IGAMBIT INC.
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 2014 and 2013
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, 2013, 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, 2014 are not
necessarily indicative of results that may be expected for the year ending December 31,
2014. 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, 2013 included in the Company’s Annual Report on Form 10-K, filed with
the Securities and Exchange Commission (“SEC”) on April 1, 2014.
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
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over the prior year’s revenue. These adjustments to the sales price were included in the
discontinued operations line of the statements of operations for the year ended December
31, 2011, the last year of payments.
The assets of the discontinued operations are presented in the balance sheets under the
captions “Assets from discontinued operations”. The underlying assets of the
discontinued operations consist of accounts receivable of $533,090 and $570,590 as of
March 31, 2014 and December 31, 2013, respectively, and of accrued interest receivable
of $78,980 as of March 31, 2014.
Accounts Receivable
Assets from discontinued operations, net includes accounts receivable which represents
50% of contingency payments earned for the previous quarters.The reserve for bad debts
of $250,000 charged to operations in 2010 was reversed in connection with the Summary
Judgment and Forbearance Agreement described in Note 11.Also included is accrued
interest receivable of $78,980 recorded for interest granted on the balance due from Digi-
data through March 31, 2014.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Gotham Innovation Lab, Inc. All intercompany accounts and
transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
For certain of the Company’s financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and amounts due to related parties, the carrying
amounts approximate fair value due to their short maturities. Additionally, there are no
assets or liabilities for which fair value is remeasured on a recurring basis.
Revenue Recognition
The Company’s revenues are derived primarily from the sale of products and services
rendered to real estate brokers. The Company recognizes revenues when the services or
products have been provided or delivered, the fees charged are fixed or determinable, the
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Company and its customers understand the specific nature and terms of the agreed upon
transactions, and collectability is reasonably assured.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs for the three
months ended March 31, 2014 and 2013 were $843 and $1,989, 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 $17,865 at March 31, 2014 and
December 31, 2013, respectively. There was no bad debt expense charged to operations
for the three months ended March 31, 2014 and 2013, 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$1,191 and $1,538 was charged to operations for the three
months ended March 31, 2014 and 2013, 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
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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
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,
2014
2013
Stock options
668,900
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1,268,900
Stock warrants
275,000
275,000
Total shares excluded from calculation
943,900
1,543,900
Note 5–Stock Based Compensation
Stock-based compensation expense for all stock-based award programs, including grants
of stock options and warrants, is recorded in accordance with "Compensation—Stock
Compensation", Topic 718 of the FASB ASC. Stock-based compensation expense, which
is calculated net of estimated forfeitures, is computed using the grant date fair-value and
amortized over the requisite service period for all stock awards that are expected to vest.
The grant date fair value for stock options and warrants is calculated using the Black-
Scholes option pricing model. Determining the fair value of options at the grant date
requires judgment, including estimating the expected term that stock options will be
outstanding prior to exercise, the associated volatility of the Company’s common stock,
expected dividends, and a risk-free interest rate. Stock-based compensation expense is
reported under general and administrative expenses in the accompanying consolidated
statements of operations.
Options
In 2006, the Company adopted the 2006Long-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 March31,
2014, 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 beenexercised and 692,962 have expired to date. There were296,900
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, 2014 and 2013 follows:
Weighted
Average
Weighted
Remaining
Weighted
Average
Average
Contractual
Options
Grant-DateFair
Life
Outstanding
Exercise Price
Value
(Years)
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the inception date of the Note. The calculated debt discount equaled the face of the note
and is being amortized over the term of the note. During the three months ended March
31, 2014, the Company amortized $34,500 of debt discount.
Note7 - Derivative Liability
Convertible Note
During the year ended December 31, 2013, the Company issued a convertible note (see
Note 6 above).
The note is convertible into common stock, at the holders’ option, at a discount to the
market price of the Company’s common stock. The Company has identified embedded
derivatives included in these notes as a result of certain anti-dilutive (reset) provisions,
related to certain conversion features. The accounting treatment of derivative financial
instruments requires that the Company record the fair value of the derivatives as of the
inception date of the convertible note and debt discount amortization to fair value as of
each subsequent reporting date. This resulted in a fair value of derivative liability of
$152,076 in which to the extent of the face value of convertible note was treated as debt
discount with the remainder treated as interest expense.
