ITEM 1.
BUSINESS
HISTORY
We were incorporated in the State of Delaware under the name BigVault.com Inc. on April 13, 2000. On April 18, 2000, we merged with BigVault.com, Inc., a New York corporation with which we were affiliated. We survived the merger, and on December 21, 2000 changed our name to bigVAULT Storage Technologies, Inc. At that time we were in the business of providing remote, internet-based storage vaulting services and related ancillary services to end users and resellers (the “Vault Business”).
On February 28, 2006 we sold all of our assets to Digi-Data Corporation (“DDC”), an unrelated third party, pursuant to the terms of an Asset Purchase Agreement dated December 21, 2005 (the “APA”), a copy of which is filed herewith as an exhibit. As consideration for our transfer of assets under the APA, DDC paid certain of our liabilities and agreed to make certain quarterly and annual revenue sharing payments to us, as is further described below. Mr. Salerno and Ms. Luqman accepted employment with DDC in senior management positions post closing, and continued to work for DDC until February 2009. As of March 1, 2009 Mr. Salerno and Ms. Luqman returned to their full time management roles with the Company.
On April 5, 2006, we changed our name to iGambit, Inc.
On October 1, 2009, we acquired the assets of Jekyll Island Ventures, Inc., a New York corporation doing business as Gotham Photo Company (“Jekyll”) through our wholly owned subsidiary Gotham Innovation Lab, Inc., a New York corporation (“Gotham”). Pursuant to the terms of the Asset Purchase Agreement and Plan of Reorganization (“APAPR”), we (i) issued 500,000 shares of our common stock to Jekyll at closing; (ii) assumed $10,410.59 of Jekyll accounts payable relating to office rent and health insurance premiums; and (iii) issued Jekyll warrants to purchase 1,500,000 shares of our common stock, at $0.01 per share, subject to a 3 year vesting schedule and the attainment by Gotham of certain revenue targets during said 3 year period.
On December 2, 2009, we amended our Certificate of Incorporation increasing our authorized shares of common stock to 75 million shares.
OUR COMPANY
Introduction
We are a company focused on the technology markets. Presently we have one operating subsidiary in the business of providing media technology services to the real estate industry. At this point we have limited revenues consisting solely of revenues from the operation of our Gotham subsidiary ($850,222 during the year ended December 31, 2010) and the receipt of Quarterly Revenue Share Payments and Annual Increase Payments from DDC. Payments earned from DDC totaled $1,898,435 during the year ended December 31, 2010, of which $1,724,838 was for the four quarters of 2010 Contingency Payments and $173,597 was accrued revenue for the 5% year to year Contingency Payment for the year ended December 31, 2010. Payments earned from DDC totaled $1,730,637 during the year ended December 31, 2009, of which $1,364,538 was for the four quarters of 2009 Contingency Payments and $339,099 was accrued revenue for the 5% year to year Contingency Payment for the year ended December 31, 2009. During the third quarter 2010 DDC disclosed to Management that their largest customer Verizon Online re-negotiated their contract with DDC and the pricing model has changed. As a result of the new pricing model the DDC Vault Revenue will decrease from the levels that have occurred in recent months and return closer to revenue levels seen in 2009. Subsequently the DDC Contingency Payments will also return to revenue levels closer to 2009. We expect that the payments from DDC, which we will receive through February 2011, will continue to grow, but at a lesser pace, based upon the past three month’s revenue reporting from DDC and the expansion of DDC’s business. We are also focused on acquiring or partnering with additional technology companies.
Our primary focus is the acquisition of additional technology companies. We believe that the background of our management and of our Board of Directors in the technology markets is a valuable resource that makes us a desirable business partner to the companies that we are seeking to acquire. When we acquire a company, we work to assume an active role in the development and growth of the company, providing both strategic guidance and operational support. We provide strategic guidance to our partner companies relating to, among other things, market positioning, business model and product development, strategic capital expenditures, mergers and acquisitions and exit opportunities. Additionally, we provide operational support to help our partner companies manage day-to-day business and operational issues and implement best practices in the areas of finance, sales and marketing, business development, human resources and legal services. Once a company joins our partner company network, our collective expertise is leveraged to help position that company to produce high-margin, recurring and predictable earnings and generate long-term value for our stockholders.
Our current intention is to fund the purchase price of acquisitions through a combination of the issuance of our common stock at closing and the issuance of common stock purchase warrants that would become exercisable only in the event certain earn-out conditions are satisfied by the acquired company. In addition to acquiring entire companies, we would also consider entering into joint ventures and acquiring less than 100 percent of a target company.
Our Strategy to Grow the Company
General
We have an overall corporate business plan as a holding company to seek out and acquire operating companies. Phase one of our strategy is near completion. We have established new corporate headquarters and a website, expanded our board to include 3 outside independent directors, set up quarterly board meetings, engaged a sophisticated full service law firm, engaged an PCOAB auditing firm, engaged an investment banking firm as advisors to assist in the analysis of target acquisitions, and become an SEC reporting company. In addition, we have identified and acquired our first target company, Jekyll Island Ventures Inc., as a result of a 10 year relationship with Jekyll’s management. While completing phase one of our strategy we are working on a daily basis towards phase two of our strategy, identifying further acquisitions.
Sources of Target Businesses
We anticipate that target business candidates will be brought to our attention from various sources, including our management team, investment bankers, venture capital funds, private equity funds, leveraged buyout funds, management buyout funds, consulting firms and other members of the financial community who will become aware that we are seeking business partners via public relations and marketing efforts, direct contact by management or other similar efforts, who may present solicited or unsolicited proposals. Any finder or broker would only be paid a fee upon the completion of a business combination. While we do not presently anticipate engaging the services of professional firms that specialize in acquisitions on any formal basis, we may decide to engage such firms in the future or we may be approached on an unsolicited basis. Our officers and directors, as well as their affiliates, may also bring to our attention target business candidates that they become aware of through their business contacts. While our officers and directors make no commitment as to the amount of time they will spend trying to identify or investigate potential target businesses, they believe that the various relationships they have developed over their careers together with their direct inquiry, will generate a number of potential target businesses that will warrant further investigation. In no event will we pay any of our existing officers, directors, special advisors or stockholders or any entity with which they are affiliated any finder’s fee or other compensation for services rendered to us prior to or in connection with the completion of a business combination. In addition, none of our officers, directors, special advisors or existing stockholders will receive any finder’s fee, consulting fees or any similar fees from any person or entity in connection with any business combination involving us other than any compensation or fees that may be received for any services provided following such business combination.
Selecting Acquisition Targets
Our management has virtually unrestricted flexibility in identifying prospective target business and diligently reviews all of the proposals we receive.
The criteria we look for in a potential acquisition include the following:
Company Characteristics
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Established Company with proven track record
o
Company with history of strong operating and financial performance, or
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Company undergoing a turnaround that demonstrates strong prospects for future growth
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Strong Cash Flow Characteristics.
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Cash flow neutral or positive,
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Predictable recurring revenue stream,
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High gross margins over 60%, and
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Low working capital and capital expenditure needs
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Strong Competitive Industry Position
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Leading or niche market position, and/or
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Strong channel relationships that promote barriers to entry
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Strong Management Team
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Experienced, proven track record in delivering revenue and ability to execute, or
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A management team that can be complemented with our contacts and team
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Diversified Customer and Supplier base
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Proprietary products or marketing position
Industry Characteristics
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Non-cyclical
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Services Consumer or niche market
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Fragmented with potential for consolidation or growth
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Emerging markets
Industries of Interest
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Real Estate Services
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Hospitality Services
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Health and Medical records management and billing systems
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Internet
o
Social Networks
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Media Distribution
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User Experience
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Online
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Handheld devices
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Voice interaction
Investment Criteria
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Sales Volumes: $500 thousand to $30 million
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Cash Flow: Neutral or positive
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Structure: Controlled ownership. Closely held private company
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Geography: North America, Asia
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Investment size: $1 million to $5 Million
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Involvement: Board oversight
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Controlling Interest: Acquire 100% of controlling interest in target
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Marketing:
o
Target captures a particular segment of the market
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Target has a focused strategic marketing plan.
These criteria are not intended to be exhaustive. Any evaluation relating to the merits of a particular business combination will be based, to the extent relevant, on the above factors as well as other considerations deemed relevant by our management in effecting a business combination consistent with our business objective.
Diligence Process
Upon receipt of a business plan, the procedure is for management to review the business plan and determine if it satisfies the Company’s acquisition criteria, and whether the business plan should be rejected or pursued further. If the plan satisfies the requirements, then Management meets with the target’s management to determine if there is a synergy that can work and to explore the business plan in greater detail. Generally this occurs over several meetings and can take some time. Depending on the nature of the business, management may enlist certain technical of industry consultants to meet with the target and provide feedback and analysis. Management will also review the target’s financials. If the analysis suggests the target should be explored further Management will present the opportunity to the BOD for approval to pursue the opportunity further. One or two outside directors may meet with the target to make an independent assessment. If the opportunity is approved for further exploration management will discuss potential purchase structure with target’s management to be sure that a meeting of the minds exists for a potential deal. At this point management will request that our investment banking advisors give their opinion of the industry, the market and potential financing options of the deal. Often, the investment bankers will meet with target’s management. The investment banker’s feedback is presented to the board and, if positive, the Board analyzes the proposed financing structure, discusses effects of a transaction on the Company as they relate to taxes, capitalization, stock value etc., engaging the necessary outside consultants. If all appears positive a letter of intent is negotiated and executed, additional diligence is conducted, and definitive transaction documents are negotiated and executed.
Evaluation of the Target’s Management
We would condition any acquisition on the commitment of management of the target business to remain in place post closing. Following a business combination, we may seek to recruit additional managers to supplement the incumbent management of the target business. We cannot assure you that we will have the ability to recruit additional managers, or that any such additional managers will have the requisite skills, knowledge or experience necessary to enhance the incumbent management. Although we intend to closely scrutinize the management of a prospective target business when evaluating the desirability of effecting a business combination, we cannot assure you that our assessment of the target business’s management will prove to be correct.
Competition
In identifying, evaluating and selecting a target business, we may encounter intense competition from other entities having a business objective similar to ours. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than us and our financial resources will be relatively limited when contrasted with those of many of these competitors, which may limit our ability to compete in acquiring certain target businesses. This inherent competitive limitation gives others an advantage in pursuing the acquisition of a target business.
Companies Currently Under Review
We are constantly in the process of reviewing potential target companies. Currently, we are not under contract to acquire any companies, but we are actively engaged in discussions with four potential acquisition candidates.
Our Partner Company - Gotham Photo Company
Products and Services
Gotham’s business is directed at providing media technology services to the real estate community. The range of media services includes the exclusive Gotham EXPO Full Screen Experience. Gotham also provides website development services, sales office technology and data interchange services for many of the real estate firms in New York City.
When it comes to selling real estate every broker or seller listing has to have pictures. Utilizing the latest technology Gotham’s EXPO product provides a full screen listing experience. It allows brokers and sellers to present their listing in the largest format possible while giving the viewer control of the show. EXPO integrates images, photos, floor plans, agent and key listing details in an engaging format that immerses the viewer. Currently, Gotham is capable of integrating up to 16 images into a full screen presentation for any listing.
EXPO is available for all NYC realtors and will be made available nationwide within the coming months. Currently, approximately 19% of our clients utilize EXPO, of which 24% do so on a per unit basis, 48% do so as an add-on to photography services, and 28% do so on a subscription basis.
All systems are built on accessible web platforms that integrate quickly and seamlessly into the agent’s workflow. EXPO is available on a per unit basis, as an add-on to photography services, or on a subscription basis. We price the product on a per-unit basis at $50 per unit, and offer subscription rates ranging from $400 per month to $2500 per month depending on the average yearly listing volume of the subscriber. EXPO was a key factor in our securing of a semi-exclusive media services agreement with Prudential Douglas Elliman.
In addition to natural expansion into the areas surrounding NYC, Gotham is actively working to expand by further providing services to large accounts that exist in both Manhattan and targeted secondary markets, and through the selective hiring of one-off service providers who are currently operating in other markets.
Competitive Comparison
Gotham competes with others in the industry by focusing on user interaction, technology and delivery. Gotham maintains strict standards of photography and a roster of accomplished photographers who we engage in between their premium assignments such as fashion shoots, architectural projects, etc.
In addition to superior media, in the opinion of management, Gotham’s technology tools set us apart from our competition. For example, our expo product offering utilizes the pre-generation of a multitude of media sets to deliver images sized perfectly for the users screen, wasting no bandwidth or file size, thereby enabling us to maintain the speed and efficiency of the product at an optimal level. In the opinion of management, a majority of our competitors either don’t seem to employ similar measures in their full screen product offerings or do so, on a more limited basis.
Future Products and Services
Future offerings will include enhanced products that focus on social media interaction, mobile applications and tools for realtors, as well as multi touch augmented reality technologies for presentations, etc. Gotham will continue to expand its media offerings, integrating with and adopting technologies as they become available.
Customers
Gotham currently has less than 996 client accounts, including accounts ranging from single agent accounts to large “master accounts” with large firms such as Prudential Douglas Elliman and Halstead. Taking these and other master accounts into consideration, Gotham does business with over 3,000 New York City real estate agents. The following five customers constituted approximately 67% of the Company’s sales in 2010: EGR International, Inc. - 7% of sales; Cambridge Who’s Who - approximately 17% of sales; Prudential Douglas Elliman Real Estate, LLC - approximately 20% of sales; Halstead Property Development Marketing LLC - approximately 7% of sales; and Christies Great Estates, Inc. - approximately 16% of sales. The loss of any of the foregoing client accounts could have a material adverse affect on the company’s financial condition.
Expansion Strategy and Implementation Summary
Gotham’s objective is to be a market leader in offering EXPO, Virtual Tours, and e-Brochures, type services to the real estate industry. Gotham is currently providing services to a number of realtors and brokers in the New York Metropolitan area including, but not limited to, Prudential Douglas Elliman (“PDE”), Corcoran and others. We plan to increase our marketing and client base in the NYC area and expand to other major cities and markets such as Boston, Philadelphia, Washington DC, Chicago, etc. Within 3 years we expect to be offering our services to over 250 US metropolitan statistical areas.
