OneMedNet Corp 8-K/A, filed Nov 22, 2024
OneMedNet Corp (ONMD)
About this 8-K/A
OneMedNet Corp filed this 8-K/A on November 22, 2024, reporting on events of September 30, 2023.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
PURSUANT
TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date
of Report (Date of earliest event reported): November 7,
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code:
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) |
Name
of each exchange on which registered | ||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging
growth company
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Explanatory Note
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired
The consolidated financial statements of Legacy OneMedNet as of and for the three and nine months ended September 30, 2023, and the related notes thereto, are attached to this Amendment as Exhibit 99.1 and are incorporated herein by reference.
Also attached as Exhibit 99.3 and incorporated herein by reference is the Management’s Discussion and Analysis of Financial Condition and Results of Operations of Legacy OneMedNet as of and for the three and nine months ended September 30, 2023.
(d) Exhibits
** Filed herewith
* Previously filed
+ Indicates a management or compensatory plan.
† Schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Registration S-K. The Registrant hereby agrees to furnish a copy of any omitted schedules to the SEC upon request.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: November 22, 2024
| ONEMEDNET CORPORATION | ||
| By: | /s/ Aaron Green | |
| Aaron Green | ||
| Chief Executive Officer | ||
Exhibit 99.1
ONEMEDNET CORPORATION
INDEX TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ONEMEDNET CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| (Unaudited) | 2022 | |||||||
| September 30, | ||||||||
| 2023 | December 31, | |||||||
| (Unaudited) | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net
of allowance for credit losses of $ | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Deferred transaction costs | ||||||||
| Property and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities, temporary equity and stockholders’ deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable & accrued expenses | $ | $ | ||||||
| Deferred revenues | ||||||||
| Convertible promissory notes | ||||||||
| Total current liabilities | ||||||||
| Convertible promissory notes | ||||||||
| Loan, related party | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | $ | $ | ||||||
| Commitments and contingencies (Note 11) | ||||||||
| Temporary equity: | ||||||||
| Preferred Series A-2, par value $, shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Preferred Shares A-1, par value $, shares authorized; shares issued and outstanding as of September 30, 2023 and December 31, 2022 | ||||||||
| Total temporary equity | ||||||||
| Stockholders’ deficit: | ||||||||
| Common Stock, par value $, shares authorized; and shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, temporary equity, and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-1 |
ONEMEDNET CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | ||||||||||||||||
| Subscription revenue | $ | $ | $ | $ | ||||||||||||
| Web imaging revenue | ||||||||||||||||
| Total revenue | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross margin | ( | ) | ( | ) | ( | ) | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Stock warrant expense | ||||||||||||||||
| Change in fair value of convertible debt | ||||||||||||||||
| Other expense | ||||||||||||||||
| Total other expense | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Earnings per share: | ||||||||||||||||
| Basic and diluted net loss per common share outstanding | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Basic and diluted weighted average number of common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
| F-2 |
ONEMEDNET CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIT
(In thousands, except share data)
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Three and Nine Months Ended September 30, 2023 and 2022 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Series A-2 | Series A-1 | Temporary | Additional | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Equity | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balances as of June 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common shares in exchange for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series A-2 Preferred Stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of OMN warrants in conjunction with convertible promissory notes | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances as of September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balances as of December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common shares in exchange for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series A-2 Preferred Stock | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of OMN warrants in conjunction with convertible promissory notes | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances as of September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Three and Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Series A-2 | Series A-1 | Temporary | Additional | Total | ||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Equity | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Amount | Shares | Amount | Capital | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balances as of June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of OMN warrants in conjunction with convertible promissory notes | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances as of September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balances as of December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Issuance of common shares in exchange for services | - | - | ||||||||||||||||||||||||||||||||||||||
| Issuance of Series A-2 Preferred Stock | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of OMN warrants in conjunction with convertible promissory notes | - | - | - | |||||||||||||||||||||||||||||||||||||
| Issuance of OMN warrants to board of directors | - | - | - | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Balances as of September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
ONEMEDNET CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| 2023 | 2022 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation expense | ||||||||
| Stock warrant expense | ||||||||
| Board of director warrant expense | ||||||||
| Change in fair value of convertible debt | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Deferred revenues | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of shareholder loans | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Proceeds from issuance of Series A-2 preferred stock | ||||||||
| Data Knights merger transaction costs | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ONEMEDNET CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2023
1. Organization and Operations
OneMedNet Corporation (the “Company”) is a healthcare software company with solutions focused on digital medical image management, exchange, and sharing. The Company was founded in Delaware on October 13, 2009. The Company has been solely focused on creating solutions that simplify digital medical image management, exchange, and sharing. The Company has one wholly owned subsidiary, OneMedNet Technologies (Canada) Inc., incorporated on October 16, 2015 under the provisions of the Business Corporations Act of British Columbia whose functional currency is the Canadian dollar. The Company’s headquarters location is Eden Prairie, Minnesota.
Risks and Uncertainties
The Company is subject to risks common to companies in the markets it serves, including, but not limited to, global economic and financial market conditions, fluctuations in customer demand, acceptance of new products, development by its competitors of new technological innovations, dependence on key personnel, and protection of proprietary technology.
Going Concern and Management’s Plan
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result from the outcome of this uncertainty.
