NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Description of Business
IMAC
Holdings, Inc. and its affiliates (collectively, the “Company”) provide orthopedic therapies through its chain of
IMAC Regeneration Centers. Through its consolidated and equity owned entities, its outpatient medical clinics provide conservative,
non-invasive medical treatments to help patients with back pain, knee pain, joint pain, ligament and tendon damage, and other
related soft tissue conditions. The Company had open two (2) medical clinics located in Tennessee and opened or acquired through
management service agreements thirteen (13) medical clinics located in Kentucky, Missouri, Illinois and Florida at September 30,
2020. The Company has partnered with several well-known sports stars such as Ozzie Smith, David Price, Tony Delk and Mike Ditka
in opening its medical clinics, with a focus around treating sports injuries.
Effective
June 1, 2018, the Company converted from IMAC Holdings, LLC a Kentucky limited liability company to IMAC Holdings, Inc. a Delaware
corporation, followed by a reverse stock split in February 2019. These accounting changes have been given retrospective treatment
in the condensed consolidated financial statements.
During
February 2019, the Company completed an initial public offering (“IPO”) of securities. See Note 12 – Stockholder’s
Equity.
Note
2 – Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles
(“GAAP”) in the United States of America (“U.S.”) as promulgated by the Financial Accounting Standards
Board (“FASB”), Accounting Standards Codification (“ASC”) and with the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC” or the “Commission”). The information contained in these condensed
consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and
notes thereto for the fiscal year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K filed with
the SEC on March 26, 2020.
The
accompanying condensed consolidated financial statements include the accounts of IMAC Holdings, Inc. (“IMAC Holdings”)
and the following entities which are consolidated due to direct ownership of a controlling voting interest or other rights granted
to us as the sole general partner or managing member of the entity: IMAC Management Services, LLC (“IMAC Management”),
IMAC Regeneration Management, LLC (“IMAC Texas”), IMAC Regeneration Management of Nashville, LLC (“IMAC Nashville”),
IMAC Management of Illinois, LLC (“IMAC Illinois”) and IMAC Management of Florida, LLC (“IMAC Florida”);
the following entity which is consolidated with IMAC Regeneration Management of Nashville, LLC due to control by contract: IMAC
Regeneration Center of Nashville, PC (“IMAC Nashville PC”); and the following which prior to June 1, 2018 was held
as a minority interest, IMAC Regeneration Center of St. Louis, LLC (“IMAC St. Louis”).
In
June 2018, the Company consummated certain transactions resulting in the acquisition of the outstanding equity interests in IMAC
St. Louis and Clinic Management Associates of KY, LLC (“CMA of KY”), an entity which consolidates Integrated Medical
and Chiropractic Regeneration Center, PSC (“IMAC Kentucky”) due to control by contract. These entities are included
in the condensed consolidated financial statements from the date of acquisition.
In
August 2018, the Company acquired 100% of Advantage Hand Therapy and Orthopedic Rehabilitation, LLC (“Advantage Therapy”)
and 70% of BioFirma LLC (“BioFirma”). Both companies are consolidated due to direct ownership of a controlling voting
interest or other rights granted to us as the sole general partner or managing member of the entity. On October 1, 2019, the Company
acquired the 30% of BioFirma’s membership interests which were not previously held by the Company, resulting in the Company
owning 100% of the membership interests of BioFirma. Substantially all the assets of BioFirma were sold effective December 31,
2019; however as of September 30, 2020, the acquirer of the assets had paid $10,000 in cash and gave the Company medical
supplies valued at $27,500 as a payment in-kind. The Company has established a bad debt reserve of 100% of the
remaining selling price, $312,000.
In
April 2019, the Company consummated certain transactions resulting in the acquisition of the outstanding equity interest in ISDI
Holdings II, Inc., an Illinois corporation (“ISDI Holdings II”), and PHR Holdings, Inc., an Illinois corporation (“PHR
Holdings”), entities which consolidate the results of Progressive Health and Rehabilitation, Ltd (“Progressive”)
and Illinois Spine and Disc Institute, Ltd (“ISDI”) due to control by contract. These entities are included in the
condensed consolidated financial statements from the date of acquisition.
In
November 2019, IMAC Illinois entered into a management agreement for an occupational and physical therapy practice in Rockford,
Illinois. This entity is included in the condensed consolidated financial statements due to control by contract from the date
of entry into the management agreement.
In
January 2020, the Company consummated an agreement for the acquisition of Chiropractic Health of Southwest Florida, Inc. (“CHSF”)
in Bonita Springs, Florida. This entity is included in the condensed consolidated financial statements from the date of acquisition.
All
significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses at the date and for the periods that the condensed
consolidated financial statements are prepared. On an ongoing basis, the Company evaluates its estimates, including those related
to insurance adjustments and provisions for doubtful accounts. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from
those estimates.
COVID-19
Pandemic
On
January 30, 2020, the World Health Organization (WHO) announced a global health emergency because of a new strain of coronavirus
originating in Wuhan, China (the “COVID-19 outbreak”) and the risks to the international community as the virus spread
globally beyond the point of origin. On March 20, 2020 the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid
increase in exposure globally.
The
full impact of the COVID-19 outbreak continues to evolve as of the date of these condensed consolidated financial statements.
As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s combined financial condition,
liquidity and future results of operations. Management is actively monitoring the impact of the global situation on its consolidated
financial condition, liquidity, operations, suppliers, industry and workforce. Given the daily evolution of the COVID-19 outbreak
and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results
of operations, financial condition, or liquidity for fiscal year 2020 beyond the results presented in these condensed consolidated
financial statements and this quarterly report.
