IMAC HOLDINGS, INC. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth previously under the caption "Risk Factors." This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this report.
The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.
References in this MD&A to "we," "us," "our," "our company," "our business" and "IMAC Holdings " are toIMAC Holdings, Inc. , aDelaware corporation and prior to the Corporate Conversion (defined below),IMAC Holdings, LLC , aKentucky limited liability company, 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 ofNashville, LLC ("IMAC Nashville")IMAC Management of Illinois, LLC ("IMAC Illinois") andIMAC Management of Florida, LLC ("IMAC Florida"); the following entity which is consolidated withIMAC Regeneration Management ofNashville, LLC due to control by contract:IMAC Regeneration Center of Nashville , PC ("IMAC Nashville PC"); and the following which prior toJune 1, 2018 was held as a minority interest,IMAC Regeneration Center of St. Louis , LLC ("IMAC St. Louis"). Overview We are a provider of movement and orthopedic therapies and minimally invasive procedures performed through our regenerative and rehabilitative medical treatments to improve the physical health of our patients at our fast-growing chain of IMAC Regeneration Centers which we own or manage. Our outpatient medical clinics provide conservative, minimally invasive medical treatments to help patients with back pain, knee pain, joint pain, ligament and tendon damage, and other related soft tissue conditions. Our licensed healthcare professionals evaluate each patient and provide a custom treatment plan that integrates traditional medical procedures and innovative regenerative medicine procedures in combination with physical medicine. We do not use or offer opioid-based prescriptions as part of our treatment options in order to help our patients avoid the dangers of opioid abuse and addiction. The original IMAC RegenerationCenter opened inKentucky inAugust 2000 and remains the flagship location of our current business, which was formally organized inMarch 2015 . To date, we have opened seven, acquired six and manage two outpatient medical clinics inKentucky ,Missouri ,Tennessee, Illinois andFlorida , and plan to further expand the reach of our facilities to other strategic locations throughoutthe United States . We have partnered with several active and former professional athletes, includingOzzie Smith ,David Price ,Tony Delk andMike Ditka , in the branding of our IMAC Regeneration Centers. Our outpatient medical clinics emphasize our focus around treating sports and orthopedic injuries as an alternative to traditional surgeries for repair or joint replacement. We own our medical clinics directly or have entered into long-term management services agreements to operate and control certain of our medical clinics by contract. Our preference is to own the clinics; however, some state laws restrict the corporate practice of medicine and require a licensed medical practitioner to own the clinic. Accordingly, our managed clinics are owned exclusively by a medical professional within a professional service corporation (formed as a limited liability company or corporation) and are under common control with us in order to comply with state laws regulating the ownership of medical practices. We are compensated under management services agreements through service fees based on the cost of the services provided, plus a specified markup percentage, and a discretionary annual bonus determined in the sole discretion of each professional service corporation. Corporate Conversion Prior toJune 1, 2018 , we were aKentucky limited liability company namedIMAC Holdings, LLC . EffectiveJune 1, 2018 , we converted into aDelaware corporation pursuant to a statutory merger (the "Corporate Conversion") and changed our name toIMAC Holdings, Inc. All of our outstanding membership interests were exchanged on a proportional basis into shares of common stock ofIMAC Holdings, Inc. 21 Following the Corporate Conversion,IMAC Holdings, Inc. continues to hold all of the property and assets ofIMAC Holdings, LLC and all of the debts and obligations ofIMAC Holdings, LLC continue as the debts and obligations ofIMAC Holdings, Inc. The purpose of the Corporate Conversion was to reorganize our corporate structure so that the top tier entity in our corporate structure is a corporation rather than a limited liability company and so that our existing owners own shares of our common stock rather than membership interests in a limited liability company. Except as otherwise noted herein, the consolidated financial statements included herein are those ofIMAC Holdings, Inc. and its consolidated subsidiaries. Initial Public Offering OnFebruary 15, 2019 , we completed our initial public offering of 850,000 units, with each unit consisting one share of our common stock and two warrants each to purchase one share of our common stock, at a combined initial public offering price of$5.125 per unit. The exercise price of the warrants is$5.00 per warrant. The units immediately and automatically separated upon issuance, and the common stock and warrants trade on The NASDAQ Capital Market under the ticker symbols "IMAC" and "IMACW," respectively. We received aggregate gross proceeds of$4,356,250 from our initial public offering, before deducting underwriting discounts, commissions and other related expenses. Proceeds from the offering have been used for financing the costs of leasing, developing and acquiring new clinic locations, funding research and new product development activities, and for working capital and general corporate purposes. In addition, upon the closing of our initial public offering, we issued unit purchase options toDawson James Securities, Inc. , as representative of the several underwriters, and its affiliates entitling them to purchase a number of our securities equal to 4% of the securities sold in the initial public offering. The unit purchase options have an exercise price equal to 120% of the public offering price of the units (or$6.15 per share and two warrants) and may be exercised on a cashless basis. The unit purchase options are not redeemable by us.
