NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 – Description of Business
IMAC
Holdings, Inc. is a holding company for IMAC Regeneration Centers, The Back Space retail stores and our Investigational New Drug division.
IMAC Holdings, Inc. and its affiliates (collectively, the “Company”) provide movement, orthopedic and neurological 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 has opened or acquired through management service agreements twelve (12) medical clinics
located in Florida, Illinois, Kentucky, Louisiana and Missouri as of June 30, 2022. The Back Space operates a healthcare center specializing
in chiropractic and spinal care services inside Walmart retail locations. As of June 30, 2022, the Back Space has opened ten retail clinic
locations in Florida, Missouri and Tennessee. The Company’s Investigational New Drug division is conducting a clinical trial for
its investigational compound utilizing umbilical cord-derived allogenic mesenchymal stem cells for the treatment of bradykinesia due
to Parkinson’s disease.
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”).
The
accompanying condensed consolidated financial statements include the accounts of IMAC Holdings, Inc. 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 Regeneration Center of St. Louis, LLC (“IMAC St. Louis”), 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”),
Advantage Hand Therapy and Orthopedic Rehabilitation, LLC (“Advantage Therapy”), IMAC Management of Florida, LLC
(“IMAC Florida”), Louisiana Orthopaedic & Sports Rehab (“IMAC Louisiana”) and The Back Space, LLC
(“BackSpace”); 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”); the following entities which are
consolidated with IMAC Management of Illinois, LLC due to control by contract: Progressive Health and Rehabilitation, Ltd., Illinois
Spine and Disc Institute, Ltd. and Ricardo Knight, P.C.; the following entities which are consolidated with IMAC Management
Services, LLC due to control by contract: Integrated Medicine and Chiropractic Regeneration Center PSC (“Kentucky PC”) and IMAC Medical of Kentucky, PSC;
the following entities which are consolidated with IMAC Florida due to control by contract: Willmitch Chiropractic, P.A. and IMAC
Medical of Florida, P.A.; the following entity which is consolidated with Louisiana Orthopaedic & Sports Rehab due to control by
contract: IMAC Medical of Louisiana, a Medical Corporation; and the following entities which are consolidated with BackSpace due to
control by contract: ChiroMart LLC, ChiroMart Florida LLC, and ChiroMart Missouri LLC.
In
February 2021, the Company completed the asset purchase of and signed a Management Services Agreement with Willmitch Chiropractic, P.A.
in Tampa, Florida.
In
March 2021, the Company completed the asset purchase of NHC Chiropractic, PLLC dba Synergy Healthcare in Orlando, Florida.
In
June 2021, the Company completed the asset purchase of Fort Pierce Chiropractic in Fort Pierce, Florida and Active Medical Center in
Naperville, Illinois.
In
October 2021, the Company consummated certain transactions resulting in the acquisition of the outstanding equity interest in Louisiana
Orthopaedic & Sports Rehab Institute, Inc, an entity which presents the results of Louisiana Medical due to control by contract.
These
acquisitions are 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
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 beyond the results presented in these condensed consolidated financial statements.
Due
to the impacts of COVID-19 we have experienced an increase in recruiting and labor costs as well as staffing disruptions and fulfilment
delays in supplies and equipment.
Revenue
Recognition
The
Company’s patient service revenue is derived from non-surgical procedures performed at our outpatient medical clinics. The fees
for such services are billed either to the patient or a third-party payer, including Medicare.
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.
Starting
in January 2020, the Company implemented wellness maintenance programs on a subscription basis. There are currently four membership plans
offered with different levels of service for each plan. The Company recognizes membership revenue on a monthly basis. Enrollment in the
wellness maintenance program can occur at any time during the month and can be dis-enrolled at any time.
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 a 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 recognizes other management service revenue in the period in which services are rendered. These revenues are earned
by IMAC Nashville, IMAC Management, IMAC Illinois, IMAC Florida, IMAC Louisiana and the Back Space and are eliminated in consolidation
to the extent owned.