CARES
Act
The
Company is continuing to closely monitor legislative actions at the federal, state and local levels including the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and other governmental assistance that might be available
in response to the COVID-19 pandemic. As part of the CARES Act, the United States government initially announced that it would
offer $100 billion of relief to eligible health care providers. On April 7, 2020, Centers for Medicare and Medicaid Services (“CMS”)
officials indicated they would distribute $30 billion of direct grants to hospitals, ASCs and other health care providers based
on how much they bill Medicare. Payments received from these grants are not required to be repaid provided the recipients attest
to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the
grants to reimburse expenses or losses that other sources are obligated to reimburse.
The
Company received approximately $416,000 of the grant funds distributed under the CARES Act Provider Relief Fund program in April
2020. Based on an analysis of the compliance and reporting requirements and the impact of the COVID-19 pandemic on our operating
results through the end of the third quarter, these funds were recognized as a reduction in operating expenses under the line
item “Grant funds” in the condensed consolidated statements of operations for the nine months ended September
30, 2020. The recognition of amounts received is conditioned upon certification that payment will be used to prevent, prepare
for and respond to the COVID-19 pandemic and shall reimburse the recipient only for healthcare related expenses or lost revenues
that are attributable to the COVID-19 pandemic. Amounts are recognized as a reduction to operating costs and expenses only to
the extent the Company is reasonably assured that underlying conditions are met.
Revenue
Recognition
The
Company’s patient service revenue is derived from non-surgical procedures performed at our outpatient medical clinics and
patient visits to physicians. The fees for such services are billed either to the patient or a third-party payer, including Medicare.
Starting in January 2020, the Company implemented wellness maintenance programs on a subscription basis. There are three membership
plans offered with different levels of service for each plan. The Company recognizes service revenues based upon the estimated
amounts the Company expects to be entitled to receive from patients and third-party payers. Estimates of contractual adjustments
are based upon the payment terms specified in the related contractual agreements. The Company also records estimated implicit
price concessions (based primarily on historical collection experience) related to uninsured accounts to record these revenues
at the estimated amounts expected to be collected.
Other
management service fees are derived from management services where the Company provides billings and collections support to the
clinics and where management services are provided based on state specific regulations known as the corporate practice of medicine
(“CPM”). Under the CPM, a business corporation is precluded from practicing medicine or employing a physician to provide
professional medical services. In these circumstances, the Company provides all administrative support to the physician-owned
PC through an LLC. The PC is consolidated due to control by contract (an “MSA” – Management Services Agreement).
The fees we derive from these management arrangements are either based on a predetermined percentage of the revenue of each clinic
or a percentage mark up on the costs of the LLC. The company recognize other management service revenue in the period in which
services are rendered. These revenues are earned by IMAC Nashville, IMAC Management and IMAC Illinois and are eliminated in consolidation
to the extent owned.
The
Company’s patient revenue consisted of the following for the three and nine months ended September 30, 2020 and September
30, 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient revenues
|
|
$
|
8,191,160
|
|
|
$
|
8,712,495
|
|
|
$
|
20,938,380
|
|
|
$
|
24,889,336
|
|
Contractual adjustments
|
|
|
(4,713,319
|
)
|
|
|
(4,356,591
|
)
|
|
|
(11,578,890
|
)
|
|
|
(14,006,849
|
)
|
Patient revenue, net
|
|
$
|
3,477,841
|
|
|
$
|
4,355,904
|
|
|
$
|
9,359,490
|
|
|
$
|
10,882,487
|
|
Patient
Deposits
Patient
deposits are derived from patient payments in advance of services delivered. Our service lines include traditional and regenerative
medicine. Regenerative medicine procedures are rarely paid by insurance carriers; therefore, the Company typically requires up-front
payment from the patient for regenerative services and any co-pays and deductibles as required by the patient specific insurance
carrier. For some patients, credit is provided through an outside vendor. In this case, the Company is paid from the credit card
company and the risk is transferred to the credit card company for collection from the patient. These funds are accounted for
as patient deposits until the procedures are performed at which point the patient deposit is recognized as patient service revenue.
Fair
Value of Financial Instruments
The
carrying amount of accounts receivable and accounts payable approximate their respective fair values due to the short- term nature.
The carrying amount of the line of credit and note payable approximates fair values due to their market interest rates. Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
Cash
and Cash Equivalents
The
Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. The Company
had no cash equivalents at September 30, 2020 and December 31, 2019.
Accounts
Receivable
Accounts
receivable primarily consists of amounts due from third-party payers (non-governmental), governmental payers and private pay patients
and is recorded net of allowances for doubtful accounts and contractual discounts. The Company’s ability to collect outstanding
receivables is critical to its results of operations and cash flows. Accordingly, accounts receivable reported in the Company’s
condensed consolidated financial statements is recorded at the net amount expected to be received. The Company’s primary
collection risks are (i) the risk of overestimation of net revenues at the time of billing that may result in the Company receiving
less than the recorded receivable, (ii) the risk of non-payment as a result of commercial insurance companies’ denial of
claims, (iii) the risk that patients will fail to remit insurance payments to the Company when the commercial insurance company
pays out-of-network claims directly to the patient, (iv) resource and capacity constraints that may prevent the Company from handling
the volume of billing and collection issues in a timely manner, (v) the risk that patients do not pay the Company for their self-pay
balances (including co-pays, deductibles and any portion of the claim not covered by insurance) and (vi) the risk of non-payment
from uninsured patients.
