10-Q/A: IMAC Holdings Restates Q3 Financials Amid Preferred Dividend Error, Reveals Deepening Deficit and Going Concern Warning

IMAC Holdings, Inc. has filed an amended quarterly report for Q3 2024, restating previous financial statements due to preferred dividend accounting errors, revealing a significantly increased accumulated deficit and a substantial doubt about its ability to continue as a going concern.

Summary

• IMAC Holdings, Inc. (the "Company") filed an amended Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2024, to restate previously issued financial statements due to an error in accounting for preferred dividends.
• The restatement resulted in an increase in preferred dividends by $725,347 for both the three and nine months ended September 30, 2024, leading to a higher net loss available to common stockholders.
• The Company has transitioned its primary business focus from physical therapy and rehabilitation centers to precision medicine in cancer treatment, following the sale or discontinuation of all previous patient care locations by September 30, 2024.
• For the nine months ended September 30, 2024, the Company reported net revenues from continuing operations of $72,050 and a gross loss of $122,029.
• Net loss from continuing operations for the nine months ended September 30, 2024, was $3,963,279, while net loss from discontinued operations was $31,992.
• The net loss available to common stockholders for the nine months ended September 30, 2024, was $5,881,529, compared to $8,014,631 for the same period in 2023.
• As of September 30, 2024, the Company had a cash balance of $195,511 and a negative working capital of $5.8 million, a significant deterioration from a negative working capital of $0.8 million at December 31, 2023.
• The accumulated deficit increased to $59,933,596 as of September 30, 2024, from $55,938,325 at December 31, 2023.
• The Company issued promissory notes totaling approximately $2.0 million in principal, receiving $1.4 million in cash proceeds during the nine months ended September 30, 2024.
• Preferred stock sales generated gross proceeds of $1.35 million during the nine months ended September 30, 2024, alongside the issuance of 2.8 million common stock purchase warrants valued at $8.4 million.
• Subsequent to the reporting period, in October 2024, the Company issued additional promissory notes for $0.3 million principal ($0.2 million cash proceeds) and completed a PIPE financing raising $3,740,000 through Series G convertible preferred stock and warrants.
• Proceeds from the PIPE financing, specifically $2.2 million, were used to repay outstanding promissory notes in October 2024.
• In November 2024, the Company entered into a Common Stock Purchase Agreement with Keystone Capital Partners, LLC, allowing for the sale of up to $60 million or 402,438 shares of common stock at a discount, with 25% of proceeds earmarked for preferred stock redemption at a 120% premium.

Sentiment

Score: 2

Explanation: The Company faces severe financial distress, evidenced by a significant increase in working capital deficit, a stated 'going concern' warning, and persistent net losses. The restatement of financials and identified material weaknesses in internal controls further undermine confidence. While the business pivot to precision medicine offers long-term potential, the immediate financial outlook is highly challenging, necessitating substantial and continuous capital raises to sustain operations.

Positives

• The Company has successfully transitioned its core business to precision medicine in cancer treatment, acquiring necessary laboratory capabilities and intellectual property licenses from Theralink Technologies, Inc.
• Revenues from continuing operations were established at $56,300 for the three months and $72,050 for the nine months ended September 30, 2024, indicating the initiation of the new business model's revenue generation.
• Operating loss and net loss from continuing operations showed improvement compared to the prior year, reflecting the wind-down of underperforming legacy operations.
• Net cash used in operating activities decreased to approximately $2.0 million for the nine months ended September 30, 2024, from $3.0 million in the prior year, indicating some efficiency gains in the new operational structure.
• The Company successfully raised $1.35 million through preferred stock sales and $1.4 million from promissory notes during the nine months ended September 30, 2024, and an additional $3.74 million from a PIPE financing in October 2024, demonstrating continued access to capital markets.
• The recent Common Stock Purchase Agreement with Keystone Capital Partners, LLC provides access to up to $60 million in additional capital, which could significantly bolster liquidity and fund future operations.

Negatives

• The Company's previously issued financial statements for Q3 2024 required restatement due to material errors in preferred dividend accounting, raising concerns about financial reporting accuracy.
• The working capital deficit significantly worsened to $5.8 million as of September 30, 2024, from $0.8 million at December 31, 2023, indicating severe liquidity challenges.
• The Company reported a negative gross profit of $65,777 for the three months and $122,029 for the nine months ended September 30, 2024, suggesting that current revenues do not cover the direct costs of services.
• Net loss available to common stockholders increased to $3,363,425 for Q3 2024 and $5,881,529 for the nine months ended September 30, 2024, primarily due to significantly higher preferred dividends.
• The accumulated deficit grew to $59.9 million, highlighting substantial historical losses.
• Management has concluded that there is substantial doubt about the Company's ability to continue as a going concern for the next twelve months.
• Material weaknesses in internal control over financial reporting were identified, including insufficient accounting resources and lack of segregation of duties, which could lead to future financial misstatements.