Starting
in June 2021, the Company introduced BackSpace and began offering outpatient chiropractic and spinal care services as well as memberships
services in Walmart retail locations. The fees for such services are paid and recognized as incurred.
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.
Variable
Interest Entities
Certain
states prohibit the “corporate practice of medicine,” which restricts business corporations from practicing medical care
by exercising control over clinical decisions by doctors. In states which prohibit the corporate practice of medicine, the Company enters
into long-term management agreements with professional corporations (“PCs”) that are owned by licensed doctors, which, in
turn employ or contract with doctors who provide professional care in its clinics. Under these management agreements with PCs, the Company
provides, on an exclusive basis, all non-clinical services of the practice.
The
condensed consolidated financial statements include the accounts of variable interest entities (“VIE”) in which the Company
is the primary beneficiary under the provisions of the FASB Accounting Standards Codification 810, “Consolidation”.
The Company has the power to direct the activities that most significantly impact a VIE’s economic performance. Additionally, the
Company would absorb substantially all of the expected losses from any of these entities should such expected losses occur. As of June
30, 2022, the Company’s consolidated VIE’s include 12 PCs.
The
total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated
balance sheets as of June 30, 2022 and December 31, 2021, were approximately $2.1 million and $2.2 million respectively, and the total
liabilities of the consolidated VIEs were approximately $897,000 and $661,000, respectively.
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 June 30, 2022 and December 31, 2021.
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 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 applied against operating expenses 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 are computed using the straight-line method over the estimated useful lives 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 operating expenses 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. The Company records an impairment loss when the carrying amount of the asset is
not recoverable and exceeds its fair value. In March 2022 the Company decided to close a clinic in Florida with a total intangible carrying
amount of approximately $30,000, which was written off as impaired. As a result, the Company recorded a noncash impairment loss for this
amount during the three months ended March 31, 2022. No impairments of intangible assets were recorded for the three months ended June
30, 2022 or the six months ended June 30, 2021.
Goodwill
Our
goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed
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.
The
goodwill test is performed at least annually, or more frequently if events or changes in circumstances indicate that the asset might
be impaired. The annual impairment test includes an option to perform a qualitative assessment of whether it is more likely than not
that a reporting unit’s fair value is less than its carrying value; the qualitative test may be performed prior to, or as an alternative
to, performing a quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines
that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company is required
to perform the quantitative goodwill impairment test. Otherwise, no further analysis is required.
The
Company operates under one reporting unit. The quantitative impairment test involves the comparison of the fair value of the reporting
unit to its carrying value. The Company calculates the fair value of each reporting unit using either (i) a discounted cash flows analysis
that converts future cash flow amounts into a single discounted present value amount or (ii) a market approach. The Company assesses
the valuation methodology based upon the relevance and availability of the data at the time that the valuation is performed. The Company
compares the estimate of fair value for the reporting unit to the carrying value of the reporting unit. If the carrying value is greater
than the estimate of fair value, an impairment loss will be recognized in the amount of the excess.
The
Company performs its annual impairment test during the fourth quarter of the fiscal year. For the year ended December 31, 2021, the Company
performed a qualitative impairment test and, based on the totality of information available for the reporting unit, the Company concluded
that it was more-likely-than-not that the estimated fair value of the reporting unit was greater than the carrying value of the reporting
unit and, as such, no further analysis was required. There was no goodwill impairment for the months presented.
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 approximately $243,000
and $316,000
for the three months ended June 30, 2022 and 2021, respectively and was approximately $613,000
and $581,000
for the six months ended June 30, 2022 and 2021, 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 year. Diluted net loss per common share is determined using the weighted-average of common shares outstanding
during the year, 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
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Deferred
tax assets are required to be reduced by a valuation allowance to the extent that, based on the weight of available evidence, it is more
likely than not that the deferred tax assets will not be realized.
Note
3 – Capital Requirements, Liquidity and Going Concern Considerations
The
Company’s condensed consolidated financial statements are prepared in accordance with GAAP and includes 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 which raises substantial doubt regarding the Company’s ability to continue as a going concern. The Company had working capital of approximately $809,000
at June 30, 2022 and $4.1
million at December 31, 2021. The Company had a net loss of approximately $5.0
million for the six months ended June 30, 2022, and used cash in operations of approximately $5.9
million for the six months ended June 30, 2022. 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. Management plans to continue to raise funds to support our operations in 2022 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, 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.
