OneMedNet Corp 10-K/A

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. Company Overview Founded in 2015, Legacy ONMD provides innovative solutions that unlock the significant value contained within the clinical image archives of healthcare providers. Employing our OneMedNet iRWD™ solution, which securely de-identifies, searches, and curates a data archive locally, bringing a wealth of internal and third-party research opportunities to providers. By leveraging our extensive federated provider network, together with our technology and in-house clinical expertise, OneMedNet successfully meets the most rigorous Real World Data life science requirements. Business Combination On November 7, 2023, we held the Closing of the Business Combination whereby Merger Sub merged with and into Legacy ONMD, with Legacy ONMD continuing as the surviving entity, which resulted in all of the issued and outstanding capital stock of Legacy ONMD being exchanged for shares of the Company’s Common Stock upon the terms set forth in the Merger Agreement. 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 Legacy ONMD. 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, the Common Stock began trading on the Nasdaq Global Market under the symbol “ONMD” and the Public 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. 35 Key Components of Consolidated Statements of Operations Revenue The Company generates revenue from two streams: (1) iRWD, which provides regulatory grade imaging and clinical data in the pharmaceutical, device manufacturing, contract research organizations, 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 that 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. General and Administrative General and administrative functions include 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. Operations 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 and Marketing Our sales and marketing costs consist of labor and tradeshow costs. Interest Expense Interest expense consists of interest incurred on shareholder loans. 36 Other (Income) Expenses, Net Other (income) expenses, net, primarily includes the changes in fair value of convertible debt and change in fair value of PIPE Notes for which we have elected the fair value option of accounting. Convertible notes payable, which include convertible promissory notes and PIPE Notes issued to related parties, including accrued interest and contingently issuable warrants, contain embedded derivatives, including settlement of the contingent conversion features, which require bifurcation and separate accounting. Accordingly, we have elected to measure the entire contingently convertible debt instruments, including accrued interest, at fair value. These debt instruments were initially recorded at fair value as liabilities and are subsequently re-measured at fair value on our consolidated balance sheet at the end of each reporting period and at settlement, as applicable. Other income or expenses, net, also includes changes in fair value of loan extensions, deferred underwriting fees and warrants which are treated as liability instruments measured at fair value for accounting purposes, initially recorded at fair value and subsequently re-measured to fair value on our consolidated balance sheets at the end of each reporting period. The changes in the fair value of these debt and liability instruments are recorded in changes in fair value, included as a component of other (income) expenses, net, in the consolidated statements of operations. At the Closing of the Business Combination, convertible promissory notes were converted into Common Stock immediately prior to the Closing and were no longer outstanding as of the Closing Date. Other (income) expenses, net, also includes 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: For the year ended December 31, Change 2023 2023 2022 $ % Revenue Subscription revenue $ 878 $ 678 $ 200 29 % Web imaging revenue 143 475 (332 ) -70 % Total revenue 1,021 1,153 (132 ) -11 % Cost of revenue 1,150 1,513 (363 ) -24 % Gross margin (129 ) (360 ) 231 -64 % Operating expenses General and administrative 3,544 4,806 (1,262 ) -26 % Sales and marketing 1,115 958 157 16 % Research and development 2,065 1,591 474 30 % Total operating expenses 6,724 7,355 (631 ) -9 % Loss from operations (6,853 ) (7,715 ) 862 -11 % Other (income) expense, net Interest expense 11 - 11 N/A Stock warrant expense 9,207 8,073 1,134 14 % Change in fair value of warrants (129 ) - (129 ) N/A Change in fair value of PIPE notes 269 - 269 N/A Change in fair value of convertible promissory notes 17,517 14,616 2,901 20 % Other expense 34 30 4 13 % Total other (income) expenses, net 26,909 22,719 4,190 18 % Loss before income taxes $ (33,762 ) $ (30,434 ) $ (3,328 ) 11 % Income tax expense 18 17 1 6 % Net loss $ (33,780 ) $ (30,451 ) $ (3,329 ) 11 % 37 Revenue For the year ended December 31, Change 2023 2023 2022 $ % Subscription revenue (Beam) $ 878 $ 678 $ 200 29 % Web imaging revenue (Real-World Data) 143 475 (332 ) -70 % Total $ 1,021 $ 1,153 $ (132 ) -11 % Our revenue is comprised of sales made from our subscription