Risks

• Substantial doubt exists regarding the Company's ability to continue as a going concern, indicating significant financial instability and potential inability to meet obligations.
• The Company anticipates needing to raise additional capital to fund future operations, and there is no assurance that such funds will be available on favorable terms or at all, which could force delays, limitations, or termination of development/acquisition activities, or even cessation of operations.
• Material weaknesses in internal control over financial reporting, specifically insufficient accounting resources and lack of segregation of duties, pose a risk of material financial misstatements and potential non-compliance with stock exchange listing requirements.
• Ongoing governmental audits by CMS (Center for Medicare & Medicaid Services) for alleged overpayments, totaling approximately $2.7 million for Progressive Health and $0.5 million for Advantage Therapy, and a new $1.1 million claim for a MO patient center, present significant contingent liabilities with uncertain outcomes.
• The Company's ability to attract competent, skilled laboratory and sales personnel at acceptable prices is crucial for its new precision medicine operations and managing overhead.
• Inflation has had a material impact on operating results, particularly on staffing and supply costs, and future inflation could continue to adversely affect financial condition.

Future Outlook

The Company anticipates needing to raise additional capital to fund future operations and may seek further capital due to favorable market conditions or strategic considerations. Management plans to expand accounting functions with dedicated staff and improve internal accounting procedures and separation of duties when additional capital resources become available.

Management Comments

• Management, in concurrence with the Audit Committee, determined that previously issued financial statements for the period ended September 30, 2024, should no longer be relied upon due to an error in preferred dividends accounting.
• The Company has historically incurred and expects to continue incurring operating losses and cash outflows from operations, leading to substantial doubt about its ability to continue as a going concern.
• The growth of the business and future success depend on the ability to obtain additional financing, attract competent laboratory and sales personnel at acceptable prices, and control operating expenses.
• The Company's technology is expected to be used to gain FDA approval for treatments and determine which patients will most benefit from those treatments in the precision medicine sector.

Industry Context

IMAC Holdings is undergoing a significant strategic pivot, divesting from its traditional physical therapy and rehabilitation centers to focus entirely on precision medicine in cancer treatment. This shift positions the company in a high-growth, high-potential sector (oncology and biopharmaceutical collaborations) but also implies a complete overhaul of its operational and revenue models. The transition involves acquiring specialized laboratory capabilities and intellectual property, moving from a service-based patient care model to a technology-driven diagnostic and drug development support model. This move aligns with broader healthcare trends towards personalized medicine and targeted therapies, but also introduces new market and regulatory challenges inherent to the biotechnology and pharmaceutical industries.

Comparison to Industry Standards

• NA The document does not provide specific comparable companies, projects, or results within the precision medicine or oncology sector to allow for a direct assessment against industry standards. The Company is in a transitional phase, having recently acquired new capabilities, making direct comparisons difficult without more established operational history in the new segment.

Corporate Governance

Legal Proceedings

• The Company is subject to ongoing audits by Covent Bridge Group, a CMS contractor, for potential overpayments under various governmental programs.
• For Progressive Health & Rehabilitation, Ltd., CMS recommended an overpayment of approximately $2.7 million for claims from July 2017 to November 2020. The Company's redetermination request was denied, a reconsideration request resulted in a partially favorable decision, and an Administrative Law Judge (ALJ) decision in February 2024 did not address the Company's appeal. An appeal to the Medicare Appeals Council was filed in April 2024, with a response pending.
• For Advantage Therapy, CMS recommended an overpayment of approximately $0.5 million for claims from May 2022. A reconsideration request resulted in a partially favorable decision, and an ALJ hearing was conducted in February 2024, with the response awaited.
• In November 2024, the Company received notification of an estimated overpayment of approximately $1.1 million at a Missouri patient center for the period February 26, 2020, through January 2, 2024. The Company plans to file a redetermination request.
• The Company is currently unable to predict the timing and ultimate outcomes of these matters or estimate the range of possible loss, although insurance coverage may be in place for a majority of the years evaluated.

Related Party Transactions

• During the nine months ended September 30, 2024, the Company acquired certain assets from Theralink Technologies, Inc. as part of a Settlement and Release Agreement, which involved settling $1.1 million in note receivables and issuing 24,172 shares of Series E preferred stock to Theralink security holders. This transaction effectively replaced a previously contemplated merger agreement, which was terminated.

Stakeholder Impact

• Shareholders face significant dilution risk due to ongoing and planned capital raises through preferred stock, warrants, and common stock sales at a discount, as well as the increasing accumulated deficit.
• Shareholders are directly impacted by the restatement of financial statements, which can erode trust and confidence in the Company's financial reporting.
• Employees, particularly those in the accounting department, may face increased workload and pressure due to insufficient resources and material weaknesses in internal controls.
• Creditors, especially those holding the new promissory notes and preferred stock, are exposed to the Company's 'going concern' risk and its ability to meet its financial obligations, although some preferred stock terms include redemption premiums and anti-dilution protections.
• Patients and biopharmaceutical partners in the new precision medicine segment may experience uncertainty if the Company's financial instability impacts its operational continuity or ability to invest in its new business.

Next Steps

• Raise additional capital to fund future operations and address liquidity needs.
• Expand accounting functions with dedicated staff and improve internal accounting procedures and separation of duties to remediate material weaknesses in internal control over financial reporting.
• Continue appeals process for CMS overpayment claims related to Progressive Health ($2.7 million) and Advantage Therapy ($0.5 million), and plan appeal for the new $1.1 million claim in Missouri.
• Utilize proceeds from the Common Stock Purchase Agreement with Keystone Capital Partners, LLC, including optional redemption of preferred stock at a 120% premium.

Key Dates

Recommendation

Keywords

SEC filing, 10-Q/A, restatement, financial reporting, going concern, precision medicine, cancer treatment, proteomics, preferred stock, warrants, capital raise, liquidity, internal controls, CMS audit, accumulated deficit, Thralink Technologies