Item 7. Management’s Discussion and Analysis
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. See “Risk Factors” elsewhere in this Annual Report 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
We
provide 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.
30
Business
Combination
On
November 7, 2023, we completed the Business Combination, whereby a subsidiary of Data Knights merged with and into Legacy ONMD, with
Legacy ONMD surviving as a wholly-owned subsidiary of Data Knights. Following the Business Combination, Data Knights changed its name
to “OneMedNet Corporation”.
The
total consideration for the Business Combination and related transactions (the “Merger Consideration”) was approximately
$200 million. In connection with the meeting of stockholders of Data Knights to approve the Business Combination (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’ common stock, warrants and units ceased trading, and effective November
8, 2023, our 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 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 (the “Closing”), 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, 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.
31
General
and Administrative
General
and administrative functions include finance, legal, operations, 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.
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 our outstanding debt facilities, including loans with related parties, deferred underwriter
fees, insurance premiums paid in exchange for a note payable, and our line of credit.
Other
(Income) Expenses, Net
Other
(income) expenses, net, primarily includes the changes in fair value of convertible debt, change in fair value of PIPE Notes and change
in fair value of Yorkville Note (as defined below) 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 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 change in fair value of our Bitcoin holdings, as well as foreign exchange and tax expenses related
to the Company’s operations and revenue outside of the United States.
32
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 2024
2024
2023
$
%
Revenue
Subscription revenue
$ 351
$ 878
$ (527 )
-60 %
Web imaging revenue
292
143
149
104 %
Total revenue
643
1,021
(378 )
-37 %
Cost of revenue
924
1,150
(226 )
-20 %
Gross margin
(281 )
(129 )
(152 )
118 %
Operating expenses
General and administrative
7,027
3,544
3,483
98 %
Sales and marketing
830
1,115
(285 )
-26 %
Research and development
1,467
2,065
(598 )
-29 %
Total operating expenses
9,324
6,724
2,600
39 %
Loss from operations
(9,605 )
(6,853 )
(2,752 )
40 %
Other (income) expense, net
Interest expense
147
11
136
1236 %
Stock warrant expense
35
9,207
(9,172 )
-100 %
Change in fair value of warrants
(9 )
(129 )
120
-93 %
Change in fair value of PIPE notes
97
269
(172 )
-64 %
Change in fair value of Yorkville Note
711
-
711
N/A
Change in fair value of crypto assets – Bitcoin
(798 )
-
(798 )
N/A
Realized gain on sale of crypto assets – Bitcoin
(120 )
-
(120 )
N/A
Change in fair value of derivative liability
434
-
434
N/A
Change in fair value of convertible promissory notes
-
17,517
(17,517 )
-100 %
Other expense
25
34
(9 )
-26 %
Total other (income) expenses, net
522
26,909
(26,387 )
-98 %
Loss before income taxes
$ (10,127 )
$ (33,762 )
$ 23,635
-70 %
Income tax (benefit) expense
2
18
(16 )
-89 %
Net loss
(10,129 )
(33,780 )
23,651
-70 %
33
Revenue
For the year ended December 31,
Change 2024
2024
2023
$
%
Subscription revenue (BEAM)
$ 351
$ 878
$ (527 )
-60 %
Web imaging revenue (Real-World Data)
292
143
149
104 %
Total
$ 643
$ 1,021
$ (378 )
-37 %
Our
revenue is comprised of sales made from our subscription revenue (BEAM) and from our web imaging (iRWD). For the year ended December
31, 2024, overall revenue decreased by 37%. The primary driver for the decrease in subscription revenue was the planned discontinuation
of the BEAM platform in 2025. As we move away from the BEAM platform to focus on iRWD sales, we have stopped renewals for most of our
customers leading to a $0.5 million decrease for the year ended December 31, 2024, as compared to the prior year. The primary driver
for the increase in web imaging revenue was due to our enhanced focus on iRWD sales leading to increased customer deliveries during the
year ended December 31, 2024, as compared to the prior year.