Significant financial metrics
Significant financial metrics of the Company for the third quarter of 2020 are set forth in the bullets below.
? Net loss of
of
? Adjusted EBITDA1 of (
(
(1) Adjusted EBITDA is a non-GAAP financial measure most closely comparable to
the GAAP measure of net loss. See "Reconciliation of Non-GAAP Financial
Matters" below for a full reconciliation of the GAAP and non-GAAP measures.
Impacts of and Response to COVID-19 Outbreak
InMarch 2020 , federal, state and local government authorities issued orders and guidance in order to combat the spread of the COVID-19 outbreak. These actions have required or encouraged our patients to remain at home except for essential activities and may reduce patient visits to our clinics. For example, the governor ofKentucky ordered all chiropractic facilities in the state ofKentucky to close effectiveMarch 20, 2020 , which caused us to close ourKentucky chiropractic facilities until such order was lifted onMay 4, 2020 . The full extent and duration of such actions and their impacts over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the COVID-19 outbreak and the extent and effectiveness of containment actions taken.
Our response plan has multiple facets and continues to evolve as the pandemic unfolds. As a precautionary measure, we have taken steps to enhance our operational and financial flexibility to react to the risks the COVID-19 outbreak presents to our business, including the following:
? Launched telemedicine communications for remote patient engagement;
? Suspended operations in three
orders until we were allowed to resume operations on
? Suspended operations at one clinic in
government orders until such order is lifted. The lease for this clinic
expired June 30, 2020 and was not renewed.
The COVID-19 outbreak appears likely to cause significant economic harm across
the United States , and the negative economic conditions that may result in
reduced patient demand in our industry. We may experience a material loss of
patients, revenue and market share as a result of the suspension of any
operations. Initiatives to implement telehealth engagement with patients may not
be adopted by existing and new patients. Patient habits may also be altered in
the medium to long term. Negative economic conditions, a decrease in our revenue
and consequent longer term trends harmful to our business may all exert pressure
on our company during the pendency of emergency restrictions on our operations
and beyond. Due to such conditions, beginning in the month of March 2020 we
began to terminate or furlough employees to reduce costs associated with
non-essential personnel, which resulted in a 27% reduction in workforce. As of
September 30, 2020 , 98% of the full and part-time workforce had returned from
furlough.
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.
22
We cannot predict with certainty when public health and economic conditions will return to normal. A decline in patient visits and/or the possible suspension of operations mandated in response to the COVID-19 outbreak, and the consequent loss of revenue and cash flow during this period may make it difficult for us to obtain capital necessary to fund our operations.
Matters that May or Are Currently Affecting Our Business
We believe that the growth of our business and our future success depend on various opportunities, challenges, trends and other factors, including the following:
? Our ability to identify, contract with, install equipment and operate a large
number of outpatient medical clinics and attract new patients to them;
? Our need to hire additional healthcare professionals in order to operate the
large number of clinics we intend to open;
? Our ability to enhance revenue at each facility on an ongoing basis through
additional patient volume and new services;
? Our ability to obtain additional financing for the projected costs associated
with the acquisition, management and development of new clinics, and the
personnel involved, if and when needed;
? Our ability to attract competent, skilled medical and sales personnel for our
operations at acceptable prices to manage our overhead; and
? Our ability to control our operating expenses as we expand our organization
into neighboring states.