The fair value of the embedded derivatives at March 31, 2014 and December 31, 2013, in
the amount of $152,076, respectively, was determined using the Binomial Option Pricing
Model based on the following assumptions: (1) dividend yield of 0%; (2) expected
volatility of 243.00%, (3) weighted average risk-free interest rate of 0.09%, (4) expected
lives of 0.72 to 0.75 years, and (5) estimated fair value of the Company’s common stock
of $0.51 per share. The Company recorded interest expense from the excessof the
derivative liability over the convertible note of $48,576 during the year ended December
31, 2013.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted
a sequencing approach regarding the application of ASC 815-40 to its outstanding
convertible note. Pursuant to the sequencing approach, the Company evaluates its
contracts based upon earliest issuance date.
Note 8 - Income Taxes
Quarter Ended March 31,
2014 2013
Effective tax rate
0.0 % 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
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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 9 - Retirement Plan
Gotham as 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 three months ended March 31, 2014 and 2013
were $2,149 and$6,522, respectively.
Note 10 – Concentrations and Credit Risk
Sales and Accounts Receivable
Gotham had sales to one customer which accounted for approximately 65%of Gotham’s
total sales for the three months ended March 31, 2014.The customer accounted for
approximately 62%of accounts receivable at March 31, 2014.
Gotham had sales to two customers which accounted for approximately 44% and 17%,
respectively of Gotham’s total sales for the three months ended March 31, 2013. The two
customers accounted for approximately 41% and 3%, respectively of accounts receivable
at March 31, 2013.
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
March 31, 2014. As of December 31, 2013, the Company had no amounts of cash or cash
equivalents in financial institutions in excess of amounts insured by agencies of the U.S.
Government, the limit of which is $250,000. The Company did not have any interest-
bearing accounts at March 31, 2014 and December 31, 2013, respectively.
Note 11 - Fair Value Measurement
The Company adopted the provisions of Accounting Standards Codification subtopic
825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines
fair value as the price that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
When determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact and considers assumptions that market
participants would use when pricing the asset or liability, such as inherent risk, transfer
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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
retained earnings and no impact on the consolidated financial statements.
The carrying value of the Company’s cash and cash equivalents, accounts receivable,
accounts payable, short-term borrowings (including convertible note payable), and other
current assets and liabilities approximate fair value because of their short-term maturity.
As of March 31, 2014 and December 31, 2013, the Company did not have any items that
would be classified as level 1 or 2 disclosures.
The Company recognizes its derivative liabilities as level 3 and values its derivatives
using the methods discussed in Note 7. While the Company believes that its valuation
methods are appropriate and consistent with other market participants, it recognizes that
the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different estimate of fair value at the reporting
date. The primary assumptions that would significantly affect the fair values using the
methods discussed in Note 7 are that of volatility and market price of the underlying
common stock of the Company.
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As of March 31, 2014 and December 31, 2013, the Company did not have any derivative
instruments that were designated as hedges.
The derivative liability as of March 31, 2014 and December 31, 2013, in the amount of
$152,076, respectively has a level 3 classification. Further, there were no changes in fair
value of the Company’s level 3 financial liabilities during the three months ended March
31, 2014.
Fluctuations in the Company’s stock price are a primary driver for the changes in the
derivative valuations during each reporting period. As the stock price decreases for each
of the related derivative instruments, the value to the holder of the instrument generally
decreases, therefore decreasing the liability on the Company’s balance sheet.
Additionally, stock price volatility is one of the significant unobservable inputs used in
the fair value measurement of each of the Company’s derivative instruments. The
simulated fair value of these liabilities is sensitive to changes in the Company’s expected
volatility. A 10% change in pricing inputs and changes in volatilities and correlation
factors would currently not result in a material change in value for the level 3 financial
liability.
