recover the carrying amount of goodwill, and the
goodwill was written off.
Stock-Based Compensation
The Company accounts for its stock-based awards granted under its employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as
Equity, which requires the measurement of compensation expense for all share-based
compensation granted to employees and non-employee directors at fair value on the date
of grant and recognition of compensation expense over the related service period for
awards expected to vest. The Company uses the Black-Scholes option pricing model to
estimate the fair value of its stock options and warrants. The Black-Scholes option
pricing model requires the input of highly subjective assumptions including the expected
stock price volatility of the Company’s common stock, the risk free interest rate at the
date of grant, the expected vesting term of the grant, expected dividends, and an
assumption related to forfeitures of such grants. Changes in these subjective input
assumptions can materially affect the fair value estimate of the Company’s stock options
and warrants.
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with ASC Topic No. 740, Income Taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse.
The Company applies the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements. In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position.
Recent Accounting Pronouncements
The Company has reviewed recently issued, but not yet adopted, accounting standards in
order to determine their effects, if any, on its results of operations, financial position or
cash flows. Based on that review, the Company believes that none of these
pronouncements will have a significant effect on its consolidated financial statements.
Note 4 - Earnings Per Common Share
The Company calculates net earnings (loss) per common share in accordance with ASC
260 “Earnings Per Share” (“ASC 260”). Basic and diluted net earnings (loss) per
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Note 7 - Income Taxes
Nine Months Ended September 30,
2013
2012
Effective tax rate
0.0 %
38.0 %
The decrease in the effective tax rate for the nine months ended September 30, 2013 is
due to the establishment of a full valuation allowance against the Company’s net deferred
tax assets which was initially recorded in the fourth quarter of 2012. 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 8 - Retirement Plan
Gotham has adopted the Gotham Innovation Lab, Inc. SIMPLE IRA Plan, which covers
substantially all employees. Participating employees may elect to contribute, on a tax-
deferred basis, a portion of their compensation in accordance with Section 408 (a) of the
Internal Revenue Code. The Company matches up to 3% of employee contributions. The
Company's contributions to the plan for the nine months ended September 30, 2013 and
2012 were $12,690 and $5,476, respectively.
Note 9 – Concentrations and Credit Risk
Sales and Accounts Receivable
Gotham had sales to two customers which accounted for approximately 44% and 25%,
respectively of Gotham’s total sales for the nine months ended September 30, 2013. The
two customers accounted for approximately 61% and 11%, respectively of accounts
receivable at September 30, 2013.
Gotham had sales to three customers which accounted for approximately 38%, 15% and
11%, respectively of Gotham’s total sales for the nine months ended September 30, 2012.
The three customers accounted for approximately 27%, 14% and 5% of accounts
receivable at September 30, 2012.
Cash
Cash is maintained at a major financial institution and, at times, balances may exceed
federally insured limits. The Company has never experienced any losses related to these
balances. All of the Company’s non-interest bearing cash balances were fully insured at
September 30, 2013. As of December 31, 2012, the Company had no amounts of cash or
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cash equivalents in financial institutions in excess of amounts insured by agencies of the
U.S. Government, the limit of which is $250,000. The Company did not have any
interest-bearing accounts at September 30, 2013 and December 31, 2012, respectively.
Note 10 - Related Party Transactions
Note Payable – Related Party
Gotham was provided a loan from an entity that is controlled by the officers of Gotham,
such amounts outstanding were $6,263 at September 30, 2013 and December 31, 2012,
respectively. The note bears interest at a rate of 5.5% and is due on December 31, 2013.
Note 11 – Commitments and Contingencies
Lease Commitment
On February 1, 2012, iGambit entered into a 5 year lease for new executive office space
in Smithtown, New York commencing on March 1, 2012 at a monthly rent of $1,500
with 2% annual increases.
Gotham has a month to month license agreement for office space that commenced on
August 2, 2012 at a monthly license fee of $4,900. The license agreement may be
terminated upon 30 days notice.
Total future minimum annual lease payments under the lease for the years ending
December 31 are as follows:
2013
$ 4,590
2014
18,720
2015
19,080
2016
19,440
2017
3,240
$ 65,070
Rent expense of $55,673 and $69,642 was charged to operations for the nine months
ended September 30, 2013 and 2012, 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.
