OneMedNet Corp 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto that appear elsewhere in this Annual Report on Form 10-K. See “Risk Factors” elsewhere in this Annual Report on Form 10-K for a discussion of certain risks associated with our business. The following discussion contains forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. The use of words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. From time to time, we also may provide forward-looking statements in other materials we release to the public. Unless the context otherwise requires, references in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “OneMedNet Corporation,” “we,” “us,” “our” and the “Company” are intended to mean the business and operations of OneMedNet Corporation. 25 Company Overview Founded in 2009, we provide innovative solutions that unlock the significant value contained within the clinical image archives of healthcare providers. Employing our proven OneMedNet iRWD™ solution, we securely de-identifies, searches, and curates a data archive locally, bringing a wealth of internal and third-party research opportunities to providers. By leveraging this extensive federated provider network, together with industry leading technology and in-house clinical expertise, OneMedNet successfully meets the most rigorous RWD Life Science requirements. Business Combination On November 7, 2023, we held the closing of the previously announced merger (the “Merger”) whereby Data Knights Merger Sub, Inc., merged with and into OneMedNet Solutions Corporation (formerly named OneMedNet Corporation), with OneMedNet Solutions Corporation continuing as the surviving entity, which resulted in all of the issued and outstanding capital stock of OneMedNet Solutions Corporation being exchanged for shares of the Company’s Common Stock upon the terms set forth in the Merger Agreement (collectively, the “the Business Combination”). The Merger and other transactions that closed on November 7, 2023, pursuant to the Merger Agreement, led to Data Knights changing its name to “OneMedNet Corporation” and the business of the Company became the business of OneMedNet Solutions Corporation. Pursuant to the terms of the Merger Agreement, the total consideration for the Business Combination and related transactions (the “Merger Consideration”) was approximately $200 million. In connection with the Special Meeting, certain public holders (the “Redeeming Stockholders”) holding 1,600,741 shares of Common Stock exercised their right to redeem such shares for a pro rata portion of the funds held by Continental Stock Transfer & Trust Company, as trustee (“Continental”) in the trust account established in connection with Data Knights’ initial public offering (the “Trust Account”). Effective November 7, 2023, Data Knights’ units ceased trading, and effective November 8, 2023, OneMedNet’s common stock began trading on the Nasdaq Global Market under the symbol “ONMD” and the warrants began trading on the Nasdaq Global Market under the symbol “ONMDW.” As a result of the Merger and the Business Combination, holders of Data Knights common stock automatically received common stock of OneMedNet, and holders of Data Knights warrants automatically received warrants of OneMedNet with substantively identical terms. At the Closing of the Business Combination, all shares of Data Knights owned by the Sponsor (consisting of shares of Common Stock and shares of Class B common stock, which we refer to as the founder shares), automatically converted into an equal number of shares of OneMedNet’s Common Stock, and the Private Placement Warrants held by the Sponsor, automatically converted into warrants to purchase one share of OneMedNet Common Stock with substantively identical terms. Key Components of Consolidated Statements of Operations Revenue The Company generates revenue from two streams: (1) iRWD (imaging Real World Data) which provides regulatory grade imaging and clinical data in the Pharmaceutical, Device Manufacturing, CRO’s and AI markets and (2) BEAM which is a Medical Imaging Exchange platform between Hospital/Healthcare Systems, Imaging Centers, Physicians and Patients. iRWD is sold on a fixed fee basis based on the number of data units and the cost per data unit committed to in the customer contract. Revenue is recognized when the data is delivered to the customer. Beam revenue is subscription-based revenue which is recognized ratably over the subscription period committed to by the customer. The Company invoices its Beam customers quarterly or annually in advance with the customer contracts automatically renewing unless the customer issues a cancellation notice. The Company excludes from revenue taxes collected from a customer that are assessed by a governmental authority and imposed on and concurrent with a specific revenue-producing transaction. The transaction price for the products is the invoiced amount. Advanced billings from contracts are deferred and recognized as revenue when earned. Deferred revenue consists of payments received in advance of performance under the contract. Such amounts are generally recognized as revenue over the contractual period. The Company receives payments from customers based upon contractual billing schedules. Accounts receivable is recorded when the right to consideration becomes unconditional. Payment terms on invoiced amounts typically range from zero to 90 days, with typical terms of 30 days. Cost of Revenue Our cost of revenue is composed of our distinct performance obligations of hosting, labor, and data cost. 26 General, and Administrative General and administrative functions, includes finance, legal, human resources, and information technology support. These functions include costs for items such as salaries and benefits and other personnel-related costs, maintenance and supplies, professional fees for external legal, accounting, and other consulting