Management meets with Gotham’s management on a bi-weekly basis and has refocused Gotham’s business model towards a recurring revenue model. The strategy is multi-fold. First to leverage the subsidiary’s strong development reputation in the New York real estate market by expanding its client base, thus creating a stronger niche in this market. This involves some transition away from non-real estate development activities. Management is assisting Gotham in its transition by creating budgets, helping to reassign personnel, and aiding in the creation of targeted marketing material. Second to the strategy, is to complete the next version EXPO product which includes the EXPO Media Manager system. Gotham is working in partnership with PDE in the design and implementation of the launce of this new version. Management is assisting in the launch planning process and often attends meeting with PDE and Gotham’s management. Upon the successful launch of the PDE Expo Media Management system the third phase of the strategy is to expand and offer the EXPO Media Manage system to the other PDE offices through New York State and other real estate firms. Management has already set up and participated in meetings with Gotham at Prudential Westchester, PDE in the Hamptons, New York, and Coach Realty. The fourth phase after successful penetration throughout New York State is to identify other US cities’ real estate markets to target. Management has been evaluating the various markets and has had discussions with Condo-Domain and Fore3. In addition, when analyzing other acquisitions we take into consideration companies that can complement the subsidiary’s products and services or expedite the expansion into other cities.
Simultaneous to the EXPO strategy, management has assisted in successfully negotiating a revenue share agreement for Gotham with RealPlus LLC for All Access NYC (AANYC). All Access NYC is a "Virtual Office Website", or VOW. A VOW allows real estate firms to market listings that are represented exclusively by other real estate companies within a given geographic or listing system controlled area. This is all done within the brand of the VOW real estate firm, allowing the firm to better service buyers by showing them ALL listings in one place, as opposed to the current model in NYC, which has buyers reaching out to un-regulated 3rd parties (street easy, NY Times, craigslist), and waiting on antiquated forms of listing delivery. NYC has a need for VOW services since there is no MLS service in Manhattan. Currently, no REBNY controlled firm has the right to display or advertise another firm’s listings, leaving buyers in a place where they have to fend for themselves on unregulated sites, or wait on the agents they are dealing with to delivery listings to them. The partnership with RealPlus LLC is significant because RealPlus LLC is one of only a handful of companies in NYC pulling and centralizing the listing data from the various agents in NYC. RealPlus provides the listing data and Access to clients.
DDC Revenue Share Payments and Annual Increase Payments
In connection with the sale of our assets to DDC in February 2006, DDC agreed to make certain ongoing payments to us, which payments have constituted a material amount of our revenues over the last several periods. Specifically, DDC agreed to make quarterly payments to us, for a period of 5 years, in the amount equal to 10% of the Vault Net Revenues received by DDC through its operation of the Vault Business (the “Quarterly Revenue Share Payments”). “Vault Net Revenues” is defined in the APA as the gross revenue of DDC actually received by DDC that is solely and directly attributable to the Vault Business, to the extent that such revenue is derived from the provision of vault services and/or vault appliances which use the Big Vault core technology, less the sum of (i) any discount given by DDC in compensation for early payment, (ii) returns, allowances, quantity discounts and credits, (iii) any accounting reserve amount, as determined in accordance with GAAP, and (iv) shipping and mailing costs, duties, taxes and insurance. In addition, DDC agreed to make an annual payment to us after the 2nd, 3rd, 4th, and 5th anniversaries of the closing of the transaction, in an amount equal to 5% of any increase in the annual Vault Net Revenue over the immediately prior year’s Vault Net Revenue (the “Annual Increase Payments”, and together with the Quarterly Revenue Share Payments the “Revenue Share Payments”). A schedule of the Quarterly Revenue Share Payments and Annual Increase Payments received to date is set forth below. The final Annual Increase Payment and the final Quarterly Revenue Share Payment are each due on or before May 31, 2011.
* $180,000 paid on 6/21/2010, and $182,202 paid on 7/26/2010.
** Partial payments received. $100,000 paid on 9/29/2010 $75,000 paid on 10/27/2010, $75,000 paid on 11/29/2010, $25,000 paid on 12/24/2010, $25,000 paid on 12/28/2010, $50,000 paid on 1/31/2011, $50,000 paid on 2/24/2011 and $50,000 paid on 3/28/2011.
*** Not yet received.
Since the sale to DDC, our management has worked to increase the Quarterly Revenue Share Payments and has actively sought to leverage its business experience and knowledge through other opportunities in the technology market. Management engages in monthly status updates with DDC to ensure that online business operations are running smoothly and to guarantee the continuity of the Quarterly Revenue Share Payments. Management has leveraged its contacts at certain high profile target prospects, such as Cablevision Systems, AARP, USAA, Comcast and others, in an effort to encourage them to utilize DDC’s online business and to offer it to their customers. In large part as a result of the foregoing efforts, Cablevision is a contracted online customer of DDC and others continue their analysis of the opportunity.
Employees
We presently have 11 total employees, all of which are full-time.
SEC FILINGS
We are classified as a “Smaller Reporting Company” for the purpose of filings with the Securities and Exchange Commission. Certain Form 10-K report disclosures previously included that are not required under the disclosure requirements of a smaller reporting company have been omitted in this report.
Interested parties may access our public filing free of charge on the SEC’s EDGAR website located at www.sec.gov.
OUR CORPORATE INFORMATION
Our principal offices are located at 1600 Calebs Path Extension, Suite 114, Hauppauge, New York, 11788. Our telephone number is (631) 780-7055 and our fax number is (631) 656-1055. We currently operate two corporate websites that can be found at www.igambit.com and www.gothamphotocompany.com (the information on the foregoing websites does not form a part of this report).
ITEM 1A.
ITEM 1A.
RISK FACTORS
Not Required.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Required.
ITEM 2.
ITEM 2.
PROPERTIES
Our principal executive office is located in Hauppauge, New York, in an executive center, where we lease approximately 300 square feet of office space. Monthly lease payments are approximately $2,600 and the lease term is month to month.
Our Gotham operations are located in New York, New York, where we lease approximately 3,000 square feet of office space. Monthly lease payments are approximately $5,000 and the lease renews annually on October 31.
Our leased properties are suitable for their respective uses and are, in general, adequate for our present needs. Our properties are subject to various federal, state, and local statutes and ordinances regulating their operations. Management does not believe that compliance with such statutes and ordinances will materially affect our business, financial condition, or results of operations.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4.
(REMOVED AND RESERVED)
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Effective March 19, 2011 the Company’s common stock is quoted on the Over the Counter Bulletin Board, a service maintained by the Financial Industry Regulatory Authority, under the ticker symbol “IGMB”. To date there has not been an established public trading market in the Company’s common stock.
HOLDERS
As of March 31, 2011, there are 23,954,056 shares of our common stock outstanding, held of record by 149 persons. We have 2,335,000 common stock warrants outstanding and 2,468,900 common stock options outstanding.
As of March 31, 2011, approximately 21,737,018 shares of our common stock are eligible to be sold under Rule 144.
DIVIDENDS
We have never declared or paid any dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The Board of Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations.
EQUITY COMPENSATION PLAN INFORMATION
We currently have one equity compensation plan outstanding which is our 2006 Long Term Incentive Plan. The Plan was adopted by our directors and approved by our stockholders on March 26, 2006. The Plan permits the award of incentive stock options, non-qualified stock options, stock appreciation rights, and stock grants. We have reserved 10 million shares for issuance under the Plan, plus an annual increase equal to 10% of the number of outstanding shares of our common stock on the first day of each year, but in no event more than 15 million shares of common stock in the aggregate. As of December 31, 2010, there were 6,522,114 shares available for issuance under the Plan.
In addition to our 2006 Long Term Incentive Plan, we have issued and outstanding compensatory warrants to three consultants entitling the holders to purchase a total of 2,310,000 shares of our common stock at an average exercise price of $0.75 per share. Warrants to purchase 60,000 shares of common stock vested upon issuance, have an exercise price of $0.01 per share, and expire December 31, 2010. Warrants to purchase 2,000,000 shares of common stock vest in four equal installments on the date of issuance (May 26, 2009) and on each of the following three anniversaries of the date of issuance, have exercise prices ranging from $0.50 per share to $1.15 per share, and expire on May 26, 2019. Warrants to purchase 250,000 shares of common stock vest 100,000 shares on issuance (June 1, 2009), and 50,000 shares on each of the following three anniversaries of the date of issuance, have exercise prices ranging from $0.50 per share to $1.15 per share, and expire on June 1, 2019. The issuance of the compensatory warrants was not submitted to our shareholders for their approval.
The following table describes our equity compensation plans as of December 31, 2010:
(1)
Equity compensation plans approved by our stockholders consist of our 2006 Long Term Incentive Plan.
RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, we have sold the following securities in transactions not registered under the Securities Act of 1933, as amended (the “Securities Act”):
In February 2008, we issued a total of 135,000 shares of our common stock to Charles Antonucci, Pamela LaPerch, Alyson LaPerch, and Kelli LaPerch upon their exercise of outstanding common stock purchase warrants, with an exercise price of $0.50 per share. The Company received $67,500 as a result of the exercises. At the time of the exercise the foregoing individuals were able to evaluate the risks and merits of the investment, had access to information regarding the Company, were given the opportunity to ask the Company’s management questions about the Company, and were able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
In February 2008, we issued a warrant to purchase 60,000 shares of our common stock to Barry Sharf, at an exercise price of $0.01 per share. The warrants were issued in consideration of services rendered, and were valued at $5,400 using the Black-Scholes pricing model. Mr. Sharf exercised the warrant with respect to all 60,000 shares, immediately upon issuance, and paid the Company $600. At the time of the issuances the foregoing individual was able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
In May 2008, Mehul Mehta, Marian Rasa, Muhammad Luqman, Troy Thomas, Hui Zhi Zhang and Guy Sayers exercised a total of 750,000 stock options, with an exercise price of $0.01 per share. The options were exercised cashlessly, and, based on a $0.10 per share value for the Company’s common stock at the time of exercise, the foregoing individuals received a total of 735,000 shares of our common stock. At the time of the exercise the foregoing individuals were able to evaluate the risks and merits of the investment, had access to information regarding the Company, were given the opportunity to ask the Company’s management questions about the Company, and were able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
In October 2008, Mr. John L. Salerno exercised a total of 53,100 stock options, with an exercise price of $0.01 per share. The options were exercised cashlessly, and, based on a $0.10 per share value for the Company’s common stock at the time of exercise, the following individuals, as designees of Mr. John L. Salerno, received a total of 52,038 shares of our common stock: John Eberhard, Michal Hart, Patrick J. Ryan and Gerard P. Ryan. At the time of the exercise the foregoing individuals were able to evaluate the risks and merits of the investment, had access to information regarding the Company, were given the opportunity to ask the Company’s management questions about the Company, and were able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
In August 2009, Mehul Mehta, Marian Rasa, Muhammad Luqman, Troy Thomas, Hui Zhi Zhang and Guy Sayers exercised a total of 750,000 stock options, with an exercise price of $0.01 per share. The options were exercised cashlessly, and, based on a $0.10 per share value for the Company’s common stock at the time of exercise, the foregoing individuals received a total of 735,000 shares of our common stock. At the time of the exercise the foregoing individuals were able to evaluate the risks and merits of the investment, had access to information regarding the Company, were given the opportunity to ask the Company’s management questions about the Company, and were able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
On May 26, 2009, we issued warrants to purchase 2,000,000 shares of our common stock to Newbridge Securities pursuant to the terms of a consulting agreement between the Company and Newbridge. The warrants were issued as part consideration for the services rendered by Newbridge Securities under the consulting agreement, and were valued at $1,759 using the Black-Scholes pricing model. 500,000 warrants, at an exercise price of $0.50 per share, vested upon issuance; 500,000 warrants, at an exercise price of $0.65 per share, vest on the 1 year anniversary of issuance; 500,000 warrants, at an exercise price of $0.80 per share, vest on the 2 year anniversary of issuance; and 500,000 warrants, at an exercise price of $1.15 per share, vest on the 3 year anniversary of issuance. At the time of the issuance Newbridge Securities was able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
On November 30, 2010 the company executed a Settlement and Release with Newbridge cancelling the consulting agreement between the Company and Newbridge.
On December 12, 2010, we issued warrants to purchase 2,000,000 shares of our common stock to Douglas K. Aguililla pursuant to the terms of a consulting agreement between the Company and Aguililla. The warrants were issued as part consideration for the services rendered by Douglas K. Aguililla under the consulting agreement, and were valued at $1,759 using the Black-Scholes pricing model. 500,000 warrants, at an exercise price of $0.50 per share, vested upon issuance; 500,000 warrants, at an exercise price of $0.65 per share, vest on the 1 year anniversary of issuance; 500,000 warrants, at an exercise price of $0.80 per share, vest on the 2 year anniversary of issuance; and 500,000 warrants, at an exercise price of $1.15 per share, vest on the 3 year anniversary of issuance. At the time of the issuance Douglas K. Aguililla was able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
On June 1, 2009, we issued warrants to purchase 250,000 shares of our common stock to Roetzel & Andress pursuant to the terms of an engagement letter between the Company and Roetzel. The warrants were issued as partial consideration for the services rendered by Roetzel & Andress under the engagement letter, and were valued at $270 using the Black-Scholes pricing model. 100,000 warrants, at an exercise price of $0.50 per share, vested upon issuance; 50,000 warrants, at an exercise price of $0.65 per share, vest on the 1 year anniversary of issuance; 50,000 warrants, at an exercise price of $0.85 per share, vest on the 2 year anniversary of issuance; and 50,000 warrants, at an exercise price of $1.15 per share, vest on the 3 year anniversary of issuance. At the time of the issuance Roetzel & Andress was able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
On October 1, 2009, we issued 500,000 shares of our common stock and options to purchase 1,500,000 shares of our common stock, at $0.01 per share, to Jekyll in connection with our acquisition of the assets of Jekyll. The Company determined the fair value of the stock to be $0.10 per share, and the fair value of the options at issuance to be $0.09 per share, based on the Black-Scholes pricing model. At the time of the issuances Jekyll was able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
On July 21, 2010, we issued options to purchase 672,000 shares of our common stock, at $0.01 per share, to our three outside Directors, George Dempster (113,000), James Charles (59,000) and John Waters (500,000). The options were issued in connection with services rendered. The Company determined the fair value of the stock to be $.06 per share, and the fair value of the options at issuance to be $.0087 per share, based on the Black-Scholes pricing model. At the time of the issuances the each of the three Directors, Dempster, Charles and Waters, were able to evaluate the risks and merits of the investment, had access to information regarding the Company, was given the opportunity to ask the Company’s management questions about the Company, and was able to bear the economic risk of the investment. The securities were issued in reliance on Section 4(2) of the Securities Act, and contained a standard restrictive legend.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not Required
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Fair Value of Financial Instruments
For certain of the our 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.