Note 12 - Related Party Transactions
Note Payable – Related Party
Gotham was provided a loan which was due on December 31, 2013 from an entity that
was previously a related party. The balance of $6,263 has not been paid and is
accordingly included in accounts payable at March 31, 2014.
Loan Payable - Stockholder
A stockholder/officer of the Company made cash advances totaling $3,600 on behalf of
the Company. The loan does not bear interest and will be repaid by December 31, 2014.
Note 13 – Commitments and Contingencies
Lease Commitment
On February 1, 2012, iGambit entered into a 5 year lease for new executive office space
in Smithtown, New York commencing on March 1, 2012 at a monthly rent of $1,500
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 $4,025. The license agreement may be
terminated upon 30 days notice.
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Total future minimum annual lease payments under the lease for the years ending
December 31 are as follows:
2014
$ 14,130
2015
19,080
2016
19,440
2017
3,240
$ 55,890
Rent expense of $17,456 and $20,750 was charged to operations for the three months
ended March 31, 2014 and 2013, 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.
Litigation
Digi-Data Corporation
In connection with the asset purchase agreement discussed in Note 2, the Company filed
a complaint against Digi-Data on October 1, 2012 for unpaid contingency payments
owed to the Company totaling $570,590 at December 31, 2013, exclusive of an
allowance for bad debts of $250,000.On or about December 3, 2012, Digi-Data filed its
Answer, Affirmative Defenses and Counterclaim against the Company. The
Counterclaim seeks damages against the Company for breach of the Agreement for the
alleged failure to indemnify Digi-Data for expenses related to pending litigation between
Verizon Communications, Inc. (one of Digi-Data's customers) and an unrelated third
party, Titanide Ventures, LLC, concerning alleged patent violations (hereinafter "Verizon
Patent Litigation").The Verizon Patent Litigation is a result of a "patent troll" whereby
Titanide seeks to extract settlement funds from alleged patent infringers without seeking
actual adjudication of its purported patent rights. The Company has advised Digi-Data of
what it believes is "prior act" related to the subject intellectual property that is at-issue in
the Verizon Patent Litigation, a possible defense to the claims by Titanide. A pre-trial
order was issued by the Court with detailed deadlines regarding among other items,
discovery cut-off and status report deadline date of April 29, 2013 and dispositive
motions deadline date of May 28, 2013. The Company propounded its initial discovery
upon Digi-Data, responses to which were due on or about March 8, 2013. On April 4,
2013, Digi-Data provided discovery to the 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
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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.
On December 13, 2013 the Court Granted Summary Judgment in iGambit’s favor
against Digi-Data in the amount of $570,590, plus interest at the Maryland legal rate of
6% per annum from August 31, 2012, and post judgment interest at the Federal statutory
Rate. Furthermore, Digi-Data’s Counterclaim was dismissed.
On February 24, 2014 the Company entered into a Forbearance Agreement with Digi-
Data pursuant to which Digi-Data shall pay to iGambit Six Hundred Forty-Six
Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($646,668.67) (the
“Settlement Amount”) in full satisfaction of the Judgment.
Initial Payment: Data shall pay the Settlement Amount by delivering Twenty-Five
Thousand Dollars and No Cents ($25,000.00) to iGambit upon the execution of this
Agreement (“Initial Payment”), and delivering the remaining Six Hundred Twenty-One
Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($621,668.67), plus
interest at a rate of 6% per annum (calculated at Actual/360) (the “Remaining Balance”)
to iGambit.
Monthly Payments: Commencing thirty (30) calendar days after the Effective Date, and
continuing for the three following months, Digi-Data shall make monthly payments of
Twelve Thousand, Five Hundred Dollars and No Cents ($12,500.00) to iGambit (each, an
“Initial Monthly Payment”). Thirty (30) calendar days after the fourth Initial Monthly
Payment is made, Digi-Data shall commence making a monthly payment of Twenty-Five
Thousand Dollars and No Cents ($25,000.00) to iGambit until the Remaining Balance is
paid in full (each, a “Subsequent Monthly Payment”). Such Initial Monthly Payments
and Subsequent Monthly Payments shall be credited to payment of the Settlement
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
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Line of Credit Payments: In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data in the amount of
Three Million Dollars and No Cents ($3,000,000.00) or greater it shall, within fifteen
(15) calendar days upon obtaining such funding, pay the full Remaining Balance to
iGambit (the “LOC Payment”). In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data for any amount less
than Three Million Dollars and No Cents ($3,000,000.00) that is secured by its
receivables it shall, within fifteen (15) calendar days of obtaining such funding, pay
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit (the “Receivables
Payment”). Such Receivables Payment shall be credited to payment of the Settlement
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
Digi-Data Sale: In the event of a Digi-Data Sale, iGambit shall be paid the Remaining
Balance at closing of any such Digi-Data Sale as provided in paragraph 2, below.