Revenue
and Accounts Receivable
As
of June 30, 2022 and December 31, 2021, the Company had the following revenue and accounts receivable concentrations:
Schedule
of Concentration Risk
| | |
June 30,
2022 | | |
December 31,
2021 | |
| | |
% of Revenue | | |
% of Accounts Receivable | | |
% of Revenue | | |
% of Accounts Receivable | |
| | |
(Unaudited) | | |
| | |
| |
| Medicare | |
| 27 | % | |
| 23 | % | |
| 37 | % | |
| 16 | % |
Note
5 – Accounts Receivable
As
of June 30, 2022 and December 31, 2021, the Company’s accounts receivable consisted of the following:
Schedule
of Accounts Receivable
| | |
June 30, 2022 | | |
December 31, 2021 | |
| | |
(Unaudited) | | |
| |
| Gross accounts receivable | |
$ | 3,135,996 | | |
$ | 1,290,312 | |
| Less: allowance for doubtful accounts | |
| (80,979 | ) | |
| (80,979 | ) |
| Accounts receivable, net | |
$ | 3,055,017 | | |
$ | 1,209,333 | |
Note
6 – Business Acquisitions
IMAC
Florida
In
February 2021, the Company completed the acquisition of and signed Management Services Agreement with Willmitch Chiropractic, P.A. in
Tampa, Florida. The transaction was completed for $421,000. Willmitch Chiropractic’s founder, Martin Willmitch, will remain with
the Company and serve as Vice President of Managed Care of IMAC Holdings. A total of $7,400 was allocated to property and equipment with
the remaining $413,600, being allocated to goodwill.
In
March 2021, the Company completed the asset purchase of NHC Chiropractic, PLLC dba Synergy Healthcare in Orlando, Florida. The transaction
was completed as an asset purchase for $142,500. A total of $149,720 was allocated to property and equipment and $7,220 being allocated
to acquired payables.
In
June 2021, the Company completed an asset purchase of Fort Pierce Chiropractic in Fort Pierce, Florida. The transaction was completed
as an asset purchase for $50,000. A total of $45,000 was allocated to property and equipment with the remaining $5,000 being allocated
to customer lists.
IMAC
Chicago
In
June 2021, the Company also completed an asset purchase of Active Medical Center in Naperville, Illinois. The transaction was completed
as an asset purchase for $205,000. A total of $200,000 was allocated to property and equipment with the remaining $5,000 being allocated
to deposits.
IMAC
Louisiana
In
October 2021, the Company consummated certain transactions resulting in the acquisition of the outstanding equity interest in Louisiana
Orthopaedic & Sports Rehab Institute, Inc, (the “Louisiana Acquisition”). The transaction was completed for $1,200,000
and $1,200,000 stock.
The
Company is in the process of completing its formal valuation analysis to identify and determine the fair value of identifiable tangible
assets acquired related to this acquisition. Thus, the final allocation of the purchase price may differ from this preliminary allocation,
based on completion of the valuation of the identifiable intangible assets. A total of $192,500 has been allocated to property and equipment
with the remaining $2,207,500 allocated to goodwill. Changes in the estimated valuation will likely result in adjustments to goodwill.
The Company does not expect the adjustments to be material.