The
Company has incurred recurring net losses since its inception, including $
To continue in existence and expand its operations, the Company will be required to, and management plans to, raise additional working capital through an equity or debt offering and ultimately attain profitable operations to fulfill its operating and capital requirements for at least 12 months from the date of the issuance of the consolidated financial statements. However, the Company may not be able to secure such financing in a timely manner or on favorable terms, if at all. Furthermore, if the Company issues equity securities to raise additional funds, its existing stockholders may experience dilution, and the new equity securities may have rights, preferences and privileges senior to those of the Company’s existing stockholders. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent upon its ability to continue receiving working capital cash payments and generating cash flow from operations.
| F-5 |
2. Summary of Significant Accounting Policies
Basis of Presentation of Unaudited Interim Consolidated Financial Information
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying unaudited consolidated interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2023 included in the Company’s Amendment No. 1 to its Annual Report on Form 10-K/A filed with the SEC on November 4, 2024. The Company’s results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results of operations for the year ending December 31, 2023.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, including its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and the amounts disclosed in these notes to the consolidated financial statements. Actual results and outcomes may differ materially from management’s estimates, judgments, and assumptions. Significant estimates, judgments, and assumptions used in these financial statements include, but are not limited to, those related to revenue such as determining the nature and timing of the satisfaction of performance obligations, allowances for accounts receivable, useful lives and realizability of long-lived assets, accounting for income taxes and related valuation allowances, and stock-based compensation. Estimates are periodically reviewed in light of changes in circumstances, facts, and experience.
Operating Segments
The
Company operates as
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid, short-term investments with a maturity of three months or less when purchased. Cash equivalents consist of money market funds and are carried at cost, which approximates fair value. The balances, at times, may exceed Federal Deposit Insurance Corporation insured limits. The Company believes that, as of September 30, 2023, its risk relating to deposits exceeding federally insured limits was not significant. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
| F-6 |
Accounts Receivable and Allowance for Credit Losses
Accounts
receivable are unsecured, recorded at net realizable value, and do not bear interest. Accounts receivable are considered past due if
not paid within the terms established between the Company and the customer. Amounts are only written off after all attempts at collections
have been exhausted. The Company determines the need for an allowance for credit losses based upon factors surrounding the credit risk
of specific customers, historical trends and other information. As of September 30, 2023, and December 31, 2022, the Company established
allowances for credit losses of $
The
Company believes its credit policies are prudent and reflect normal industry terms and business risk. The Company generally does not
require collateral from its customers and generally requires payment from 0 to 90 days from the invoice date. For the nine months ended
September 30, 2023 and 2022, there was one customer that accounted for
Schedule of Aggregate Percentage Revenue and Accounts Receivable
| 2023 | 2022 | |||||||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Customer 1 | % | % | ||||||
| Aggregate percent of revenue | % | % | ||||||
As
of September 30, 2023, four customers accounted for more than
| September 30, 2023 | December 31, 2022 | |||||||
| Customer 1 | % | % | ||||||
| Customer 2 | % | % | ||||||
| Customer 3 | % | % | ||||||
| Customer 4 | % | % | ||||||
| Customer 5 | % | % | ||||||
| Customer 6 | % | % | ||||||
| Customer 7 | % | % | ||||||
| Aggregate percent of total accounts receivable | % | % | ||||||
| Aggregate Percent of Revenue and Accounts Receivable | % | % | ||||||
Property and Equipment
Property
and equipment are recorded at cost, less accumulated depreciation and amortization. The straight-line method is used for computing depreciation
and amortization. Assets are depreciated and amortized over their estimated useful lives ranging from to
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of an asset may not be fully recoverable. An impairment loss would be recognized when the estimated
future undiscounted net cash flows from the use of the asset are less than the carrying amount of that asset. There have been
| F-7 |
Fair Value Option of Accounting
When financial instruments contain various embedded derivatives which may require bifurcation and separate accounting of those derivatives apart from the entire host instrument, if eligible, Accounting Standards Codification (“ASC”) 825, Financial Instruments, allows issuers to elect the fair value option (“FVO”) of accounting for those instruments. The FVO may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. The FVO allows the issuer to account for the entire financial instrument at fair value with subsequent remeasurements of that fair value recorded through the statements of operations at each reporting date. A financial instrument is generally eligible for the FVO if, amongst other factors, no part of the convertible, or contingently convertible, instrument is classified in stockholders’ equity and the instrument does not contain a beneficial conversion feature at issuance. In addition, because a contingent beneficial conversion feature, if any, is not separately recognized within stockholders’ equity at the issuance date, a convertible debt instrument with a contingent beneficial conversion feature is therefore eligible for the FVO if all other criteria are met.
Based on the eligibility assessment discussed above, the Company concluded that its convertible notes payable are eligible for the FVO and accordingly elected the FVO for those debt instruments. This election was made because of operational efficiencies in valuing and reporting for these debt instruments in their entirety at each reporting date.
Convertible promissory notes contain embedded derivatives, which require bifurcation and separate accounting under GAAP, for which the Company elected the FVO for the convertible promissory notes. 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 promissory notes are recorded in changes in fair value of convertible debt, included as a component of other (income) expenses, net, in the consolidated statements of operations. The change in fair value related to the accrued interest components is also included within the respective 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 9.
Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. Warrants that meet the definition of a derivative financial instrument and the equity scope exception in ASC 815-10-15-74(a) are classified as equity and are not subject to remeasurement provided that the Company continues to meet the criteria for equity classification. Warrants that are classified as liabilities are accounted for at fair value and remeasured at each reporting date until exercise, expiration, or modification that results in equity classification. Any change in the fair value of the warrants is recognized as change in fair value of warrant liabilities included as a component of other (income) expenses, net in the consolidated statements of operations. The classification of warrants, including whether warrants should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. See Note 8 for further details regarding warrants.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:
Level 1 - Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2 - Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Valuations based on unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment.