Cost
of Revenue
For the year ended December 31,
2024
2023
Cost of revenue
924
1,150
% of revenue
144 %
113 %
The
decrease in cost of revenue of $0.2 million was primarily attributable to a decrease of $0.1 million in software and hosting costs due
to the planned shutdown of our BEAM platform and a decrease of $0.2 million in personnel costs driven by decreased headcount. These decreases
are partially offset by an increase of $0.1 million in iRWD data charges as we shift our focus to the iRWD service line.
34
General
and Administrative
General
and administrative expenses were $7.0 million for the year ended December 31, 2024, compared to $3.5 million for the year ended
December 31, 2023. The increase in total general and administrative expenses of $3.5 million was primarily due to an increase of
$2.2 million in accounting, audit and tax related services, an increase of $0.8 million in legal fees, an increase of $0.4 million
in insurance premiums and an increase of $0.1 million in other general and administrative expenses, each of which is attributable to enhanced public company reporting obligations and regulatory requirements
after the Business Combination closed in the fourth quarter of 2023.
Sales
and Marketing
Sales
and marketing expenses were $0.8 million for the year ended December 31, 2024, compared to $1.1 million for year ended December 31, 2023.
The decrease in total sales and marketing expenses of $0.3 million in 2024 was primarily due to a decrease of $0.3 million in personnel
costs driven by decreased headcount.
Research
and development
Research
and development expenses were $1.5 million for the year ended December 31, 2024, compared to $2.1 million for year ended December 31,
2023. The decrease in total research and development expenses of $0.6 million in 2024 was primarily due to a decrease of $0.4 million
in stock based compensation expense and a decrease of $0.2 million in third-party contractor costs.
Interest
Expense
During
the year ended December 31, 2024, interest expense was primarily comprised of interest expense on loans made by related parties (Management
and Directors) and interest expense on the remaining $0.4 million of deferred underwriter fees that are payable in cash. The increase
of $0.1 million in 2024 is primarily due to receiving additional loans from related parties, as well as interest on deferred underwriter
fees which did not accrue interest in 2023. During the year ended December 31, 2023, interest expense was only comprised of interest
expense on loans made by related parties.
Change
in Fair Value of Warrants
At
the closing of the Business Combination in 2023, we issued warrants in connection with the PIPE financing and
separately assumed certain private warrants from Data Knights. We determined that these warrants should be accounted for as liabilities,
which are adjusted to fair value at the end of each reporting period. The change in fair value is mainly due to the resulting fluctuations
in the market price of shares of Common Stock .
Change
in Fair Value of PIPE Notes
At
the closing of the Business Combination in 2023, we issued PIPE Notes (as defined below) that are convertible into shares of Common Stock
and carried at fair value. The change in fair value is mainly due to the resulting fluctuations in the market price of shares of Common
Stock .
Change
in Fair Value of Yorkville Note
In
June 2024, we issued the Yorkville Note (as defined below) which is convertible into shares of Common Stock and carried at fair value.
The change in fair value is mainly due to the resulting fluctuations in the market price of shares of Common Stock .
35
Change
in Fair Value of Crypto Assets – Bitcoin
The
change in fair value of crypto assets – Bitcoin during the year ended December 31, 2024 reflects the increase in the price of
Bitcoin, which we began strategically investing in using excess cash from our private placement transactions. During the year ended
December 31, 2023, we did not have any Bitcoin holdings.
Realized
Gain on Sale of Crypto Assets – Bitcoin
The
realized gain on sale of crypto assets – Bitcoin during the year ended December 31, 2024 reflects the increase in the price of
Bitcoin upon sale compared to its purchase price. During the year ended December 31, 2023, we did not have any Bitcoin holdings.
Change
in Fair Value of Derivative Liability
The
change in fair value of derivative liability during the year ended December 31, 2024 represents the issuance date fair value and remeasurement
adjustment of the SEPA put option with Yorkville. The fair value is primarily driven by expected sales of our Common Stock to Yorkville
and projections on the future path of the Company’s stock price during the commitment period. During the year ended December 31,
2023, we did not have the SEPA arrangement.
Change
in Fair Value of Convertible Promissory Notes
There
was no change in fair value of our Convertible Promissory Notes (as defined below) in 2024 because all previously outstanding principal
and accrued interest was converted into shares of Common Stock at the closing of the Business Combination. As a result, no obligation
remained on our Convertible Promissory Notes immediately after the Business Combination. The change in fair value in 2023 was due to
the resulting fluctuations in the market price of shares of Common Stock .