revenue (BEAM) and from our web imaging (RWD). For the year ended December 31, 2023, overall revenue was down by 11%. The primary driver for the subscription revenue increase was delivery of revenue to a significant customer. The primary driver for the decrease in web imaging revenue was revenue deliveries pushed to the first quarter of 2024. Cost of Revenue For the year ended December 31, 2023 2022 Cost of revenue 1,150 1,513 % of revenue 113 % 131 % In 2023 we were able to reduce our cost of revenue as a percentage of revenue by 18%. In the year ended 2023 our software cost, iRWD consultants and iRWD Data cost each decreased by $0.2 million ($0.6 million total). The decrease in cost of revenue was partially offset by a $0.2 million increase in payroll expenses. General and Administrative Our general and administrative expense decreased $1.3 million, or 26%, to $3.5 million for 2023 from $4.8 million for 2022. The decrease is primarily due to a decrease in stock compensation expense of $0.2 million, board of director warrant expense of $1.2 million, recruiting fees of $0.2 million and bad debt expense of $0.2 million. The decrease in general and administrative expenses was partially offset by $0.3 million in additional employees’ salaries. Sales and Marketing Our sales & marketing expense increased $0.2 million, or 16%, to $1.1 million for 2023 from $1.0 million for 2022. The increase is due to the addition of an employee and consultant in 2023. Research and development Our research and development expense increased $0.5 million, or 30%, to $2.1 million for 2023 from $1.6 million for 2022. 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. The increase is partially offset by a $0.2 million decrease in stock compensation expense. Income tax provision For the year ended 2023, the Company recorded a tax provision of $18 thousand due to the earnings of its Canadian subsidiary. As a result of its U.S. taxable loss, no U.S. federal or state tax provision was recorded. Interest Expense The Company incurred interest expense on loans made from related parties (Management and Directors). Interest expense for the year ended 2023 was immaterial. 38 Change in Fair Value of Warrants The change in fair value of Warrants was due to the Closing of the Business Combination and the resulting fluctuations in the market price of shares of Common Stock . Change in Fair Value of PIPE Notes The change in fair value of PIPE Notes was due to the resulting fluctuations in the market price of shares of Common Stock . Change in Fair Value of Convertible Debt The change in fair value of convertible debt was due to the Closing of the Business Combination and the resulting fluctuations of the market price of shares of Common Stock . Non-GAAP Financial Measure In addition to providing financial measurements based on GAAP, we provide an additional financial metric that is not prepared in accordance with GAAP (a “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. This non-GAAP financial measure should not be viewed as a substitute for a GAAP financial measure and may be different from a similarly titled non-GAAP financial measure used by other companies. Furthermore, there are limitations inherent in the non-GAAP financial measure because it excludes charges and credits that are required to be included in a GAAP presentation. Accordingly, 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. GAAP net loss is the closest comparable GAAP measure used. 39 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 expense; income tax expense; depreciation and amortization of tangible assets; 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: ● Adjusted EBITDA does not reflect interest expense or the cash requirements necessary to service payments on our shareholder loans which is not a core form of financing for our business; ● Adjusted EBITDA does not reflect income tax expense, which relates to our foreign subsidiary, because we have suffered recurring consolidated operating losses since inception and expect that to continue in the future; ● Although depreciation and amortization are non-cash charges, the assets that we currently depreciate and amortize will likely have to be replaced in the future, and Adjusted EBITDA does not reflect the cash required to fund such replacements; ● Adjusted EBITDA excludes stock-based compensation expense which has been, and will continue to be for the foreseeable future, a significant recurring non-cash expense for our business and an important part of our compensation strategy; ● Adjusted EBITDA excludes transactions costs attributable to legal, advisory, and other professional service fees incurred in connection with the Business Combination because they are unrelated to our current operations and are not comparable to the prior period nor predicative of future results; ● Adjusted EBITDA does not reflect the effect of earnings or charges resulting from matters that our management does not consider to be indicative of our ongoing operations. However, some of these charges and gains (such as mark-to-market adjustments, stock warrant expense