iGambit acknowledges that, if the Digi-Data Sale is a sale or sales of the Digi-Data
Assets, there may be insufficient proceeds to pay the Remaining Balance in full. If the
Digi-Data Sale is a sale or sales of the stock of Digi-Data and there are insufficient
proceeds at closing to pay the Remaining Balance in full, iGambit shall continue to
receive the Subsequent Monthly Payment until the full Remaining Balance is paid. On May 12, 2014, Digi-Data paid the full balance due on the judgment plus all accrued interest upon the sale of Digi-Data.
Financial Advisor Contract
Brooks, Houghton & Company, Inc. (BHC)
The Company had entered into a contract with BHC in which BHC would provide
financial advisory services in connection with the Company’s proposed business
combinations and related fund raising transactions. As part of that agreement BHC would
be entitled to a “Business Combination Fee” equal to three percent of the amount of the
company’s total proceeds and other consideration paid or to be paid for the assets
acquired, inclusive of equity or any debt issued; however the fee was to be no less than
$300,000. As a result of the IGX transaction, as described in Note 12, BHC initially felt
entitled to $300,000. The Company has taken a position that since the transaction has
been rescinded, that the fee is has not been earned and thus not to be paid.While the
ultimate outcome of this matter is not presently determinable, it is the opinion of
management that the resolution of any outstanding claim will not have a material adverse
effect on the financial position or results of operations of the Company.
Note 14 – Rescission of Purchase Agreement for Acquisition of IGX Global Inc. and
IGX Global UK Limited
On April 8, 2013, the Company and its wholly owned subsidiary, IGXGLOBAL, CORP.
entered into, and became obligated under, a transaction to rescind the Company’s
purchase agreement dated December 28, 2012 (the “Purchase Agreement”) with IGX
Global Inc.(“IGXUS”), IGX Global UK Limited (“IGXUK”) and Tomas Duffy
(“DUFFY”) the sole shareholder of both IGXUK and IGXUS.
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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.
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 for the year ended December 31, 2013. The balance due from
IGX was $229,779 and $239,779 at March 31, 2014 and December 31, 2013,
respectively.
Note 15 – Subsequent Events
In connection with the convertible note payable (see Note 6), on April 1, 2014, the note
holder elected to convert $10,000 principal amount of the Note into 90,909 shares of
common stock at a conversion price of $.11 per share. On April 24, 2014, the note holder
elected to convert an additional $12,000 principal amount of the Note into 112,888 shares
of common stock at a conversion price of $.1063 per share. The remaining principal
balance after the conversions is $81,500.
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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.
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.
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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 three months ended March 31, 2014
and 2013, respectively.
Assets from discontinued operations, net includes accounts receivable which
represents 50% of contingency payments earned for the previous quarters. The reserve
for bad debts of $250,000 charged to operations in 2010 was reversed in connection with
the Summary Judgment and Forbearance Agreement described in Note 11.Also included
is accrued interest receivable of $78,980 recorded for interest granted on the balance due
from Digi-data through March 31, 2014.
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
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depreciation are removed from the respective accounts and any gain or loss is credited or
charged to income.
Depreciation expense of $1,191 and $1,538 was charged to operations for the
three months ended March 31, 2014 and 2013, respectively.
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 our 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.
We apply the provisions of ASC Topic No. 740 for the financial statement
recognition, measurement and disclosure of uncertain tax positions recognized in the
Company’s financial statements. In accordance with this provision, tax positions must
meet a more-likely-than-not recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position.