Stock
Warrant Expense
Stock
warrant expense of $0.04 million during the year ended December 31, 2024 was due to the issuance of the Helena Termination Warrants (as
defined below) in December 2024 in connection with the Company’s termination of the Helena SPA (as defined below) .
Stock
warrant expense of $9.2 million during the year ended December 31, 2023 was due to the issuance of the Convertible Note Warrants (as
defined below) during 2023 in connection with the issuance of the Convertible Promissory Notes. In connection with the closing of the
Business Combination, all Convertible Note Warrants were cashless exercised into shares of Legacy ONMD common stock and exchanged based
on the appropriate conversion ratio for the Common Stock less an exercise price of $1.00.
Liquidity
and Capital Resources
As
of December 31, 2024, our principal sources of liquidity were net proceeds received related to debt and equity financings 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,
2024
2023
Net cash provided by (used in)
Operating activities
$ (6,983 )
$ (4,791 )
Investing activities
(1,982 )
(44 )
Financing activities
9,090
4,611
36
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, stock-based compensation expense, changes in fair value of liability classified financial instruments, 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.
During
the year ended December 31, 2024, we used $7.0 million of cash in operating activities, primarily resulting from our net loss of $10.1
million, offset by non-cash charges of $1.6 million and cash provided by changes in our operating assets and liabilities of $1.5 million.
During
the year ended December 31, 2023, we used $4.8 million of cash in operating activities, primarily resulting from our net loss of $33.8
million, offset by non-cash charges of $28.4 million and cash provided by changes in our operating assets and liabilities of $0.6 million.
Investing
Activities
Our
investing activities have consisted primarily of property and equipment purchases and Bitcoin purchases and sales.
During
the year ended December 31, 2024, net cash used in investing activities was $2.0 million, consisting of $1.9 million in net purchases
of Bitcoin and $0.1 million of purchases of property and equipment.
During
the year ended December 31, 2023, net cash used in investing activities was $44 thousand, consisting of purchases of property and equipment.
Financing
Activities
During
the year ended December 31, 2024, net cash provided by financing activities was $9.1 million, consisting of $6.3 million in net proceeds
from the private placements in July and September 2024, $1.8 million in net proceeds from shareholder loans, $1.4 million in net proceeds
from the Yorkville Note, partially offset by $0.2 million paid for the repurchase of Common Stock and $0.1 million in repayment of deferred
underwriter fees.
During
the year ended December 31, 2023, net cash provided by financing activities was $4.6 million, consisting of $4.2 million in proceeds
from convertible notes, $1.5 million in proceeds from PIPE Notes, and $0.5 million in proceeds from shareholder loans, partially offset
by $1.5 million in Business Combination costs paid.
Contractual
Obligations and Commitments and Going Concern Outlook
Currently,
management does not believe that cash and cash equivalents are 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.
37
The
following table summarizes our current and long-term material cash requirements as of December 31, 2024:
Payments due in:
Total
Less than 1 year
1-3 years
Accounts payable & accrued expenses
$ 6,371
$ 6,371
$ -
Loan extensions
2,992
2,992
-
Deferred underwriter fee payable
3,250
3,250
-
Loan - related party
2,319
2,319
-
PIPE Notes
1,734
1,734
-
Yorkville Note
1,718
1,718
-
$ 18,384
$ 18,384
$ -
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.
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 at a point in 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.
38
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 Annual Report.
Convertible
notes payable, the Yorkville Note 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,
Yorkville Note 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 7, Convertible Debt , and Note 13, Fair Value Measurement
to the consolidated financial statements included elsewhere in this Annual Report.
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.
Recently
Adopted Accounting Pronouncements
See
Note 2, Summary of Significant Accounting Policies to the accompanying consolidated financial statements included elsewhere in
this Annual Report 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 for a description of certain recently issued accounting standards which may impact our financial statements in future
reporting periods.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
As
a smaller reporting company, we are not required to provide the information requested by this item pursuant to Item 305(e) of Regulation
S-K.
39