Critical Accounting Policies and Estimates
The preparation of our 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, we evaluate our estimates, including those related to insurance adjustments and provisions for doubtful accounts. We base our 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. We believe that, of the significant accounting policies discussed in our Notes to the Condensed Consolidated Financial Statements (Unaudited), the following accounting policies require our most difficult, subjective or complex judgments in the preparation of our financial statements. 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. 23Goodwill 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, or when events or circumstances indicate the fair value of a reporting unit is below its carrying value. No impairments of goodwill were recorded for the nine months endedSeptember 30, 2020 . Revenue Recognition Our patient service revenue is derived from minimally invasive 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 inJanuary 2020 , we implemented wellness maintenance programs on a subscription basis. There are three membership plans offered with different levels of service for each plan. We recognize patient service revenue, net of contractual adjustments, which we estimate based on the historical trend of our cash collections and contractual write-offs in the period in which services are performed. Contractual adjustments represent discounts offered for patients serviced within a negotiated third-party payer contract.
Other management service fees are derived from management services where we
provide 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, we provide all administrative support
to the physician-owned professional corporation ("PC") through a limited
liability company. The PC is consolidated due to control by contract (an "SMA"
or Service Management Agreement). The fees we derive from these management
arrangements are based on a percentage mark-up on the costs of the LLC. We
recognize other management service revenue in the period in which services are
rendered. These revenues are eliminated in consolidation.
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 not paid by insurance carriers; therefore,
we typically require 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, we are paid from the outsourced credit vendor and the risk is
transferred to the credit vendor 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.
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. Our ability
to collect outstanding receivables is critical to our results of operations and
cash flows. Accordingly, accounts receivable reported in our consolidated
financial statements are recorded at the net amount expected to be received. Our
primary collection risks are (i) the risk of overestimation of net revenues at
the time of billing that may result in our 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 us when the commercial insurance company pays
out-of-network claims directly to the patient, (iv) resource and capacity
constraints that may prevent us from handling the volume of billing and
collection issues in a timely manner, (v) the risk that patients do not pay us
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 fromuninsured patients. 24 Our accounts receivables 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 our 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, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations. Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payer, physician and patient. We analyze 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. Income Taxes
IMAC Holdings was taxed as a partnership throughMay 31, 2018 . As a result, income tax liabilities were passed through to the individual members. Accordingly, no provision for income taxes were reflected in the consolidated financial statements for periods prior toMay 31, 2018 , at which time the Company converted from a limited liability company to aDelaware corporation. Subsequent to the Company converting to aDelaware corporation, IMAC Nashville, IMAC Texas, IMAC St. Louis continued as single-member limited liability companies that are disregarded entities for tax purposes and do not file separate returns. Their activity is included as part ofIMAC 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. EffectiveOctober 1, 2019 , BioFirma became wholly owned byIMAC Holdings and is a disregarded entity for tax purposes. BioFirma discontinued operations as ofDecember 31, 2019 . IMAC Management is a C-corporation and is included in the consolidated return ofIMAC 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 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. AtSeptember 30, 2020 andDecember 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.
Results of Operations for the Three and Nine Months Ended
We own our medical clinics directly or have entered into long-term management services agreements to operate and control these medical clinics by contract. Our preference is to own the clinics; however, some state laws restrict the corporate practice of medicine and require a licensed medical practitioner to own the clinic. Accordingly, our managed clinics are owned exclusively by a medical professional within a professional service corporation (formed as a limited liability company or corporation) under common control with us or eligible members of our company in order to comply with state laws regulating the ownership of medical practices. We are compensated under management services agreements through service fees based on the cost of the services provided, plus a specified markup percentage, and a discretionary annual bonus determined in the sole discretion of each professional service corporation. 25 Revenues
