Filed
pursuant to Rule 424(b)(3)
Registration
Statement File No. 333-132296
PROSPECTUS
SUPPLEMENT NO. 6
TO
PROSPECTUS
DATED APRIL 25, 2007
MDWERKS,
INC.
This
prospectus supplement should be read in conjunction with our prospectus
dated
April
25,
2007 and in particular “Risk Factors” beginning on page 7 of the
prospectus
.
This
prospectus supplement includes the attached Current Report on Form 10-QSB of
MDwerks, Inc.,
filed
with the Securities and Exchange Commission on November 13, 2007.
The
date
of this prospectus supplement is November 13, 2007
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-QSB
(Mark
One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended September 30, 2007
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For
the
transition period from _______ to _________
Commission
File Number: 333-118155
MDWERKS,
INC.
(Exact
name of small business issuer as specified in charter)
Delaware
|
33-1095411
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
Windolph
Center, Suite I
1020
N.W. 6th Street
Deerfield
Beach, FL 33442
(Address
of principal executive offices)(Zip Code)
(954)
389-8300
(Issuer's
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days.
Yes
x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 12,940,065 shares at November 9,
2007
Transitional
Small Business Disclosure Format (Check one): Yes
o
No
x
MDWERKS,
INC.
FORM
10-QSB
FOR
THE PERIOD ENDED SEPTEMBER 30, 2007
INDEX
|
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
Item
1 - Consolidated Financial Statements
|
|
|
Consolidated
Balance Sheet As of September 30, 2007 (Unaudited)
|
3
|
|
Consolidated
Statements of Operations (Unaudited) For the Three and Nine Months
Ended
September 30, 2007 and 2006
|
4
|
|
Consolidated
Statements of Cash Flows (Unaudited) For the Nine Months Ended September
30, 2007 and 2006
|
5
|
|
Notes
to Unaudited Consolidated Financial Statements
|
6-21
|
|
Item
2 - Management's Discussion and Analysis and Plan of
Operations
|
22-29
|
|
Item
3 - Controls and Procedures
|
29-30
|
PART
II - OTHER INFORMATION
|
|
|
Item
1 - Legal Proceedings
|
31
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
31
|
|
Item
3 - Defaults Upon Senior Securities
|
31
|
|
Item
4 - Submission of Matters to a Vote of Security Holders
|
31
|
|
Item
5 - Other Information
|
31
|
|
Item
6 - Exhibits
|
31
|
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
SEPTEMBER
30, 2007
(Unaudited)
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
|
$
|
1,771,111
|
|
Notes
receivable
|
|
|
1,010,549
|
|
Accounts
receivable
|
|
|
82,056
|
|
Prepaid
expenses and other
|
|
|
48,017
|
|
Total
current assets
|
|
|
2,911,733
|
|
Long-term
assets:
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $81,724
|
|
|
127,173
|
|
Debt
issuance and offering costs, net of accumulated amortization of
$200,295
|
|
|
470,057
|
|
Total
assets
|
|
$
|
3,508,963
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIENCY
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Current
portion of notes payable, net
|
|
$
|
1,686,269
|
|
Mandatory
Redeemable Convertible Series B Preferred Stock, $.001 par value,
250
shares authorized;
200
shares issued and outstanding
|
|
|
1,126,831
|
|