Revenue Recognition
Contingency payment income is recognized quarterly from a percentage of Digi-Data’s vaulting service revenue, and is included in discontinued operations. Our revenues from continuing operations consist of revenues primarily from sales of products and services rendered to real estate brokers. Revenues are recognized upon delivery of the products or services.
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 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 current 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.
Accounts receivable includes 50% of contingency payments earned for the previous quarter. A reserve for bad debt of $250,000 and $65,000 was charged to operations for the years ended December 31, 2010 and 2009 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. During the year ended December 31, 2010, the Company purchased computer equipment totaling $5,688. Computer equipment is depreciated over 5 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 $1,496 and $596 was charged to operations for the years ended December 31, 2010 and 2009, respectively.
Goodwill
Goodwill represents the fair market value of the common shares issued and common stock options granted by the Company for 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 being amortized, but instead will be subject to an annual assessment of impairment by applying a fair-value based test, and will be reviewed more frequently if current events and circumstances indicate a possible impairment. An impairment loss is charged to expense in the period identified. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover the assets 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. The company has performed an impairment study and has determined that there is no indication that present and future cash flows are not expected to be sufficient to recover the carrying amount of goodwill. Based on the Company's evaluation of goodwill, no impairment was recorded during the year ended December 31, 2010.
Stock-Based Compensation
We account for our stock-based 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.
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’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. During the year ended December 31, 2010 and December 31, 2009 Gotham produced approximately $850,222 and $173,011of revenue, respectively. We are focused on expanding the operations of Gotham by marketing the company to existing and potential new clients. Currently Gotham has several proposals outstanding to franchisees of one of its main customers, as well as other potential new clients. In addition to Gotham’s operations, we receive Quarterly Revenue Share Payments and Annual Increase Payments from Digi-Data Corporation, which are payable pursuant to the terms of an agreement under which we sold certain assets to DDC in 2006. Contingency Payments earned from DDC under the agreement totaled $1,898,435 during the year ended December 31, 2010, of which $1,724,838 was for the four quarters of 2010 Contingency Payments and $173,597 was accrued revenue for the 5% year to year Contingency Payment for the year ended December 31, 2010. We earned $1,730,637 under our arrangement with DDC during the year ended December 31, 2009, of which $1,364,538 was for the four quarters Contingency Payments and $339,099 was accrued revenue for the 5% year to year Contingency Payment for the year ended December 31, 2010, which we anticipate will be paid in 2011. We expect that the payments from DDC, which we will receive through February 2011, will continue to grow based upon the expansion of DDC’s business. We are also focused on acquiring or partnering with additional technology companies.
Year Ended December 31, 2010 as Compared to Year Ended December 31, 2009
Assets. At December 31, 2010, we had $2,218,175 in current assets and $2,336,788 in total assets, compared to $1,655,228 in current assets and $1,920,634 in total assets as of December 31, 2009. The increase in total assets was primarily due to the increase in Accounts Receivable from DDC Contingency Payments and Notes Receivable. The Company loaned $420,000 to Allied Airbus Inc. The Company also had prepaid income taxes of $326,000.
Liabilities. At December 31, 2010, we had total liabilities of $351,617 compared to $99,432 at December 31, 2009. Our total liabilities at December 31, 2010 consisted of accounts payable of $­­­­­­­­­­­­­326,227, and a note to a related party of $25,390, whereas our total liabilities as of December 31, 2009 consisted primarily of payables in the amount of $96,928.
Stockholders’ Equity (Deficit). Our Stockholders’ Equity increased to $1,985,171 at December 31, 2010 from $1,821,202 at December 31, 2009. This increase was primarily due to increase in net income.
Revenue and Net Income. We had revenue of $874,774 for the year ended December 31, 2010, compared to revenue of $173,011 for the year ended December 31, 2009. The increase in revenue was due to revenue generated by our acquired subsidiary Gotham. In addition, we had income from discontinued operations (net of taxes and reserve for bad debt) of $997,303 for the year ended December 31, 2010, compared to $1,047,035 for the year ended December 31, 2009. Our net income was $305,865 for the year ended December 31, 2010, compared to $605,288 for the year ended December 31, 2009. The increase in revenue was due to having a full year of Gotham revenue in 2010 compared to three months of revenue in 2009 as well as our Gotham subsidiary marketing strategy beginning to take a effect. . We continue to receive 10% of Digi-Data’s gross Vault sales and 5% of the year to year increase. This agreement ends on February 28, 2011. The decrease in net income was due primarily to the increase in general and administrative expense and Gotham net loss of $375,073 and a $250,000 reserve for bad debt. .
General and Administrative Expenses. General and Administrative Expenses increased to $1,829,401 for the year ended December 31, 2010 from $809,542 for the year ended December 31, 2009. For the year ended December 31, 2010 our General and Administrative Expenses consisted of corporate administrative expenses of $483,005, legal and accounting fees of $199,924, consulting fees of $27,738, payroll expenses of $1,111,931, and bad debt expenses of $6,803 related to doubtful accounts receivable of our Gotham subsidiary. For the year ended December 31, 2009 our General and Administrative Expenses consisted of corporate administrative expenses of $235,382, legal and accounting fees of $119,015, consulting fees of $114,000, payroll expenses of $276,145, and bad debt expenses of $65,000 related to doubtful accounts receivable of our Gotham subsidiary. The increases from the year ended December 31, 2009 to the year ended December 31, 2010 relate primarily to: (i) salaries for officers hired by the Company in 2010; (ii) professional costs associated with the acquisition of certain assets of Jekyll Island Ventures, Inc., and the preparation and filing of a registration statement with the SEC; and (iii) 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. Further, whereas the additional professional fees associated with the acquisition of Jekyll Island Ventures, Inc. will not carry over into future periods unless we engage in other acquisitions, we do anticipate an increase in legal and accounting fees in 2011 now that we are a reporting company under the Securities Exchange Act of 1934.
LIQUIDITY AND CAPITAL RESOURCES
General
As reflected in the accompanying consolidated financial statements, at December 31, 2010, we had $465,549 cash and stockholders’ equity of $1,985,171. At December 31, 2009, we had $857,074 cash and stockholders’ equity of $1,821,202.
Our primary capital requirements in 2011 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 $1,637,145 for the year ended December 31, 2010, compared to net cash used in operating activities of $981,869 for the year ended December 31, 2009. Our primary source of operating cash flow for the year ended December 31, 2010 was from net income of $, compared to net income of $605,288 for the year ended December 31, 2009. The primary source of net income is income from discontinued operations totaling $1,148,553 for the year ended December 31, 2010 (net of taxes of $749.882) compared to income from discontinued operations of $1,047,035 for the year ended December 31, 2009 (net of taxes of $683,602). Income from discontinued operations is comprised solely of income from DDC contingency payments, which is classified as cash provided by discontinued investing activities. We receive Quarterly Revenue Share Payments and Annual Increase Payments from Digi-Data Corporation, which are payable pursuant to the terms of an agreement under which we sold certain assets to DDC in 2006. Revenue earned from DDC under the agreement totaled $1.898.435 in the year ended December 31, 2010, and $1,730,637 in the year ended December 31, 2009. Of the $1,898,435 revenue earned from DDC in the year ended December 31, 2010 we received $1,549,437 in cash payments from DDC of which $414,851 was for the fourth quarter 2009 Contingency Payment (paid in February 2010), $472,384 was for the first quarter 2010 Contingency Payment (paid in May 2010), $362,202 was for the March 2009- February 2010 Annual Increase Contingency Payment (paid in June and July 2010), $300,000 was for the second quarter 2010 Contingency Payment (paid in September, October, November and December 2010), Additionally $348,998 was offset by an increase in the accounts receivable included in Assets from Discontinued Operations. Of the $1,730,637 revenue earned from DDC in the year ended December 31, 2009 we received $1,445,015 in cash payments from DDC of which $246,006 was for the fourth quarter 2008 Contingency Payment (paid in March 2009), $286,977 was for the first quarter 2009 Contingency Payment (paid in June 2009), $222,322 was for the March 2008- February 2009 Annual Increase Contingency Payment (paid in June 2009), $325,514 was for the second quarter 2009 Contingency Payment (paid in September 2009), $364,196 was for the third quarter Contingency Payment (paid in December 2009), Additionally $250,000 was charged to Reserve to Bad Debt and $35,622 was offset by an increase in the accounts receivable included in Assets from Discontinued Operations. We expect that the payments from DDC, which we will receive through February 2011, will continue to grow based upon the expansion of DDC’s business. Also included in discontinued investing activities is cash provided by DDC contingency payment escrow of $150,985 for the year ended December 31, 2010 and, cash provided by DDC contingency payment escrow of $14,742 for the year ended December 31, 2009 resulting in net cash provided by discontinued investing activities of $1,700,422 and $1,459,757 for the years ended December 31, 2010 and 2009, respectively.
In addition to the DDC Contingency Payments, we receive revenue from the operation of our Gotham subsidiary, which operates the business we acquired from Jekyll Island Ventures, Inc. in 2009. We anticipate that Gotham’s business and revenues will continue to grow throughout 2011. Gotham is not currently cash flow positive. Gotham generated revenues of $850,222 and incurred a net loss of $375,073 in 2010 compared to revenues of $166,661 and a net loss of $124,954 in the last three months of 2009
Cash provided by investing activities was $1,222,734 for the year ended December 31, 2010 compared to $1,655,538 for the year ended December 31, 2009. The primary source of cash provided by investing activities is the DDC Contingency Payments classified as cash flows from discontinued investing activities.
Cash provided by financing activities was $22,886 for the year ended December 31, 2010 compared to cash used by financing activities of $139,034 for the year ended December 31, 2009. The cash used by financing activities in the year ended December 31, 2009 was from repayment of the prepaid contingency balance to DDC. The cash provided by financing activities in the year ended December 31, 2010 was primarily from loans received from a related party.
Supplemental Cash Flow Activity
In the year ended December 31, 2010 the company paid income taxes of $389,357 compared to $4,698 for the year ended December 31, 2009. The increase in taxes was due to the utilization of the net operating loss carryovers in 2009. The company also paid interest of $1,767 during the year ended December 31, 2010 compared to interest of $1,189 during the year ended December 31, 2009.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance-sheet arrangements.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements required by this Item 8 are included in this Report beginning on page, as follows:
None.
ITEM 9A.
ITEM 9A.
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 December 31, 2010. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010
Management’s Annual Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal accounting and financial officer), and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, we concluded that, as of December 31, 2010, our internal control over financial reporting was effective.
Change in Internal Controls
During the the fourth quarter of December 31, 2010, we engaged the services of an outside financial consultant to assist in overseeing our financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors manages our business and affairs. Under our Articles of Incorporation and Bylaws, the Board will consist of not less than one nor more than seven directors. Currently, our Board consists of five directors.
The names, ages, positions and dates appointed of our current directors and executive officers are set forth below.
John Salerno, Chief Executive Officer, President, Chairman of the Board, and Director. Mr. Salerno is a seasoned hands-on executive with over 40 years of experience with public and private computer software and service companies. Mr. Salerno built a multi-million dollar business from a start up, servicing the real estate industry. The business was sold in 1984 and Mr. Salerno provided consulting services to a wide range of clients through 1995. In 1996, along with his daughter and a small group of private accredited investors, he co-founded the Company. Mr. Salerno was President and CEO of the Company from April 1, 2000 until February 28, 2006. After signing contracts with Verizon and Cablevision, the Company sold its assets in 2006 to Digi-Data Corporation. From March 1, 2006 thru February 2009 Mr. Salerno served as President of the Vault Services Division of Digi-Data Corporation. Upon the expiration of his 3 year contract the Vault Services Division was at a revenue run rate of $12 million annually. As of March 1, 2009, Mr. Salerno returned to his full time management roll at the Company. Mr. Salerno is an ex - US Marine Corps, Crypto/ Communications Officer and has a BS in Mathematics from Fordham University. Mr. Salerno is Elisa Luqman’s father.
Mr. Salerno was nominated as a Director because if his intimate knowledge of the Company and its history as a founder. Additionally, Mr. Salerno’s mathematical and technical background as a data center manager early in his professional career and later as a software developer offers the board hand’s on technical experience in both operations and software analysis. Mr. Salerno utilized his experience and contacts to secure the major customers driving the sales that generate the Company’s payment stream from DDC. Moreover, Mr. Salerno adds value to Gotham through his 40 plus years serving the New York Real Estate industry. He is thoroughly familiar with the unique workings of the New York real estate industry and has many contacts within that community that are a benefit to Gotham.
Elisa Luqman, Chief Financial Officer, Executive Vice President, General Counsel, and Director. Ms. Luqman is a computer literate attorney with over 18 years experience with intellectual property and computer software. Prior to co-founding the Company, Ms. Luqman was president of University Software Corp., a software development company focused on a wide range of student educational and intellectual applications. Ms. Luqman was Chief Operating Officer of the Company, from April 1, 2000 until February 28, 2006. From March 1, 2006 through February 28, 2009 Ms. Luqman was employed as Chief Operating Officer of the Vault Services Division of Digi-Data Corporation, the company that acquired the Company’s assets in 2006, and subsequently during her tenure with Digi-Data Corporation she became the in-house general counsel for the entire corporation. In that capacity she was responsible for acquisitions, mergers, patents, and employee contracts, and worked very closely with Digi-Data’s outside counsel firms, DLA-Piper, the Law Offices of Sandra T. Carr and the patent firm of Jordan and Hamburg. As of March 1, 2009, Ms. Luqman rejoined the Company in her current capacities. Ms Luqman received a BA degree in Marketing, a JD in Law, and a MBA Degree in Finance from Hofstra University. Ms. Luqman is a member of the bar in New York and New Jersey. Ms. Luqman is John Salerno’s daughter.
Ms. Luqman was nominated as a Director because of her intimate knowledge of the Company and its history as a founder. Additionally, as an attorney, Ms. Luqman’s legal background enables her to provide counsel to the Company. Her experience as general counsel to the Company provides her with a unique insight into the Company’s contracts with customers and vendors, intellectual property assets and issues, financing transactions and shareholder transactions. Moreover, having been through the merger and acquisition process on both sides of the table, Ms. Luqman offers the Company in-house guidance throughout the acquisition process. That combined with Ms. Luqman’s MBA in Finance aids in providing the Board with more efficient analysis of input from outside auditors and legal advisors.