services, and depreciation expense. Operation services Operations consists primarily of labor cost for our operations team who provides services to our customers. Research and Development Costs incurred in the research and development of our products are expensed as incurred. Research and development costs include personnel, contracted services, materials, and indirect costs involved in the design and development of new products and services, as well as hosting expense. Sales & Marketing Our sales and marketing costs consist of labor and tradeshow costs. Interest Expense Interest incurred on convertible notes and shareholder loans. Other Expense Foreign exchange and tax expenses related to the Company’s operations and revenue outside of the United States. Results of Operations The following tables set forth our Consolidated Statements of Operations data for the periods presented: Year Ended December 31, 2023 2022 Revenue $ 1,021,651 $ 1,152,738 Cost of Revenue 1,149,551 1,513,428 Gross Margin (127,900 ) (360,690 ) Operating Expenses General and administrative 5,273,503 8,755,620 Operations 226,257 398,760 Sales & Marketing 1,114,977 957,690 Research and Development 1,631,613 952,701 Total Operating Expenses 8,246,350 11,064,771 Operating loss (8,374,250 ) (11,425,461 ) Other Expense (income) Impairment 10,504,327 - Income tax provision - 214,850 Interest expense 749,213 403,307 Other expense 52,256 46,820 Change in FV of Warrants (46,822 ) (4,489,110 ) Stock Expense 3,572,232 Unrealized gain or loss - (1,371,689 ) 14,831,206 $ (5,195,822 ) Net loss $ (23,205,456 ) $ (6,229,639 ) Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 Revenue Year Ended December 31, 2023 Year Ended December 31, 2022 % Percentage Change Data Exchange (Beam) $ 878,416 $ 678,138 30 % Data Broker (RWD) $ 143,235 $ 474,600 -70 % Master Reseller Agreement $ 1,021,651 $ 1,152,738 -11 % 27 Our revenue comprises of sales made from our data exchange (BEAM) and from data broker (RWD). For the year ended 2023, overall revenue was down by 11%. The primary driver for exchange revenue increase was delivery of revenue to a significant customer. The primary drive for the decrease in broker revenue was revenue deliveries pushed to Q1 of Fiscal 2024. Cost of Revenue Year Ended December 31, 2023 Year Ended December 31, 2022 Cost of Revenue 1,149,551 1,513,428 As a percentage of Revenue 113 % 131 % In 2023 we were able to reduce our cost of revenue as a percentage of revenue by 24%. In the year ended 2023 our Software cost, iRWD consultants and iRWD Data cost each decreased by $0.2 million. The decrease was partially offset by a $0.2 million increase in payroll expenses. General and Administrative Our general and administrative expense increased year over year by $1.8 million from the year ended 2022 compared to the year ended 2023. The increase is primarily due to the additional cost incurred in connection with our Business Combination. We incurred an additional $1.0 million legal cost, $0.7 million on warrants issued to convertible note holders that were converted into share of commons stock, $0.4 million additional employees’ salaries, $0.3 million for investor relations cost, and $0.3 million in additional audit fees. The increase in general and administrative expenses were partially offset by $0.2 million decrease in both recruitment fees and bad debt expense. Operation Our operations expense includes payroll and consultant costs. Operations expense decreased year over year by $0.2 million from the year ended 2022 compared with the year ended 2023. This decrease was primarily due to a decrease in headcount. Sales & Marketing Our sales & marketing expense increased by $0.15 million year over year from the year ended 2022 compared to the year ended 2023. The increase is due to the addition of an employee and consultant in 2023. Research and development Our research and development expense increased by $0.7 million year over year from the year ended 2022 compared to the year ended 2023. The increase is primarily due to the additional cost in salaries for curators, consultants and increased hosting costs, which increased by $0.4 million, $0.2 million and $0.1 million, respectively. Impairment The Company recorded goodwill of $10.5 million in connection with the Business Combination. In December 2023, the Company concluded that the entire goodwill was impaired, as such the $10.5 million of goodwill was written-off. Income tax provision For the year ended 2023, the Company is in a significant loss, as such we did not record any income tax provision. Interest Expense The Company incurred interest expense on Loan extensions associated with the Business Combination, convertible promissory notes, the Pipe Senior Secured Convertible Notes and Loans made from related parties (Management and Directors). Interest expense in the year ended 2023 increased by $0.3 million. The increase was mainly from the Pipe Senior Secured Convertible Notes issued in 2023. Change in Fair Value of Warrants The change in Warrant Fair Value was due to the closing of the Business Combination Agreement and the resulting fluctuations of the share market price . 