Loans
payable
|
|
|
319,559
|
|
Accounts
payable
|
|
|
461,569
|
|
Accrued
expenses
|
|
|
468,295
|
|
Deferred
revenue
|
|
|
10,996
|
|
Total
current liabilities
|
|
|
4,073,519
|
|
Long-term
liabilities:
|
|
|
|
|
Notes
payable, net of discount of $2,829,535, less current
portion
|
|
|
391,809
|
|
Deferred
revenues, less current portion
|
|
|
6,237
|
|
Total
liabilities
|
|
|
4,471,565
|
|
Stockholders'
deficiency:
|
|
|
|
|
Preferred
stock, $.001 par value, 10,000,000 shares authorized;
no
shares issued and outstanding
|
|
|
—
|
|
Series
A preferred stock, $.001 par value, 1,000 shares authorized;
2
shares issued and outstanding
|
|
|
—
|
|
Common
stock, $.001 par value, 100,000,000 shares authorized;
12,940,065
shares issued and outstanding
|
|
|
12,940
|
|
Additional
paid-in capital
|
|
|
32,980,978
|
|
Accumulated
deficit
|
|
|
(33,867,842
|
)
|
Deferred
compensation
|
|
|
(88,678
|
)
|
Total
stockholders' deficiency
|
|
|
(962,602
|
)
|
Total
liabilities and stockholders' deficiency
|
|
$
|
3,508,963
|
|
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Three Months
Ended
September 30,
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
$
|
119,820
|
|
$
|
147,726
|
|
$
|
356,540
|
|
$
|
262,292
|
|
Financing
income
|
|
|
16,753
|
|
|
10,387
|
|
|
46,693
|
|
|
36,558
|
|
Total
revenue
|
|
|
136,573
|
|
|
158,113
|
|
|
403,233
|
|
|
298,850
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
1,229,568
|
|
|
1,730,160
|
|
|
4,073,320
|
|
|
3,193,895
|
|
Consulting
expenses
|
|
|
158,360
|
|
|
144,081
|
|
|
562,798
|
|
|
399,126
|
|
Professional
fees
|
|
|
74,215
|
|
|
153,782
|
|
|
299,901
|
|
|
277,906
|
|
Selling,
general and administrative
|
|
|
372,161
|
|
|
456,587
|
|
|
1,260,775
|
|
|
1,416,993
|
|
Total
operating expenses
|
|
|
1,834,304
|
|
|
2,484,610
|
|
|
6,196,794
|
|
|
5,287,920
|
|
Loss
from operations
|
|
|
(1,697,731
|
)
|
|
(2,326,497
|
)
|
|
(5,793,561
|
)
|
|
(4,989,070
|
)
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
13,492
|
|
|
1,123
|
|
|
60,201
|
|
|
5,671
|
|
Interest
expense
|
|
|
(500,601
|
)
|
|
(372,291
|
)
|
|
(1,526,737
|
)
|
|
(380,039
|
)
|
Gain
(Loss) on revaluation of warrant liability
|
|
|
—
|
|
|
1,030,338
|
|
|
—
|
|
|
(192,914
|
)
|
Other
income (expense)
|
|
|
—
|
|
|
(3,502
|
)
|
|
165
|
|
|
(3,491
|
)
|
Total
other income (expense)
|
|
|
(487,109
|
)
|
|
655,668
|
|
|
(1,466,371
|
)
|
|
(570,773
|
)
|
Net
loss
|
|
|
(2,184,840
|
)
|
|
(1,670,829
|
)
|
|
(7,259,932
|
)
|
|
(5,559,843
|
)
|
Deemed
preferred stock dividend
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(913,777
|
)
|
Common
stock issued in connection with anti-dilutive
recalculation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(246,240
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(2,184,840
|
)
|
$
|
(1,670,829
|
)
|
$
|
(7,259,932
|
)
|
$
|
(6,719,860
|
)
|
NET
LOSS PER COMMON SHARE - basic and diluted
|
|
$
|
(0.17
|
)
|
$
|
(0.14
|
)
|
$
|
(0.57
|
)
|
$
|
(0.57
|
)
|
WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING - basic and diluted
|
|
|
12,907,674
|
|
|
11,777,818
|
|
|
12,726,732
|
|
|
11,728,751
|
|
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,259,932
|
)
|
$
|
(5,559,843