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Litigation
Digi-Data Corporation
In connection with the asset purchase agreement discussed in Note 2, the Company filed
a complaint against Digi-Data on October 1, 2012 for unpaid contingency payments
owed to the Company totaling $570,590 at June 30, 2013, exclusive of an allowance for
bad debts of $250,000. On or about December 3, 2012, Digi-Data filed its Answer,
Affirmative Defenses and Counterclaim against the Company. The Counterclaim seeks
damages against the Company for breach of the Agreement for the alleged failure to
indemnify Digi-Data for expenses related to pending litigation between Verizon
Communications, Inc. (one of Digi-Data's customers) and an unrelated third party,
Titanide Ventures, LLC, concerning alleged patent violations (hereinafter "Verizon
Patent Litigation"). The Verizon Patent Litigation is a result of a "patent troll" whereby
Titanide seeks to extract settlement funds from alleged patent infringers without seeking
actual adjudication of its purported patent rights. The Company has advised Digi-Data of
what it believes is "prior act" related to the subject intellectual property that is at-issue in
the Verizon Patent Litigation, a possible defense to the claims by Titanide. A pre-trial
order was issued by the Court with detailed deadlines regarding among other items,
discovery cut-off and status report deadline date of April 29, 2013 and dispositive
motions deadline date of May 28, 2013. The Company propounded its initial discovery
upon Digi-Data, responses to which were due on or about March 8, 2013. On April 4,
2013, Digi-Data provided discovery to the Company. No depositions have been
scheduled as of the date of this report, nor has the Company received any information
from Digi-data regarding any specific quantified “damages” directly resulting from this
Order or the settlement agreement between Verizon and the Plaintiff. On April 4, 2013,
an Order of Dismissal in the Verizon Patent Litigation was filed. The Dismissal is with
prejudice with each party to bear its own costs and fees. On May 24, 2013, the Company
filed a Motion for Summary Judgment with the Court asking the Court to move in its
favor against DDC for the entire outstanding balance due along with attorney’s fees and
post and pre-judgment interest as applicable under Maryland Law. On June 11, 2013,
Digi-Data filed its Response to the Motion for Summary Judgment and, for the first time,
purported to liquidate certain alleged damages for which Digi-Data seeks a set-off against
the amounts admittedly owed by Digi-Data to iGambit and alludes the existence of
additional although not yet quantified damages. The Response relies entirely upon the
Affidavit of a Vice President of Digi-Data for its evidentiary support. Notwithstanding,
Digi-Data failed to produce documentary support for its alleged damages and to explain
why it failed to disclose such information during the discovery period or thereafter.
On July 9, 2013, the Company filed its Reply to Digi-Data’s Response and, thereby,
advised the Court of Digi-Data’s apparent litigation-by-ambush tactic such as
withholding allegations of damages until the end of discovery and attempting to use such
previously withheld information to defeat summary judgment, and the legal inadequacy
of same. Pursuant to the Maryland District Court’s Local Rules, Digi-Data is not
authorized to file a Surreply without Court order.
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Allied Airbus, Inc.
On November 1, 2011, the Company commenced collection proceedings against Allied
Airbus, Inc. (“Allied”) for nonpayment of various promissory notes totaling $434,512 at
December 31, 2011 in connection with a letter of intent the Company entered into to
acquire the assets and business of Allied, to which a definitive agreement could not be
reached. The claim against Allied included accrued interest at the rate of 6% per annum.
As a result of a settlement reached on June 12, 2012, the Company received payment of
the total balance, accrued interest and legal fees on June 27, 2012.
Financial Advisor Contract
Brooks, Houghton & Company, Inc. (BHC)
The Company had entered into a contract with BHC in which BHC would provide
financial advisory services in connection with the Company’s proposed business
combinations and related fund raising transactions. As part of that agreement BHC would
be entitled to a “Business Combination Fee” equal to three percent of the amount of the
company’s total proceeds and other consideration paid or to be paid for the assets
acquired, inclusive of equity or any debt issued; however the fee was to be no less than
$300,000. As a result of the IGX transaction, as described in Note 12, BHC initially felt
entitled to $300,000. The Company has taken a position that since the transaction has
been rescinded, that the fee is has not been earned and thus not to be paid. While the
ultimate outcome of this matter is not presently determinable, it is the opinion of
management that the resolution of any outstanding claim will not have a material adverse
effect on the financial position or results of operations of the Company.