When quoted market prices are available in active markets, the fair value of assets and liabilities is estimated within Level 1 of the valuation hierarchy. If quoted prices are not available, then fair values are estimated by using pricing models, quoted prices of assets and liabilities with similar characteristics, or discounted cash flows, within Level 2 of the valuation hierarchy. In cases where Level 1 or Level 2 inputs are not available, the fair values are estimated by using inputs within Level 3 of the hierarchy.
| F-8 |
The Company has determined the estimated fair value of its financial instruments based on appropriate valuation methodologies; however, considerable judgment is required to develop these estimates. Accordingly, these estimated fair values are not necessarily indicative of the amounts the Company could realize in a current market exchange. The estimated fair values can be materially affected by using different assumptions or methodologies. The methods and assumptions used in estimating the fair values of financial instruments are based on carrying values and future cash flows.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, convertible notes payable, liability classified financial instruments and certain privately issued warrants. The carrying amounts of cash and cash equivalents, accounts payable financial instruments approximate their fair value due to their short-term nature. The carrying amount of accounts receivable is net of an allowance that reflects management’s best estimate of expected credit losses. See Note 9 for fair value measurements.
Classification of Series A-1 and Series A-2 Preferred Stock
The Company originally classified its Series A-1 and Series A-2 preferred stock (collectively, “Preferred Stock”) outside of permanent equity because the Preferred Stock contained certain redemption features that result in those shares being redeemable upon the occurrence of certain events that are not solely within the Company’s control, including liquidation, sale or transfer of control. Accordingly, the Preferred Stock was recorded outside of permanent equity and was subject to the classification guidance provided under ASC 480-10-S99. Because dividends were not contractually required to be accrued on the Preferred Stock as there was no stated or required dividend rate per annum, the Company was not required to accrete dividends into the carrying amount of the Preferred Stock in anticipation of a future contingent event or redemption value. Accordingly, the Company did not adjust the carrying values of the Preferred Stock to the respective liquidation preferences of such shares because of the uncertainty of whether or when such events would occur.
Revenue Recognition
The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which aligns revenue recognition with the transference of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
This core principle is achieved to the application of a five-step model: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied. Payment terms between customers related to product and services sales vary by the type of customer, country of sale, and the products or services offered and could result in an unbilled receivable or deferred revenue balance depending on whether the performance obligation has been satisfied (or partially satisfied).
Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation in proportion to the standalone selling price for each and recognized as revenue when, or as, the performance obligation is satisfied.
Individual promised goods and services in a contract are considered a performance obligation and accounted for separately if the good or service is distinct. A good or service is considered distinct if the customer can benefit from the good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement.
The transaction price for the products is the invoiced amount. Advanced billings from contracts are deferred and recognized as revenue when earned. Revenue is recognized only to the extent that it is probable that a significant reversal of revenue will not occur and when collection is considered probable. 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. 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.
| F-9 |
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.
Patents and Trademarks
Costs associated with the submission of a patent application are expensed as incurred given the uncertainty of the patents resulting in probable future economic benefits to the Company and are included in research and development on the consolidated statements of operations.
Research and Development
The Company accounts for its research and development (“R&D”) costs in accordance with ASC 730, Research and Development (“ASC 730”). ASC 730 requires that all R&D costs be recognized as an expense as incurred. However, some costs associated with R&D activities that have an alternative future use (e.g., materials, equipment, facilities) may be capitalizable. For the three and nine months ended September 30, 2023 and 2022, research and development expenditures were charged to operating expense as incurred.
Stock-Based Compensation
The Company recognizes compensation expense related to employee option grants and restricted stock grants, if any, in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).
The Company measures all stock options and other stock-based awards granted based on the fair value of the award on the date of the grant and recognizes compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. The Company has elected to recognize forfeitures as they occur. The reversal of compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service condition is recognized in the period of the forfeiture. Generally, and unless otherwise specified, the Company grants stock options with service-based only vesting conditions and records the expense for these awards using the straight-line method over the requisite service period. Generally, and unless otherwise specified, the Company grants stock options with service-based only vesting conditions and records the expense for these awards using the straight-line method over the requisite service period.
| F-10 |
The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
The Company estimates the fair value of its common stock with the assistance of an independent third-party valuation firm when issuing stock options and computing estimated stock-based compensation expense. The assumptions underlying these valuations represent the Company’s best estimates, which involved inherent uncertainties and the application of significant levels of judgment. In order to determine the fair value of its common stock, the Company considers, among other items, previous transactions involving the sale of Company securities, the business, financial condition and results of operations, economic and industry trends, the market performance of comparable publicly traded companies, and the lack of marketability of the Company’s common stock.
Each valuation methodology includes estimates and assumptions that require the Company’s judgment. These estimates and assumptions include a number of objective and subjective factors, including external market conditions, guideline public company information, the prices at which the Company sold convertible preferred stock and common stock to third parties in arm’s-length transactions, the rights and preferences of securities senior to the Company’s common stock at the time, and the likelihood of achieving a liquidity event such as an initial public offering or sale. Significant changes to the assumptions used in the valuations could result in materially different fair values of stock options at each valuation date, as applicable.
The fair value of each stock option grant is estimated using the Black-Scholes option-pricing model. The Company estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies within the biotechnology industry with characteristics similar to the Company. The expected term of the Company’s stock options has been determined utilizing the “simplified” method, which reflects the weighted-average of time-to-vesting. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero, based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
Earnings per share attributable to common stockholders is calculated using the two-class method , which is an earnings allocation formula that determines earnings per share for the holders of the Company’s Common Stock and participating securities. Although the Company’s historical Preferred Stock contained participating rights in any dividend declared and paid by the Company and were therefore participating securities, the Preferred Stock had no stated dividends and OneMedNet has never paid any cash dividends and does not plan to pay any dividends in the foreseeable future. Net loss attributable to common stockholders and participating securities is allocated to each share on an if-converted basis as if all of the earnings for the period had been distributed. However, the participating securities do not include a contractual obligation to share in the losses of the Company and are not included in the calculation of net loss per share in the periods that have a net loss. In addition, common stock equivalent shares (whether or not participating) are excluded from the computation of diluted earnings per share in periods in which they have an anti-dilutive effect on net loss per common share.