Note
7 – Property and Equipment
The
Company’s property and equipment consisted of the following at June 30, 2022 and December 31, 2021:
Schedule
of Property and Equipment
| | |
Estimated Useful Life in Years | |
June 30, 2022 | | |
December 31, 2021 | |
| | |
| |
| | |
| |
| Leasehold improvements | |
Shorter of asset or lease term | |
$ | 2,302,421 | | |
$ | 2,127,762 | |
| Equipment | |
1.5 - 7 | |
| 2,968,621 | | |
| 2,810,028 | |
| Total property and equipment | |
| |
| 5,271,042 | | |
| 4,937,790 | |
| | |
| |
| | | |
| | |
| Less: accumulated depreciation | |
| |
| (3,238,905 | ) | |
| (2,990,902 | ) |
| Property and equipment | |
| |
| 2,032,137 | | |
| 1,946,888 | |
| Construction in progress | |
| |
| 17,937 | | |
| 376,275 | |
| Total property and equipment, net | |
| |
$ | 2,050,074 | | |
$ | 2,323,163 | |
Depreciation
expense was approximately $238,000
and $171,000 for the
three months ended June 30, 2022 and 2021, respectively and approximately $473,000
and $335,000 for the
six months ended June 30, 2022 and 2021, respectively.
Note
8 – Intangibles Assets and Goodwill
The
Company’s intangible assets and goodwill consisted of the following at June 30, 2022 and December 31, 2021:
Schedule
of Intangible Assets and Goodwill
| | |
| |
June 30, 2022 | |
| | |
Estimated | |
| | |
Accumulated | | |
| |
| | |
Useful Life | |
Cost | | |
Amortization | | |
Net | |
| | |
| |
| | |
| | |
| |
| Intangible assets: | |
| |
| | | |
| | | |
| | |
| Management service agreements | |
10 years | |
$ | 7,940,398 | | |
$ | (2,897,438 | ) | |
$ | 5,042,960 | |
| Non-compete agreements | |
3 years | |
| 306,000 | | |
| (303,708 | ) | |
| 2,292 | |
| Brand development | |
10 years | |
| 69,071 | | |
| (6,291 | ) | |
| 62,777 | |
| Total definite lived assets | |
| |
| 8,315,469 | | |
| (3,207,440 | ) | |
| 5,108,029 | |
| Research and development | |
| |
| 243,750 | | |
| - | | |
| 243,750 | |
| Goodwill | |
| |
| 4,661,796 | | |
| - | | |
| 4,661,796 | |
| Total intangible assets and goodwill | |
| |
$ | 13,221,015 | | |
$ | (3,207,440 | ) | |
$ | 10,013,575 | |
| | |
| |
December 31, 2021 | |
| | |
Estimated | |
| | |
Accumulated | | |
| |
| | |
Useful Life | |
Cost | | |
Amortization | | |
Net | |
| | |
| |
| | |
| | |
| |
| Intangible assets: | |
| |
| | | |
| | | |
| | |
| Management service agreements | |
10 years | |
$ | 7,940,398 | | |
$ | (2,500,418 | ) | |
$ | 5,439,980 | |
| Non-compete agreements | |
3 years | |
| 306,000 | | |
| (302,458 | ) | |
| 3,542 | |
| Customer lists | |
3 years | |
| 134,882 | | |
| (89,921 | ) | |
| 44,961 | |
| Brand development | |
15 years | |
| 69,071 | | |
| (3,835 | ) | |
| 65,236 | |
| Total definite lived assets | |
| |
| 8,450,351 | | |
| (2,896,632 | ) | |
| 5,553,719 | |
| Research and development | |
| |
| 243,750 | | |
| - | | |
| 243,750 | |
| Goodwill | |
| |
| 4,661,796 | | |
| - | | |
| 4,661,796 | |
| Total intangible assets and goodwill | |
| |
$ | 13,355,897 | | |
$ | (2,896,632 | ) | |
$ | 10,459,265 | |
Amortization
was approximately $200,000
and $270,000
for the three months ended June 30, 2022 and 2021, respectively and approximately $412,000
and $529,000
for the six months ended June 30, 2022 and 2021, respectively. The Company’s estimated future amortization of intangible
assets was as follows:
Schedule
of Future Amortization of Intangible Assets
| Years Ending December 31, | | |
| |
| | | |
| |
| 2022 (six months) | | |
$ | 400,572 | |
| 2023 | | |
| 799,686 | |
| 2024 | | |
| 798,645 | |
| 2025 | | |
| 798,645 | |
| 2026 | | |
| 798,645 | |
| Thereafter | | |
| 1,511,836 | |
| Total | | |
$ | 5,108,029 | |
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 of leases added as of June 30, 2022 and December 31, 2021, the
Company used a weighted average interest rate.