Note 12 – Rescission of Purchase Agreement for Acquisition of IGX Global Inc. and
IGX Global UK Limited
On April 8, 2013, the Company and its wholly owned subsidiary, IGXGLOBAL, CORP.
entered into, and became obligated under, a transaction to rescind the Company’s
purchase agreement dated December 28, 2012 (the “Purchase Agreement”) with IGX
Global Inc.(“IGXUS”), IGX Global UK Limited (“IGXUK”) and Tomas Duffy
(“DUFFY”) the sole shareholder of both IGXUK and IGXUS.
Under the Purchase Agreement, the Company intended to purchase, as of December 31,
2012, substantially all of the assets of IGXUS and all of the issued and outstanding shares
of IGXUK and thereby the acquired business operated by IGXUS and IGXUK (the
“Acquired Business”). The original agreement called for a $500,000 payment at closing,
a $1,000,000 Promissory Note, assumption of certain liabilities of the IGXUS up to
$2,500,000 and 3.75 million shares of iGambit stock to be earned over a three year period
based upon certain revenue and earnings targets. The Company had arranged financing at
the original effective date of the purchase to pay the $500,000 payment and payoff
certain liabilities of IGXUS.
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On April 8, 2013, under the terms of a Rescission Agreement, the Company, IGXUS,
IGXUK and Duffy (IGX), agreed to unwind the Purchase Agreement in its entirety and to
fully restore each to the positions they were respectively prior to entering into the
Purchase Agreement. This included IGX obtaining financing to payoff the entire balance
of the financing the Company had obtained to fund the upfront payment and certain
liabilities at the original closing date; IGX also assumed and paid certain expenses related
to the purchase. Also as consideration for iGambit’s expenses and inconvenience, the
Company received $130,000 prior to the effective date of the rescission from IGX, and
upon the effective date of the rescission, an additional payment of $275,000, and will
receive an additional $350,000 payable in equal monthly installments over 18 months.
The consideration from IGX totaling $755,000 is reported as Other Income in the
Statements of Operations. The balance due from IGX was $272,223 at September 30,
2013.
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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.
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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.
Revenue Recognition
Our revenues from continuing operations consist of revenues derived primarily
from sales of products and services rendered to real estate brokers. Revenues are
recognized upon delivery of the products or services.
Contingency payment income was recognized quarterly from a percentage of
Digi-Data’s vaulting service revenue until February 28, 2011.
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. There
was no bad debt expense charged to operations for nine months ended September 30,
2013 and 2012, respectively.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation for both financial
reporting and income tax purposes is computed using combinations of the straight line
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and accelerated methods over the estimated lives of the respective assets. Computer
equipment is depreciated over 5 years and furniture and fixtures are depreciated over 7
years. Maintenance and repairs are charged to expense when incurred. When property
and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is credited or
charged to income.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value
of the net assets acquired in a business combination, specifically the acquisition of Jekyll
by the Company’s subsidiary, Gotham. In accordance with ASC Topic No. 350
“Intangibles – Goodwill and Other”), the goodwill is not amortized, but instead is subject
to an annual assessment of impairment by applying a fair-value based test, and is
reviewed more frequently if current events and circumstances indicate a possible
impairment. If indicators of impairment are present and future cash flows are not
expected to be sufficient to recover the asset’s carrying amount, an impairment loss is
charged to expense in the period identified. A lack of projected future operating results
from Gotham’s operations may cause impairment. At December 31, 2012, the Company
performed its annual impairment study and determined that present and future cash flows
were not expected to be sufficient to recover the carrying amount of goodwill, and the
goodwill was written off.
Stock-Based Compensation
We account for our stock-based awards granted under our employee
compensation plan in accordance with ASC Topic No. 718-20, Awards Classified as
Equity, which requires the measurement of compensation expense for all share-based
compensation granted to employees and non-employee directors at fair value on the date
of grant and recognition of compensation expense over the related service period for
awards expected to vest. We use the Black-Scholes option valuation model to estimate
the fair value of our stock options and warrants. The Black-Scholes option valuation
model requires the input of highly subjective assumptions including the expected stock
price volatility of the Company’s common stock. Changes in these subjective input
assumptions can materially affect the fair value estimate of our stock options and
warrants.