James J. Charles, Director. Mr. Charles is a high profile financial executive with a broad base of experience with firms ranging in size from $24MM to $180MM in annual revenue. He worked closely with management and Boards of Directors on matters ranging from mergers and acquisitions to stock restructurings and spin-offs. Mr. Charles has been a self employed Certified Public Accountant from 1999 to present. From 1994 to 1999 Mr. Charles was the chief financial officer of Interpharm Holdings, Inc. Interpharm Holdings, Inc., through its subsidiary, Interpharm, Inc., engages in the development, manufacture, and marketing of generic prescription strength and over-the-counter pharmaceuticals in the United States. It also focuses on the development of products in the areas of female hormone, scheduled narcotic, soft gelatin capsule, oral liquid, products coming off patent, and other products. From 1966 to 1994 Mr. Charles was a Senior Managing Partner with Ernst & Young. Mr. Charles’ education includes studies and management programs at Harvard University and Williams College. Mr. Charles received his BBA in Accounting at Manhattan College.
Mr. Charles was nominated as a Director because of his financial expertise. He has been involved in the practice of public accounting for over forty years. During his tenure as a Senior Managing Partner at Ernst & Young he spent considerable years analyzing potential acquisition targets for corporate clients and has particular experience and skills on matter such as mergers and acquisitions, stock restructuring and spin-offs. He has also been a Chief Financial Officer of a public company.
George G. Dempster, Director. Mr. Dempster was Commissioner of Commerce for the State of New York from 1979 to 1983. He served as the Chairman of the Finance Committee for Hofstra University for 25 years from 1976 through 2001, and is currently Chairman Emeritus of the Board of Trustees. Mr. Dempster has been the Chairman of Tran-Leisure Corp. since 1983, and was its CEO from 1983-2002. Tran -Leisure Corp is a diversified holding company with interests ranging from helicopter services to manufacturing. From 1969 to 1973 Mr. Dempster served as the CEO of Cybernetics, a major computer software developer. Mr. Dempster served as a marketing manager for IBM from 1961 to 1968. Mr. Dempster has a BA in business administration from Hofstra University.
Mr. Dempster was nominated as a Director because of his strong administrative, financial and economic background. Having served as Commissioner of Commerce for the State of New York for 4 years and on the Board of Hofstra University for over 25 years, Mr. Dempster provides the Company with extensive experience in commerce and administration in both the private and public sectors. Moreover, during his tenure at Hofstra University Mr. Dempster was intimately involved in several financing transactions to maintain the University in a solvent and profitable manner. Additionally, having been CEO of a diversified holding company, Mr. Dempster is thoroughly familiar with the merger and acquisition process. He offers years of experience analyzing business, their models and economics, and identifying the appropriate financing vehicles.
John Waters, Director. Mr. Waters was a Senior Partner at Arthur Andersen from 1967 to 2001, with exceptional leadership skills in mergers and acquisitions (particularly reverse mergers) and 1933 Act fillings with the Securities and Exchange Commission. Mr. Waters was involved in raising over $60 million for a special purpose acquisition company (SPAC) Avantair Inc., and was that company’s Chief Financial Officer from February 2006 to April 2008. Mr. Waters serves on the audit committee and on the board of Authentidate Holding Corp. (ADAT) since July 2004. ADAT is a worldwide provider of solutions that enhance the secure exchange of health information and related administrative and clinical workflows. In the United States ADAT offers its patent pending content authentication technology in the form of the United States Postal Service® Electronic Postmark® (EPM).He was previously the Chief Administrative Officer of that company from July 2004 to December 31, 2005. Mr. Waters has been a self employed Consultant from December 31, 2005 to present. He also serves on the board of two privately held companies. My Waters is a Certified Public Accountant and has a BBA degree from Iona College.
Mr. Waters was nominated as a Director because of his financial expertise. He was involved in the practice of public accounting for thirty-four years. During his tenure as a Senior Partner at Arthur Andersen he spent considerable years analyzing potential acquisition targets for corporate clients. He has also been a Chief Financial Officer of a public company, and has served as a Director of another public company for over six years and presently serves on the audit committee of that company.
COMMITTEES OF THE BOARD
The Board has established an Audit Committee and a Compensation Committee. The Board does not currently have a Nominating Committee. The work typically conducted by a Nominating Committee is conducted by the full Board.
Audit Committee
The Audit Committee presently consists of Messrs. Charles, Waters, and Dempster, with Mr. Charles serving as chairman. Our Board has determined that Mr. Charles qualifies as an “audit committee financial expert” as defined under the federal securities laws. The Audit Committee is responsible for monitoring and reviewing our financial statements and internal controls over financial reporting. In addition, they recommend the selection of the independent auditors and consult with management and our independent auditors prior to the presentation of financial statements to stockholders and the filing of our forms 10-Q and 10-K. The Company has not adopted a charter. When a charter is adopted, it will be posted on our web site.
Compensation Committee
The Compensation Committee presently consists of Messrs. Charles, Waters, and Dempster, with Mr. Waters serving as chairman. The Compensation Committee is responsible for reviewing and recommending to the Board the compensation and over-all benefits of our executive officers, including administering the Company’s 2006 Long Term Incentive Plan. The Compensation Committee may, but is not required to, consult with outside compensation consultants. The Compensation Committee has not adopted a charter. When a charter is adopted, it will be posted on our web site.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) the Company is not aware of any person that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the year ended December 31, 2010.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics is attached as an exhibit to this report. A copy of the Code of Ethics is available on the Company’s website at www.igambit.com. Any amendments to, or waivers from, the Code of Ethics will be disclosed on the Company’s website at www.igambit.com.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Summary Compensation Table
Effective September 1, 2009 Mr. Salerno and Ms. Luqman became full time employees of the Company with annual salaries of $225,000 and $200,000 respectively. Prior to September 1, 2009 Mr. Salerno and Ms. Luqman were employees of Digi-Data Corp.
During 2006 and 2007, Mr. Salerno exercised options to acquire 1,800,000 common shares of the Company and during 2007 Ms. Luqman exercised options to acquire 1,500,000 common shares of the Company.
Prior to December 31, 2006, the Company was indebted to officers, John Salerno and Elisa Luqman for unpaid compensation accrued totaling $350,000. John Salerno received advances against the deferred compensation in the amounts of $74,281.25 and $44,000 as of December 31, 2007, and December 31, 2008, respectively. Elisa Luqman received advances against the deferred compensation in the amounts of $5,000 and $75,000 as of December 31, 2007, and December 31, 2008, respectively. The advances against deferred compensation totaling $79,281 and $198,281 as of December 31, 2007, and December 31, 2008, respectively were in the form of a note payable to the Company and were collateralized with the officers common shares issued and outstanding of 5,470,000 shares each. During the nine months ended September 30, 2009, the Company paid the total amount of unpaid compensation accrued to the officers, who subsequently repaid the advances received.
(1)
Includes $5,766 in health insurance premiums and $4,069 in life insurance premiums.
(2)
Does not include $200,000 in deferred compensation that was earned prior to December 31, 2006, and paid during 2009.
(3)
Includes $5,766 in health insurance premiums and $4,069 in life insurance premiums.
(4)
Includes $11,068 in health and dental insurance premiums.
(5)
Does not include $150,000 in deferred compensation that was earned prior to December 31, 2006, and paid during 2009.
Employment Arrangements with Named Executive Officers
The Company does not currently have any employment agreements with it executive officers.
Compensation of the Board of Directors
The following table sets forth the compensation received by our directors, for their service as directors, during the year ended December 31, 2010.
Name
Fees earned or paid in cash ($)
Stock awards ($)
Option awards ($)
Non-equity incentive plan compensation ($)
Nonqualified deferred compensation earnings
($)
All other compensation ($)
Total
($)
John Salerno (1)
-
-
-
-
-
-
Elisa Luqman (1)
-
-
-
-
-
-
James J. Charles
$4,000
-
-
-
-
-
$4,000
George G. Dempster
$4,000
-
-
-
-
-
$4,000
John Waters
$4,000
-
-
-
-
-
$4,000
(1) These individuals serve as executive officers of the Company, and do not receive any compensation for the services they provide as directors of the Company.
Members of our Board receive $1,000 per quarter for their service to the Company.
Director George Dempster was engaged as an Independent Consultant to Digi-Data Corporation from the period June 1, 2006 through April 30, 2009. The Company agreed to share equally in the fees paid to Mr. George Dempster. From the period of February 2006 through February 2009 George Dempster was paid $179,448 directly from Digi-Data. The $89,724 representing the Company’s 50% share of that expense was deducted by Digi-Data from amounts Digi-Data owed to the Company. The foregoing is not included in the Director Compensation Table set forth above.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us, as of March 31, 2011, relating to the beneficial ownership of shares of common stock by: (i) each person who is known by us to be the beneficial owner of more than 5% of the Company’s outstanding common stock; (ii) each director; (iii) each executive officer; and (iv) all executive officers and directors as a group. Under securities laws, a person is considered to be the beneficial owner of securities owned by him (or certain persons whose ownership is attributed to him) or securities that can be acquired by him within 60 days, including upon the exercise of options, warrants or convertible securities. The Company determines a beneficial owner’s percentage ownership by assuming that options, warrants and convertible securities that are held by the beneficial owner and which are exercisable within 60 days, have been exercised or converted. The Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them. Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of iGambit, Inc., 1600 Calebs Path Extension, Suite 114, Hauppauge, New York, 11788. The percentages in the following table are based upon 23,954,056 shares outstanding as of March 31, 2011.
1.
Includes: options to purchase 46,900 shares of common stock at $0.01 per share held by John L. Salerno, Mr. Salerno’s son; and options to purchase 100,000 shares of common stock at $0.01 per share held by Dean T. Salerno, Mr. Salerno’s son.
2.
Includes 245,000 shares of common stock held by Muhammad Luqman, Ms. Luqman’s husband.
3.
Includes options to purchase 59,000 shares of the common stock at $0.10 per share.
4.
Includes options to purchase 113,000 shares of the common stock at $0.10 per share.
5.
Includes options to purchase 500,000 shares of the common stock at $0.10 per share.
6.
Includes the disclosures in footnotes 1 through 5 above.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
RELATED PARTY TRANSACTIONS
Pursuant to the terms of the agreements governing the sale of our assets to DDC in 2006, we will continue to receive Revenue Share Payments from DDC until 2011. In connection with said asset sale, Mr. Salerno and Ms. Luqman entered into employment agreements with DDC and worked for DDC until those agreements terminated in February 2009. Notwithstanding the termination of said employment agreements, Mr. Salerno is entitled, pursuant to the terms thereof, to receive a share of the net proceeds of any sale or other disposition of all or substantially all of the stock or assets of DDC that occurs on or before February 2011.
Director George Dempster was engaged as an Independent Consultant to Digi-Data Corporation from the period June 1, 2006 through April 30, 2009. The Company agreed to share equally in the fees paid to Mr. George Dempster. From the period of February 2006 through February 2009 George Dempster was paid $179,448 directly from Digi-Data. The $89,724 representing the Company’s 50% share of that expense was deducted by Digi-Data from amounts Digi-Data owed to the Company.
Prior to December 31, 2006, the Company was indebted to officers, John Salerno and Elisa Luqman for unpaid compensation accrued totaling $350,000. John Salerno received advances against the deferred compensation in the amounts of $74,281.25 and $44,000 as of December 31, 2007, and December 31, 2008, respectively. Elisa Luqman received advances against the deferred compensation in the amounts of $5,000 and $75,000 as of December 31, 2007, and December 31, 2008, respectively. The advances against deferred compensation totaling $79,281 and $198,281 as of December 31, 2007, and December 31, 2008, respectively, were in the form of a note payable to the Company and were collateralized with the officers’ common shares issued and outstanding of 5,470,000 shares each. During the nine months ended September 30, 2009, the Company paid the total amount of unpaid compensation to the officers, who subsequently repaid the advances received.
BOARD INDEPENDENCE
The Company has elected to use the independence standards of the NYSE AMEX Equities Exchange in its determination of whether the members of its Board are independent. Based on the foregoing, the Company has concluded that Mr. Charles, Mr. Waters, and Mr. Dempster are independent. The Board has established an Audit Committee and a Compensation Committee. The Board does not currently have a Nominating Committee. The work typically conducted by a Nominating Committee is conducted by the full Board.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows what Michael F. Albanese, CPA billed for the audit and other services for the years ended December 31, 2010 and December 31, 2009.
Audit Fees - This category includes the audit of the Company’s annual financial statements, review of financial statements included in the Company’s Form 10-Q Quarterly Reports and services that are normally provided by the independent auditors in connection with engagements for those years.
Audit-Related Fees - This category includes assurance and related services by the independent auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements and that are not reported under the caption “Audit Fees.”
Tax Fees - This category includes services rendered by the independent auditor for tax compliance, tax advice, and tax planning.
All Other Fees - This category includes products and services provided by the independent auditor other than the services reported under the captions “Audit Fees,” “Audit-Related Fees,” and “Tax Fees.”
Overview - The Company’s Audit Committee, reviews, and in its sole discretion pre-approves, our independent auditors’ annual engagement letter including proposed fees and all audit and non-audit services provided by the independent auditors. Accordingly, all services described under “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” and “All Other Fees” were pre-approved by our Company’s Audit Committee. The Audit Committee may not engage the independent auditors to perform the non-audit services proscribed by law or regulation. The Company’s Audit Committee may delegate pre-approval authority to a member of the Board of Directors, and authority delegated in such manner must be reported at the next scheduled meeting of the Board of Directors.
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2010 and 2009
Consolidated Statement of Income for the years ended December 31, 2010 and 2009
Consolidated Statement of Changes in Stockholder’s Equity for the years ended December 31, 2010 and 2009
Consolidated Statement of Cash Flows for the years ended December 31, 2010 and 2009
Notes to Financial Statements
(b) Exhibits
(1)
Incorporated by reference to Form 10 filed on December 31, 2009.
(2)
Incorporated by reference to Amendment No. 1 to Form 10 filed on June 11, 2010.
(3)
Filed with initial Form 10-K on June 15, 2010.
(4)
We hereby agree to furnish the SEC with any omitted schedule or exhibit upon request.