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
34,168
|
|
|
22,807
|
|
Amortization
of debt issuance cost
|
|
|
10,954
|
|
|
3,120
|
|
Amortization
of debt discount
|
|
|
1,208,594
|
|
|
28,793
|
|
Amortization
of deferred offering costs
|
|
|
133,500
|
|
|
—
|
|
Amortization
of deferred compensation
|
|
|
199,530
|
|
|
—
|
|
Stock-based
compensation
|
|
|
2,506,281
|
|
|
1,878,572
|
|
Common
stock issued for services
|
|
|
150,000
|
|
|
285,000
|
|
Settlement
expense related to debt conversion
|
|
|
—
|
|
|
180,827
|
|
Loss
on valuation of warrant liability
|
|
|
—
|
|
|
192,914
|
|
Interest
expense in connection with the grant of warrants
|
|
|
—
|
|
|
335,273
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Notes
receivable
|
|
|
(536,856
|
)
|
|
(1,628
|
)
|
Accounts
receivable
|
|
|
(26,465
|
)
|
|
(20,032
|
)
|
Prepaid
expenses and other
|
|
|
25,780
|
|
|
20,080
|
|
Accounts
payable
|
|
|
193,647
|
|
|
211,535
|
|
Accrued
expenses
|
|
|
89,536
|
|
|
103,763
|
|
Deferred
revenues
|
|
|
(38,726
|
)
|
|
48,425
|
|
Total
adjustments
|
|
|
3,949,943
|
|
|
3,289,449
|
|
Net
cash used in operating activities
|
|
|
(3,309,989
|
)
|
|
(2,270,394
|
)
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(5,209
|
)
|
|
(71,728
|
)
|
Net
cash used in investing activities
|
|
|
(5,209
|
)
|
|
(71,728
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from convertible notes payable
|
|
|
250,000
|
|
|
—
|
|
Proceeds
from loans payable
|
|
|
250,000
|
|
|
360,000
|
|
Placement
fees in connection with notes payable
|
|
|
—
|
|
|
(23,434
|
)
|
Repayment
of convertible notes payable
|
|
|
(250,000
|
)
|
|
—
|
|
Repayment
of notes payable
|
|
|
(194,698
|
)
|
|
(25,000
|
)
|
Repayment
of loan payable
|
|
|
(2,916
|
)
|
|
(21,486
|
)
|
Proceeds
from sale of Mandatory Redeemable Series B preferred stock
|
|
|
2,000,000
|
|
|
—
|
|
Proceeds
from sale of Series A preferred stock
|
|
|
—
|
|
|
1,700,000
|
|
Placement
fees and other expenses paid
|
|
|
(112,918
|
)
|
|
(273,609
|
)
|
Net
cash provided by financing activities
|
|
|
1,939,468
|
|
|
1,716,471
|
|
Net
decrease in cash
|
|
|
(1,375,730
|
)
|
|
(625,651
|
)
|
Cash
- beginning of period
|
|
|
3,146,841
|
|
|
766,464
|
|
Cash
- end of period
|
|
$
|
1,771,111
|
|
$
|
140,813
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
247,078
|
|
$
|
9,253
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Common
stock issued for debt and accrued interest
|
|
$
|
—
|
|
$
|
46,250
|
|
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization
On
November 16, 2005, a wholly-owned subsidiary of MDwerks, Inc. (f/k/a Western
Exploration, Inc., and hereinafter referred to as the ‘‘Company’’) was merged
with and into MDwerks Global Holdings, Inc., a Florida corporation
(‘‘MDwerks’’), with MDwerks surviving. The Company acquired all of the
outstanding capital stock of MDwerks in exchange for issuing 9,246,339 shares
of
the Company’s common stock, par value $0.001 per share to MDwerks’ stockholders,
which at closing of the Merger Agreement represented approximately 87.4% of
the
issued and outstanding shares of the Company’s common stock. In connection with
the Merger, the Company changed its corporate name to MDwerks, Inc.
