Nutex Health Inc. quarterly report, Q3 FY2016

Business context and reporting period

Issuer discrepancy: The supplied filing is iGambit Inc.’s Form 10-Q for the quarter ended September 30, 2016, not a filing identified as Nutex Health Inc. The summary below reflects the filing text.

iGambit describes itself as a technology-focused holding company. Its operating subsidiary, ArcMail, sells email archiving hardware and software and provides support and maintenance. Gotham’s business was sold in November 2015 and is reported as discontinued operations. The financial statements are unaudited and cover the three and nine months ended September 30, 2016.

Financial performance and position

Prior-year sales were zero for both comparison periods; management attributes the 2016 sales to ArcMail, acquired in November 2015. Thus, the reported year-over-year revenue increase is not a like-for-like comparison. Q3 2016 included $550 of discontinued-operations income, versus $47,619 in Q3 2015; nine-month discontinued-operations income was $3,868 versus $79,584.

At September 30, 2016, cash was $21,829, accounts receivable $545,873, current assets $764,246, and current liabilities $2,746,457 (working capital deficit of about $1.98 million). Total assets were $7,495,555, including $6,705,157 of goodwill; total liabilities were $6,052,495 and stockholders’ equity was $1,443,060. Reported notes payable and related-party notes, including current and long-term portions and other notes, total approximately $3.83 million. Accrued interest on notes was $494,207.

For the nine months, cash used in continuing operating activities was $304,796; total operating cash use, including discontinued operations, was $197,849. Investing activities used $1,194 and financing activities provided $88,885, resulting in a $110,158 net decrease in cash from $131,987 at year-end 2015. Cash interest paid was $13,427.

Material changes versus the prior comparable period

• ArcMail’s post-acquisition operations generated reported sales of $1.79 million for the nine-month period; the prior-year statements reported no sales.
• Nine-month net loss narrowed to $118,256 from $271,392, although continuing operations remained loss-making. Q3 shifted from a $74,849 net loss in 2015 to $216,666 net income in 2016.
• Nine-month general and administrative expense rose to $1,598,461 from $348,840, primarily reflecting payroll and costs associated with ArcMail, according to management.
• Nine-month interest expense increased to $279,060 from $2,136. Cash declined by $110,158 from December 31, 2015, while accrued interest increased.
• Deferred revenue fell to $882,484 from $1,190,279. Accounts receivable increased to $545,873 from $230,182.

Outlook, risks, and unusual items

Management said 2016 capital needs could arise from ArcMail expansion and potential acquisitions. It anticipated raising private-market capital but gave no assurance that financing would be available on acceptable terms; it reported no plan for a commercial-bank credit facility. Management expected officer salary and ArcMail operating costs to remain level absent a material expansion, which could increase corporate expenses. No quantified earnings or revenue guidance was provided.

Liquidity is tight: cash was $21,829 against $2.75 million of current liabilities, and operating cash flow from continuing operations was negative. The company also disclosed merchant-financing agreements entered into during the nine months: $281,000 of proceeds are repayable through collections, with total payments of $358,400 and maturity in January 2017; the reported outstanding balance was $79,459. ArcMail’s other notes are secured by its assets and bear 7% interest; a related-party note bears 6% and is subordinated to those notes.

Gotham’s sale to VHT included $400,000 received and twelve scheduled monthly installments beginning January 2016. The $10,000 earn-out portion of each installment depends on VHT maintaining its relationship with Gotham’s major client, subject to the stated exception in the agreement. Goodwill was $6.71 million; management recorded no impairment in the period but said it was too early to evaluate impairment following the ArcMail acquisition. The company recorded a full valuation allowance against deferred tax assets. It reported no material litigation and stated that disclosure controls were effective; no material change in internal control was reported.

Important facts for investors to verify

• Confirm the correct issuer and filing: the supplied document names iGambit Inc., not Nutex Health Inc.
• Assess near-term liquidity, including the current-liability shortfall, low cash balance, negative continuing operating cash flow, and January 2017 merchant-financing maturity.
• Review ArcMail’s underlying sales, collections, margins, and ability to convert deferred maintenance revenue into cash; the prior-year sales comparison is distorted by the acquisition timing.
• Verify the terms and remaining receipts from the VHT sale, the earn-out conditions, debt balances and maturities, and the recoverability of the substantial goodwill balance.