(5)
Filed with Form 10-K/A (Amendment No. 1) on September 13, 2010.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hauppauge, New York, on March 31, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated:
Signature
Title
Date
/s/ John Salerno
John Salerno
Chief Executive Officer and Director
March 31, 2011
/s/ Elisa Luqman
Elisa Luqman
Chief Financial Officer, Executive Vice President, General Counsel, Principal Accounting Officer and Director
March 31, 2011
/s/ James J. Charles
James J. Charles
Director
March 31, 2011
/s/ George G. Dempster
George G. Dempster
Director
March 31, 2011
/s/ John Waters
John Waters
Director
March 31, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANT
To the Board of Directors and Shareholders of:
iGambit Inc.
I have audited the accompanying consolidated balance sheets of iGambit Inc. as of December 31, 2010 and December 31, 2009 and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of iGambit Inc. as of December 31, 2010 and December 31, 2009, and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
___________________________
/s/ Michael F. Albanese
___________________________
Michael F. Albanese, CPA
Parsippany, NJ
March 31, 2011
IGAMBIT INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2010 and 2009
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 22, 2000 before changing to iGambit Inc. on July 18, 2006. Gotham was incorporated under the laws of the state of New York on September 23, 2009.
Business Acquisition
The Company acquired 200 no par value common shares of Gotham for $100. Subsequent to the acquisition of the Company’s newly formed subsidiary, Gotham, on October 1, 2009 Gotham acquired all of the assets and business operations of Jekyll Island Ventures Inc. doing business as Gotham Photo Company (“Jekyll”) for 500,000 shares of the Company’s common stock at a value of $.10 per share, and for 1,500,000 options to purchase the Company’s common stock over a three year period at a value of $.09 per share. Jekyll is a developer of web based software solutions for the real estate industry in the areas of marketing real estate. Subsequent to the acquisition, Jekyll dissolved and distributed its shares of the Company’s common stock to the shareholders of Jekyll. Gotham maintained Jekyll’s d/b/a name of Gotham Photo Company. The assets acquired from Jekyll are as follows:
Following is a presentation of pro forma balance sheets and statements of operations for the nine months ended September 30, 2009 and for the year ended December 31, 2008, and the pro forma statements of operations for the year ended December 31, 2009:
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 receives payments from Digi-Data based on 10% of the net vaulting revenue payable quarterly over five years. The Company is 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 are included in the discontinued operations line of the statements of income.
The assets of the discontinued operations are presented in the balance sheets under the captions “Assets of discontinued operations”. The underlying assets of the discontinued operations for the years ended December 31 are as follows:
Accounts Receivable
Accounts receivable includes 50% of contingency payments earned for the previous quarter. Reserve for bad debts of $250,000 was charged to operations for the year ended December 31, 2010.
Restricted Cash
An escrow account was established in connection with the sale of business to Digi-Data to hold funds for contingent liabilities. Under the terms of the sale, 25% of the quarterly contingency payments are deposited into the escrow account for a period of three years. Also under the terms of the sale, 50% of the balance of the escrow funds held will be released after three years, and the remaining balance released after two more years. The escrow account balance of $151,543 was released to the Company on September 29, 2010. The escrow account balance was $150,985 at December 31, 2009.
Prepaid Contingency
Prepaid contingency includes cash and expenses advanced by Digi-Data prior to the sale. The balance is being repaid with 25% of quarterly contingency payments earned and received by the Company from Digi-Data. The prepaid contingency balance was fully repaid as of December 31, 2009.
Deferred Compensation
The Company was indebted to two former officers for unpaid compensation totaling $350,000 at December 31, 2008. The officers received advances against the deferred compensation totaling $198,281 as of December 31, 2008. In 2009, compensation was fully repaid to the former officers who subsequently repaid the advances against the deferred compensation.
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 significant 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 reporting amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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.
Revenue Recognition
Contingency payment income is recognized quarterly from a percentage of Digi-Data’s vaulting service revenue, and is included in discontinued operations.
The Company’s revenues from continuing operations consists of revenues primarily from sales of products and services rendered to real estate brokers. Revenues are recognized upon delivery of the products or services.
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 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 current 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. Bad debt expense of $6,803 and $65,000 was charged to operations for the years ended December 31, 2010 and 2009, respectively.
Prepaid Expenses
Prepaid expenses consist of the following:
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. During the year ended December 31, 2010, the Company purchased computer equipment totaling $5,688. Computer equipment is depreciated over 5 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 $1,496 and $596 was charged to operations for the years ended December 31, 2010 and 2009, respectively.
Goodwill
Goodwill represents the fair market value of the common shares issued and common stock options granted by the Company for 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 being amortized, but instead will be subject to an annual assessment of impairment by applying a fair-value based test, and will be reviewed more frequently if current events and circumstances indicate a possible impairment. An impairment loss is charged to expense in the period identified. If indicators of impairment are present and future cash flows are not expected to be sufficient to recover the assets 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. The Company has performed an impairment study and has determined that there is no indication that present and future cash flows are not expected to be sufficient to recover the carrying amount of goodwill. Based on the Company's evaluation of goodwill, no impairment was recorded during the year ended December 31, 2010.
Stock-Based Compensation
The Company accounts for its stock-based 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 valuation model to estimate the fair value of its 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 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.
Note 4 - Restatement to Prior Consolidated Financial Statements
On October 26, 2010, the Company’s Audit/Corporate Governance Committee determined that the previously issued audited consolidated financial statements for the year ended December 31, 2009 (contained in the Company’s Annual Report on Form 10-K filed June 15, 2010, and subsequently amended by Amendment No. 1 to the Annual Report on Form 10-K filed on September 13, 2010) and the previously issued unaudited consolidated financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010 (contained in the Company’s Quarterly Reports on Form 10-Q filed, respectively, on June 17, 2010 (Amendment No. 1 to The Quarterly Report for March 31, 2010 on Form 10-Q filed on September 13, 2010) and August 16, 2010, and November 22, 2010) should be revised. The restatements to these consolidated financial statements reflect the appropriate income tax provision, goodwill, compensation from vested warrants, and reclassifications in the statements of cash flows.
For the year ended December 31, 2009, the Company determined that a schedule M-1 deduction for payments of deferred compensation was not claimed on the 2009 corporate tax return, resulting in an overstated income tax accrual aggregating $107,559. The December 31, 2009 Form 10-K/A properly reflects this item. The net impact on this item increased net income by $107,559. This item also increased prepaid expenses for the overpaid taxes by $107,559 for the three months ended March 31, 2010 and for the six months ended June 30, 2010. The Company also determined that its reporting of the Gotham acquisition resulted in an overstatement of goodwill and additional paid-in capital of $73,974. The net impact of this item decreased goodwill and additional paid-in capital by $73,974. The March 31, 2010 and June 30, 2010 goodwill and additional paid-in capital balances were restated accordingly.
For the year ended December 31, 2009, the Company determined that compensation expense for 2,250,000 stock warrants granted on May 26, 2009 was overstated as a result of overvaluing the warrants. The December 31, 2009 Form 10-K/A properly reflects this item. The net impact on this item increased net income and decreased additional paid-in capital by $51,970.
The Company determined that payment for unpaid compensation was incorrectly classified as a financing activity. The December 31, 2009 and September 30, 2009 statements of cash flows were restated to reflect the proper classification of the payment for unpaid compensation as an operating activity. The Company determined that part of the cash received from discontinued operations of Digi-Data classified as operating activities should have been classified as investing activities. The December 31, 2009 and 2008 and the September 30, 2010 and 2009 statements of cash flows were restated to reflect the proper classification of cash received from discontinued operations of Digi-Data.
The following table presents the previously reported and the restated amounts included in the restatements:
Note 5 - 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.
Note 6 - Stock Based Compensation
Stock-based compensation expense for all stock-based award programs, including grants of stock options and warrants, is recorded in accordance with "Compensation-Stock Compensation", Topic 718 of the FASB ASC. Stock-based compensation expense, which is calculated net of estimated forfeitures, is computed using the grant date fair-value method on a straight-line basis over the requisite service period for all stock awards that vest during the period. The grant date fair value for stock options is calculated using the Black-Scholes option valuation 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 and the expected dividends. Stock-based compensation expense is reported under general and administrative expenses on the accompanying consolidated statements of income.
In 2006, the Company adopted the 2006 Long-Term Incentive Plan (the "2006 Plan"). Awards granted under the 2006 plan have a ten-year term and may be incentive stock options, non-qualified stock options or warrants. The awards are granted at an exercise price equal to the fair market value on the date of grant and generally vest over a three or four year period. Effective January 1, 2006, we recognized compensation expense ratably over the vesting period, net of estimated forfeitures. As of December 31, 2010, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 plan. Stock-based compensation of $5,832 for vested options was charged to operations for the year ended December 31, 2010.
The 2006 Plan provides for the granting of options to purchase up to 5,510,000 shares of common stock. 5,213,100 options have been exercised to date. There are 2,468,900 options outstanding under the 2006 Plan.
Warrant activity during the year ended December 31, 2010 follows:
Stock Option Plan activity during the year ended December 31, 2010 follows:
The fair value of warrants and options granted is estimated on the date of grant based on the weighted-average assumptions in the table below. The assumption for the expected life is based on evaluations of historical and expected exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. The calculated value method using the historical volatility of the Computer Services industry is used as the basis for the volatility assumption.
Note 7 - Common Stock Issued
During the year ended December 31, 2009, the Company issued 500,000 common shares in exchange for the asset acquisition of Jekyll Island Ventures Inc. by its wholly-owned subsidiary, Gotham Innovation Labs Inc. Also, during the year ended December 31, 2009, options were exercised for 735,000 shares of common stock, valued at $.01 per share.
On December 2, 2009, the Company amended its certificate of incorporation to increase the number of authorized common shares to 75,000,000.
Dividends may be paid on outstanding shares as declared by the Board of Directors from time to time. Each share of common stock is entitled to one vote.
Note 8 - Income Taxes
The tax provision at December 31 consists of the following:
A reconciliation of the statutory federal income tax rate and the effective tax rate follows:
The Company recognizes deferred tax assets and liabilities based on the future tax consequences of events that have been included in the financial statements or tax returns. The differences relate primarily to net operating loss carryovers and to deferred compensation. Deferred tax assets and liabilities are calculated based on the difference between the financial reporting and tax bases of assets and liabilities using the currently enacted tax rates in effect during the years in which the differences are expected to reverse. Deferred taxes are classified as current or non-current, depending on the classification of the assets and liabilities to which they relate.
The Company’s provision for income taxes differs from applying the statutory U.S. federal income tax rate to income before income taxes. The primary differences result from providing for state income taxes and from deducting certain expenses for financial statement purposes but not for federal income tax purposes.
In accordance with ASC Topic No. 740, Income Taxes, a valuation allowance is established based on the future recoverability of deferred tax assets. 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. Management has determined that no valuation allowance related to deferred tax assets is necessary at December 31, 2010 and 2009.
Note 9 - 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 years ended December 31, 2010 and 2009 were $13,475 and $0, respectively.
Note 10 - Significant Customers
Sales of Gotham to four customers amounted to approximately 58% of Gotham’s total sales for the year ended December 31, 2010 at 18%, 15%, 14%, and 11%, respectively.
Note 11 - Risks and Uncertainties
Contingency Payment Income - Discontinued Operations
The discontinued operations of contingency payments received from Digi-Data is the Company’s primary source of income. Should Digi-Data not achieve sufficient vaulting revenue or continue to exist, substantial doubt would be raised as to the Company’s ability to continue to exist, as the Company has no other significant source of revenue.
Uninsured Cash Balances
Substantially all amounts of cash accounts held at financial institutions are insured by the FDIC.
Note 12 - Related Party Transactions
Notes Receivable - Stockholders
The Company provided loans to a stockholder totaling $17,000 at December 31, 2010 and 2009. The loans bear interest at a rate of 6% and are due on December 31, 2010.
Accrued interest on the note was $1,020 for each of the years ended December 31, 2010 and 2009.
The Company provided advances to two stockholders and former officers totaling $198,281 and $79,281 as of December 31, 2008, against their respective deferred compensation balances. The advances to the stockholders were collateralized with their common shares issued and outstanding of 5,470,000 shares each. The former officers repaid the advances to the Company during the year ended December 31, 2009.
Loans Payable - Stockholders
Two stockholders of the Company who are also former stockholders of Jekyll provided advances to Gotham for expenses totaling $2,504 at December 31, 2009. The loans from the stockholders were repaid without interest during the year ended December 31, 2010.
Note Payable - Related Party
Gotham provided loans to an entity that is controlled by the officers of Gotham totaling $25,390 at December 31, 2010. The note bears interest at a rate of 5.5% and is due on July 1, 2011.
Interest expense of $763 was charged to operations for the year ended December 31, 2010.
Lease Commitment
iGambit Inc. entered into an operating lease for office space for a term of 12 months effective June 1, 2010. Monthly rent under the lease is $2,600.
Gotham has an operating lease for office space renewable annually on October 16 at a monthly rent of $5,500.
Rent expense of $97,200 was charged to operations for the year ended December 31, 2010.
Note 13 - Commitments and Contingencies
The Company provides accruals for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated.
Note 14 - Recent Accounting Pronouncements
In September 2009, the Company adopted Accounting Standards Codification (ASC) 105-10-05, which provides for the Financial Accounting Standards Board Accounting Standards Codification (the Codification) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP) to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. The Codification does not change GAAP, but combines all authoritative standards into a comprehensive, topically organized online database. ASC 105-10-05 explicitly recognizes rules and interpretative releases of the Securities and Exchange Commission (SEC) under Federal securities laws as authoritative GAAP for SEC registrants. Subsequent revisions to GAAP will be incorporated into the Codification through Accounting Standards Updates (ASU). ASC 105-10-05 is effective for interim and annual periods ending after September 15, 2009, and was effective for the Company in the third quarter of 2009. The adoption of ASC 105-10-05 impacted the Company's financial statement disclosures, as all references to authoritative accounting literature were updated to and in accordance with the Codification.
In February 2009, the FASB issued an accounting standard now codified within ASC 805, “Business Combinations” that amends the provisions related to the initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies in a business combination. The standard applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of ASC 450, “Contingencies”, if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in ASC 805. The standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the standard by the Company was effective January 1, 2009 and did not have an impact on the Company's financial position and results of operations.