The
Company has four operating subsidiaries. Xeni Medical Systems, Inc. ("Xeni
Medical") was incorporated under the laws of the state of Delaware on July
21,
2004. Xeni Medical provides a Web-based package of electronic claims
solutions to the healthcare provider industry through Internet access to it’s
‘‘MDwerks’’ suite of proprietary products and services so that healthcare
providers can significantly improve daily insurance claims transaction
processing, administration and management. Xeni Financial Services, Corp. ("Xeni
Financial") was incorporated under the laws of the state of Florida on February
3, 2005. Xeni Financial offers financing and advances to health care providers
secured by claims processed through the MDwerks system. Xeni Medical Billing,
Corp. ("Xeni Billing") was incorporated under the laws of the state of Florida
on March 2, 2005. Xeni Billing offers health care providers billing services
facilitated through the MDwerks system. Patient Payment Solutions, Inc. (“PPS”)
was incorporated under the laws of the state of Florida on May 30, 2007. PPS
will offer healthcare providers a payment improvement process for “out of
network” claims.
Going
concern
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. The Company has suffered losses
that raise substantial doubt about its ability to continue as a going concern.
While the Company is attempting to attain revenue growth and profitability,
the
growth has not been significant enough to support the Company’s daily
operations. Management intends to attempt to raise additional funds by way
of a
public or private offering and make strategic acquisitions. While the Company
believes in the viability of its strategy to improve sales volume and in its
ability to raise additional funds, there can be no assurances to that effect.
The ability of the Company to continue as a going concern is dependent on the
Company’s ability to further implement its business plan and generate revenue.
The Company believes it is taking actions to further implement its business
plan
and generate revenue, including the institutional financing described in Note
4
and additional private placement or debt financing transactions, which the
Company is currently pursuing, but the Company will not be able to continue
as a
going concern in the absence of obtaining sufficient funding. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
As
reflected in the accompanying consolidated financial statements, the Company
has
stockholders’ deficiency of $962,602 and a working capital deficiency of
$1,161,786 at September 30, 2007.
Basis
of presentation
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, the financial statements do not include all of
the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and such
adjustments are of a normal recurring nature. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 2006 and notes thereto and other
pertinent information contained in the Form 10-KSB of the Company as filed
with
the Securities and Exchange Commission (the ‘‘Commission’’). The results of
operations for the nine months ended September 30, 2007 are not necessarily
indicative of what the results will be for the full fiscal year ending
December 31, 2007.
Certain
amounts previously reported for in 2006 have been reclassified to conform with
the classifications used in 2007. Such reclassifications have no effect on
the
reported net loss.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Use
of estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Fair
value of financial instruments
Statement
of Financial Accounting Standards No. 107, ‘‘Disclosures about Fair Value of
Financial Instruments,’’ requires disclosures of information about the fair
value of certain financial instruments for which it is practicable to estimate
the value. For purpose of this disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or
liquidation.
The
carrying amounts reported in the consolidated balance sheet for cash, notes
receivable, accounts receivable, accounts payable and accrued expenses, notes
payable and loans payable approximate their fair market value based on the
short-term maturity of these instruments.
Cash
and cash equivalents
For
purposes of the consolidated statements of cash flows, the Company considers
all
highly liquid instruments purchased with a maturity of three months or less
and
money market accounts to be cash equivalents.
At
various times, the Company has deposits in excess of the Federal Deposit
Insurance Corporation limit. The Company has not experienced any losses on
these
accounts.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs charged to
operations were approximately $93,593 and $103,816 for the nine months ended
September 30, 2007 and 2006, respectively.
Property
and equipment
Property
and equipment are stated at cost. Depreciation and amortization are provided
using the straight-line method over the estimated useful life.
Revenue
recognition
The
Company follows the guidance of the Securities and Exchange Commission’s
(‘‘SEC’’) Staff Accounting Bulletin 104 for revenue recognition. In
general, the Company records revenue when persuasive evidence of an arrangement
exists, services have been rendered or product delivery has occurred, the sales
price to the customer is fixed or determinable, and collectability is reasonably
assured. The following policies reflect specific criteria for the various
revenue streams of the Company.