Income Taxes
We account for income taxes using the asset and liability method in accordance
with ASC Topic No. 740, Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and tax bases
of assets and liabilities, and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
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We apply the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements. In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position. Management has
determined that the Company has no significant uncertain tax positions requiring
recognition and measurement under ASC 740-10.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
iGambit is a company focused on the technology markets. Our sole operating
subsidiary, Gotham Innovation Lab, Inc., is in the business of providing media
technology services to the real estate industry. We are focused on expanding the
operations of Gotham by marketing the company to existing and potential new clients.
Assets. At September 30, 2013, we had $1,058,526 in total assets, compared to
$745,919 at December 31, 2012. The increase in total assets was primarily due to the
increase in accounts receivable and the receivable due from the IGX Rescission
Agreement.
Liabilities. At September 30, 2013, our total liabilities were $524,823 compared
to $440,221 at December 31, 2012. The increase in liabilities was primarily due to the
issuance of a convertible note payable to an unrelated party. We do not have any long
term liabilities.
Stockholders’ Equity. Our stockholders’ equity increased to $533,703 at
September 30, 2013 from $305,698 at December 31, 2012. This increase was primarily
due to a decrease in accumulated deficit from $(2,448,346) at December 31, 2012 to
$(2,220,341) at September 30, 2013, resulting from income from operations of $228,005
for the nine months ended September 30, 2013.
THREE MONTHS ENDED SEPTEMBER 30, 2013 AS COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2012
Revenues and Cost of Sales. We had $397,081 of revenue during the three
months ended September 30, 2013 compared to revenue of $416,429 during the three
months ended September 30, 2012. The decrease in revenue was due primarily to a
decrease in revenue generated by our Gotham subsidiary. The decrease in our cost of
goods sold for the three months ended September 30, 2013 was due to a decrease in the
cost of the outsourced photography vendors utilized by our Gotham subsidiary.
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General and Administrative Expenses. General and Administrative Expenses
decreased to $421,298 for the three months ended September 30, 2013 from $438,058 for
the three months ended September 30, 2012. For the three months ended September 30,
2013 our General and Administrative Expenses consisted of corporate administrative
expenses of $86,338, legal and accounting fees of $19,951, employee benefits expense of
$28,640, directors and officers insurance of $10,326 and payroll expenses of $276,043.
For the three months ended September 30, 2012 our General and Administrative
expenses consisted of corporate administrative expenses of $96,829, legal and accounting
fees of $35,573, payroll expenses of $279,068, employee benefits expense of $17,131
and directors and officers insurance of $9,457. The decreases from the three months
ended September 30, 2012 to the three months ended September 30, 2013 relate primarily
to a decrease in payroll expenses and a decrease in general and administrative costs
associated with the operation of our Gotham subsidiary. Costs associated with our
officers’ salaries and the operation of our Gotham subsidiary should remain level going
forward, subject to a material expansion in the business operations of Gotham which
would likely increase our corporate administrative expenses.
Other Income (Expense) and Taxes. There was no interest income for the three
months ended September 30, 2013 compared to interest income of $257 for the three
months ended September 30, 2012. There was no income tax benefit the three months
ended September 30, 2013 compared to $(70,218) for the three months ended September
30, 2012.
NINE MONTHS ENDED SEPTEMBER 30, 2013 AS COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2012
Revenues and Net Income. We had $1,171,621 of revenue during the nine months
ended September 30, 2013, as compared to $1,325,945 of revenue during the nine months
ended September 30, 2012. The decrease in revenue was due to decrease in revenue
generated by our acquired subsidiary Gotham. In addition, we had other income of
$755,000 for the nine months ended September 30, 2013, compared to $0 for the nine
months ended September 30, 2012. The decrease in our cost of goods sold for the nine
months ended September 30, 2013 was due to a decrease in the cost of the outsourced
photography vendors utilized by Gotham.