Effective January 1, 2008, the Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”. This pronouncement defines fair value, establishes a hierarchal disclosure framework for measuring fair value, and requires expanded disclosures about fair value measurements. The provisions of this statement apply to all financial instruments that are being measured and reported on a fair value basis. Effective January 1, 2009, the Company adopted the remaining provisions of ASC Topic 820 that were delayed by the issuance of ASC Section 820-10-55, “Fair Value Measurements and Disclosures: Overall: Implementation Guidance and Illustrations”.
In April 2008, the FASB issued an accounting standard now codified within ASC 350, “Intangibles-Goodwill and Other” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. Under this standard, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. The intent of the standard is to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset. Adoption of the standard was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, The Company adopted the standard on January 1, 2009. The Company does not expect the standard to have a material impact on its accounting for future acquisitions of intangible assets.
In November 2008, the FASB issued an accounting now standard codified within ASC 350, “Intangibles-Goodwill and Other” that applies to defensive assets which are acquired intangible assets which the acquirer does not intend to actively use, but intends to hold to prevent its competitors from obtaining access to the asset. The standard clarifies that defensive intangible assets are separately identifiable and should be accounted for as a separate unit of accounting in accordance with guidance provided within ASC 805, “Business Combinations” and ASC 820, “Fair Value Measurements and Disclosures”. The standard was effective for intangible assets acquired in fiscal years beginning on or after December 15, 2008. The Company adopted this standard effective January 1, 2009 and will apply the provisions of this guidance to intangible assets acquired on or after that date. The Company does not expect the standard to have a material impact on its accounting for future acquisitions of intangible assets.
In April 2009, the FASB issued an accounting standard now codified within ASC 825, “Financial Instruments” that requires disclosures about the fair value of financial instruments that are not reflected in the consolidated balance sheets at fair value whenever summarized financial information for interim reporting periods is presented. Entities are required to disclose the methods and significant assumptions used to estimate the fair value of financial instruments and describe changes in methods and significant assumptions, if any, during the period. The standard was effective for interim reporting periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009.
In April 2009, the FASB issued an accounting standard now codified within ASC 820, “Fair Value Measurements and Disclosures”, which provides guidance on determining fair value when there is no active market or where the price inputs being used represent distressed sales, The standard reaffirms the objective of fair value measurement, which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. The standard is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009.
In May 2009, the FASB issued an accounting standard now codified within ASC 855, “Subsequent Events”, which sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The standard was effective for interim or annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. In February 2010, the FASB issued Accounting Standards Update No. 2010-09 (ASU 2010-09) “Subsequent Events” (Topic 855): “Amendments to Certain Recognition and Disclosure Requirements”. This ASU amends FASB Codification topic 855. The amendments in ASU 2010-09 removes the requirement in ASC 855-10 for a SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. This ASU was effective upon issuance and the Company adopted this ASU as of December 31, 2009. Except for the removal of disclosure requirements in ASC 855-10, the adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, “Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value”. The ASU provides additional guidance for the fair value measurement of liabilities under ASC 820, Fair Value Measurements and Disclosures. The ASU provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using certain techniques. The ASU also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of a liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level fair value measurements. The Company adopted the ASU in the fourth fiscal quarter of 2009.
The adoption of the pronouncements above did not have a material effect on the Company's financial position or results of operations.
New Accounting Pronouncements Not Yet Effective
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, (amendments to ASC Topic 605, Revenue Recognition) (ASU 2009-13) and ASU 2009-14, “Certain Arrangements that Include Software Elements”, (amendments to ASC Topic 985, Software) (ASU 2009-14). ASU 2009-13 requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,2010, with early adoption permitted. The Company is currently evaluating the impact of the adoption of these ASUs on its consolidated results of operations or financial condition.
In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable” Interest Entities, which amends ASC 810, Consolidation to address the elimination of the concept of a qualifying special purpose entity. The standard also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity. This standard also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE whereas previous accounting guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. The standard provides more timely and useful information about an enterprise's involvement with a variable interest entity and will be effective as of the beginning of interim and annual reporting periods that begin after November 15, 2009, which for the Company would be January 1, 2010. The Company does not expect the adoption of this standard to have a material effect on its consolidated results of operations and financial condition.
In January 2010, the FASB issued ASU No. 2010-6, “Improving Disclosures About Fair Value Measurements”, which provides amendments to ASC 820 Fair Value Measurements and Disclosures, including requiring reporting entities to make more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements including information on purchases, sales, issuances, and settlements on a gross basis and (4) the transfers between Levels 1, 2, and 3. The standard is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
The FASB updated ASC Topic 810, Consolidations, and ASC Topic 860, “Transfers and Servicing”, which significantly changed the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity (VIE). The update to ASC Topic 860 eliminates the qualifying special purpose entity (QSPE) concept, establishes conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial asset de-recognition criteria, revises how interests retained by the transferor in a sale of financial assets initially are measured, and removes the guaranteed mortgage securitization re-characterization provisions. The update to ASC Topic 810 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE's primary beneficiary from a mainly quantitative assessment to an exclusively qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Note 15 - Potential Acquisition
On July 20, 2010, the Company entered into a letter of intent to acquire the assets and business of Allied Airbus, Inc. (“Allied”). In exchange for the acquisition of Allied, the Company would issue to Allied upon execution of the definitive agreement 500,000 shares of the Company’s common stock and an additional 2,250,000 common shares over a three year period beginning on January 1, 2011 based upon certain performance criteria, as well as additional cash or discounted common stock based upon earnings criteria. The Company would also assume or retire debt of Allied of not more than $225,000. The letter of intent will terminate on December 31, 2010 if both parties are unable to negotiate a mutually acceptable definitive agreement, unless the parties agree in writing to extend such date.
In connection with the letter of intent, the Company provided various loans to Allied totaling $472,000 at December 31, 2010, for which promissory notes were issued. The notes are personally guaranteed by the officers of Allied, bear interest at a rate of 6% and are due in one year.
Accrued interest on the notes was $6,694 for the year ended December 31, 2010.
F-
Exhibit 4.2
IGAMBIT, INC.
Common Stock Purchase Warrant
Warrant Holder:
Douglas K. Aquililla
Date of Issuance:
December 12, 2010
Number of shares of Common Stock to be issued upon exercise in full: 2,000,000
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT IN COMPLIANCE WITH STATE SECURITIES LAWS AS EVIDENCED BY AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
FOR VALUE RECEIVED, iGambit, Inc., a Delaware corporation (the “Company”) hereby agrees to sell upon the terms and on the conditions hereinafter set forth, at any time commencing on the date hereof but no later than 5:00 p.m., Eastern Time, on the 7th anniversary date of this warrant (the “Expiration Date”) to Douglas K. Aquililla or registered assigns (the “Holder”), under the terms as hereinafter set forth, Two Million (2,000,000) fully paid and non-assessable shares of the Company’s Common Stock (the “Warrant Shares”) pursuant to this warrant (this “Warrant”). The term “Common Stock” shall mean, when used herein, unless the context otherwise requires, the stock and other securities and property at the time receivable upon the exercise of this Warrant.
1) EXERCISE OF WARRANT
a) Exercise Price and Vesting. The Holder may exercise this Warrant as follows: (i) for up to 500,000 Warrant Shares at any time at a purchase price per Warrant Share of $0.50 (an “Exercise Price”); (ii) for up to an additional 500,000 Warrant Shares at any time after the 1st anniversary of the date hereof at a purchase price per Warrant Share of $0.65 (an “Exercise Price”); (iii) for up to an additional 500,000 Warrant Shares at any time after the 2nd anniversary of the date hereof at a purchase price per Warrant Share of $0.85 (on “Exercise Price”); and (iv) for up to an additional 500,000 Warrant Shares at any time after the 3rd anniversary of the date hereof at a purchase price per Warrant Share of $1.15 (an “Exercise Price”). The number of Warrant Shares to be so issued and the Exercise Prices are subject to adjustment in certain events to prevent dilution as set forth in Section 5 herein.
b) Procedure for Exercise. The Holder may exercise all or any part of this Warrant by surrendering to the Company this Warrant and the Notice of Exercise (form attached hereto) having then been duly executed by the Holder, accompanied by cash or certified check, for the number of Warrant Shares specified below prior to 5:00 p.m., Eastern Time, on the Expiration Date. If exercised in part, the Company may deliver to the Holder a new Warrant, identical in form, in the name of the Holder, evidencing the right to purchase the number of shares of Warrant Shares as to which this Warrant has not been exercised, which new Warrant shall be signed by the Chairman, Chief Executive Officer or President of the Company. The term Warrant as used herein shall include any subsequent Warrant issued as provided herein.
c) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if at any time there is not a current, valid and effective registration statement covering the Warrant Shares that are the subject of the Notice of Exercise, the Holder may, in its sole discretion, exercise this Warrant in whole or in part and, in lieu of making the cash payment otherwise contemplated to be made to the Company upon such exercise, elect instead to receive upon such exercise the “Net Number” of Warrant Shares determined according to the following formula (a “Cashless Exercise”):
Net Number =
(B-C) x A
B
For purposes of the foregoing formula:
A =
the total number of shares with respect to which this Warrant is then being exercised.
B =
the Fair Market Value of a share of the Company’s Common Stock as of the date of exercise.
C =
the Exercise Price then in effect for the applicable Warrant Shares at the time of such exercise.
Fair Market Value. Fair Market Value of a share of the Company’s Common Stock as of a particular date (the “Determination Date”) shall mean:
i) If the Company’s Common Stock is traded on a national stock exchange, then the closing price reported for the business day immediately preceding the Determination Date;
ii) If the Company’s Common Stock is not traded on a national stock exchange, but is traded in the over-the-counter market, then the average of the closing bid and ask prices for the business day immediately preceding the Determination Date; or
iii) If the Company’s Common Stock is not publicly traded, then as the Holder and the Company agree, or in the absence of such an agreement, by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided.
d) No Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. The Company shall either round up said fractional shares to the next whole share or shall pay cash in lieu of fractions with respect to the Warrants based upon the fair market value of such fractional shares of Common Stock as determined by the Company.
e) Delivery of Certificates. In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the Warrant Shares so purchased, registered in the name of the Holder, shall be delivered to the Holder within a reasonable time after such rights shall have been so exercised. The person or entity in whose name any certificate for the Warrant Shares is issued upon exercise of the rights represented by this Warrant shall for all purposes be deemed to have become the holder of record of such shares immediately prior to the close of business on the date on which the Warrant was surrendered and payment of the Exercise Price and any applicable taxes was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the opening of business on the next succeeding date on which the stock transfer books are open.
2) EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANT
Subject to Section 3, this Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other Warrants of different denominations, entitling the Holder or Holders thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants that carry the same rights upon presentation hereof at the office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof.
3) COMPLIANCE WITH SECURITIES LAWS
a) The Holder hereby acknowledges that this Warrant and any Warrant Shares purchased pursuant hereto are not being registered (i) under the Act on the ground that the issuance of this Warrant is exempt from registration under Section 4(2) of the Act as not involving any public offering or (ii) under any applicable state securities law because the issuance of this Warrant does not involve any public offering; and that the Company’s reliance on the Section 4(2) exemption of the Act and under applicable state securities laws is predicated in part on the representations hereby made to the Company by the Holder that it is acquiring this Warrant and will acquire the Warrant Shares for investment for its own account, with no present intention of dividing its participation with others or reselling or otherwise distributing the same, subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control.
b) Except as provided in section 3(c), this Warrant and the certificates representing the Warrant Shares issued upon exercise hereof shall be stamped or imprinted with a legend in substantially the following form:
“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT IN COMPLIANCE WITH STATE SECURITIES LAWS AS EVIDENCED BY AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”
In addition, so long as the foregoing legend may remain on any stock certificate delivered to the Holder, the Company may maintain appropriate “stop transfer” orders with respect to such certificates and the shares represented thereby on its books and records and with those to whom it may delegate registrar and transfer functions.
c) The restrictions imposed by this Section 3 upon the transfer of this Warrant or the Warrant Shares to be purchased upon exercise hereof, shall terminate (i) when such securities shall have been resold pursuant to an effective registration statement under the Securities Act; (ii) upon the Company’s receipt of an opinion of counsel , in form and substance reasonably satisfactory to the Company, addressed to the Company to the effect that such restrictions are no longer required to ensure compliance with the Securities Act or state securities laws; or (iii) upon the Company’s receipt of other evidence reasonably satisfactory to the Company that such registration and qualification under the Securities Act and state securities laws are not required. Whenever such restrictions cease and terminate as to any such securities, the Holder thereof shall be entitled to receive from the Company (or its transfer agent or registrar), without expense, new Warrants (or in the case of Warrant Shares, new certificates) of like tenor not bearing the applicable legend required by Section 3(b) relating to the Securities Act and state securities laws.
4) RESERVATION OF WARRANT SHARES
The Company hereby agrees that at all times there shall be reserved for issuance upon the exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant. The Company further agrees that all shares which may be issued upon the exercise of the rights represented by this Warrant will be duly authorized and will, upon issuance and against payment of the exercise price, be validly issued, fully paid and non-assessable, free from all taxes, liens, charges and preemptive rights with respect to the issuance thereof, other than taxes, if any, in respect of any transfer occurring contemporaneously with such issuance and other than transfer restrictions imposed by federal and state securities laws.