28 Stock Expense The Company incurred approximately $3.5 million in common stock issuance expense for the Data Knight shares converted to OneMedNet Corporation shares. Non-GAAP Financial Measure In addition to providing financial measurements based on generally accepted accounting principles in the United States of America, or GAAP, we provide an additional financial metric that is not prepared in accordance with GAAP, or non-GAAP financial measure. We use this non-GAAP financial measure, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes, to measure executive compensation, and to evaluate our financial performance. This non-GAAP financial measure is Adjusted EBITDA, as discussed below. We believe that this non-GAAP financial measure reflects our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as it facilitates comparing financial results across accounting periods and to those of peer companies. We also believe that this non-GAAP financial measure enables investors to evaluate our operating results and future prospects in the same manner as we do. This non-GAAP financial measure may exclude expenses and gains that may be unusual in nature, infrequent, or not reflective of our ongoing operating results. The non-GAAP financial measure does not replace the presentation of our GAAP financial measures and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP. We consider Adjusted EBITDA to be an important indicator of the operational strength and performance of our business and a good measure of our historical operating trends. Adjusted EBITDA eliminates items that we do not consider to be part of our core operations. We define Adjusted EBITDA as GAAP net loss excluding the following items: interest income; income taxes; depreciation and amortization of tangible and intangible assets; unit and stock-based compensation; Business Combination transaction expenses; and other non-recurring items that may arise from time to time. The non-GAAP adjustments, and our basis for excluding them from our non-GAAP financial measure, are outlined below: ● Unit and Stock-based compensation – Although unit and stock-based compensation is an important aspect of the compensation paid to our employees, the grant date fair value varies based on the derived stock price at the time of grant, varying valuation methodologies, subjective assumptions, and the variety of award types. This makes the comparison of our current financial results to previous and future periods difficult to interpret; therefore, we believe it is useful to exclude unit and stock-based compensation from our non-GAAP financial measures in order to highlight the performance of our business and to be consistent with the way many investors evaluate our performance and compare our operating results to peer companies. ● Business Combination transaction expenses – Business Combination transaction expenses represent the expenses incurred solely related to the Business Combination, which we completed on June 7, 2022. It primarily includes investment banker fees, legal fees, professional fees for accountants, transaction fees, advisory fees, due diligence costs, certain other professional fees, and other direct costs associated with strategic activities. These amounts are impacted by the timing of the Business Combination. We exclude Business Combination transaction expenses from our non-GAAP financial measures to provide a useful comparison of our operating results to prior periods and to our peer companies because such amounts vary significantly based on the magnitude of the Business Combination transaction and do not reflect our core operations. The following table reconciles GAAP net loss to Adjusted EBITDA during the periods presented (in thousands): Year Ended December 31, 2023 Year Ended December 31, 2022 Net loss $ (23,205,456 ) $ (6,229,639 ) Interest Expense 749,213 403,307 Impairment 10,504,327 - Depreciation and amortization 27,983 24,807 Unit and Stock-based compensation 3,572,232 45,584 Business combination transaction expenses 1,427,73 900,152 Adjusted EBITDA $ (6,932,966 ) $ (4,855,789 ) Liquidity and Capital Resources As of December 31, 2023, our principal sources of liquidity were net proceeds received related to the Business Combination and cash received from customers. 29 The following table shows net cash and cash equivalents provided by (used in) operating activities, net cash and cash equivalents used in investing activities, and net cash and cash equivalents provided by financing activities during the periods presented: Year Ended December 31, 2023 December 31, 2022 Net cash provided by (used in) Operating activities $ 8,220,910 $ 87,239,622 Investing activities (43,757 ) (58,137 ) Financing Activities (8,431,875 ) (88,032,226 ) Operating Activities Our net cash and cash equivalents provided by (used in) operating activities consists of net loss adjusted for certain non-cash items, including depreciation and amortization, business combination cost, stock-based compensation expense, cash held in trust account, and as well as changes in operating assets and liabilities. The primary changes in working capital items, such as the changes in accounts receivable and deferred revenue, result from the difference in timing of payments from our customers related to contract performance obligation. This may result in an operating cash flow source or use for the period, depending on the timing of payments received as compared to the fulfillment of the performance obligation. Net cash used in operating activities was $8.2 million during the year ended December 31, 2023. Net cash used in operating activities was due to our net loss of $23.2 million adjusted for non-cash items of $31.4 million, primarily consisting of the redemption of public shares in connection with the Business Combination causing the withdrawal of $29.0 million of cash held in the trust account, $0.9 million business combination cost, $0.4 million extension loan, and use of cash for operating assets and liabilities of $1.1million due to the timing of cash payments to vendors and cash receipts from customers. By comparison, the Company’s net cash provided by operating activities was $87.2 million during the year ended December 31, 2022. Net cash provided by operating activities was due to our net loss of $6.2 million adjusted for non-cash items of $93.5 million, primarily consisting of the redemption of public shares in connection with the Business Combination causing the withdrawal of $88.3 million of cash held in trust account $1.6 million of stock-based compensation expense, $2.5 million extension loan, less $0.5 million and use of cash for operating assets and liabilities of $.5 