Convertible Note
On September 16, 2013, we issued an 8% convertible note in the aggregate
principal amount of $103,500, convertible into shares of the Company’s common stock.
The Note, including accrued interest is due June 18, 2014 and is convertible any time
after 180 days at the option of the holder into shares of our common stock at 55% of the
average stock price of the lowest 3 closing bid prices during the 10 trading day period
ending on the latest complete trading day prior to the conversion date. Interest expense on
the convertible note of $2,405 was recorded for the year ended December 31, 2013.
Initially we anticipated repaying the obligation prior to the effective date of the
holder electing to convert. Since the effective date of the election to convert has passed
we recorded a debt discount related to identified embedded derivatives relating to
conversion features and a reset provisions (see Note 7) based fair values as of the
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inception date of the Note. The calculated debt discount equaled the face of the note and
is being amortized over the term of the note. During the year ended December 31, 2013,
we amortized $40,250 of debt discount.
Derivative Liability
During the year ended December 31, 2013, we issued a convertible note.
The note is convertible into common stock, at the holders’ option, at a discount to
the market price of our common stock. We identified embedded derivatives included in
these notes as a result of certain anti-dilutive (reset) provisions, related to certain
conversion features. The accounting treatment of derivative financial instruments requires
that we record the fair value of the derivatives as of the inception date of the convertible
note and debt discount amortization to fair value as of each subsequent reporting date.
This resulted in a fair value of derivative liability of $152,076 in which to the extent of
the face value of convertible note was treated as debt discount with the remainder treated
as interest expense.
The fair value of the embedded derivatives at December 31, 2013, in the amount
of $152,076, was determined using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%; (2) expected volatility of 243.00%, (3)
weighted average risk-free interest rate of 0.09%, (4) expected lives of 0.72 to 0.75 years,
and (5) estimated fair value of our common stock of $0.51 per share. We recorded
interest expense from the excess of the derivative liability over the convertible note of
$48,576 during the year ended December 31, 2013.
Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) we adopted a
sequencing approach regarding the application of ASC 815-40 to its outstanding
convertible note. Pursuant to the sequencing approach, we evaluate its contracts based
upon earliest issuance date.
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 March 31, 2014, we had $1,022,104 in total assets, compared to
$1,071,342 at December 31, 2013. The decrease in total assets was primarily due to the
decrease in accounts receivable and the decrease in assets from discontinued operations.
Liabilities.At March 31, 2014, our total liabilities were $627,495 compared to
$515,155 at December 31, 2013. Our total liabilities at March 31, 2014 consisted of
accounts payable of $397,069, a convertible note payable of $74,750, a derivative
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liability for certain provisions of the convertible note of $152,076 and a loan payable to a
stockholder of $3,600, whereas our total liabilities as of December 31, 2013 consisted of
accounts payable of $316,566, a convertible note payable of $40.250, a derivative
liability for certain provisions of the convertible note of $152,076 and a note to a related
party of $6,263. The increase in liabilities was primarily due to a derivative liability
recorded for the issuance of a convertible note payable to an unrelated party. We do not
have any long term liabilities.
Stockholders’ Equity. Our stockholders’ equity decreased to $394,609 at March
31, 2014 from $556,187 atDecember 31, 2013. This decrease was primarily due to an
increase in accumulated deficit from $(2,197,857) at December 31, 2013 to $(2,359,435)
at March 31, 2014, resulting from losses from operations of $(134,966) for the three
months ended March 31, 2014.
THREE MONTHS ENDED MARCH 31, 2014 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 2013
Revenues and Cost of Sales. We had $240,213 of revenue during the three
months ended March 31, 2014 compared to revenue of $362,821 during the three months
ended March 31, 2013. The decrease in revenue was due primarily to a decrease in
revenue generated by our Gotham subsidiary as result of transitioning out our customer
technical services division and focusing more on the real estate photography division.
The decrease in our cost of goods sold for the three months ended March 31, 2014 was
due to a decrease in the cost of the outsourced photography vendors utilized by Gotham.