5) ADJUSTMENTS; ANTI-DILUTION
The number and kind of securities or other property for which the Warrant is exercisable are subject to adjustment in certain events to prevent dilution as follows:
a) Recapitalization, Reclassification and Succession. If the Company shall do any of the following (each a “Capital Transaction”): (i) effect any recapitalization of the Company or reclassification of its Common Stock; (ii) effect any merger or consolidation of the Company into or with a corporation or other business entity; or (iii) effect the sale or transfer of all or substantially all of the Company’s assets or of any successor corporation’s assets to any other corporation or business entity (any such corporation or other business entity being included within the meaning of the term “successor corporation”) at any time while this Warrant remains outstanding and unexpired, then, as a condition of such Capital Transaction, the Holder of this Warrant shall have the right to receive at the Exercise Price in effect at the time immediately prior to the consummation of such Capital Transaction in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such Capital Transaction, the securities, cash or other property to which such Holder would have been entitled upon consummation of such Capital Transaction if such Holder had exercised the rights represented by this Warrant immediately prior thereto, subject to adjustments (subsequent to each action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 5.
b) Stock Dividends, Distributions, Subdivisions and Combinations. If the Company at any time while this Warrant is outstanding and unexpired shall issue or pay the holders of its Common Stock, or take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of Common Stock or subdivide its Common Stock into a larger nwmber of shares of Common Stock, or combine its Common Stock into a smaller number of shares of Common Stock, then (i) the number of Warrant Shares purchasable upon exercise of this Warrant immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event; and (ii) the Exercise Price then in effect shall be adjusted to equal (A) the Exercise Price then in effect multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment, divided by (B) the number of shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.
c) Certain Shares Excluded. The number of shares of Common Stock outstanding at any given time for purposes of the adjustments set forth in this Section 5 shall exclude any shares then directly or indirectly held in the treasury of the Company.
d) Duration of Adjustment. Following each computation or readjustment as provided in this Section 5, the new adjusted Exercise Price and number of shares of Warrant Shares purchasable upon exercise of this Warrant shall remain in effect until a further computation or readjustment thereof is required.
e) Form of Warrant After Adjustment. The form of this Warrant need not be changed because of any adjustments in the Exercise Price or the number and kind of securities purchasable upon exercise of this Warrant.
f) Notice of Adjustment. Whenever any adjustment shall be made pursuant to Section 5 hereof, the Company shall promptly (i) cause its Chairman, Chief Executive Officer or President to prepare and execute a certificate setting forth in reasonable detail the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Exercise Price and number of shares of Warrant Shares purchasable upon exercise of this Warrant after giving effect to such adjustment; and (ii) cause copies of such certificate to be delivered to the Holder promptly after each adjustment.
6) LOSS, THEFT, DESTRUCTION OR MUTILATION
Upon receipt by the Company of evidence satisfactory to it, in the exercise of its reasonable discretion, of the ownership and the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company and, in the case of mutilation, upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof, without expense to the Holder, a new Warrant of like tenor dated the date hereof.
7) HOLDER NOT A STOCKHOLDER OF THE COMPANY
The Holder of this Warrant, as such, shall not be entitled by reason of this Warrant to any rights whatsoever as a stockholder of the Company, including but not limited to voting rights until such time as the Warrant is exercised for Warrant Shares.
8) MISCELLANEOUS
a) Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given one business day after delivery to a reputable overnight carrier or six business days after delivery to the U.S. Postal Service, if sent by first class mail, certified or registered mail with postage prepaid or by telecopy with a copy following by hand or by overnight carrier or mailed, certified or registered mail with postage prepaid:
If to the Company:
iGambit, Inc.
1600 Calebs Path Extension, Suite 114
Hauppauge, New York 11788
If to Holder:
Douglas K. Aquililla
11807 Greystone Drive
Boca Raton, Florida 33428
Attn: Douglas K. Aguililla
or to such other person or address as any party shall furnish to the other parties in writing
b) Successors and Assigns. This Warrant shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. The Holder may assign some or all of its rights hereunder in connection with transfer of all or part of this Warrant, subject to compliance with the securities laws, without the consent of the Company, in which event such assignee shall be deemed to be a Holder hereunder with respect to such assigned rights.
c) Severability. Whenever possible, each provision of this Warrant shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provisions shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Warrant.
d) Headings and Captions. The headings and captions contained in this Warrant are set forth for the purpose of convenience only and shall be given no effect in the construction or interpretation of this Warrant.
e) Governing Law; Jurisdiction; Venue. The validity, interpretation, and performance of this Warrant shall be governed in all respects by the laws of the State of Florida, without giving effect to conflicts of law principles that would result in the application of the substantive laws of another jurisdiction. The parties hereby consent to the jurisdiction of the federal and state courts located in the Southern District of Florida with respect to any actions brought concerning this Warrant. Venue for any such actions or arbitrations shall be in any of such courts in Broward, County, Florida and the parties hereto hereby waive any objection to such venue on the grounds of inconvenient forum.
f) Signature Delivery. The parties agree that signatures delivered by facsimile or “pdf” shall be binding and shall have the same force and effect as original signatures.
g) Changes to be in Writing. No waiver, change, amendment or discharge of any term or condition hereof or any consent on the part of any party hereto shall be of any force or effect unless made in writing and signed by the party to be bound thereby.
IN WITNESS WHEREOF, the Company has duly caused this Warrant to be signed on its behalf, in its corporate name and by a duly authorized officer, as of December 12, 2010.
FORM OF NOTICE OF EXERCISE
(To be executed by the Holder to exercise the right to purchase shares of Common Stock)
To: IGAMBIT, INC.
The undersigned is the Holder of a Warrant issued by iGambit, Inc., a Delaware corporation (the “Company”). The Warrant is currently exercisable to purchase a total of Warrant Shares. The undersigned Holder hereby irrevocably exercises its right to purchase
Warrant Shares pursuant to the Warrant. The Holder (check applicable box):
has included the sum of $ payable to the Company in accordance with the terms of the Warrant; or
elects a Cashless Exercise.
Pursuant to this exercise, certificates for such shares of Common Stock, issued in the name of the following, shall be delivered to the following:
Name:
Address:
SSN or EIN:
Following this exercise, the Warrant shall be exercisable to purchase a total of Warrant Shares. If said number of shares of Common Stock shall not be all the shares evidenced by the within Warrant, the Holder requests that a new warrant certificate for the balance of the shares covered by the within Warrant be registered in the name of, and delivered to:
Name:
Address:
FORM OF ASSIGNMENT
[To be completed and signed only upon assignment of Warrant]
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the right represented by the within Warrant to purchase shares of Common Stock of IGAMBIT, INC. to which the within Warrant relates and appoints attorney to transfer said right on the books of iGambit, Inc. with full power of substitution in the premises.
Pursuant to this assignment, the Company is instructed to deliver a new Warrant in the name of:
Name:
Address:
SSN or EIN:
Exhibit 10.2
BUSINESS ADVISORY AGREEMENT
This Agreement is made and entered into as of this 12th day of December 2010 (the “Effective Date”) between iGambit, Inc. a Delaware corporation with its principal offices at 1600 Calebs Path Ext, Hauppauge, NY 11788 (the “Company”) and Douglas K. Aguililla, an individual who resides in Boca Raton, Fl.(the “Advisor”).
WHEREAS, the Company is seeking certain services and advice regarding the Company’s business and financing activities; and
WHEREAS, the Advisor is willing to furnish certain business and financial related advice and services to the Company on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual terms and covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows:
1. Purpose. The Company hereby engages the Advisor on a non-exclusive basis for the term specified in this Agreement to render financial and business advisory consulting advice to the Company as a financial advisor relating to financial and similar matters upon the terms and conditions set forth herein.
2. Representations of the Advisor. The Advisor represents and warrants to the Company that it is free to enter into this Agreement and the services to be provided pursuant to this Agreement are not in conflict with any other contractual or other obligation to which the Advisor is bound. The Company acknowledges that the Advisor is in the securities business and may provide financial and business consulting services and advice of the type contemplated by this Agreement to others, and that nothing contained herein shall be construed to limit or restrict the Advisor in providing such services or advice to others.
3. Duties of the Advisor. During the term of this Agreement, the Advisor will provide the Company with consulting advice as specified below at the request of the Company, provided that the Advisor shall not be required to undertake duties not reasonably within the scope of the consulting advisory service in which the Advisor is engaged generally. In the performance of these duties, the Advisor shall provide the Company with the benefits of its best judgment and efforts, and the Advisor cannot and does not guarantee or promise that its efforts will have any impact on the business of the Company or that any subsequent improvement will result from the efforts of the Advisor. It is understood and acknowledged by the parties that the value of the Advisor’s advice is not measurable in any quantitative manner, and that the amount of time spent rendering such consulting advice shall be determined according to the Advisor’s discretion. The Advisor’s duties may include, but will not necessarily be limited to, rendering the following services to the Company:
(a) Study and review the business, operations, historical financial performance of the Company (based upon information provided to the Advisor by management) so as to enable the Advisor to provide advice to the Company;
(b) Assist the Company in attempting to formulate the optimum strategy to meet the Company’s working capital and capital resource needs during the term of this Agreement;
(c) Assist the Company in seeking to identify and evaluate potential merger and acquisition candidates for the Company and, in appropriate instances, negotiate on the Company’s behalf;
(d) Assist in the introduction of the Company to institutional or other capital financing sources;
(e) Assist in the formulation of the terms and structure of any reasonable proposed equity or debt financing or business transaction involving the Company;
(f) Advisor, upon request, will seek out and recommend financial events (such as conferences, seminars, etc…) in order for the Company to maximize its awareness to the financial community and
(g) Advisor, upon request, will assist the Company in appropriately positioning itself with the financial community as to its sector and advantages to its peers.
4. Term. Subject to the termination provisions set forth in paragraph 15 hereof, the term of this Agreement shall be for one (1) year commencing from the date of this Agreement (the “Term”); provided, however, that this Agreement may be renewed or extended upon such terms and conditions as may be mutually agreed upon by the parties hereto. Advisory Fee.
(a) As compensation for the services to be rendered by Advisor hereunder, Company agrees to pay to Advisor a $3000 non-refundable retainer due upon the Effective Date and $3000 per month, the first such payment to be due no later than thirty (30) days from the Commencement Date and thereafter, on the same date for each month in which such a payment is due, provider however that this agreement is not cancelled as per Sections 4, and 15.
(b) As additional compensation for the services to be rendered by Advisor hereunder, the Company agrees to issue 500,000 shares of the Company’s restricted common stock (the “Shares”) to Advisor at a purchase price of $.50 per share;
(c) As additional compensation for the services to be rendered by Advisor hereunder the Company also agrees to issue one or more warrants (each, a “Warrant”), substantially in the form attached hereto as Exhibit A (the “Warrant Agreement”), to acquire up to 1,500,000 shares of common stock (the “Warrant Shares”) in three (3) equal tranches of 500,000 shares with exercise prices of $.65 $.80, and $1.15, respectively. Each Warrant will be exercisable for a period of 7 years following the date of issuance of such Warrant;
(d) The Shares and Warrants and rights provided under Section 5(e) shall be deemed earned as follows: 1/3rd, on the Effective Date, 1/3rd, 12 months from the Effective Date and 1/3rd, 24 months from the Effective Date provided, however, that this Agreement has not been terminated and is still in effect at the time each tranch. If this Agreement is terminated prior to 36 months after the Effective Date the warrants will be pro-rated based upon the number of actual months the Agreement has been in effect.
5. Financing Fee
In the event the Advisor effects, underwrites or introduces a financing by offering or selling any of the securities of the Company, in a private or public debt and/or equity transaction, pursuant to which the Company obtains financing or other consideration, the Advisor shall receive a Financing Fee in addition to the Advisory Fee and any other fee to be received pursuant to this Agreement, which shall be mutually determined between the Company and the Advisor at the time of any such Financing.
6. Transaction Finder’s Fee.
(a) In connection with any transaction (“Transaction”) consummated by the Company during the period ending two years from the termination of this Agreement in which the Advisor during the term of this Agreement introduced the other party (except for any party identified by the Company on a schedule to be provided contemporaneously with the execution of this Agreement) to the Company, the Company will pay to the Advisor a Transaction Fee (“Transaction Fee”) based on the aggregate consideration received or to be paid by the Company in connection with such Transaction, and computed as follows: (i) 5% of the first million dollars or part thereof; 4% of the next million dollars or part thereof; 3% of the next million dollars or part thereof; 2% of the next million dollars of part thereof and 1% of the balance of the value of the transaction, or (ii) as otherwise mutually agreed to in writing by the parties (the formula can be increased or decreased). The Transaction Fee will be payable in the same forms and proportions as the aggregate consideration disbursed or received by the Company, unless otherwise mutually agreed to in writing by the parties.
(b) As used herein, the term “aggregate consideration” shall be deemed to be the total amount disbursed or received by the Company (which shall be deemed to include amounts paid into escrow) in connection with a Transaction.
(c) A Transaction Fee is payable in the event of and upon the closing of a Transaction; provided, however, that if the aggregate consideration consists of or may be increased by future payments or contingent payments related to future earnings or operations, the Company, in its discretion, shall have the choice to either (i) pay that portion of the Transaction Fee at closing based on the present value of any future and/or contingent payments calculated as at closing or (ii) pay that portion of the Transaction Fee calculated and paid when and as such future and/or contingent payments are made to the Company; provided further, however, that even if the Company exercises its discretion under clause (ii) above, the entire Transaction Fee due to the Advisor will be paid within twenty-four (24) months of the date this Agreement is terminated, regardless of whether the Company has then received all payments that are to be made to the Company in connection with the Transaction.
7. Use of Name and Advice. The Company agrees that any reference to Advisor in any release, communication or other material is subject to Advisor’s prior written approval, which may be given or withheld in its sole discretion and which will expire immediately upon Advisor’s resignation or the termination of this Agreement. No statements made or advice rendered by Advisor in connection with the services performed by Advisor pursuant to this Agreement will be quoted by, nor will any such statements or advice be referred to, in any communication, whether written or oral, prepared, issued or transmitted, directly or indirectly, by the Company without the prior written authorization of Advisor, which may be given or withheld in its sole discretion, except to the extent required by law (in which case the appropriate party shall so advise Advisor in writing prior to such use and shall consult with Advisor with respect to the form and timing of disclosure).
8. Representations and Warranties of the Company. Set forth on Exhibit C are the representations and warranties of the Company.
9. Covenants of the Company. The Company covenants and agrees with Advisor that:
(a) During the Term of this Agreement, the Company will deliver to the Advisor:
(i) as soon as they are available, copies of all reports (financial or other) mailed to shareholders;
(ii) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, FINRA or any securities exchange;
(iii) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was prepared and released by or on behalf of the Company; and
(iv) any additional information of a public nature concerning the Company (and any future subsidiaries) or its businesses which the Advisor may reasonably request.
(b) During the Term of this Agreement, the Company will provide to a designated representative of Advisor’s investment banking team, a quarterly current client list and shareholder list, which will be treated at all times as “Confidential Information” as defined in that certain Confidentiality Agreement between the Company and the Advisor.
10. Costs and Expenses. In addition to the fees payable hereunder, the Company shall reimburse the Advisor, within five (5) business days of its request, for any and all reasonable out-of-pocket expenses incurred in connection with the services performed by the Advisor under this Agreement; provided, however, that any single expense item in excess of $1,000 shall be pre-approved by the Company.