Diluted net loss per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method and treasury stock method, as applicable. Contingently convertible notes payable were not included for purposes of calculating the number of diluted shares outstanding as the number of dilutive shares is based on a conversion contingency associated with the completion of a future financing event that had not occurred, and the contingency was not resolved, in the reporting periods presented herein. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. Diluted net loss per share is equivalent to basic net loss per share for the periods presented herein because common stock equivalent shares from the Preferred Stock, convertible notes, stock option awards and outstanding warrants to purchase common stock were antidilutive.
| F-11 |
As a result of the Company reported net loss attributable to common stockholders for all periods presented herein, the following common stock equivalents were excluded from the computation of diluted net loss per common share as of September 30, 2023, and December 31, 2022, because including them would have been antidilutive (in thousands):
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Employee stock options | ||||||||
| Restricted stock awards | ||||||||
| Warrants for common stock | ||||||||
| Series A-1 preferred stock | ||||||||
| Series A-2 preferred stock | ||||||||
| Convertible promissory notes | ||||||||
| Total common stock equivalents | ||||||||
General and Administrative
General and administrative expenses include all costs that are not directly related to satisfaction of customer contracts. General, and administrative expenses include items for the Company’s selling and administrative functions, such as sales, 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.
Emerging Growth Company
The Company is an emerging growth company, as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has not elected to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company , can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740) (“ASU 2023-09”). ASU 2023-09 requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. ASU 2023-09 is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is currently evaluating the impact of adopting ASU 2023-09.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to provide enhancements to segment disclosures, even for entities with only one reportable segment. In particular, the standard will require disclosures of significant segment expenses regularly provided to the chief operating decision maker and included within each reported measure of segment profit and loss. The standard will also require disclosure of all other segment items by reportable segment and a description of its composition. Finally, the standard will require disclosure of the title and position of the chief operating decision maker and an explanation of how the chief operating decision maker uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The standard is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of the standard on the presentation of its unaudited consolidated financial statements and footnotes.
| F-12 |
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, (Topic 326), an amendment on measurement of credit losses on financial assets held by at each reporting date. The guidance requires the use of a new current expected credit loss (“CECL”) model in estimating allowances for doubtful accounts with respect to accounts receivable. The CECL model requires that the Company estimate its lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the estimated net amounts expected to be collected. Effective January 1, 2023, the Company adopted ASU No. 2016-13 and the adoption of this standard did not have a material impact on the Company’s unaudited consolidated financial statements.
In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. The Company adopted ASU No. 2022-03 and the adoption of this standard did not have a material impact on the Company’s unaudited consolidated financial statements.
3. Property and Equipment
Property and equipment are summarized as follows (in thousands):
Schedule of Property and Equipment
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Computers | $ | $ | ||||||
| Furniture and equipment | ||||||||
| Total property and equipment | ||||||||
| Less: accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
For
the three months ended September 30, 2023 and 2022, depreciation and amortization expense was $
| F-13 |
4. Convertible Debt
Convertible Promissory Notes
2019 Notes
During
November 2019, the Company entered into a convertible promissory note (the “2019 Note”) agreement with a related party investor.
The total amount of the 2019 Note is $
2022 Notes
During
2022, the Company entered into convertible promissory notes with related party investors totaling $
The
principal and unpaid accrued interest on each of the 2022 Notes will convert: (i) automatically, upon the Company’s issuance of
equity securities (the “Next Equity Financing”) in a single transaction, or series of related transactions, with aggregate
gross proceeds to the Company of at least $
If a Corporate Transaction occurs before the repayment or conversion of the 2022 Notes, the Company will pay at the closing of the Corporate Transaction to each noteholder that elects not to convert its 2022 Notes in connection with such Corporate Transaction an amount equal to the outstanding principal amount of such noteholder’s Note plus a 20% premium. “Corporate Transaction” means (a) a sale by the Company of all or substantially all of its assets, (b) a merger of the Company with or into another entity (if after such merger the holders of a majority of the Company’s voting securities immediately prior to the transaction do not hold a majority of the voting securities of the successor entity) or (c) the transfer of more than 50% of the Company’s voting securities to a person or group.
In
connection with the issuance of the 2022 Notes, the Company also issued
| F-14 |
The Convertible Promissory Notes were issued for general working capital purposes. The Company elected the FVO of accounting for its Convertible Promissory Notes. Under the FVO election, the financial instrument is initially measured at its issue-date estimated fair value and subsequently remeasured at estimated fair value on a recurring basis at each reporting period date. The estimated fair value adjustment is presented as a single line item within other (income) expenses, net in the accompanying consolidated statements of operations under the caption change in fair value of convertible debt.
As
of September 30, 2023 the fair value of the 2019 Notes and 2022 Notes was $
As
of December 31, 2022 the fair value of the 2019 Notes and 2022 Notes was $
5. Canadian Emergency Business Loan Act (“CEBA”)
During
December 2020, the Company applied for and received a $
The Company accounted for the loan as debt in accordance with ASC 470, Debt, and accrued interest in accordance with the interest method under ASC 835-30.
6. Stockholders’ Deficit
Series A-2 Preferred Stock
The
Company’s previously issued and outstanding Series A-2 preferred stock included a $ per share annual noncumulative dividend
when and if declared by the board of directors.
Series A-1 Preferred Stock
The
Company’s previously issued and outstanding Series A-1 preferred stock included a $ per share annual noncumulative dividend
when and if declared by the board of directors.
| F-15 |
Stock Options
During 2020, the Company adopted a new equity incentive plan (the “Plan”), which provides for the granting of incentive and nonqualified stock options to employees, directors, and consultants. As of December 31, 2020, the Company has reserved shares of common stock under the Plan. The Company believes that such awards better align the interests of its employees with those of its stockholders. Option awards are generally granted with an exercise price equal to the fair market value of the Company’s stock at the date of grant; those option awards generally vest with a range of to of continuous service and have contractual terms. Certain option awards provide for accelerated vesting if there is a change in control, as defined in the Plan. The Plan also permits the granting of restricted stock and other stock-based awards. Unexercised options are cancelled upon termination of employment and become available under the Plan.