Revenue
derived from fees related to claims and contract management services are
generally recognized when services are provided to the customer.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Revenue
recognition (continued)
The
Company, through its subsidiaries, provides advance funding for medical
claims and term loan services to unaffiliated healthcare providers that are
customers of the Company. The customer advances are typically
collateralized by Security Agreements granting first position liens on the
medical claims submitted by its customers to third party payors (the
‘‘Payors’’). The advances are repaid through the remittance of payments of
customer medical claims, by Payors, directly to the Company. The Company can
withhold from these advances interest, an administrative fee and other charges
as well as any amount for prior advances that remain unpaid after a specified
number of days. These interest charges, administrative fees and other charges
are recognized as revenue when earned. There is no right of cancellation or
refund provisions in these arrangements and the Company has no further
obligations once the services are rendered.
Revenue
derived from fees related to billing and collection services are generally
recognized when the customer’s accounts receivable are collected.
Revenue
from implementation fees are generally recognized over the term of the
customer’s agreement. Revenue derived from maintenance, administrative and
support fees are generally recognized at the time the services are provided
to
the customer.
Income
taxes
Income
taxes are accounted for under the asset and liability method of Statement of
Financial Accounting Standards No. 109, ‘‘Accounting for Income Taxes’’ (‘‘SFAS
109’’). Under SFAS 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax
assets and liabilities of a change in tax rates is recognized in income in
the
period that includes the enactment date.
Loss
per common share
Basic
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the period. Diluted loss per share
is computed by dividing net income by the weighted average number of shares
of
common stock, potential common stock and potentially dilutive securities
outstanding during each period. As of September 30, 2007, the Company had
outstanding options to purchase an aggregate of 3,031,250 shares of common
stock
and warrants to purchase an aggregate of 5,566,345 shares of Common Stock,
which
could potentially dilute future earnings per share. Diluted loss per common
share has not been presented for the nine months ended September 30, 2007 since
the impact of the stock options and warrants would be antidilutive. As of
September 30, 2006, the Company had outstanding options to purchase an aggregate
of 1,726,250 shares of common stock, warrants to purchase an aggregate of
1,439,085 shares of common stock, and 566,667 shares of common stock issuable
upon conversion of preferred stock which could potentially dilute future
earnings per share.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Stock-based
compensation
The
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004),
Share
Based Payment
(‘‘SFAS
No. 123R’’) utilizing the modified prospective method. SFAS No. 123R
establishes the financial accounting and reporting standards for stock-based
compensation plans. As required by SFAS No. 123R, the Company recognizes
the cost resulting from all stock-based payment transactions including shares
issued under its stock option plans in the consolidated financial
statements.
Recent
accounting pronouncements
In
February 2006, the Financial Accounting Standards Board issued Statement No.
155
(‘‘SFAS No 155’’), ‘‘Accounting for Certain Hybrid Instruments: An Amendment of
FASB Statements No. 133 and 140’’. Management does not believe that this
statement will have a significant impact as the Company does not use such
instruments.
In
July 2006, the Financial Accounting Standards Board (‘‘FASB’’) issued FASB
Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109’’ (‘‘FIN 48’’), which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is ‘‘more likely than not’’ that the position is
sustainable based on its technical merits. The provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. The Company
does not expect FIN 48 will have a material effect on its consolidated financial
condition or results of operations.
In
September 2006, the SEC issued Staff Accounting Bulletin (‘‘SAB’’) 108 which
provides interpretive guidance on how the effects of the carryover or reversal
of prior year misstatements should be considered in quantifying a current year
misstatement. SAB 108 is effective for the first interim period following the
first fiscal year ending after November 15, 2006, which, for us, is effective
for fiscal 2007 beginning January 1, 2007. We believe that the adoption of
SAB
108 will not have a material impact on the Company’s results of operations, cash
flows or financial condition.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (‘‘SFAS 157’’), Fair Value Measurements. SFAS 157 provides guidance for
measuring the fair value of assets and liabilities. It requires additional
disclosures related to the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the
effect of fair value measurements on earnings. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. The Company is in the process of
determining what effect, if any, the adoption of SFAS 157 will have on its
consolidated results of operations and financial condition.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
In
February 2007, the FASB issued SFAS No. 159
The
Fair Value Option for Financial Assets and Financial Liabilities - including
an
Amendment of SFAS No. 115
,
(‘‘SFAS 159’’), which permits an entity to measure many financial assets and
financial liabilities at fair value that are not currently required to be
measured at fair value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting date.