In addition to Gotham’s operations, we had income from discontinued operations of
$0and $11,355for the three months ended March 31, 2013and March 31, 2014,
respectively.
General and AdministrativeExpenses. General and Administrative Expenses
decreased to 272,267 for the three months ended March 31, 2014 from $449,027 for the
three months ended March 31, 2013. For the three months ended March 31, 2014 our
General and Administrative Expenses consisted of corporate administrative expenses of
$74,221, legal and accounting fees of $36,336,health insurance expenses of $19,887,
directors and officers insurance expenses of $10,924 and payroll expenses of 130,899.
For the three months ended March 31, 2013 our General and Administrative Expenses
consisted of corporate administrative expenses of $95,990, legal and accounting fees of
$27,284, health insurance expenses of $22,088, commissions and finder’s fees of $25,000
and payroll expenses of $279,303.. The decreases from the three months ended March 31,
2013 to the three months ended March 31, 2014 relate primarily to: (i) a decrease in
payroll expenses; and (ii) 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.
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Other Income (Expense) and Taxes. There was no interest income and no
income tax benefit for the three months ended March 31, 2014and March 31, 2013,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at March 31,
2014, we had $28,607of cash and stockholders’ equity of $394,609 as compared to
$26,870 and $556,187 at December 31, 2013. At March 31, 2014 we had $1,022,104 in
total assets, compared to $1,071,342 at December 31, 2013.
Our primary capital requirements in 2014 are likely to arise from the expansion of
our Gotham operations, and, in the event we effectuate an acquisition, from: (i) the
amount of the purchase price payable in cash at closing, if any; (ii) professional fees
associated with the negotiation, structuring, and closing of the transaction; and (iii) post
closing costs. It is not possible to quantify those costs at this point in time, in that they
depend on Gotham’s business opportunities, the state of the overall economy, the relative
size of any target company we identify and the complexity of the related acquisition
transaction(s). We anticipate raising capital in the private markets to cover any such
costs, though there can be no guaranty we will be able to do so on terms we deem to be
acceptable. We do not have any plans at this point in time to obtain a line of credit or
other loan facility from a commercial bank.
While we believe in the viability of our strategy to improve Gotham’s sales volume
and to acquire companies, and in our ability to raise additional funds, there can be no
assurances that we will be able to fully effectuate our business plan.
We believe we will continue to increase our cash position and liquidity for the
foreseeable future. We believe we have enough capital to fund our present operations.
Cash Flow Activity
Net cash used by operating activities was $34,625 for the three months ended
March 31, 2014, compared to net cash used by operating activities of $58,310 for the
three months ended March 31, 2013. Our primary source of operating cash flows from
continuing operating activities for the three months ended March 31, 2014 was from our
Gotham subsidiary’s revenues of $240,213 and $362,821 for the three months ended
March 31, 2013. Additional contributing factors to the change were from a decrease in
accounts receivable of $32,581, an increase in prepaid expenses of $14,204, an increase
in accounts payable of $74,240 and a receivable due from the IGX rescission agreement
of $10,000. Net cash provided by discontinued operating activities was $37,500 for the
three months ended March 31, 2014 and cash provided by discontinued operating
activities was $0 for the three months ended March 31, 2013.The $37,500 cash provided
by discontinued operations for the three months ended March 31, 2014, was $37,500 in
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cash payments received from DDC which was offset by a decrease in accounts receivable
included in the Assets from Discontinued Operations.
Cash used in investing activities was $4,738 for the three months ended March 31,
2014 and Cash provided by investing activities was $2,850 for the three months ended
March 31, 2013. For the three months ended March 31, 2014the primary source of cash
provided by investing activities was $2,026from the purchase of property and equipment
and an increase in deposits of $2,712. For the three months ended March 31, 2013 the
source of cash provided by investing activities was from a decrease in deposits of $2,850.
Cash provided by financing activities was $3,600 for the three months ended March
31, 2014 compared to $0 for the three months ended March 31, 2013. The cash provided
by financing activities for the three months ended March 31, 2013was a loan of $3,600
from a stockholder.