Schedule of Options Outstanding
| Weighted | Aggregate | |||||||||||
| Number of | Average | Intrinsic | ||||||||||
| Options | Exercise Price | Value | ||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Cancelled | ( | ) | ||||||||||
| Outstanding as of September 30, 2023 | $ | $ | ||||||||||
| Vested and exercisable as of September 30, 2023 | $ | $ | ||||||||||
| Vested and expected to vest at September 30, 2023 | $ | $ | ||||||||||
For the three months ended September 30, 2023 and 2022, the Company recorded stock-based compensation expense of $ million and $ million, respectively, on its outstanding stock options. For the nine months ended September 30, 2023 and 2022, the Company recorded stock-based compensation expense of $ million and $ million, respectively, on its outstanding stock options. The Company has determined its share-based payments to be a Level 3 fair value measurement. At September 30, 2023, and December 31, 2022, the Company has used the Black-Scholes option pricing model and was estimated assuming no expected dividends and the following weighted average assumptions:
Schedule of Fair Value of Stock Options
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Risk-free interest rate | % | % - % | ||||||
| Expected dividend yield | ||||||||
| Expected term in years | - | |||||||
| Expected volatility | % | % - % | ||||||
| F-16 |
Restricted Stock Awards
Certain employees, directors and consultants have been awarded restricted stock. The restricted stock vesting consists of milestone and time-based vesting as well as compensation for services performed by the Board of Directors. The following table summarizes restricted stock award activity for the nine ended September 30, 2023 (in dollars):
| Weighted | ||||||||
| Number of | Average Grant | |||||||
| Awards | Date Fair Value | |||||||
| Nonvested at December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at September 30, 2023 | $ | |||||||
Schedule of Stock-based Compensation Expense
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
8. Stock Warrants
The Company has the following warrants outstanding:
Schedule of Warrants Outstanding
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equity Classified Warrants | ||||||||
| OneMedNet Warrants | ||||||||
| Convertible Promissory Note Warrants | ||||||||
| Total | ||||||||
Legacy ONMD Warrants
In
2021, there were
| F-17 |
Convertible Promissory Notes Warrants
In
connection with the convertible promissory notes described in Note 4, the Company issued stock warrants. In 2022, there were
9. Fair Value Measurements
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis, inclusive of related party (in thousands):
Schedule of Assets and Liabilities Measured at Fair Value
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| September 30, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible promissory notes | $ | $ | $ | $ | ||||||||||||
| Total liabilities, at fair value | $ | $ | $ | $ | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| December 31, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Convertible promissory notes | $ | $ | $ | $ | ||||||||||||
| Total liabilities, at fair value | $ | $ | $ | $ | ||||||||||||
The following table presents the changes in the convertible promissory notes measured at fair value at September 30, 2023, and December 31, 2022 (in thousands):
Schedule of Changes in Convertible Promissory Notes
| Level 3 Rollforward: | Convertible Promissory Notes | |||
| Balance, December 31, 2022 | ||||
| Beginning balance | ||||
| Additions | ||||
| Changes in fair value | ||||
| Balance, September 30, 2023 | $ | |||
| Ending balance | $ | |||
10. Related Party Transactions
Convertible Promissory Notes and Warrants
From
2019 to 2023, the Company issued various Convertible Promissory Notes to related party investors. Total gross proceeds raised from Convertible
Promissory Notes with related parties was $
| F-18 |
Shareholder Loans
From
April 2023 to September 2023, the Company entered into shareholder loans with two related party investors (the “Shareholder Loans”)
for aggregate gross proceeds of $
11. Commitments and Contingencies
Lease Agreement
The
Company has a month-to-month lease for a suite at a cost of $
Litigation
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recognized, if and when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company was not subject to any material legal proceedings during the nine months ended September 30, 2023 and 2022.
12. Subsequent Events
The Company has evaluated subsequent events occurring through November 20, 2024 the date the consolidated financial statements were available for issuance, for events requiring recording or disclosure in the Company’s consolidated financial statements.
Business Combination
On November 7, 2023, the Company consummated a merger (the “Merger”) following the approval at the special meeting of the shareholders of Data Knights Acquisition Corp. (“Data Knights”), a Delaware corporation, held on October 17, 2023, of the agreement and plan of merger, dated as of April 25, 2022, by and among Data Knights, Data Knights Merger Sub, Inc., a Delaware corporation (“Merger Sub”) and a wholly-owned subsidiary of Data Knights, OneMedNet Solutions Corporation (formerly named OneMedNet Corporation) (“Legacy ONMD”), Data Knights, LLC, a Delaware limited liability company (“Sponsor”), and Paul Casey, in his capacity as representative of the stockholders of Legacy ONMD. Pursuant to the Merger Agreement, Merger Sub merged with and into Legacy ONMD, with Legacy ONMD surviving the Merger as a wholly owned subsidiary of Data Knights (such transactions contemplated by the Merger Agreement, the “Business Combination”).
Settlement of Deferred Underwriting Fees
During
2024, through the date of this report, the Company issued and shares of Common Stock to EF Hutton LLC and Kingwood Capital
Partners, LLC, respectively, as consideration for $
Share Repurchase
During 2024, through the date of this report, the Company bought back shares of Common Stock from a convertible note holder.