million due to the timing of cash payments to vendors and cash receipts from customers. Investing Activities Our investing activities have consisted primarily of property and equipment purchases. Net cash and cash equivalents used in investing activities during the year ended December 31, 2023 consisted of $44 thousand of purchased property and equipment. By comparison, the Company’s net cash and cash equivalents used in investing activities during the year ended December 31, 2022 consisted primarily of $58 thousand of purchased property and equipment. Financing Activities Net cash flows from financing activities was ($8.4 million) for the year ended December 31, 2023, which primarily consisted of $10.7 million repayment on convertible promissory note payable, $1.5 million proceeds from issuance of PIPE Convertible Notes and Warrants, $0.5 proceeds from related loan, $28.8 million from Common Stock subject to redemption in connection with the Business Combination, $0.5 million underwriting fee related to the Business Combination, $0.3 million decrease in warrant liability, $18.2 million additional paid in capital and $11.6 million retained earning adjustment. By comparison, the Company’s net cash flows from financing activities was ($88.0 million) for the year ended December 31, 2023, which primarily consisted of $5.5 million proceeds from convertible promissory notes payable, $88.5 million from common stock subject to redemption in connection with the Business Combination, $4.5 million decrease in warrant liability, $2.8 million additional paid in capital and $3.4 million retained earning adjustment. Contractual Obligations and Commitments and Liquidity Outlook Currently, management does not believe the cash and cash equivalents is sufficient to meet our foreseeable cash needs for at least the next 12 months. Our foreseeable cash needs, in addition to our recurring operating expenses, include our expected capital expenditures to support the expansion of our infrastructure and workforce, interest expense and minimum contractual obligations. Management hopes to raise cash either through a public offering or private debt and equity offering. Our inability to raise cash would cause to operate as a going concern. Our future capital requirements will depend on many factors, including our growth rate, the timing and extent of spending to support research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product and service offerings, and the cost of any future acquisitions of technology or businesses. In the event that additional financing is required from outside sources, we may be unable to raise the funds on acceptable terms, if at all. 30 The following table summarizes our current and long-term material cash requirements as of December 31, 2023: Payments due in: Total Less than 1 year 1-3 years Accounts payable and accrued expenses $ 4,184,398 $ 4,184,398 $ - Excise tax 113,353 113,353 - Income tax payable 120,017 120,017 - PIPE Notes, net of discount including interest 1,549,820 1,549,820 - Loan, related party of OMN including interest 465,023 - 465,023 $ 6,432,610 $ 5,967.587 $ 465,023 Critical Accounting Policies and Estimates Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. In preparing our financial statements, we make estimates, assumptions, and judgments that can have a significant impact on our reported revenue, results of operations, and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet during and as of the reporting periods. These estimates, assumptions, and judgments are necessary because future events and their effects on our results and the value of our assets cannot be determined with certainty and are made based on our historical experience and on other assumptions that we believe to be reasonable under the circumstances. These estimates may change as new events occur or additional information is obtained, and we may periodically be faced with uncertainties, the outcomes of which are not within our control and may not be known for a prolonged period of time. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates. We believe that the assumptions and estimates associated with the following critical accounting policies involve significant judgment and thus have the most significant potential impact on our Consolidated Financial Statements. Revenue Recognition We generate revenue from the sale of products and services. A description of our revenue recognition policies is included in Note 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. Although most of our sales agreements contain standard terms and conditions, certain agreements contain multiple performance obligations or non-standard terms and conditions. For customer contracts that contain more than one performance obligation, we allocate the total transaction consideration to each performance obligation based on the relative stand-alone selling price of each performance obligation within the contract. We rely on either observable standalone sales or an expected cost plus a margin approach to determine the standalone selling price of offerings, depending on the nature of the performance obligation. As we further discuss in Note 2, Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K, for contracts with customers entered into during fiscal years 2023 and 2022, revenue from the sales of our iRWD and BEAM are recognized over time as the asset created by our performance does not have alternative use to us and an enforceable right to payment for performance completed to date is present. We recognize revenue as work progresses, using costs incurred to date relative to total estimated costs at completion. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs are incurred over a period of time, which can span periods, and the estimation of these costs requires management’s judgment. Due to the nature of the work required to be performed on the iRWD and BEAM and our reliance on the availability the estimation of total revenue and cost at completion is complex, subject to many variables, and requires significant judgment on a contract-by-contract basis. As part of this process, we review information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenue and costs. The risks and opportunities relate to our judgment about the delays that may or may not be within our control. Risks and opportunities may also relate to supply chain trends and commodity pricing, as well as changes in foreign currencies. Changes in estimates of net sales, cost of sales, and the related impact to operating profit are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage of completion in the current period. A significant change in one or more of these estimates could affect the profitability of one of more of our performance obligations and could have a material impact on our financial condition and results of operations. Stock-based Compensation Prior to the Business Combination, OneMedNet Corporation (now OneMedNet Solutions Corporation) had five authorized classes of membership interests, consisting of a class of common units known as the Class A Common Units (the “Class A Units”), a class of preferred units known as the Series A-2 Preferred Units (the “A-2 Preferred Units”), a class of preferred units known as the Series A-1 Preferred Units (the “A-1 Preferred Units”), Convertible Notes, Stock Options units, known as the Options and Warrants units granted to employees, officers, and directors pursuant to an incentive plan. 31 Following the Business Combination, the Company has authorized 101,000,000 shares of common stock, including 100,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. In addition, the Company has three classes of warrants ( i.e. , Public Warrants, Private Warrants and PIPE Warrants) issued and outstanding. As the Business Combination is accounted for as a reverse recapitalization, all periods prior to the Business Combination have been retroactively adjusted using the Exchange Ratio as stipulated by the Merger Agreement for the equivalent number of shares outstanding immediately after the Merger to effect the reverse recapitalization. The Class A Units, A-2 Preferred Units, A-1 Preferred Units, Options and Warrants were converted into Common Stock using an exchange ratio of 1:1, the Convertible Notes were converted into Common Stock using an exchange ratio of 2.5 per share. This is presented within the consolidated statements of changes in redeemable preferred and common units and equity (deficit). We typically issue restricted stock units (“RSUs”) as stock-based compensation. For RSUs, the fair value is the closing market price of the stock on the date immediately preceding the grant. We recognize compensation expense over the requisite service period for awards expected to vest. We account for forfeitures as they occur, rather than applying an estimated forfeiture rate. The graded-vesting method of expense recognition is applied to all awards with service-only conditions. Certain RSUs involve stock to be issued upon the achievement of certain performance conditions. Such RSUs become available, subject to time-based vesting conditions if, and to the extent that, financial performance criteria for the applicable period are achieved. Accordingly, the number of RSUs earned will vary based on the level of achievement of financial performance objectives for the applicable period. Until such time that our financial performance can ultimately be determined, each quarter we estimate the number of RSUs to be earned based on an evaluation of the probability of achieving the financial performance objectives. Such estimates are revised, if necessary, in subsequent periods when the underlying factors change our evaluation of the probability of achieving the financial performance objectives. Accordingly, stock-based compensation expense associated with performance-based RSUs may differ significantly from the amount recorded in the current period. The assumptions used in calculating the fair value of stock-based compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. Warrant transactions PIPE Warrants to purchase our shares of Common Stock may be accounted for as either liability or equity instruments depending on the terms of the warrant agreements. The warrants issued by us are accounted for as equity instruments due to our ability to settle the warrants through the issuance of units and the absence of terms which would require liability classification, including the rights of the grantee to require cash settlement. We classify these equity instruments within additional paid-in capital on the consolidated balance sheets. Private Warrants to purchase units accounted for as liability instruments represent the warrants issued to significant shareholders and related parties. In order to calculate warrant charges, we used the Black-Scholes pricing model, which required key inputs including volatility and risk-free interest rate and certain unobservable inputs for which there is little or no market data, requiring us to develop our own assumptions. We estimated the fair value of unvested warrants, considered to be probable of vesting, at the time. Based on that estimated fair value, we determined warrant charges, which were recorded as a reduction of the transaction price. Off-Balance Sheet Arrangements: As of December 31, 2023, we had no off-balance sheet arrangements as defined in Instruction 8 to Item 303(b) of Regulation S-K. Recently Adopted Accounting Pronouncements See Note 2 to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recently adopted accounting standards. Recently Issued Accounting Pronouncements See Note 2 to the accompanying consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of certain recently issued accounting standards which may impact our financial statements in future reporting periods.