The
Company’s accounts receivable from third-party payers are recorded net of estimated contractual adjustments and allowances
from third-party payers, which are estimated based on the historical trend of the Company’s facilities’ cash collections
and contractual write-offs, accounts receivable aging, established fee schedules, relationships with payers and procedure statistics.
While changes in estimated reimbursement from third-party payers remain a possibility, the Company expects that any such changes
would be minimal and, therefore, would not have a material effect on the Company’s financial condition or results of operations.
The Company’s collection policies and procedures are based on the type of payor, size of claim and estimated collection
percentage for each patient account. The Company analyzes accounts receivable at each of the facilities to ensure the proper collection
and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts.
Collection efforts include direct contact with insurance carriers or patients and written correspondence.
Allowance
for Doubtful Accounts, Contractual and Other Discounts
Management
estimates the allowance for contractual and other discounts based on its historical collection experience and contracted relationship
with the payers. The services authorized and provided and related reimbursement are often subject to interpretation and negotiation
that could result in payments that differ from the Company’s estimates. The Company’s allowance for doubtful accounts
is based on historical experience, but management also takes into consideration the age of accounts, creditworthiness and current
economic trends when evaluating the adequacy of the allowance for doubtful accounts. An account may be written-off only after
the Company has pursued collection efforts or otherwise determines an account to be uncollectible. Uncollectible balances are
written-off against the allowance. Recoveries of previously written-off balances are credited to income when the recoveries are
made.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Additions and improvements to property and equipment are capitalized
at cost. Depreciation of owned assets and amortization of leasehold improvements are computed using the straight-line method over
the shorter of the estimated useful lives of the related assets or the lease term. The cost of assets sold or retired, and the
related accumulated depreciation are removed from the accounts and any resulting gains or losses are reflected in other income
(expense) for the year. Expenditures for maintenance and repairs are charged to expense as incurred.
Intangible
Assets
The
Company capitalizes the fair value of intangible assets acquired in business combinations. Intangible assets are amortized on
a straight-line basis over their estimated economic useful lives, generally the contract term. The Company performs valuations
of assets acquired and liabilities assumed on each acquisition accounted for as a business combination and allocates the purchase
price of each acquired business to its respective net tangible and intangible assets. Acquired intangible assets include trade
names, non-compete agreements, customer relationships and contractual agreements.
Goodwill
Our
goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in business combinations.
The goodwill generated from the business combinations is primarily related to the value placed on the employee workforce and expected
synergies. Judgment is involved in determining if an indicator or change in circumstances relating to impairment has occurred.
Such changes may include, among others, a significant decline in expected future cash flows, a significant adverse change in the
business climate, and unforeseen competition. There was no goodwill impairment for the years presented.
The
Company tests goodwill for impairment on an annual basis, and when events or circumstances indicate the fair value of a reporting
unit may be below its carrying value.
Long-Lived
Assets
Long-lived
assets such as property and equipment and intangible assets are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. There were no impairments of long-lived assets for the years presented.
Advertising
and Marketing
The
Company uses advertising and marketing to promote its services. Advertising and marketing costs are expensed as incurred. Advertising
and marketing expense was $234,694 and $317,800 for the three months ended September 30, 2020 and 2019, respectively and was $650,861
and $1,014,144 for the nine months ended September 30, 2020 and 2019, respectively.
Net
Loss Per Share
Basic
net loss per common share is computed by dividing net loss applicable to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted net loss per common share is determined using the weighted-average of common
shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of the conversion
option embedded in convertible debt. The weighted-average number of common shares outstanding excludes common stock equivalents
because their inclusion would have an anti-dilutive effect.
Income
Taxes
Following
the Company’s conversion to a Delaware corporation in 2018, IMAC Nashville, IMAC Texas, IMAC St. Louis continued as single-member
limited liability companies (wholly owned by the Company) that are disregarded entities for tax purposes and do not file separate
returns. Their activity is included as part of IMAC Holdings Inc. Advantage Therapy, IMAC Illinois and IMAC Florida are also disregarded
entities for tax purposes. BioFirma was a limited liability company taxed as a partnership. Effective October 1, 2019 until its
disposal on December 31, 2019, BioFirma was a disregarded entity for tax purposes. IMAC Management is a C-corporation
and is included in the consolidated return of IMAC Holdings as a subsidiary.
Any
future benefit arising from losses have been offset by a valuation allowance. Accordingly, no provision for income taxes is reflected
in the condensed consolidated financial statements. The Company records a liability for uncertain tax positions when it is probable
that a loss has been incurred and the amount can be reasonably estimated. Interest and penalties related to income tax matters,
if any, would be recognized as a component of income tax expense. At September 30, 2020 and December 31, 2019, the Company had
no liabilities for uncertain tax positions. The Company continually evaluates expiring statutes of limitations, audits, proposed
settlements, changes in tax law and new authoritative rulings. Currently, the tax years subsequent to 2017 are open and subject
to examination by the taxing authorities.
Note
3 – Capital Requirements, Liquidity and Going Concern Considerations
The
Company’s condensed consolidated financial statements are prepared in accordance with GAAP including the assumption of a
going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
However, as shown in the accompanying condensed consolidated financial statements, the Company has sustained substantial losses
from operations since inception and had a deficiency in working capital of approximately $2.2 million and $3.5 million at September
30, 2020 and December 31, 2019. The Company had a net loss of approximately $5.2 million and $5.0 million at September 30, 2020
and 2019, respectively, and used cash in operations of approximately $4.0 million and $2.8 million at September 30, 2020 and 2019,
respectively. The Company expects to continue to incur significant expenditures to develop and expand its owned and managed outpatient
medical clinics.