Shareholder Loans
During
2024, through the date of this report, the Company received gross proceeds of $
| F-19 |
Private Placements
As
previously announced on a Current Report on Form 8-K filed with the SEC on April 2, 2024, on March 28, 2024, the Company entered into
a definitive securities purchase agreement (the “Helena SPA”) with Helena Global Investment Opportunities 1 Ltd. (“Helena”),
an affiliate of Helena Partners Inc., a Cayman-Islands based advisor and investor providing for up to $
On
July 23, 2024 and July 25, 2024, the Company entered into securities purchase agreements (the “Securities Purchase Agreements”)
with certain institutional investors in connection with the private placement of its Common Stock and pre-funded warrants with aggregate
gross proceeds of approximately $
Pursuant
to the Securities Purchase Agreements, the Company agreed to issue and sell to the investors shares of its Common Stock at
a price of $ per share, pre-funded warrants exercisable for
On
September 24, 2024, the Company entered into securities purchase agreements (the “Follow-on SPA”) with an institutional investor
in connection with the private placement of its Common Stock, warrants and pre-funded warrants with aggregate gross proceeds of approximately
$
Pursuant
to the Follow-on SPA, the Company agreed to issue and sell to the investor shares of its Common Stock at a price of $ per
share, warrants exercisable for
Standby Equity Purchase Agreement
On
June 17, 2024, the Company entered into a standby equity purchase agreement (the “SEPA”) with YA II PN, LTD, a Cayman Islands
exempt limited partnership managed by Yorkville Advisors Global, LP (“Yorkville”). Pursuant to the SEPA, subject to certain
conditions, the Company has the option to sell to Yorkville an aggregate amount of up to up to $
| F-20 |
Any purchase under an advance would be subject to certain limitations, including that Yorkville will not purchase or acquire any shares that would result in it and its affiliates beneficially owning more than % of the then outstanding voting power or number of shares of Common Stock or any shares that when aggregated with shares issued under all other earlier advances, would exceed shares of Common Stock (representing % of the aggregate number of then outstanding shares of Common Stock) (the “Exchange Cap”) unless shareholders approved issuances in excess of the Exchange Cap.
In
connection with the execution of the SEPA, the Company paid a $
Additionally,
Yorkville agreed to advance to the Company, in exchange for a convertible promissory note (the “Yorkville Promissory Note”),
a principal amount of $
The Yorkville Promissory Note may be accelerated by Yorkville upon specified events of default, and may become amortizable for cash if (i) the daily VWAP is less than the Floor Price for five trading days during a period of seven consecutive trading days, (ii) the Company has issued in excess of 95% of the shares of Common Stock available under the Exchange Cap or (iii) the Company is in material breach of its obligations under a Registration Rights Agreement it entered into with Yorkville in connection with the SEPA or Yorkville becomes limited in its ability to freely resell shares subject to an advance as further described in the Yorkville Promissory Note, subject to de-amortization after certain cures.
Yorkville Letter
On October 8, 2024, Yorkville sent the Company a letter notifying the Company that it had breached a registration rights agreement with Yorkville by failing to file a Registration Statement on Form S-1 on the timeline set forth in the registration rights agreement (the “Yorkville Letter”). The Yorkville Letter asserted that this breach was an event of default and an amortization event under the prepaid advance in connection with SEPA. The Yorkville Letter also asserted that the Company’s failure to timely file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2024 was an event of default under the Yorkville Promissory Note. The Company subsequently engaged in discussions with Yorkville regarding the Yorkville Letter, which discussions are ongoing.
Pursuant to the Yorkville Promissory Note, upon the occurrence of an amortization event, the Company is required to pay all principal and accrued interest on the Yorkville Promissory Note, plus a 10% payment premium on the principal amount, in equal installments over 3 calendar months or until the amortization event is cured, whichever is earlier. In addition, upon the occurrence of an event of default, the interest rate on the Yorkville Promissory Note increases to 18% retroactive to the date of the event of default.
| F-21 |
Executive Turnover
As
previously announced on a Current Report on Form 8-K filed with the SEC on April 2, 2024, on March 22, 2024, Paul J. Casey notified the
Company of his intention to retire as Chief Executive Officer of the Company effective March 29, 2024. Mr. Casey continued to serve as
a member of the Board of Directors until October 1, 2024. In connection with Mr. Casey’s retirement from the Company, Mr. Casey
and the Company entered into a Resignation Agreement and Release, dated March 22, 2024, pursuant to which Mr. Casey was paid $
Effective March 29, 2024, the Board of Directors (i) appointed Aaron Green to serve as Chief Executive Officer of the Company to fill the vacancy created by the retirement of Paul Casey; (ii) appointed Mr. Green, to serve as a member of the Board of Directors to fill the vacancy created by the retirement of Scott Holbrook; and (iii) appointed Dr. Thomas Kosasa, a member of the Board of Directors, to serve on the Company’s Audit Committee, also to fill the vacancy created by the retirement of Scott Holbrook.
As previously announced on Form 8-K, on August 26, 2024, Lisa Embree, Chief Financial Officer (“CFO”), Executive Vice President, Treasurer and Secretary, notified the Company of her intention to resign from her position effective August 30, 2024.
Effective
August 30, 2024, the Board appointed Mr. Robert Golden to serve as the Chief Financial Officer on an interim basis to fill the vacancy
created by the resignation of Lisa Embree. Effective on his appointment as interim CFO, Mr. Golden stepped down as a member and the chair
of the Audit Committee of the Board. In connection with his appointment as interim CFO, the Company entered into a consulting agreement
with Mr. Golden, pursuant to which Mr. Golden will receive a $
As previously announced on a Current Report on Form 8-K filed with the SEC on October 8, 2024, on October 1, 2024, Paul J. Casey and Erkan Akyuz resigned from the Board, effective immediately. Also on October 1, 2024, the Board of Directors appointed Jair Clarke and Sherry Coonse McCraw to the Board to fill the vacancies created by Mr. Casey and Mr. Akyuz, respectively. In connection with Ms. Coonse McCraw and Mr. Clarke’s service on the Advisory Board of the Company, the Board of Directors approved a restricted stock unit (“RSU”) grant providing for the grant of RSUs to each director for one full year of service (pro-rated for 2024). The RSUs will vest at the end of December 2024.
| F-22 |
Exhibit 99.3
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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 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.
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.
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.