Supplemental Cash Flow Activity
In the three months ended March 31, 2014 the company paid interest of $1,425
compared to interest of $638 in the three months ended March 31, 2013.
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 March 31, 2012. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of March 31, 2014.
Change in Internal Controls
During the quarter ended March 31, 2014, 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.
.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Digi-Data Corporation
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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 December 13, 2013 the Court Granted Summary Judgment in iGambit’s favor
against Digi-Data in the amount of $570,590, plus interest at the Maryland legal rate of
6% per annum from August 31, 2012, and post judgment interest at the Federal statutory
Rate. Furthermore, Digi-Data’s Counterclaim was dismissed.
On February 24, 2014 we entered into a Forbearance Agreement with Digi-Data
pursuant to which Digi-Data shall pay to iGambit Six Hundred Forty-Six Thousand, Six
Hundred Sixty-Eight Dollars and Sixty-Seven Cents ($646,668.67) (the “Settlement
Amount”) in full satisfaction of the Judgment based upon the following terms:
Initial Payment: Digi-Data shall pay the Settlement Amount by delivering
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit upon the
execution of this Agreement (“Initial Payment”), and delivering the remaining Six
Hundred Twenty-One Thousand, Six Hundred Sixty-Eight Dollars and Sixty-Seven Cents
($621,668.67), plus interest at a rate of 6% per annum (calculated at Actual/360) (the
“Remaining Balance”) to iGambit.
Monthly Payments: Commencing thirty (30) calendar days after the Effective
Date, and continuing for the three following months, Digi-Data shall make monthly
payments of Twelve Thousand, Five Hundred Dollars and No Cents ($12,500.00) to
iGambit (each, an “Initial Monthly Payment”). Thirty (30) calendar days after the fourth
Initial Monthly Payment is made, Digi-Data shall commence making a monthly payment
of Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit until the
Remaining Balance is paid in full (each, a “Subsequent Monthly Payment”). Such Initial
Monthly Payments and Subsequent Monthly Payments shall be credited to payment of
the Settlement Amount and Remaining Balance, with payment being first applied to
accrued and/or outstanding interests, then to principal.
Line of Credit Payments: In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data in the amount of
Three Million Dollars and No Cents ($3,000,000.00) or greater it shall, within fifteen
(15) calendar days upon obtaining such funding, pay the full Remaining Balance to
iGambit (the “LOC Payment”). In the event that Digi-Data obtains a new line of credit
subsequent to the Effective Date under terms acceptable to Digi-Data for any amount less
than Three Million Dollars and No Cents ($3,000,000.00) that is secured by its
receivables it shall, within fifteen (15) calendar days of obtaining such funding, pay
Twenty-Five Thousand Dollars and No Cents ($25,000.00) to iGambit (the “Receivables
Payment”). Such Receivables Payment shall be credited to payment of the Settlement
26
Amount and Remaining Balance, with payment being first applied to accrued and/or
outstanding interests, then to principal.
Digi-Data Sale: In the event of a Digi-Data Sale, iGambit shall be paid the
Remaining Balance at closing of any such Digi-Data Sale as provided in paragraph 2,
below. iGambit acknowledges that, if the Digi-Data Sale is a sale or sales of the Digi-
Data Assets, there may be insufficient proceeds to pay the Remaining Balance in full. If
the Digi-Data Sale is a sale or sales of the stock of Digi-Data and there are insufficient
proceeds at closing to pay the Remaining Balance in full, iGambit shall continue to
receive the Subsequent Monthly Payment until the full Remaining Balance is paid.
On May 12, 2014, Digi-Data paid the full balance due on the judgment plus all accrued interest upon the sale of Digi-Data.
Item 1A. Risk Factors.
Not required
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In connection with the convertible note payable (see Note 6), on April 1, 2014,
the note holder elected to convert $10,000 principal amount of the Note into 90,909
shares of common stock at a conversion price of $.11 per share. On April 24, 2014, the
note holder elected to convert an additional $12,000 principal amount of the Note into
112,888 shares of common stock at a conversion price of $.1063 per share. The
remaining principal balance after the conversions is $81,500.
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
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