11. Company Information. The Company recognizes and confirms that, in advising the Company and in fulfilling its engagement hereunder, the Advisor will use and rely on data, material and other information furnished to the Advisor by the Company (the “Company Information”). The Company acknowledges and agrees that in performing its services under this engagement, the Advisor may rely upon the Company Information without independently verifying the accuracy, completeness or veracity of same. The parties further acknowledge that the Advisor shall have no responsibility for the accuracy of any statements to be made by Company management contained in press releases or other communications, including, but not limited to, filings with the SEC and FINRA. In addition, in the performance of its services, the Advisor may look to such others for factual information, economic advice and/or research upon which to base its advice to the Company hereunder as the Advisor shall in good faith deem appropriate.
12. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Advisor, each person who controls the Advisor within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended, and the Advisor’s officers, directors, employees, accountants, attorneys and agents (the “Advisor’s Indemnitees”) against any and all losses, claims, expenses, damages or liabilities, joint or several, to which they or any of them may become subject (including the costs of any investigation and all reasonable attorneys’ fees and costs) or incurred by them, to the fullest extent lawful, in connection with any pending or threatened litigation, legal claim or proceeding, whether or not resulting in any liability, arising out of or in connection with the services rendered by the Advisor or any transactions in connection with this Agreement; provided, however, that the Indemnitee agreement contained in this Section 12(a) shall not apply to any such losses, claims, related expenses, damages or liabilities arising out of gross negligence, willful misconduct or fraud of the Advisor, or a material breach of the Advisor’s representations and warranties hereunder.
(b) The Advisor agrees to indemnify and hold harmless the Company and its officers, directors, employees, accountants, attorneys and agents (the “Company’s Indemnitees”) against any and all losses, claims, expenses, damages or liabilities, joint or several, to which they or any of them may become subject (including the costs of any investigation and all reasonable attorneys’ fees and costs) or incurred by them, to the fullest extent lawful, in connection with any pending or threatened litigation, legal claim or proceeding, whether or not resulting in any liability, arising out of gross negligence, willful misconduct or fraud of the Advisor; provided, however, that the Indemnitee agreement contained in this Section 12(b) shall not apply to any such losses, claims, related expenses, damages or liabilities arising out of the gross negligence, willful misconduct or fraud of the Company, or a material breach of the Company’s representations and warranties hereunder. In addition, Advisor and Advisor’s Indemnitees shall not have any liability to the Company or Company Indemnitees in connection with the services rendered pursuant to the Agreement except for any liability for claims, liabilities, losses or damages finally judicially determined to have resulted solely as a result of the gross negligence or willful misconduct of Advisor or Advisor’s Indemnitees. In no event shall Advisor or Advisor’s Indemnitees be responsible for any special, indirect, punitive or consequential damages.
(c) Each Advisor’s Indemnitee or Company's Indemnitee, as the case may be (an “Indemnified Person”), shall give prompt written notice to the Company or the Advisor, as appropriate (the “Indemnifying Party”), after the receipt by such Indemnified Person of any written notice of the commencement of any action, suit or proceeding for which such Indemnified Person will claim indemnification or contribution pursuant to this Agreement. The Indemnifying Party shall have the right, exercisable by giving written notice to an Indemnified Person within twenty (20) business days after the receipt of written notice from such Indemnified Person of such commencement, to assume, at its expense, the defense of any such action, suit or proceeding; provided, however, that an Indemnified Person shall have the right to employ counsel in any such action, suit or proceeding, and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless: (i) the Indemnifying Party fails to assume the defense of such action, suit or proceeding or fails to employ separate counsel reasonably satisfactory to such Indemnified Person in any such action, suit or proceeding; or (ii) the Indemnifying Party and such Indemnified Person shall have been advised by counsel that there may be one or more defenses available to such Indemnified Person which are in conflict with, different from or additional to those available to the Indemnifying Party, or another Indemnified Person, as the case may be (in which case, if such Indemnified Person notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Indemnified Person); it being understood, however, that the Indemnifying Party shall not, in connection with any one such action or proceeding of separate but substantially similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time acting for each Indemnified Person in any one jurisdiction. The Indemnifying Party shall not settle or compromise or consent to the entry of any judgment in or otherwise seek to terminate any pending or threatened action, claim, suit or proceeding in which any Indemnified Person is a party and as to which indemnification or contribution has been sought by such Indemnified Person hereunder, unless such Indemnified Person has given its prior written consent or the settlement, compromise, consent or termination includes an express unconditional release of such Indemnified Person, satisfactory in form and substance to such Indemnified Person, from all losses, claims, damages or liabilities arising out of such action, claim, suit or proceeding.
(d) If for any reason the Indemnitee provided for in this Section 12 is unavailable to an Indemnified Person or insufficient to hold an Indemnified Person harmless, then the Indemnifying Party, to the fullest extent permitted by law, shall contribute to the amount paid or payable by such Indemnified Person as a result of such claims, liabilities, losses, damages or expenses in such proportion as its appropriate to reflect (i) the relative benefits received by the Company on one hand and by the Advisor on the other, from the transaction or proposed transaction under this Agreement and (ii) the relative fault of the Company and the Advisor, as well as any relevant equitable considerations. The relative fault of the Company on the one hand and the Advisor on the other shall be determined by reference to, among other things, whether any untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Advisor. The Indemnitee, contribution and expense reimbursement obligations set forth herein (i) shall be in addition to any liability an Indemnifying Party may have to any Indemnified Person at common law of otherwise, (ii) shall survive the termination of this Agreement, (iii) shall apply to any modification of this Agreement and shall remain in full force and effect following the completion or termination of the Agreement, (iv) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Advisor or any other Indemnified Person, and (v) shall be binding on any successor or assign of the Company or the Advisor and the respective successors or assigns to all or substantially all of the Company's or the Advisor's business and assets.
(e) In the performance of its services, the Advisor shall be obligated to act only in good faith, and shall not be liable to the Company for errors in judgment that are not the result of gross negligence or willful misconduct.
13. Use of Advice by the Company. The Company acknowledges that all opinions and advice (written or oral) given by the Advisor to the Company in connection with the engagement of the Advisor are intended solely for the benefit and use of the Company in considering the matters to which they relate, and the Company agrees that no person or entity other than the Company and its Board of Directors shall be entitled to make, use or rely upon the advice of the Advisor to be given hereunder, and no such opinion or advice shall be used for any other purpose, or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, not may the Company make any public references to the Advisor, or use the Advisor’s name in any reports or releases of the Company without the Advisor’s prior written consent.
The Company acknowledges that the Advisor makes no representations or commitment whatsoever as to making a market in the Company’s securities or recommending or advising its clients, or any other persons, to purchase the Company’s securities. Research reports or corporate business reports that may be prepared by the Advisor will, when and if prepared, be done solely on the merits and the judgment and analysis of the Advisor or any of its senior personnel.
14. The Advisor as an Independent Contractor. The Advisor shall perform its services hereunder as an independent contractor and not as an employee of the Company or an affiliate thereof. It is expressly understood and agreed to by the parties hereto that the Advisor shall have no authority to act for, represent or bind the Company or any affiliate thereof, in any manner, except as may be agreed to expressly by the Company in writing from time to time.
15. Termination. This Agreement may be terminated by either party upon thirty (30) days written notice; provided, however, that all compensation (including any amounts to become due on account of a Financing Fee or Transaction Fee) due or to become due after the effective date of such termination shall be unaffected by such termination.
16. Representations, Warranties and Agreements to Survive. The respective indemnities, agreements, representations, warranties and other statements of the Company and the Advisor set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Advisor, the Company, or any of their respective officers or directors.
17. Notices. All communications hereunder will be in writing and, except as otherwise expressly provided herein, sent by overnight mail, to the Company at: IGambit, Inc. 1600 Calebs Path Ext, Hauppauge, NY 11788 Attn: John Salerno and to the Advisor at: 11807 Greystone Drive, Boca Raton, FL 33428, Attn: Douglas K. Aguililla
18. Parties in Interest. This Agreement is made solely for the benefit of the Advisor and the Company, and their respective controlling persons, directors and officers, and their respective successors, assigns, executors and administrators. No other person shall acquire or have any right under or by virtue of this Agreement.
19. Headings. The section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.
20. Applicable Law; Venue and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflict of law principles. Any action arising out of this agreement shall be brought exclusively in a court of competent jurisdiction located in Suffolk County, NY, and the parties hereby irrevocably submit to the personal jurisdiction of such courts, and waive any objection they now or hereafter may have to the laying of venue in such courts.
21. Integration. This Agreement constitutes the entire agreement and understanding of the parties hereto, and supersedes any and all previous agreements and understandings, whether oral or written, between the parties with respect to the matters set forth herein. No provision of this Agreement may be amended, modified or waived, except in a writing signed by all of the parties hereto.
22. Counterparts. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same instrument.
23. Authority. This Agreement has been duly authorized, executed and delivered by and on behalf of the Company and the Advisor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.
THE COMPANY THE ADVISOR
iGambit, Inc. Douglas K. Aguililla
By: __________________________ By:___________________________
John Salerno
Douglas K. Aguililla
Chairman, CEO
DISCLOSURE SCHEDULE
EXHIBIT C
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Advisor as follows:
(a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of its incorporation, with full corporate power and authority to own its properties and conduct its business and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business, properties or operations of the Company and its subsidiaries as a whole.
(b) The Company has full legal right, power and authority to enter into this Agreement, and to consummate the transactions provided for herein, and this Agreement, when executed by the Company, will constitute a valid and binding agreement, enforceable in accordance with its terms (except as the enforceability thereof may be limited by bankruptcy or other similar laws affecting the rights of creditors generally or by general equitable principles and except as the enforcement of indemnification provisions may be limited by federal or state securities laws).
(c) Except as disclosed in the Company’s public filings or on the Disclosure Schedule attached hereto (“Disclosure Schedule”), the Company is not in violation of its articles of incorporation or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party or by which it may be bound or is not in material violation of any law, order, rule, regulation, writ, injunction or decree of any governmental instrumentality or court, domestic or foreign; and the execution and delivery of this Agreement and the consummation of the transactions contemplated therein and will not conflict with, or result in a material breach of any of the terms, conditions or provisions of, or constitute a material default under, or result in the imposition of any material lien, charge or encumbrance upon any of the property or assets of the Company pursuant to, any material bond, debenture, note or other evidence of indebtedness or any material contract, indenture, mortgage, loan agreement, lease, joint venture, partnership or other agreement or instrument to which the Company is a party nor will such action result in the material violation by the Company of any of the provisions of its articles of incorporation or bylaws or any law, order, rule, regulation, writ, injunction, decree of any government, governmental instrumentality or court, domestic or foreign, except where such violation will not have a material adverse effect on the financial condition of the Company.
(d) The authorized, issued and outstanding capital stock of the Company is as disclosed in writing to the Advisor and all of the shares of issued and outstanding capital stock of the Company set forth therein have been duly authorized, validly issued and are fully paid and nonassessable; the holders thereof do not have any rights of rescission with respect therefor and are not subject to personal liability for any obligations of the Company by reason of being stockholders under the laws of the State in which the Company is incorporated; and none of such outstanding capital stock is subject to or was issued in violation of any preemptive or similar rights of any stockholder of the Company.
(e) Except as disclosed in the Company’s public filings or on the Disclosure Schedule, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as disclosed in writing to the Advisor. Upon the issuance and delivery pursuant to the terms hereof of any securities to the Advisor, the Advisor will acquire good and marketable title to such securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction of any kind whatsoever other than restrictions as may be imposed under the securities laws.
(f) Except as disclosed in the Company’s public filings or on the Disclosure Schedule, the Company has good and marketable title to all of its properties and assets as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except as disclosed in writing to the Advisor or which are not materially significant or important in relation to its business or which have been incurred in the ordinary course of business.
(g) The financial information contained in the Company’s public filings fairly presents the financial position and results of operations of the Company at the respective dates and for the respective periods to which they apply. Said information has been prepared in accordance with generally accepted accounting principles applied on a basis which is consistent in all material respects during the periods involved, except in the case of unaudited financial statements’ normal recurring adjustments.
(h) There has been no material adverse change or material development involving a prospective adverse change in the condition, financial or otherwise, or in the prospects, value, operation, properties, business or results of operations of the Company whether or not arising in the ordinary course of business.
(i) To the knowledge of the Company, except as disclosed in the Company’s public filings or on the Disclosure Schedule, there is no pending or threatened, action, suit or proceeding to which the Company is a party before or by any court or governmental agency or body, which might result in any material adverse change in the financial condition or business of the Company as a whole or might materially and adversely affect the properties or assets of the Company as a whole nor are there any actions, suits or proceedings against the Company related to environmental matters or related to discrimination on the basis of age, sex, religion or race which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole; and no labor disturbance by the employees of the Company exists or is, to the knowledge of the Company, imminent which might be expected to materially and adversely affect the conduct of the business, property, operations, financial condition or earnings of the Company as a whole.
(j) Except as disclosed in the Company’s public filings or on the Disclosure Schedule, the Company has properly prepared and filed all necessary federal, state, local and foreign income and franchise tax returns, has paid all taxes shown as due thereon, has established adequate reserves for such taxes which are not yet due and payable, and does not have any tax deficiency or claims outstanding, proposed or assessed against it.
(k) The Company has sufficient licenses, permits, right to use trade or service marks and other governmental authorizations currently required for the conduct of its business as now being conducted and the Company is in all material respects complying therewith. To its knowledge, none of the activities or businesses of the Company are in material violation of, or cause the Company to materially violate any law, rule, regulations, or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality.
(l) The Company knows of no outstanding claims for services either in the nature of a finder’s fee, brokerage fee or otherwise with respect to this Agreement for which the Company or the Advisor may be responsible.
(m) The Company has its property adequately insured against loss or damage.
(n) To the best of the Company’s knowledge it has generally enjoyed a satisfactory employer-employee relationship with its employees and, to the best of its knowledge, is in substantial compliance in all material respects with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours.
(o) Except as disclosed in the Company’s public filings or on the Disclosure Schedule, no officer or director of the Company, holder of 5% or more of securities of the Company or any affiliate of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company is a party or by which it may be bound or affected.
(p) The minute books of the Company have been made available to the Advisor and contain a complete summary of all meetings and actions of the directors and stockholders of the Company, since the time of its incorporation and reflect all transactions referred to in such minutes accurately in all respects.
(q) Except as disclosed in the Company’s public filings or on the Disclosure Schedule, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company.