Management
recognizes that the Company must obtain additional resources to successfully integrate its acquired and managed clinics and implement
its business plans. Through September 30, 2020, the Company has received funding in the form of indebtedness and the issuance
of common stock. Management plans to continue to raise funds and/or refinance our indebtedness to support our operations in 2020
and beyond. However, no assurances can be given that we will be successful. If management is not able to timely and successfully
raise additional capital and/or refinance indebtedness, the implementation of the Company’s business plan, financial condition
and results of operations will be materially affected. These condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Note
4 – Concentration of Credit Risks
Cash
The
Company maintains its cash in accounts at financial institutions, which may, at times, exceed federally-insured limits of $250,000.
As of September 30, 2020, the Company had approximately $150,956 of cash in excess of federally insured limits.
Revenue
and Accounts Receivable
As
of September 30, 2020 and December 31, 2019, the Company had the following revenue and accounts receivable concentrations:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
% of Revenue
|
|
|
% of Accounts Receivable
|
|
|
% of Revenue
|
|
|
% of Accounts Receivable
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Patient payment
|
|
|
34
|
%
|
|
|
30
|
%
|
|
|
47
|
%
|
|
|
40
|
%
|
Medicare payment
|
|
|
40
|
%
|
|
|
26
|
%
|
|
|
27
|
%
|
|
|
26
|
%
|
Insurance payment
|
|
|
26
|
%
|
|
|
44
|
%
|
|
|
26
|
%
|
|
|
34
|
%
|
Note
5 – Accounts Receivable
As
of September 30, 2020 and December 31, 2019, the Company’s accounts receivable consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Gross accounts receivable
|
|
$
|
1,462,439
|
|
|
$
|
1,285,228
|
|
Less: allowance for doubtful accounts
|
|
|
(28,982
|
)
|
|
|
(26,903
|
)
|
Accounts receivable, net
|
|
$
|
1,433,457
|
|
|
$
|
1,258,325
|
|
Note
6 – Business Acquisitions
BioFirma
On
August 1, 2018, the Company entered into an agreement to purchase 70% of all outstanding membership units of BioFirma LLC. The
purchase price for the interests was $1,000 paid in cash.
The
Company has included the financial results of BioFirma in the condensed consolidated financial statements from August 1, 2018,
the date of acquisition.
On
October 1, 2019, the holder of the 30% of the membership interests of BioFirma and the Company entered into an Assignment and
Assumption of Interests of BioFirma LLC, pursuant to which the Company acquired the 30% of BioFirma’s membership interests
which were not previously held by the Company, resulting in the Company owning 100% of the membership interests of BioFirma.
On
December 31, 2019, the Company and BioFirma consummated the sale of substantially all of BioFirma’s assets pursuant to an
asset purchase agreement with Self Care Regeneration LLC for a purchase price of $320,800, plus the assumption of certain of BioFirma’s
liabilities, all of which were due to be paid to us no later than March 30, 2020. On March 31, 2020, the due date for the payment
of the asset sale purchase price was extended to June 30, 2020. As of September 30, 2020, the acquirer of the assets had paid
$10,000 in cash and gave the Company medical supplies valued at $27,500 as a payment in-kind. The Company
has established a bad debt reserve of 100% of the remaining selling price, $312,000.
IMAC
Illinois
On
April 1, 2019, the Company and its wholly owned subsidiary IMAC Illinois entered into an Agreement and Plan of Merger (the “Merger
Agreement”) for the acquisition of a practice management group that manages three clinics in the Chicago, Illinois area.
The acquisition was completed on April 19, 2019. Pursuant to the Merger Agreement, the Company issued 1,002,306 restricted shares
of the Company’s common stock (the “Merger Consideration”) valued at approximately $4.1 million. The Company
has included the financial results of IMAC Illinois, which controls the three Chicago-area clinics, from April 19, 2019, the date
of acquisition.
IMAC
Florida
On
January 13, 2020, the Company and its wholly owned subsidiary IMAC Florida consummated the acquisition of CHSF, a chiropractic
practice in Bonita Springs, Florida. The transaction was completed as a purchase of the practice for $200,000. The Company has
included the financial results of IMAC Florida, which controls CHSF, from January 13, 2020, the date of acquisition.
The
following table summarizes the fair value of consideration paid and the allocation of purchase price to the fair value of net
assets acquired for the acquisition of the IMAC Florida business:
|
|
Florida
|
|
Property & equipment
|
|
$
|
50,358
|
|
Customer lists
|
|
|
128,802
|
|
Other assets
|
|
|
20,840
|
|
|
|
$
|
200,000
|
|
Note
7 – Property and Equipment
The
Company’s property and equipment consisted of the following at September 30, 2020 and December 31, 2019:
|
|
Estimated
Useful Life in Years
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
40 (Building)
|
|
$
|
-
|
|
|
$
|
1,175,000
|
|
Leasehold improvements
|
|
Shorter of asset or lease term
|
|
|
2,007,805
|
|
|
|
2,262,398
|
|
Equipment
|
|
1.5 - 7
|
|
|
1,991,182
|
|
|
|
1,948,347
|
|
Total property and equipment
|
|
|
|
|
3,998,987
|
|
|
|
5,385,745
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(2,162,007
|
)
|
|
|
(1,693,736
|
)
|
|
|
|
|
|
1,836,980
|
|
|
|
3,692,009
|
|
Construction in progress
|
|
|
|
|
24,899
|
|
|
|
-
|
|
Total property and equipment, net
|
|
|
|
$
|
1,861,879
|
|
|
$
|
3,692,009
|
|
Depreciation
was $195,288 and $198,812 for the three months ended September 30, 2020 and 2019, respectively and $632,949 and $527,088 for the
nine months ended September 30, 2020 and 2019, respectively.