etc.) have recurred and may recur; and ● Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. The following table reconciles GAAP net loss to Adjusted EBITDA during the periods presented (in thousands): 40 For the year ended December 31, 2023 2022 Net loss $ (33,780 ) $ (30,451 ) Interest expense 11 - Income tax expense 18 17 Depreciation and amortization 28 25 Stock-based compensation 1,475 1,865 Transaction expenses 983 955 Stock warrant expense 9,207 8,073 Change in fair value of warrants (129 ) - Change in fair value of PIPE notes 269 - Change in fair value of convertible promissory notes 17,517 14,616 Adjusted EBITDA (4,401 ) (4,900 ) 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. The following table shows net cash and cash equivalents 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: For the year ended December 31, 2023 2022 Net cash provided by (used in) Operating activities $ (4,791 ) $ (4,703 ) Investing activities (44 ) (58 ) Financing activities 4,611 4,333 Operating Activities Our net cash and cash equivalents 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, changes in fair value of liability classified financial instruments, 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 $4.8 million during the year ended December 31, 2023. Net cash used in operating activities was due to our net loss of $33.8 million, which is offset by non-cash items of $28.4 million, primarily consisting of the change in fair value of convertible debt of $17.5 million, stock warrant expense of $9.2 million, change in fair value of PIPE notes of $0.3 million, stock based compensation of $1.5 million and cash from operating assets and liabilities of $0.6 million due to the timing of cash payments to vendors and cash receipts from customers. By comparison, the Company’s net cash used in operating activities was $4.7 million during the year ended December 31, 2022. Net cash used in operating activities for the year ended December 31, 2022 was due to our net loss of $30.5 million, which is offset by non-cash items of $25.8 million, primarily consisting of the change in fair value of convertible debt of $14.6 million, stock warrant expense of $8.1 million, board of director warrant expense of $1.2 million and stock-based compensation expense of $1.9 million. 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. 41 Financing Activities Net cash provided by financing activities was $4.6 million for the year ended December 31, 2023, which primarily consisted of $4.2 million proceeds from the issuance of convertible promissory note payable, $1.5 million proceeds from the issuance of PIPE Notes, $0.5 proceeds from related party loan offset by $1.5 million of Business Combination costs paid. By comparison, the Company’s net cash provided by financing activities was $4.3 million for the year ended December 31, 2022, which primarily consisted of $5.1 million proceeds from the issuance of convertible promissory notes payable offset by $1.5 million of Business Combination costs paid. Contractual Obligations and Commitments and Going Concern Outlook Currently, management does not believe that 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. As a result of the Company’s recurring loss from operations and the need for additional financing to fund its operating and capital requirements there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt as to the Company’s ability to continue 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. 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 & accrued expenses $ 4,682 $ 4,682 $ - Loan extensions 2,992 2,992 - Deferred underwriter fee payable 3,525 3,525 - Loan, related party 465 - 465 PIPE Notes 1,637 1,637 - $ 13,301 $ 12,836 $ 465 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 GAAP. 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 of operations 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. 42 Revenue Recognition Although most of our sales agreements contain standard terms and conditions, certain agreements contain multiple performance obligations. 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. Subscription Revenue Subscription revenues are generated from the Company’s data exchange (BEAM) product, which is a medical imaging exchange platform between hospital/healthcare systems, imaging centers, physicians and patients. Subscriptions to the BEAM platform offering are recognized over time as the customer consumes the benefits of the services as the Company stands ready to provide access to the programs throughout the subscription period. Subscription customers are invoiced either quarterly or annually in advance with the customer contracts automatically renewing unless the customer issues a cancellation notice. The timing of revenue recognition is based on a time-based measure of progress as the Company provides access to the programs evenly over the course of the subscription period. Web Imaging Revenue Web imaging revenues are generated from the Company’s data broker (iRWD) product, which provides regulatory grade imaging and clinical data in the pharmaceutical, device