Other (Income) Expenses, Net
Other (income) expenses, net, primarily includes the changes in fair value of convertible debt for which we have elected the fair value option of accounting. Convertible notes payable, which include convertible promissory notes issued to related parties, including accrued interest and 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 instrument, 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.
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
Comparison of three months ended September 30, 2023, and 2022
The following tables set forth our consolidated statements of operations data for the periods presented:
| Three
Months Ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenue | ||||||||||||||||
| Subscription revenue | $ | 256 | $ | 174 | $ | 82 | 47 | % | ||||||||
| Web imaging revenue | 70 | 201 | (131 | ) | -65 | % | ||||||||||
| Total revenue | 326 | 375 | (49 | ) | -13 | % | ||||||||||
| Cost of revenue | 293 | 474 | (181 | ) | -38 | % | ||||||||||
| Gross margin | 33 | (99 | ) | 132 | -133 | % | ||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 1,308 | 1,989 | (681 | ) | -34 | % | ||||||||||
| Sales and marketing | 246 | 257 | (11 | ) | -4 | % | ||||||||||
| Research and development | 405 | 597 | (192 | ) | -32 | % | ||||||||||
| Total operating expenses | 1,959 | 2,843 | (884 | ) | -31 | % | ||||||||||
| Loss from operations | (1,926 | ) | (2,942 | ) | 1,016 | -35 | % | |||||||||
| Other (income) expense, net | ||||||||||||||||
| Stock warrant expense | 4,285 | 2,513 | 1,772 | 71 | % | |||||||||||
| Change in fair value of convertible debt | 7,621 | 3,278 | 4,343 | 132 | % | |||||||||||
| Other expense | 7 | 12 | (5 | ) | -42 | % | ||||||||||
| Total other (income) expenses, net | 11,913 | 5,803 | 6,110 | 105 | % | |||||||||||
| Net loss | $ | (13,839 | ) | $ | (8,745 | ) | $ | (5,094 | ) | 58 | % | |||||
Revenue
| Three
Months Ended September 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Subscription revenue (Beam) | $ | 256 | $ | 174 | $ | 82 | 47 | % | ||||||||
| Web imaging revenue (Real-World Data) | 70 | 201 | (256 | ) | -65 | % | ||||||||||
| Total | $ | 326 | $ | 375 | $ | 326 | -13 | % | ||||||||
Our revenue is comprised of sales made from our subscription revenue (BEAM) and from our web imaging (RWD). For the period ended September 30, 2023, overall revenue was down by 13%. 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
| Three
Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of revenue | 293 | 474 | ||||||
| % of revenue | 90 | % | 126 | % | ||||
For the three months ended September 30, 2023, we were able to reduce our cost of revenue as a percentage of revenue by 36%. The decrease is primarily due to a $0.1 million decrease in data broker costs and a $0.07 million decrease in payroll, along with to a 13% decrease in total revenue.
General and Administrative
Our general and administrative expense decreased $0.7 million, or 34%, to $1.3 million for the three months ended September 30, 2023, from $2.0 million for the three months ended September 30, 2022. The decrease was primarily driven by a $1.2 million decrease in Board of Director warrant expense, a $0.1 million decrease in recruitment fees and $0.1 million decrease in broker salaries. These amounts were offset by a $0.7 million increase in stock-based compensation expense.
Sales and Marketing
Our sales and marketing expense decreased $0.01 million, or 4%, to $0.2 million for the three months ended September 30, 2023, from $0.3 million for the three months ended September 30, 2022. The decrease is primarily due to an increase in sales and marketing consultant expenses of $0.4 million, partially offset by a decrease in sales and marketing salaries of $0.3 million, a decrease in commissions of $0.1 million, and a decrease in travel expenses of $0.1 million.
Research and development
Our research and development expense decreased $0.2 million, or 32%, to $0.4 million for the three months ended September 30, 2023, from $0.6 million for the three months ended September 30, 2022. The decrease is primarily due a $0.2 million decrease in stock compensation expense.
Change in Fair Value of Convertible Debt
The change in fair value of convertible debt was due to fluctuations of the share market price.
Comparison of nine months ended September 30, 2023, and 2022
The following tables set forth our consolidated statements of operations data for the periods presented:
Nine
Months Ended | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenue | ||||||||||||||||
| Subscription revenue | $ | 595 | $ | 502 | $ | 93 | 19 | % | ||||||||
| Web imaging revenue | 86 | 387 | (301 | ) | -78 | % | ||||||||||
| Total revenue | 681 | 889 | (208 | ) | -23 | % | ||||||||||
| Cost of revenue | 812 | 1,106 | (294 | ) | -27 | % | ||||||||||
| Gross margin | (131 | ) | (217 | ) | 86 | -40 | % | |||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | 2,430 | 3,951 | (1,521 | ) | -38 | % | ||||||||||
| Sales and marketing | 817 | 588 | 229 | 39 | % | |||||||||||
| Research and development | 1,565 | 1,088 | 477 | 44 | % | |||||||||||
| Total operating expenses | 4,812 | 5,627 | (815 | ) | -14 | % | ||||||||||
| Loss from operations | (4,943 | ) | (5,844 | ) | 901 | -15 | % | |||||||||
| Other (income) expense, net | ||||||||||||||||
| Stock warrant expense | 8,385 | 5,654 | 2,731 | 48 | % | |||||||||||
| Change in fair value of convertible debt | 17,872 | 10,870 | 7,002 | 64 | % | |||||||||||
| Other expense | 43 | 31 | 12 | 39 | % | |||||||||||
| Total other (income) expenses, net | 26,300 | 16,555 | 9,745 | 59 | % | |||||||||||
| Net loss | $ | (31,243 | ) | $ | (22,399 | ) | $ | (8,844 | ) | 39 | % | |||||
Revenue
Nine
Months Ended | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Subscription revenue (Beam) | $ | 595 | $ | 502 | $ | 93 | 19 | % | ||||||||
| Web imaging revenue (Real-World Data) | 86 | 387 | (595 | ) | -78 | % | ||||||||||
| Total | $ | 681 | $ | 889 | $ | 681 | -23 | % | ||||||||
Our revenue is comprised of sales made from our subscription revenue (BEAM) and from our web imaging (RWD). For the nine months ended September 30, 2023, overall revenue was down by 23%. 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
| Nine
Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Cost of revenue | 812 | 1,106 | ||||||
| % of revenue | 119 | % | 124 | % | ||||
For the nine months ended September 30, 2023, we were able to reduce our cost of revenue as a percentage of revenue by 5%. The decrease is primarily due to 23% decrease in total revenue, along with a $0.2 million decrease in data broker costs and a $0.1 million decrease in payroll.