Note
8 – Intangibles Assets and Goodwill
The
Company’s intangible assets and goodwill consisted of the following at September 30, 2020 and December 31, 2019:
|
|
|
|
September 30, 2020
|
|
|
|
Estimated
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management service agreements
|
|
10 years
|
|
$
|
7,940,398
|
|
|
$
|
(1,507,868
|
)
|
|
$
|
6,432,530
|
|
Non-compete agreements
|
|
3 years
|
|
|
301,000
|
|
|
|
(232,056
|
)
|
|
|
68,944
|
|
Customer lists
|
|
3 years
|
|
|
134,882
|
|
|
|
(33,721
|
)
|
|
|
101,161
|
|
Definite lived assets
|
|
|
|
|
8,376,280
|
|
|
|
(1,773,645
|
)
|
|
|
6,602,635
|
|
Research and development
|
|
|
|
|
243,750
|
|
|
|
-
|
|
|
|
243,750
|
|
Goodwill
|
|
|
|
|
2,040,696
|
|
|
|
-
|
|
|
|
2,040,696
|
|
Total intangible assets and goodwill
|
|
|
|
$
|
10,660,726
|
|
|
$
|
(1,773,645
|
)
|
|
$
|
8,887,081
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Estimated
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management service agreements
|
|
10 years
|
|
$
|
8,019,199
|
|
|
$
|
(994,321
|
)
|
|
$
|
7,024,878
|
|
Non-compete agreements
|
|
3 years
|
|
|
301,000
|
|
|
|
(156,806
|
)
|
|
|
144,194
|
|
Definite lived assets
|
|
|
|
|
8,320,199
|
|
|
|
(1,151,127
|
)
|
|
|
7,169,072
|
|
Goodwill
|
|
|
|
|
2,040,696
|
|
|
|
-
|
|
|
|
2,040,696
|
|
Total intangible assets and goodwill
|
|
|
|
$
|
10,360,895
|
|
|
$
|
(1,151,127
|
)
|
|
$
|
9,209,768
|
|
Amortization
was $234,833 and $223,593 for the three months ended September 30, 2020 and 2019, respectively, and $701,318 and $577,873 for
the nine months ended September 30, 2020 and 2019, respectively.
The
Company’s estimated future amortization of intangible assets was as follows:
Years Ending December 31,
|
|
|
|
|
|
|
|
2020 (three months)
|
|
$
|
234,833
|
|
2021
|
|
|
882,861
|
|
2022
|
|
|
839,000
|
|
2023
|
|
|
794,040
|
|
2024
|
|
|
794,040
|
|
Thereafter
|
|
|
3,057,861
|
|
|
|
$
|
6,602,635
|
|
Note
9 – Operating Leases
On
January 1, 2019, the Company adopted ASC 842 using the modified retrospective method applied to leases that were in place at January
1, 2019. Results for operating periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840. The Company’s leases
consist of operating leases that mostly relate to real estate rental agreements. Most of the value of the Company’s lease
portfolio relates to real estate lease agreements that were entered into starting March 2017.
Discount
Rate Applied to Operating Leases
To
determine the present value of minimum future lease payments for operating leases at January 1, 2019, the Company was required
to estimate a rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal
to the lease payments in a similar economic environment (the “incremental borrowing rate” or “IBR”).
The
Company determined the appropriate IBR by identifying a reference rate and making adjustments that take into consideration financing
options and certain lease-specific circumstances. For the reference rate, the Company used the ten year mortgage interest rate.
Right
of Use Assets
Right
of use assets included in the Company’s condensed consolidated balance sheet were as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Non-current assets
|
|
|
|
|
|
|
|
|
Right of use assets, net of amortization
|
|
$
|
3,965,755
|
|
|
$
|
3,719,401
|
|
Total
operating lease cost
Individual
components of the total lease cost incurred by the Company were as follows:
|
|
Nine Months
Ended
September 30, 2020
|
|
|
Nine Months
Ended
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Operating lease expense
|
|
$
|
942,351
|
|
|
$
|
751,175
|
|
Minimum
rental payments under operating leases are recognized on a straight light basis over the term of the lease.
Maturity
of operating leases
The
Company’s amount of future minimum lease payments under operating leases are as follows:
|
|
Operating
Leases
|
|
|
|
|
|
Undiscounted future minimum lease payments:
|
|
|
|
|
2020 (three months)
|
|
$
|
296,690
|
|
2021
|
|
|
1,165,714
|
|
2022
|
|
|
1,160,098
|
|
2023
|
|
|
1,069,971
|
|
2024
|
|
|
731,468
|
|
Thereafter
|
|
|
664,081
|
|
Total
|
|
|
5,088,022
|
|
Amount representing imputed interest
|
|
|
(312,660
|
)
|
Total operating lease liability
|
|
|
4,775,362
|
|
Current portion of operating lease liability
|
|
|
(1,051,964
|
)
|
Operating lease liability, non-current
|
|
$
|
3,723,398
|
|
Note
10 – Line of Credit
Advantage
Therapy has a $100,000 line of credit with a financial institution that matures on November 20, 2020. The line accrues interest
at a variable rate which is currently 6.0% per annum. The line is secured by substantially all of IMAC Holding’s assets.