Total
operating lease cost
Individual
components of the total lease cost incurred by the Company were as follows:
Schedule
of Operating Lease Cost
| | |
Six Months Ended June 30, 2022 | | |
Six Months Ended June 30, 2021 | |
| | |
| | | |
| | |
| Operating lease expense | |
$ | 830,373 | | |
$ | 595,936 | |
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:
Schedule
of Future Minimum Lease Payments
| | |
Operating
Leases | |
| | |
| |
| Undiscounted future minimum lease payments: | |
| | |
| 2022 (six months) | |
$ | 842,325 | |
| 2023 | |
| 1,612,648 | |
| 2024 | |
| 1,223,487 | |
| 2025 | |
| 869,279 | |
| 2026 | |
| 576,741 | |
| Thereafter | |
| 167,306 | |
| Total | |
| 5,291,786 | |
| Amount representing imputed interest | |
| (502,979 | ) |
| Total operating lease liability | |
| 4,788,807 | |
| Current portion of operating lease liability | |
| (1,470,241 | ) |
| Operating lease liability, non-current | |
$ | 3,318,566 | |
Note
10 – Notes Payable
Set
forth below is a summary of the Company’s outstanding debt as of June 30, 2022 and December 31, 2021:
Schedule
of Notes Payable
| | |
June 30, | | |
December 31, | |
| | |
2022 | | |
2021 | |
| | |
| | |
| |
| | |
| | |
| |
| |
$ | 28,443 | | |
$ | 43,413 | |
| 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. | |
$ | 28,443 | | |
$ | 43,413 | |
| | |
| | | |
| | |
| 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. | |
| 61,655 | | |
| 68,378 | |
| | |
| | | |
| | |
| $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. | |
| 48,521 | | |
| 59,913 | |
| | |
| | | |
| | |
| 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. | |
| 12,561 | | |
| 37,179 | |
| | |
| | | |
| | |
| Note payable in the amount of $2,690,000, dated October 29, 2020. The note was repaid January 2022. The interest on the note accrued at a rate of 7% per annum. | |
| - | | |
| 150,301 | |
| | |
| | | |
| | |
| Notes payable | |
| 151,180 | | |
| 359,184 | |
| Less: current portion: | |
| (78,618 | ) | |
| (254,487 | ) |
| Notes payable, net of
current portion | |
$ | 72,562 | | |
$ | 104,697 | |
Principal
maturities of the Company’s notes payable are as follows:
Schedule
of Principal Maturities of Notes Payable
| Years Ending December 31, | | |
Amount | |
| | | |
| |
| 2022 (six months) | | |
$ | 46,484 | |
| 2023 | | |
| 51,657 | |
| 2024 | | |
| 27,631 | |
| 2025 | | |
| 15,813 | |
| 2026 | | |
| 9,595 | |
| Thereafter | | |
| - | |
| Total | | |
$ | 151,180 | |
Note
11 – Stockholders’ Equity
On
October 5, 2020, the Company launched an at-the-market offering of up to $5,000,000
worth of shares of the Company’s common stock pursuant to an At-The-Market Issuance Sales Agreement, dated October 5, 2020, by
and between the Company and Ascendiant Capital Markets, LLC. Since the launch and as of June 30, 2022, pursuant to the Agreement,
the Company had sold 2,346,502
shares of common stock through Ascendiant Capital Markets for aggregate proceeds to the Company of $3.7
million. The Company sold 804,744
shares during the six months ended June 30, 2022 for an aggregate amount of approximately $830,000 and 634,676
shares during the six months ended June 30, 2021.
During
March 2021, the Company completed a public offering by issuing 10,625,000 shares of common stock for gross proceeds of $17.0 million
and incurring $1.2 million in expenses related to public offering. The Company used approximately $1.8 million for the repayment of certain
indebtedness and is using the remaining proceeds for the repayment of certain other indebtedness, to finance the costs of developing
and acquiring additional outpatient medical clinics and healthcare centers as part of the Company’s growth and expansion strategy
and for working capital.