Our revenue mix is diversified between medical treatments and physiological treatments. Our medical treatments are further segmented into traditional medical and regenerative medicine practices. We are an in-network provider for traditional physical medical treatments, such as physical therapy, chiropractic services and medical evaluations, with most private health insurance carriers. Regenerative medical treatments are typically not covered by insurance, but paid by the patient. For more information on our revenue recognition policies, see "Critical Accounting Policies and Estimates - Revenue Recognition." Revenues for the three months endedSeptember 30, 2020 and 2019 were as follows: Three Months Ended September 30, 2020 2019 (in thousands, unaudited) Revenues: Outpatient facility services$ 3,356 $ 4,356 Memberships 122 - Total revenues$ 3,478 $ 4,356 Revenues for the nine months endedSeptember 30, 2020 and 2019 were as follows: Nine Months Ended September 30, 2020 2019 (in thousands, unaudited) Revenues: Outpatient facility services$ 9,057 $ 10,882 Memberships 302 - Total revenues$ 9,359 $ 10,882 26 See the table below for more information regarding our revenue breakdown by service type. Nine Months Ended September 30, 2020 2019 Revenues: Medical treatments 66 % 59 % Physical therapy 31 % 36 % Chiropractic care 3 % 5 % 100 % 100 %
Patient service revenues decreased 20% to$3.5 million for the three months endedSeptember 30, 2020 , compared to$4.4 million for the three months endedSeptember 30, 2019 . During the three months endedSeptember 30, 2020 , chiropractic visits and physical therapy visits recovered from the COVID-19 outbreak; however, medical treatment visits did not recover, resulting in the 20% decrease in patient service revenues during such period. Patient service revenues decreased 14% to$9.4 million for the nine months endedSeptember 30, 2020 , compared to$10.9 million for the nine months endedSeptember 30, 2019 . This decrease is attributable to the IMAC Chicago and IMAC Florida acquisitions that occurred inApril 2019 andJanuary 2020 , respectively, along with the impacts of the COVID-19 outbreak. Visits to our clinics are an indication of business activity. Visits increased 10% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Visits increased from 35,749 visits in the three months endedSeptember 30, 2019 to 39,345 visits in the three months endedSeptember 30, 2020 . However, during the quarter endedSeptember 30, 2020 , some visits were determined to not be billable and therefore are not included in the following visits total. Billable visits increased 8% to 37,992 visits for the three months endedSeptember 30, 2020 , compared to 35,061 visits for the three months endedSeptember 30, 2019 . The charge per visit decreased by 26% from$124.24 per visit for the three months endedSeptember 30, 2019 to$91.55 per visit for the three months endedSeptember 30, 2020 . This decrease in charges per visit is due to the change in procedure mix. Starting inJanuary 2020 , we implemented wellness maintenance programs on a subscription basis. As ofSeptember 30, 2020 , there were 762 active memberships. All active memberships at ourKentucky locations were paused inApril 2020 due to an order of the governor ofKentucky to close all elective care facilities inKentucky . Therefore, similar to visits, there was a significant decrease in memberships inApril 2020 . Memberships increased by 20% to 762 as ofSeptember 2020 , as compared to 637 active memberships as ofJune 2020 . Operating Expenses
Operating expenses consist of patient expenses, salaries and benefits, share based compensation, advertising and marketing, general and administrative expenses and depreciation expenses.
Patient expenses consist of medical supplies for services rendered.
Percent
Change from Change from
Patient Expenses 2020 2019 Prior Year Prior Year
Three Months Ended
(55 )%
Nine Months Ended
(48 )%
Cost of revenues (patient expense) decreased for the three and nine months ended
September 30, 2020 as compared to September 30, 2019 . The decrease in the three
months ended September 30, 2020 was driven by improvements in supply management
and changes in the patient mix of services provided, as knee-oriented care
dropped 44% as compared to the three months ended September 30, 2019 and is a
high cost service compared to other services provided.
27
Salaries and benefits consist of payroll, benefits and related party contracts.
Percent
Change from Change from
Salaries and Benefits 2020 2019 Prior Year Prior Year
Three Months Ended
(9 )%
Nine Months Ended
5 %
Salaries and benefits expenses for the three months ended September 30, 2020 , as
compared to the three months ended September 30, 2019 , decreased due to the
reduction in workforce as a result of the COVID-19 outbreak. For the nine months
ended September 30, 2020 , as compared to the nine months ended September 30,
2019 , salaries and benefits expenses increased due to our April 2019 acquisition
of clinics in the Chicago, Illinois areas.
Share-based compensation consists of the value of equity incentive grants issued
to employees, directors and board members which have vested during the period.
Percent
Change from Change from
Share-based Compensation 2020 2019 Prior Year Prior Year
Three Months Ended
(4 )%
Nine Months Ended September 30 311,000 288,000 23,000 8 %
Share-based compensation was relatively consistent for the three months ended
September 30, 2020 , as compared to the three months ended September 30, 2019 .