manufacturing, clinical research organizations, and artificial intelligence markets. Web imaging customers are invoiced in installments as the related data is delivered. Revenue from the sale of web imaging products is recognized over time using an output measure of progress, which is based on the number of data units delivered relative to the total data units committed by the customer. Fair Value of Equity-Based Awards We estimate the fair value of stock option awards granted using the Black-Scholes option pricing model, which uses as inputs the fair value of our common stock and subjective assumptions we make, including expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. Due to the lack of company-specific historical and implied volatility data, we base the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded companies for which historical information is available. The historical volatility is generally calculated for a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero, as we have never paid dividends and do not have current plans to pay any dividends on our Common Stock. As there was no public market for our common stock prior to November 7, 2023, the estimated fair value of our common stock was previously approved by our Board of Directors, with input from management, as of the date of each award grant, considering our most recently available independent third-party valuations of our Common Stock and our Board of Directors’ assessment of additional objective and subjective factors deemed relevant that may have changed from the date of the most recent valuation through the date of the grant. Fair Value of Certain Debt and Liability Instruments, and the Fair Value Option of Accounting When financial instruments contain various embedded derivatives which require bifurcation and separate accounting of those derivatives apart from the host instruments, if eligible, GAAP allows issuers to elect the fair value option (“FVO”) of accounting for those instruments. The FVO allows the issuer to account for the entire financial instrument, including accrued interest, at fair value with subsequent remeasurements of that fair value recorded through the statements of operations. We elected the FVO of accounting for contingently convertible notes payable, including contingently issuable warrants and accrued interest, and certain term notes payable, including accrued interest, as further described below and as discussed in Note 2, Summary of Significant Accounting Policies in our accompanying consolidated financial statements included elsewhere in this Form 10-K. 43 Convertible notes payable and the PIPE Notes, which include the related contingently issuable warrants, contain embedded derivatives, which require bifurcation and separate accounting under GAAP, for which the Company elected the FVO for the convertible notes payable and PIPE Notes. In addition, certain term PIPE Notes were issued with separately exercisable and freestanding warrants to purchase Common Stock, were issued with substantial discounts at issuance and contained certain embedded derivatives to be bifurcated and accounted for separately for those term notes, unless the FVO is eligible and elected. Accordingly, the Company qualified for and elected the FVO for the entire PIPE Notes instruments. The convertible debt and accrued interest at their stated interest rates were initially recorded at fair value as liabilities on the consolidated balance sheets and were subsequently re-measured at fair value at the end of each reporting period presented within the consolidated financial statements. The changes in the fair value of the convertible notes payable and PIPE Notes are recorded in changes in fair value of convertible debt, included as a component of other income and expenses, net, in the consolidated statements of operations. The change in fair value related to the accrued interest components is also included within the single line of change in fair value of convertible debt on the consolidated statements of operations. See additional information on valuation methodologies and significant assumptions used in Note 6, Debt , and Note 11, Fair Value Measurement to the consolidated financial statements included elsewhere in this Amended Form 10-K. The estimated fair values of the convertible promissory notes and PIPE Notes are each determined based on the aggregated, probability-weighted average of the outcomes of certain possible scenarios. The combined value of the probability-weighted average of those outcomes is then discounted back to each reporting period in which the convertible notes are outstanding, in each case, based on a risk-adjusted discount rate estimated based on the implied discount rate. The discount rate was held constant over the valuation periods given the fact pattern associated with the Company and the stage of development. 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, Summary of Significant Accounting Policies 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, Summary of Significant Accounting Policies 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.