On
April 7, 2021 the Company closed on the sale of an additional 1,193,750 shares of common stock at the public offering price of
$1.60 per share, pursuant to the 15% over-allotment option exercised in full by the underwriters in connection with its public offering
that closed March 2021. The Company received gross proceeds of $1.91 million and incurred approximately $115,000 in additional expenses.
On
October 1, 2021, the Company completed a stock purchase agreement and issued 810,811 shares of its common stock as consideration. This
transaction was part of the $1,200,000 in stock consideration for the Louisiana Acquisition.
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 June 30, 2022, the Company had issued and outstanding stock options to purchase 343,707
shares of its common stock as non-qualified stock options to various employees of the Company. Most
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. One award granted
in 2021 vests over a period of one year and is 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.
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
October 20, 2020, the Company granted an aggregate of 300,000 RSUs to Board members with these RSUs vesting in eight equal quarterly
installments commencing on February 1, 2021, provided the Board members remain directors of the Company. Effective October 2021, the
vesting schedule was amended to a one-year vesting period. As of March 31, 2022, all these granted RSUs were vested and issued to the
Board members.
On
January 30, 2021, the Company granted an aggregate of 17,000 RSUs to non-executive staff and contractors with these RSUs vesting after
one year. As of March 31, 2022, all these granted RSUs were vested and issued.
On
October 27, 2021, the Company granted 10,000 RSUs to a consultant that vested immediately.
On
February 21, 2022, the Company granted 100,000 RSUs to an executive that vested immediately.
Note
12 – 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 100% up to 3% and 50%
of the next 2% of total compensation for those employees making salary deferrals. The Company made contributions of approximately
$36,000 and
$35,000 during
the three months ended June 30, 2022 and 2021, respectively, and approximately $71,000 and
$69,000 during
the six months ended June 30, 2022 and 2021, respectively.
Note
13 – Income Taxes
ASC
740 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of all available positive and negative
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management assessed all
available evidence to estimate if sufficient future taxable income will be generated in the appropriate period and of the appropriate
character to realize deferred tax assets. For the three and six months ended June 30, 2022 and June 30, 2021, no income tax expense or
benefit was recorded related to income taxes due to the Company’s overall operating results and the full valuation allowance.
The
Company performed a comprehensive review of its uncertain tax positions and determined that no adjustments were necessary relating to
unrecognized tax benefits as December 31, 2021. As of June 30, 2022, the Company had no unrecognized tax benefits recorded. The Company
is subject to taxation by federal, state, and local taxing authorities. The Company’s federal, state, and local income tax returns
are subject to examination by taxing authorities for three years after the returns are filed, and the Company’s federal, state,
and local income tax returns for 2018 through 2020 remain open to examination.
Note
14 – Commitments and Contingencies
The
Company accrues a liability and charges operations for the estimated costs of contingent liabilities, including adjudication or settlement
of various asserted and unasserted claims existing as of the balance sheet date, where there is a reasonable possibility that a loss
has been incurred and the loss (or range of probable loss) is estimable.
From
time to time the Company may become subject to threatened and/or asserted claims arising in the ordinary course of our business. Other
than the matter described below, 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.
Third
Party Audit
From
time to time, in the ordinary course of business, we are subject to audits under various governmental programs in which third party firms
engaged by the Center for Medicare & Medicaid Services (“CMS”) conduct extensive reviews of claims data to identify potential
improper payments. We cannot predict the ultimate outcome of any regulatory reviews or other governmental audits and investigations.
On
June 3, 2021, the Company received a request for payment from CMS in the amount of $2,918,472. The Company initiated the appropriate
appeals and then the Company received a notification dated September 30, 2021, from CMS that they “found the request to be favorable
by reversing the extrapolation to actual”. The Company received a separate notification stating “the extrapolated overpayment
was reduced to the actual overpayment amount for the sampled denied claims $5,327.73,” which was paid in 2021.