This line of credit had a balance of $79,961 at September 30, 2020 and December 31, 2019.
Note
11 – Notes Payable
On
March 25, 2020, the Company entered into a note purchase agreement with Iliad Research & Trading, L.P. (the “Holder”),
pursuant to which the Company agreed to issue and sell to the Holder a secured promissory note (the “Note”) in an
aggregate initial principal amount of $1,115,000 (the “Initial Principal Amount”), which is payable on or before the
date that is 18 months from the issuance date (the “Maturity Date”). The Initial Principal Amount includes an original
issue discount of $100,000 and $15,000 that the Company agreed to pay to the Holder to cover the Holder’s legal fees, accounting
costs, due diligence and other transaction costs. In exchange for the Note, the Holder paid an aggregate purchase price of $1,000,000.
Interest on the Note accrues at a rate of 10% per annum and is payable on the Maturity Date or otherwise in accordance with the
Note. The Note may be prepaid by the Company (with the payment of a premium), may be required by the Holder to be redeemed by
the Company for up to $200,000 per month after the six-month anniversary of the issuance of the Note (subject to certain deferral
rights), and is subject to customary event of default (with a default interest rate of up to 22%). The Note transaction documents
also give the Holder a right of first refusal to future debt issuances and a right to the first $250,000 of every $1 million of
proceeds from future sales of equity by the Company. The Note is secured by the assets of the Company, other that the Company’s
owned real property, intellectual property and accounts receivable, pursuant to a security agreement. See “Note 16 –
Subsequent Events” for information regarding a subsequent note transaction with the Holder in October 2020.
On
April 16, 2020, the Company entered into a loan with Pinnacle Bank as the lender (“Lender”) in an aggregate principal
amount of $1,691,520 (the “Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus
Aid, Relief, and Economic Security (CARES) Act. The Loan is evidenced by a promissory note (the “PPP Note”) dated
April 16, 2020 and matures on April 16, 2022. The PPP Note bears interest at a rate of 1.000% per annum, with the first six months
of payments deferred. On October 20, 2020, IMAC submitted a loan forgiveness application to the U.S. Small Business
Administration (“SBA”). However, principal and interest on the Loan will be payable monthly following
a determination by the SBA that any amount under the PPP Note not be forgiven. In order to
be entitled to forgiveness, funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits,
mortgage payments, rent utilities, and interest on other debt obligations under the terms and conditions outlined by the PPP.
The Company used all of the Loan amount for such qualifying expenses. The Loan was deemed not to be a
restricted issuance pursuant to the terms of the note purchase agreement entered into by the Company and Iliad Research &
Trading, L.P. on March 25, 2020.
Set
forth below is a summary of the Company’s outstanding debt as of September 30, 2020 and December 31, 2019:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Note payable to The Edward S. Bredniak Trust in the amount of up to $2,000,000. An existing note payable with this entity in the amount of $379,676 has been combined into the new note payable which carries an interest rate of 10% per annum. The Note was amended in September 2020 and all outstanding balances are due January 5, 2022.
|
|
$
|
1,750,000
|
|
|
$
|
1,750,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to a financial institution in the amount of $200,000 dated November 15, 2017. The note requires 66 consecutive monthly installments of $2,652 including principal and interest at 5%, with a balloon payment of $60,000 which was paid on June 15, 2018. The note matures on May 15, 2023, and is secured by the personal guarantees of certain Company executives.
|
|
|
79,221
|
|
|
|
99,628
|
|
|
|
|
|
|
|
|
|
|
$1.2 million mortgage loan with a financial institution. The loan agreement was originally for
6-months and carries an interest rate 3.35%. The loan matured in 2019. As of June 30, 2020, it was due on demand, with interest
being paid monthly. This mortgage was repaid on July 24, 2020.
|
|
|
-
|
|
|
|
1,232,500
|
|
|
|
|
|
|
|
|
|
|
Note payable to a financial institution in the amount of $131,400 dated August 1, 2016. The note requires 120 monthly installments of $1,394 including principal and interest at 5%. The note matures on July 1, 2026, and is secured by a letter of credit.
|
|
|
84,468
|
|
|
|
93,652
|
|
|
|
|
|
|
|
|
|
|
Note payable to a financial institution in the amount of $200,000 dated May 4, 2016. The note requires 60 monthly installments of $3,881 including principal and interest at 4.25%. The note matures on May 4, 2021, and is secured by the equipment and personal guarantees of certain Company executives.
|
|
|
30,550
|
|
|
|
63,913
|
|
|
|
|
|
|
|
|
|
|
Note payable to an employee in the amount of $101,906 dated March 8, 2017. The note requires payment of five annual installments of $23,350, including principal and interest at 5%. The note matures on December 31, 2021, and is unsecured.
|
|
|
40,000
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
$112,800 payable to a landlord of Advantage Therapy, LLC pursuant to a lease dated March 1, 2019. The debt is payable in 60 monthly installments of $2,129, including principal and interest at 5%. The debt matures on June 1, 2024.
|
|
|
87,181
|
|
|
|
102,744
|
|
|
|
|
|
|
|
|
|
|
Note payable to a financial institution in the amount of $140,000, dated September 25, 2019. The note requires 36 consecutive monthly installments of $4,225 including principal and interest at 5.39%. The note matures on September 19, 2022 and is secured by a personal guarantee of the Vice President of Business Development of the Company.