General and Administrative Expenses. General and Administrative Expenses
decreased to $1,299,224 for the nine months ended September 30, 2013 from $1,368,293
for the nine months ended September 30, 2012. For the nine months ended September
30, 2013 our General and Administrative Expenses consisted of corporate administrative
expenses of $225,092, employee benefits expense of $89,504, legal and accounting fees
of $102,655, directors and officers insurance expense of $30,038, finders and
commission fees related the IGX transaction of $30,175 and payroll expenses of
$821,760. For the nine months ended September 30, 2012 our General and
Administrative Expenses consisted of corporate administrative expenses of $358,604,
legal and accounting fees of $67,475, payroll expenses of $863,342, employee benefit
expenses of $51,820 and directors and officers’ insurance expense of $27,052. The
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decreases from the nine months ended September 30, 2012 to the nine months ended
September 30, 2013 relate primarily to a decrease in payroll and corporate administrative
expenses. Costs associated with our officers’ salaries and the operation of our Gotham
subsidiary should remain level going forward, subject to a material expansion in the
business operations of Gotham which would likely increase our corporate administrative
expenses.
Other Income (Expense) and Taxes. There was no interest income for the nine months
ended September 30, 2013 compared to interest income of $12,978 for the nine months
ended September 30, 2012. There was no income tax benefit the nine months ended
September 30, 2013 compared to $(254,691) for the nine ended September 30, 2012.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at September
30, 2013, we had $216,618 of cash and stockholders’ equity of $533,703 as compared to
$104,721 and $305,698 at December 31, 2012. At September 30, 2013 we had
$1,058,526 in total assets, compared to $745,919 at December 31, 2012.
Our primary capital requirements in 2013 are likely to arise from the expansion of
our Gotham operations, and, in the event we effectuate an acquisition, from: (i) the
amount of the purchase price payable in cash at closing, if any; (ii) professional fees
associated with the negotiation, structuring, and closing of the transaction; and (iii) post-
closing costs. It is not possible to quantify those costs at this point in time, in that they
depend on Gotham’s business opportunities, the state of the overall economy, the relative
size of any target company we identify and the complexity of the related acquisition
transaction(s). We anticipate raising capital in the private markets to cover any such
costs, though there can be no guaranty we will be able to do so on terms we deem to be
acceptable. We do not have any plans at this point in time to obtain a line of credit or
other loan facility from a commercial bank.
While we believe in the viability of our strategy to improve Gotham’s sales volume
and to acquire companies, and in our ability to raise additional funds, there can be no
assurances that we will be able to fully effectuate our business plan.
We believe we will continue to increase our cash position and liquidity for the
foreseeable future. We believe we have enough capital to fund our present operations.
Cash Flow Activity
Net cash provided by operating activities was $6,597 for the nine months ended
September 30, 2013, compared to net cash used by operating activities of $(263,227) for
the nine months ended September 30, 2012. Our primary source of operating cash flows
from continuing operating activities for the nine months ended September 30, 2013 was
from our Gotham subsidiary’s revenues of $1,171,621 and $1,325,945 for the nine months ended
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September 30, 2012. Additional contributing factors to the change were from a decrease in
prepaid expenses of $87,804, net income of $228,005 and no change in deferred income taxes.
Net cash provided by discontinued operating activities was $0 for the nine months ended
September 30, 2013 and $250,000 for the nine months ended September 30, 2012. Cash provided by discontinued operations for the nine months ended September 30, 2012 consists of $250,000 in cash payments received from DDC which was offset by a decrease in accounts receivable included in the Assets from Discontinued Operations.
Cash provided by investing activities was $1,800 for the nine months ended September 30,
2013 compared to $421,145 for the nine months ended September 30, 2012. For the nine months
ended September 30, 2013 the primary source of cash provided by investing activities was from a
decrease in deposits. For the nine months ended September 30, 2012 the source of cash provided
by investing activities was primarily from the repayment of notes receivable from Allied Airbus
Inc. of $434,512.
Cash provided by financing activities was $103,500 for the nine months ended September
30, 2013 compared to cash used in financing activities of $(19,127) for the nine months ended
September 30, 2012. The cash flows provided by financing activities for the nine months ended
September 30, 2013 was from the issuance of a Convertible note payable to at an unrelated party.
The cash flows used by financing activities for the nine months ended September 30, 2012 was
from a repayment of loans payable to a related party.