This
amount represented a statistical extrapolation of $
of charges from a sample of 40 claims for the periods February 2017 to November 2020. The Company began its own internal audit
process and disagrees with the interpretation of the medical records and the extrapolation techniques used to derive the balance.
The Company continued the appeals process to the second level appeal related to the error rate and are anticipating a third appeal
on the remaining $5,327.73
amount. As of June 30, 2022 this had been settled for approximately $5,000.
On
October 21, 2021, the Company received notification from Covent Bridge Group, a Center for Medicare & Medicaid Services (“CMS”)
contractor, that they are recommending to CMS that the Company was overpaid in the amount of $2,716,056.33. This amount represents a
statistical extrapolation of $ of charges from a sample of 38 claims for the periods July 2017 to November 2020 for Progressive
Health & Rehabilitation, Ltd (“Progressive Health”). The Company entered into a management agreement with Progressive
Health in April 2019 and therefore liable for only a portion of the sampled claims. There were a total of 38 claims reviewed, 25 of these
claims were from the period prior to the management agreement with the Company and the remaining 13 claims were related to the period
that Progressive Health was managed by the Company. In December 2021, the Company received a request for payment from CMS in the amount
of $2,709,265. The Company has begun its own internal audit process and has initiated the appropriate appeals.
On
May 17, 2022, the Company received notification from Covent Bridge Group, a Center for Medicare & Medicaid Services
(“CMS”) contractor, that they are recommending to CMS that the Company was overpaid in the amount of $492,086.22 related
to Advantage Therapy. This amount represents a statistical extrapolation of charges from a sample. On May 27, 2022 the Company
received a request for payment from CMS in the amount of $481,666.00. The Company has begun its own internal audit process and has
initiated the appropriate appeals.
Prior to this May 2022 notification, CMS had implemented a pre-payment
audit for Advantage Therapy. As of June 30, 2022, this audit had resulted in a balance of approximately $350,000 of Medicare accounts
receivable.
At
this stage of the appeals process, based on the information currently available to the Company, the Company is unable to predict the
timing and ultimate outcomes of these matters and therefore is unable to estimate the range of possible loss. Any potential loss may be
classified as errors and omissions for which insurance coverage was in place during a majority of the years being evaluated.
As
of June 30, 2022, the Company has not recorded a provision for either of these claims, as management does not believe that an estimate
of a possible loss or range of loss can reasonably be made at this time.
Note
15 - Subsequent Events
On
July 6, 2022, the Company’s shareholders approved the Board of Directors’ proposal to increase the number of authorized shares
of the Company’s common stock to 60,000,000 shares from 30,000,000 shares.
On
July 26, 2022, the Company announced that its board of directors has initiated an exploration of strategic alternatives. As part of this
process, the board will consider a wide range of options for the company including, among other things, a potential merger, spinoff sale,
or other strategic transaction for one or more of its key business units or assets.
On
August 3, 2022, the Company announced that effective August 8, 2022 the Company’s ticker symbol on the NASDAQ Stock Exchange changed
from “IMAC” to “BACK”. The Company’s common stock remains listed on NASDAQ and its CUSIP number remained
unchanged.
On August 12, 2022, 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 5,164,474 shares (the “Shares”) of its common
stock at a purchase price of $0.76, in a registered direct offering (the “Registered Direct Offering”). In a concurrent private
placement, the Company also agreed to issue to the investors Series 1 warrants to purchase 5,164,474 shares of common stock that will
become exercisable on the date that is six months following the date of issuance of the shares of common stock in the Registered Direct
Offering (the “Exercise Date”) and expire on the five year anniversary of the Exercise Date, at an exercise price of $0.95
per share, and Series 2 warrants to purchase 5,164,474 shares of common stock that will become exercisable on the Exercise Date and expire
on the one year anniversary of the Exercise Date, at an exercise price of $0.95 per share. 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 transactions are expected to close on or about
August 16, 2022. The Company anticipates gross proceeds of both transactions to be approximately $3.9 million. The Company intends to
use the net proceeds from this offering for working capital and other general corporate purposes, including financing the costs of implementing
the Company’s strategic alternative activities.