|
|
|
95,866
|
|
|
|
129,182
|
|
|
|
|
|
|
|
|
|
|
Note payable to a financial institution in the amount of $1,691,520 dated April 16, 2020. Any
amounts under this note which are not determined to be forgivable by the SBA shall be repaid in 18 equal monthly installments,
commencing after the SBA makes such determination. The note matures on April 16, 2022.
|
|
|
1,691,520
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable in the amount of $1,115,000, dated March 25, 2020. The note is payable on or before September 25, 2021. The interest on the note accrues at a rate of 10% per annum and is payable on the maturity date or otherwise in accordance with the note.
|
|
|
709,075
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Unamortized debt issuance costs
|
|
|
(57,242
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,510,639
|
|
|
|
3,531,619
|
|
Less: current portion:
|
|
|
(1,839,306
|
)
|
|
|
(1,422,554
|
)
|
|
|
$
|
2,671,333
|
|
|
$
|
2,109,065
|
|
Principal
maturities of the Company’s notes payable are as follows:
Years Ending December 31,
|
|
Amount
|
|
|
|
|
|
2020 (three months)
|
|
$
|
780,126
|
|
2021
|
|
|
1,391,632
|
|
2022
|
|
|
2,234,184
|
|
2023
|
|
|
51,657
|
|
2024
|
|
|
27,631
|
|
Thereafter
|
|
|
25,409
|
|
Total
|
|
$
|
4,510,639
|
|
Note
12 – Stockholders’ Equity
Prior
to the Company’s conversion to a corporation, the Company had 400 member units authorized with 365 units issued and outstanding.
On
June 1, 2018, the Company converted its 365 outstanding member units into 6,582,737 shares of common stock with a $0.001 par value
pursuant to the Company’s conversion from a limited liability company to a corporation.
On
February 12, 2019, the Company completed a reverse split of its 6,582,737 shares of common stock to 4,533,623 shares of common
stock outstanding pursuant to an amendment of the Company’s certificate of incorporation. The reverse split has been given
retrospective treatment.
During
February 2019, the Company completed an initial public offering of securities and issued 850,000 shares of its common stock, along
with 1,700,000 warrants to purchase common stock and an option to purchase 34,000 shares of common stock for gross proceeds of
$4,356,815. The Company also issued 449,217 shares of common stock for the conversion of its 4% convertible notes and 1,410,183
shares to satisfy deferred acquisition consideration payable in connection with its 2018 business acquisitions.
On
April 19, 2019, the Company consummated the Merger Agreement and issued 1,002,306 shares of its common stock in Merger Consideration.
On
July 15, 2019, the Company signed a $10 million share purchase agreement (the “Purchase Agreement”) with Lincoln Park
Capital Fund, LLC (“Lincoln Park”), an Illinois limited liability company. In consideration for entering into the
$10 million agreement, the Company issued to Lincoln Park 60,006 shares of Company common stock as a commitment fee. The Purchase
Agreement limits our sales of shares of common stock to Lincoln Park to 1,669,359 shares of common stock, representing 19.99%
of the shares of common stock outstanding on the date of the Purchase Agreement unless (a) stockholder approval is obtained to
issue more than such amount or (b) the average price of all applicable sales of our common stock to Lincoln Park under the Purchase
Agreement equals or exceeds the lower of (i) the closing price of our common stock on the Nasdaq Capital Market immediately preceding
July 15, 2019 or (ii) the average of the closing price of our common stock on the Nasdaq Capital Market for the five business
days immediately preceding July 15, 2019. As of September 30, 2020, pursuant to the Purchase Agreement, the Company sold an aggregate
of 1,602,294 shares of common stock of the Company to Lincoln Park for aggregate proceeds to the Company of $2,424,053 (excluding
the 60,006 shares issued to Lincoln Park as a commitment fee).
On
June 18, 2020, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with
institutional accredited investors (the “Purchasers”) pursuant to which the Company offered for sale to the Purchasers
an aggregate of 1,764,000 shares (the “Shares”) of its common stock, in a registered direct offering (the “Registered
Direct Offering”). The Shares were offered by the Company pursuant to its shelf registration statement on Form S-3 (File
No. 333-237455) originally filed with the SEC on March 27, 2020 (as amended, the “Registration Statement”), which
was declared effective on April 3, 2020. The purchase price for one Share in the Registered Direct Offering was $1.50, and closing
of the Registered Direct Offering occurred on June 22, 2020. The Company received $2.644 million in gross proceeds from the Registered
Direct Offering. The Company used approximately $0.5 million of the gross proceeds for the repayment of certain indebtedness,
and the remaining proceeds to the Company will be used to finance the costs of developing and acquiring additional outpatient
medical clinics as part of the Company’s growth and expansion strategy and for working capital.
2018
Incentive Compensation Plan
The
Company’s board of directors and holders of a majority of outstanding shares approved and adopted the Company’s 2018
Incentive Compensation Plan (“2018 Plan”) in May 2018, reserving the issuance of up to 1,000,000 shares of common
stock (subject to certain adjustments) upon exercise of stock options and grants of other equity awards. The 2018 Plan provides
for the grant of incentive stock options (“ISOs”), nonstatutory stock options, stock appreciation rights, restricted
stock awards, restricted stock unit awards, performance-based stock awards, other forms of equity compensation and performance
cash awards. ISOs may be granted only to employees. All other awards may be granted to employees, including officers, and to the
Company’s non-employee directors and consultants, and affiliates.
Stock
Options
As
of September 30, 2020, the Company had issued stock options to purchase 411,518 shares of its common stock as non-qualified stock
options to various employees of the Company. These options vest over a period of four years, with 25% vesting after one year and
the remaining 75% vesting in equal monthly installments over the following 36 months and are exercisable for a period of ten years.