Share-based compensation increased $23,000 for the nine months ended September
30, 2020 compared to the nine months ended September 30, 2019 since share-based
compensation began to be awarded in May 2019 .
Advertising and marketing consist of marketing, business promotion and brand
recognition.
Percent
Change from Change from
Advertising and Marketing 2020 2019 Prior Year Prior Year
Three Months Ended
(26 )%
Nine Months Ended
(36 )%
Advertising and marketing expenses decreased $83,000 for the three months ended
September 30, 2020 , as compared to the three months ended September 30, 2019 .
The decrease was attributable to a shift to more cost-effective marketing
strategies.
Advertising and marketing expenses decreased $363,000 for the nine months ended
September 30, 2020 , as compared to the nine months ended September 30, 2019 . The
decrease was due to reduced marketing spending as a result of the impact of the
COVID-19 outbreak and a shift to more cost-effective marketing strategies.
General and administrative expense ("G&A") consist of all other costs than
advertising and marketing, salaries and benefits, patient expenses and
depreciation.
Percent
Change from Change from
General and Administrative 2020 2019 Prior Year Prior Year
Three Months Ended
(27 )%
Nine Months Ended
(8 )%
G&A decreased in the three months ended September 30, 2020 as compared to the
three months ended September 30, 2019 . Due to the COVID-19 outbreak, travel
expenses have decreased in 2020 compared to 2019. For example, travel expenses
for the three months ended September 30, 2020 were $27,000 compared to $75,000
for the three months ended September 30, 2019 . Travel expenses for the nine
months ended September 30, 2020 were $100,000 compared to $207,000 for the nine
months ended September 30, 2019 . Also, in 2020 centralized purchasing was
implemented in order to streamline supply ordering for all markets which has
resulted in a reduction in other expenses and accelerated expense synergies.
Depreciation is related to our property and equipment purchases to use in the
course of our business activities. Amortization is related to our business
acquisitions.
Percent
Change from Change fromDepreciation and Amortization 2020 2019 Prior
Year Prior Year
Three Months Ended
2 %
Nine Months Ended
21 %
Depreciation and amortization increased for the three and nine months ended
September 30, 2020 compared to the three and nine months ended September 30,
2019 . For the three months ended September 30, 2020 , the increase is
attributable to the January 2020 acquisition of CHSF. For the nine months ended
September 30, 2020 , the increase in depreciation and amortization expense
resulted from the April 2019 acquisition of the clinics managed by IMAC of
Illinois and the January 2020 acquisition of CHSF.
28
Net loss attributable to the non-controlling interest. Net loss attributable to
the non-controlling interest is the amount of net income (loss) for the period
allocated to non-controlling partners of IMAC Holdings, Inc. that is included in
the entity's consolidated financial statements.
Analysis of Cash Flows
The primary source of our operating cash flow is the collection of accounts receivable from patients, private insurance companies, government programs, self-insured employers and other payers.
During the nine months endedSeptember 30, 2020 , net cash used in operations increased to$4.0 million compared to$2.8 million for the nine months endedSeptember 30, 2019 . This difference was primarily attributable to the change in accounts payable and accrued expenses during the nine months endedSeptember 30, 2020 . Net cash used in investing activities during the nine months endedSeptember 30, 2020 and 2019 was$496,000 and$688,000 , respectively. This was primarily driven by the acquisition of CHSF inJanuary 2020 and the acquisition of the proprietary license fee. Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was$5.8 million , including proceeds from notes payable, net of related fees, which totaled$2.9 million , and proceeds from the issuance of common stock of$3.8 million . Net cash provided by financing activities during the nine months endedSeptember 30, 2019 was$4.0 million , including proceeds from our initial public offering, net of related fees.
Reconciliation of Non-GAAP Financial Measures
This report contains certain non-GAAP financial measures, including non-GAAP net income and adjusted EBITDA, which are used by management in analyzing our financial results and ongoing operational performance.