General and Administrative
Our general and administrative expense decreased $1.5 million, or 38%, to $2.4 million for the nine months ended September 30, 2023, from $4.0 million for the nine months ended September 30, 2022. The decrease is primarily due to a decrease in Board of Director warrant expense of $1.2 million, stock-based compensation expense of $0.1 million, and recruiting fees of $0.2 million.
Sales and Marketing
Our sales & marketing expense increased $0.2 million, or 37%, to $0.8 million for the nine months ended September 30, 2023, from $0.6 million for the nine months ended September 30, 2022. The increase is primarily due to the addition of an employee and consultant.
Research and development
Our research and development expense increased $0.5 million, or 44%, to $1.6 million for the nine months ended September 30, 2023, from $1.1 million for the nine months ended September 30, 2022. The increase is primarily due a $0.2 million increase in salaries, a $0.9 million increase in payroll development data exchanges, a $0.05 million increase in R&D stock compensation expense, a $0.04 million increase in consultant expenses, and a $0.08 million increase in hosting expenses.
Change in Fair Value of Convertible Debt
The change in fair value of convertible debt was due to fluctuations of the market price of shares of Common Stock.
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: depreciation and amortization of tangible and intangible assets and unit; stock-based compensation 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:
| ● | 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 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):
Three
Months Ended | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (13,839 | ) | $ | (8,745 | ) | ||
| Depreciation and amortization | 7 | 6 | ||||||
| Stock-based compensation | 798 | 351 | ||||||
| Stock warrant expense | 4,285 | 2,513 | ||||||
| Change in fair value of convertible debt | 7,621 | 3,278 | ||||||
| Adjusted EBITDA | (1,128 | ) | (2,597 | ) | ||||
Nine
Months Ended | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (31,243 | ) | $ | (22,399 | ) | ||
| Depreciation and amortization | 19 | 16 | ||||||
| Stock-based compensation | 1,446 | 1,486 | ||||||
| Stock warrant expense | 8,385 | 5,654 | ||||||
| Change in fair value of convertible debt | 17,872 | 10,870 | ||||||
| Adjusted EBITDA | (3,521 | ) | (4,373 | ) | ||||
Liquidity and Capital Resources
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:
| September 30, | ||||||||
| Net cash provided by (used in) | 2023 | 2022 | ||||||
| Operating activities | $ | (3,066 | ) | $ | (3,356 | ) | ||
| Investing activities | (28 | ) | (48 | ) | ||||
| Financing activities | 3,435 | 3,017 | ||||||
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 $3.1 million during the nine months ended September 30, 2023. Net cash used in operating activities was due to our net loss of $31.2 million offset by non-cash items of $27.7 million, primarily consisting of the change in fair value of convertible debt of $17.9 million, stock warrant expense of $8.4 million, stock based compensation of $1.4 million and use of cash for operating assets and liabilities of $0.5 million due to the timing of cash payments to vendors and cash receipts from customers.
By comparison, the Company’s net cash used by operating activities was $3.4 million during the nine months ended September 30, 2022. Net cash provided by operating activities was due to our net loss of $21.2 million adjusted for non-cash items of $18.0 million, primarily consisting of the change in fair value of convertible debt of $10.9 million, stock warrant expense of $5.7 million, $1.5 million of stock-based compensation expense, offset by a use of cash for operating assets and liabilities of $0.2 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 nine months ended September 30, 2023, consisted of $28.0 thousand of purchased property and equipment.
By comparison, the Company’s net cash and cash equivalents used in investing activities during the nine months ended September 30, 2022, consisted primarily of $48.0 thousand of purchased property and equipment.
Financing Activities
Net cash provided by financing activities was $3.4 million for the nine months ended September 30, 2023, which primarily consisted of $3.9 million in proceeds from the issuance of convertible promissory notes payable, and $0.7 million from proceeds from issuance of shareholder loans. These amounts were offset by $1.2 million in Data Knights transaction costs.
By comparison, the Company’s net cash provided by financing activities was $3.0 million for the nine months ended September 30, 2022, which primarily consisted of $3.6 million in proceeds from the issuance of convertible promissory notes payable, offset by $0.6 million in Data Knights transaction costs.
Contractual Obligations and Commitments and Going Concern 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. 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 September 30, 2023:
| Payments due in: | ||||||||||||
| Total | Less than 1 year | 1-3 years | ||||||||||
| Accounts payable & accrued expenses | $ | 1,476 | $ | 1,476 | $ | - | ||||||
| Loan, related party | 704 | - | 704 | |||||||||
| Convertible promissory notes | 13,865 | 13,865 | - | |||||||||
| $ | 16,045 | $ | 15,341 | $ | 704 | |||||||
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited 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 Unaudited 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 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 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
Convertible notes payable, which include the related contingently warrants, contain embedded derivatives, which require bifurcation and separate accounting under GAAP, for which the Company elected the FVO for the convertible notes payable. 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 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 and Note 11 to the consolidated financial statements included elsewhere in this Form 10-Q.
The estimated fair values of the convertible promissory notes are 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 September 30, 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q for a description of certain recently issued accounting standards which may impact our consolidated financial statements in future reporting periods.