Stock based compensation for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes
method. The per-share fair values of these options is calculated based on the Black-Scholes-Merton pricing model with the following
assumptions: a volatility rate of 32.2%, risk free rate of 2.4% and the expected term of 10 years.
Restricted
Stock Units
On
May 21, 2019, the Company granted an aggregate of 277,500 Restricted Stock Units (“RSUs”) to certain employees, executives
and directors of the Company, the terms of which vest over various periods between the date of grant and May 21, 2023. On August
13, 2019, 30,000 shares of common stock were issued pursuant to previously granted RSUs which had vested as of such date. On May
21, 2020, the Company granted 10,000 RSUs to a director of the Company, which vested immediately. On June 30, 2020, 66,875 shares
of common stock were issued pursuant to previously granted RSUs which had vested as of such date.
Note
13 – Retirement Plan
The
Company offers a 401(k) plan that covers eligible employees. The plan provides for voluntary salary deferrals for eligible employees.
Additionally, the Company is required to make matching contributions of 50% of up to 6 % of total compensation for those employees
making salary deferrals. The Company made contributions of $31,879 and $20,042 during the three months ended September 30, 2020
and 2019, respectively, and $71,674 and $40,804 during the nine months ended September 30, 2020 and 2019, respectively.
Note
14 – Income Taxes
The
provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before
provision for income taxes. The sources and tax effects of the differences are as follows:
Deferred tax benefit at the federal statutory rate
|
|
|
21
|
%
|
Valuation allowance
|
|
|
-21
|
%
|
|
|
|
0
|
%
|
At
September 30, 2020, the Company had a net operating loss carryforward of approximately $3.7 million for federal and state purposes.
This loss will be available to offset future taxable income. If not used, this carryforward will begin to expire in 2029. The
deferred tax asset relating to the operating loss carryforward has been fully reserved at September 30, 2020. The principal differences
between the operating loss for income tax purposes and reporting purposes are shares issued for services and share-based compensation
and a temporary difference in depreciation expense.
Note
15 – Commitments and Contingencies
The
Company is subject to extensive regulation, including health insurance regulations directed at ascertaining the appropriateness
of reimbursement, preventing fraud and abuse and otherwise regulating reimbursement. To ensure compliance, various insurance providers
often conduct audits and request patient records and other documents to support claims submitted by the Company for payment of
services rendered to customers. In the event that an audit results in discrepancies in the records provided, insurance providers
may be entitled to extrapolate the results of the audit to make overpayment demands based on a wider population of claims than
those examined in the audit.
From
time to time the Company may become subject to threatened and/or asserted claims arising in the ordinary course of our business.
Management is not aware of any matters, either individually or in the aggregate, that are reasonably likely to have a material
impact on the Company’s financial condition, results of operations or liquidity.
Note
16 - Subsequent Events
On
October 5, 2020, the Company launched an at-the-market offering (the “Offering”) of up to $5,000,000 worth
of shares of the Company’s common stock, par value $0.001 per share, pursuant to an At-The-Market Issuance Sales Agreement,
dated October 5, 2020, by and between the Company and Ascendiant Capital Markets, LLC. To date, no shares have been sold and
issued pursuant to the Offering.
On October 21, 2020, David Ellwanger,
George Hampton and Gerard Hayden, directors of the Company, delivered emails notifying the Company of their intention to resign
from the Board of Directors of the Company (the “Board”) and from all of their Board committee positions, effective
as of the earlier of November 30, 2020 or the appointment of their respective replacements to the Board.
On
October 31, 2020, the Board of the Company appointed Maurice E. (Mo) Evans, Michael D. Pruitt and Cary W. Sucoff as directors
of the Company, effective on that date. Effective as of the appointments of Messrs. Evans, Pruitt and Sucoff, the resignations
of directors David Ellwanger, George Hampton and Gerard Hayden were also effective.
On October 29, 2020, the Company
entered into a note purchase agreement (the “October Purchase Agreement”) with Iliad Research & Trading,
L.P., pursuant to which the Company agreed to issue and sell to the Holder a secured promissory note (the “October
Note”) in an initial principal amount of $2,690,000 (the “October Principal Amount”), which is payable
on or before April 29, 2022. The October Principal Amount includes an original discount of $175,000 and $15,000 that the
Company agreed to pay to the Holder to cover the Holder’s legal fees, accounting costs, due diligence and other transaction
costs. In exchange for the October Note, the Holder paid a purchase price of $2,500,000. The October Purchase Agreement
also provides for indemnification of the Holder and its affiliates in the event that they incur loss or damage related to, amount
other things, breach by the Company of any of its representations, warranties or covenants under the October Purchase Agreement.
In connection with the October Purchase Agreement and the October Note, the Company entered into a Security Agreement with
the Holder (the “October Security Agreement”), pursuant to which the obligations of the Company is secured by all
of the assets of the Company, excluding the Company’s accounts receivable and intellectual property. Upon an event of default
under the October Note, the October Security Agreement entitles the Holder to take possession of such collateral; provided that
the Holder’s security interest and remedies with respect to the collateral are junior in priority to the security interest
previously granted by the Company to the Holder in connection with a separate financing entered into by them on March 25, 2020,
for which the Holder holds a senior, first-priority security interest in the same collateral.
On
November 9, 2020, the Company consummated an agreement for the acquisition of assets of Lockwood Chiropractic, LLC in Webster
Groves, Missouri, effective November 14, 2020. The transaction was completed as an all-cash asset purchase for $2,000.