In order to better assess the Company's financial results, management believes
that net income before interest, income taxes, stock based compensation, and
depreciation and amortization ("adjusted EBITDA") is a useful measure for
evaluating the operating performance of the Company because adjusted EBITDA
reflects net income adjusted for certain non-cash and/or non-operating items. We
also believe that adjusted EBITDA is useful to many investors to assess the
Company's ongoing results from current operations. Adjusted EBITDA is a non-GAAP
financial measure and should not be considered a measure of financial
performance under GAAP. Because adjusted EBITDA is not a measurement determined
in accordance with GAAP, such non-GAAP financial measures are susceptible to
varying calculations. Accordingly, adjusted EBITDA, as presented, may not be
comparable to other similarly titled measures of other companies.
This non-GAAP financial measure should not be considered as a substitute for, or
superior to, measures of financial performance which are prepared in accordance
with US GAAP and may be different from non-GAAP financial measures used by other
companies and have limitations as analytical tools.
A reconciliation of adjusted EBITDA to the most directly comparable GAAP measure
is set forth below.
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2020 2019 2020 2019
GAAP loss attributable
to IMAC Holdings, Inc. $ (1,429,658 ) $ (1,548,962 ) $ (5,193,891 )$ (5,048,917 ) Interest income (6,028 ) (120 ) (6,067 ) (125 ) Interest expense 141,416 74,456 352,541 190,337
Beneficial conversion interest expense - - - 639,159 Share-based compensation expense 108,377 112,959 311,406 288,298 Depreciation and amortization 430,121 422,405 1,334,267 1,104,961 (Gain) loss on extinguishment of debt (9,783 ) - 99,761 - Loss on sale of assets 39,047 - 60,272 - Adjusted EBITDA$ (726,508 ) $ (939,262 ) $ (3,041,711 ) $ (2,826,287 ) 29
Liquidity and Capital Resources
As ofSeptember 30, 2020 , we had$1.7 million in cash and deficiency in working capital of$2.2 million . As ofDecember 31, 2019 , we had cash of$374,000 and deficiency in working capital of$3.5 million . The decrease in working capital deficiency was primarily due to the increase in current assets. We believe our cash atSeptember 30, 2020 , including proceeds from the Iliad Note, PPP Note and the Registered Direct Offering, will be sufficient to meet our cash, operational and liquidity requirements for at least 12 months. As ofSeptember 30, 2020 , we had approximately$6.0 million in current liabilities. The Note represents$652,000 and the PPP Note represents$1.0 million of our current liabilities. Of our remaining current liabilities as ofSeptember 30, 2020 , approximately$1.0 million in current liabilities outstanding to our vendors and under operating lines of credit, which we have historically paid down in the normal course of our business. Lastly, accrued wages, taxes, 401k contributions and paid time off represent approximately$788,000 of the remaining current liabilities. As ofSeptember 30, 2020 , we had an accumulated deficit of$15.2 million . Prior to our initial public offering, we funded our operations primarily through the sale and issuance of convertible notes, bridge loans, and the use of funds from operations. Accordingly, we anticipate that we will need to raise additional capital to fund future operations. However, we may be unable to raise additional funds or enter into such arrangements when needed or favorable terms, or at all, which would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our development or acquisition activity. Failure to receive additional funding could also cause us to cease operations, in part or in full. Furthermore, even if we believe we have sufficient funds for our current of future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations. Our independent registered public accounting firm has indicated that our financial condition raises substantial doubt as to our ability to continue as a going concern. OnJuly 15, 2019 , we signed the$10 million Purchase Agreement withLincoln Park . We also entered into a registration rights agreement (the "Registration Agreement") withLincoln Park in which we agreed to file a registration statement related to the transaction with theSEC covering the shares of our common stock that may be issued toLincoln Park under the Purchase Agreement. Pursuant to the Purchase Agreement, we have the right, in our sole discretion, over a 36-month period to sell shares of common stock toLincoln Park , subject to certain limitations contained in the Purchase Agreement, in amounts up to 50,000 shares per regular sale, which may be increased to up to 100,000 shares depending on certain conditions as set forth in the Purchase Agreement (and subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement), up to the aggregate commitment of$10 million ("Regular Purchases"). In addition to Regular Purchases and subject to the terms and conditions of the Purchase Agreement, we in our sole discretion may directLincoln Park on each purchase date to make "accelerated purchases" and "additional accelerated purchases" on the following business day as provided in the Purchase Agreement. However, in no event may we sell any number of shares that would result inLincoln Park beneficially owning more than 4.99% of our outstanding common stock. There are no upper limits on the per share priceLincoln Park may pay to purchase our common stock; however, we may not sell more than$1,000,000 in shares of common stock toLincoln Park per Regular Purchase. The purchase price of the shares related to the$10 million of future funding will be based on the prevailing market prices of our shares without any fixed discount. Furthermore, we control the timing and amount of any future sales, if any, of shares of common stock toLincoln Park . The Purchase Agreement limits our sales of shares of common stock toLincoln 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 toLincoln 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 precedingJuly 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 precedingJuly 15, 2019 . 30 The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions by, among and for the benefit of the parties. Additionally,Lincoln Park has agreed not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of our common stock. The Purchase Agreement does not limit our ability to raise capital from other sources at our sole discretion, provided that we have agreed not to enter into any "variable rate" transactions with any third party for the 36-month period following the execution of the Purchase Agreement.