Supplemental Cash Flow Activity
In the nine months ended September 30, 2013 the company paid income taxes of $0 and
interest of $2,644 compared to income taxes of $4,125 and interest of $1,478 in the nine months
ended September 30, 2012.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not Required.
Item 4. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, as required by paragraph (b) of Rule 13a-15 and 15d-15 of
the Exchange Act under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as
of September 30, 2012. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of
September 30, 2013.
Change in Internal Controls
During the nine months ended September 30, 2013, there were no changes in our internal
control over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
On October 1, 2012, we filed a lawsuit in the United States District Court for the
District of Maryland, Baltimore Division, asserting claims against DigiData Corp.
("Defendant") for monetary damages arising from the Defendant's breach of contract
regarding that certain Asset Purchase Agreement dated February 26, 2006 among the
parties, and to enforce payment of outstanding contingency payments due to the
Company pursuant to said agreement.
On or about December 3, 2012, Digi-Data filed its Answer, Affirmative Defenses
and Counterclaim against iGambit. The Counterclaim seeks damages against iGambit for
breach of the Agreement for the alleged failure to indemnify Digi-Data for expenses
related to pending litigation between Verizon Communications, Inc. (one of Digi-Data's
customers) an unrelated third party, Titanide Ventures, LLC, concerning alleged patent
violations (hereinafter "Verizon Patent Litigation").
Upon information and belief, the Verizon Patent Litigation is a "patent troll"
whereby Titanide seeks to extract settlement funds from alleged patent infringers without
seeking actual adjudication of its purported patent rights. iGambit has advised Digi-Data
of what iGambit believes is "prior art" related to the subject intellectual properly that is
at-issue in the Verizon Patent Litigation, a possible defense to the claims by Titanide.
A pre-trial order was issued by the Court with detailed deadlines regarding among
other items, discovery cut-off and status report deadline date of April 29, 2013 and
dispositive motions deadline date of May 28, 2013. iGambit propounded its initial
discovery upon Digi-Data, responses to which were due on or about March 8, 2013.
On April 4, 2013, Digi-Data provided discovery to iGambit. To date, no
depositions have been scheduled. To date, we have not received any information from
DDC regarding any specific quantified “damages” directly resulting from this Order or
the settlement agreement between Verizon and the Plaintiff.
On April 4, 2013 an Order of Dismissal in the Verizon Patent Litigation was
filed. The Dismissal is with prejudice with each party to bear its own costs and fees.
On May 24, 2013 we filed a Motion for Summary Judgment with the Court
asking the Court to move in our favor against DDC for the entire outstanding balance due
along with attorney’s fees and post and pre-judgment interest as applicable under
Maryland Law.
One June 11, 2013, Digi-Data filed its Response to the Motion for Summary
Judgment and, for the first time, purported to liquidate certain alleged damages for which
Digi-Data seeks a set-off against the amounts admittedly owed by Digi-Data to iGambit
and alludes the existence of additional although not yet quantified damages. The
Response relies entirely upon the Affidavit of a Vice President of Digi-Data for its evidentiary
24
support. Notwithstanding, Digi-Data failed to produce documentary support for its alleged
damages and to explain why it failed to disclose such information during the discovery period or
thereafter.
On July 9, 2013, the Company filed its Reply to Digi-Data’s Response and, thereby,
advised the Court of Digi-Data’s apparent litigation-by-ambush tactic such as withholding
allegations of damages until the end of discovery and attempting to use such previously withheld
information to defeat summary judgment, and the legal inadequacy of same. Pursuant the
Maryland District Court’s Local Rules, Digi-Data is not authorized to file a Surreply without
Court order.
Item 1A. Risk Factors.
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Removed and Reserved.
Item 5. Other Information.
None
Item 6.
Exhibits
Exhibit No.
Description
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended.)
32.2 Certification of the Interim Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for the
purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended.)
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on
November 13, 2013.
iGambit Inc.
/s/ John Salerno
John Salerno
Chief Executive Officer
/s/ Elisa Luqman
Elisa Luqman
Chief Financial Officer
26
Exhibit Index
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2
Certification of the Interim Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (This exhibit shall not be deemed “filed” for
the purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended.)
32.2
Certification of the Interim Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. (This exhibit shall not be
deemed “filed” for the purposes of Section 18 of the Securities Exchange
Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended.)
27