In consideration for entering into the
As ofSeptember 30, 2020 , pursuant to the Purchase Agreement, the Company sold an aggregate of 1,602,294 shares of common stock of the Company toLincoln Park for aggregate proceeds to the Company of$2,424,053 (excluding the 60,006 shares previously issued toLincoln Park as a commitment fee). No shares were sold during the three months endedSeptember 30, 2020 . OnMarch 25, 2020 , the Company entered into a note purchase agreement withIliad Research & Trading, L.P. , pursuant to which the Company agreed to issue and sell to the Holder a secured promissory note in an aggregate initial principal amount of$1,115,000 , which is payable on or before the date that is 18 months from the issuance 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 events 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 than the Company's owned real property, intellectual property and accounts receivable, pursuant to a security agreement. The Company will use the proceeds of the Note for certain growth initiatives including an IND filing with the FDA. OnJune 18, 2020 , the Company entered into the Securities Purchase Agreement with institutional accredited investors pursuant to which the Company offered for sale to the Purchasers an aggregate of 1,764,000 shares of its common stock in a 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 theSEC onMarch 27, 2020 and declared effective onApril 3, 2020 . The purchase price for one Share in the Registered Direct Offering was$1.50 , and closing of the Registered Direct Offering occurred onJune 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. OnOctober 29, 2020 , the Company entered into the October Purchase Agreement withIliad Research & Trading, L.P. , pursuant to which the Company agreed to issue and sell to the Holder a secured promissory note in an initial principal amount of$2,690,000 , which is payable on or beforeApril 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$2,500,000 . The October Purchase Agreement also provides for indemnification of the Holder and its affiliates in the event that they incur loss or damage related to, amount other things, breach by the Company of any of its representations, warranties or covenants under the October Purchase Agreement. In connection with the October Purchase Agreement and the October Note, the Company entered into a Security Agreement with the Holder, pursuant to which the obligations of the Company is secured by all of the assets of the Company, excluding the Company's accounts receivable and intellectual property. Upon an event of default under the October Note, the October Security Agreement entitles the Holder to take possession of such collateral; provided that the Holder's security interest and remedies with respect to the collateral are junior in priority to the security interest previously granted by the Company to the Holder in connection with a separate financing entered into by them onMarch 25, 2020 , for which the Holder holds a senior, first-priority security interest in the same collateral. Contractual Obligations The following table summarizes our contractual obligations by period as ofSeptember 30, 2020 : Payments Due by Period Less Than 1 More Than 5 Total Year 1-3 Years 4-5 Years Years
Short-term obligations$ 1,114,456 $ 1,114,456 $ - $ - $ - Long-term obligations, including interest 4,022,495 - 3,966,518 46,221 9,756 Finance lease obligations, including interest 80,871 5,451 65,417 10,003 - Operating lease obligations 5,088,021 296,690 3,395,782 1,107,671 287,878$ 10,305,843 $ 1,416,597 $ 7,427,717 $ 1,163,895 $ 297,634
Off-Balance Sheet Arrangements
As of
31 Impact of Inflation We believe that inflation has not had a material impact on our results of operations for the three and nine months endedSeptember 30, 2020 and 2019. We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.
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