The
fair value option may be elected on an instrument-by-instrument basis, with
few
exceptions. SFAS 159 amends previous guidance to extend the use of the fair
value option to available-for-sale and held-to-maturity securities. The
Statement also establishes presentation and disclosure requirements to help
financial statement users understand the effect of the election. SFAS No. 159
is
effective as of the beginning of the first fiscal year beginning after November
15, 2007. The Company is currently evaluating the impact of adopting SFAS
159.
On
July
25, 2007, the Securities and Exchange Commission unanimously approved the Public
Company Accounting Oversight Board's (PCAOB) proposed Auditing Standard No.
5,
An
Audit of Internal Control Over Financial Reporting That is Integrated With
An
Audit of Financial Statement
.
Auditing Standard No. 5 provides the new professional standards and related
performance guidance for independent auditors to attest to, and report on,
management's assessment of the effectiveness of internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX). We
have
engaged a qualified third-party to assist us with the preparations for
management’s assessment of the effectiveness of internal controls over financial
reporting required by the end of this fiscal year and with the documentation
and
procedures required for our external auditor attestation requirement, which
becomes effective fiscal year ending 2008.
The
Company does not believe that any other recently issued, but not yet effective
accounting standards will have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
NOTE
2 — ACCOUNTS AND NOTES RECEIVABLE
Accounts
and notes receivable are reported at their outstanding unpaid principal balances
reduced by an allowance for doubtful accounts. The Company estimates doubtful
accounts based on historical bad debts, factors related to specific customers’
ability to pay and current economic trends. The Company writes off receivables
against the allowance when a balance is determined to be uncollectible. At
September 30, 2007, the Company has no allowance for doubtful
accounts.
Accounts
receivable are recorded when revenue has been recognized but not yet collected.
At September 30, 2007, the Company had $82,056 of accounts receivable from
implementation, processing, collection, and other fees, and disbursements not
yet collected.
At
September 30, 2007, the Company advanced funds to healthcare providers under
lines of credit and note agreements, respectively, aggregating $1,010,549.
Advances under the lines of credit are due to be repaid out
of collections from insurance claims and other receivables. The Company
charged the healthcare providers interest and other charges as defined in the
agreements.
NOTE
3 — PROPERTY AND EQUIPMENT
At
September 30, 2007, property and equipment consisted of the
following:
|
|
Estimated
Life
|
|
|
|
Office
furniture and equipment
|
|
5-7
Years
|
|
$
|
27,077
|
|
Computer
equipment and software
|
|
3-5
Years
|
|
|
181,820
|
|
Total
|
|
|
|
|
|
208,897
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
(81,724
|
)
|
Property
and equipment, net
|
|
|
|
|
$
|
127,173
|
|
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE
On
August
24, 2006, we received gross proceeds of $250,000 (net proceeds of $236,566,
after expenses) in connection with a financing provided by an unrelated party.
In connection with the financing, we issued a secured promissory note in the
original principal amount of $250,000 (the ‘‘Note’’) and a three year warrant to
purchase 111,111 shares of the Company’s common stock at a price of $2.25 per
share. The Note bears interest at the rate of 7% per year, payable monthly
in
arrears and was to become due and payable on August 24, 2007. In connection
with
an extension on repayment of this secured promissory note from August 24, 2007
to October 1, 2007, the Company granted options to purchase 75,000 shares of
its
common stock at an exercise price of $0.67 per share which options expire on
September 27, 2017. The fair market value of each stock option was estimated
on
the date of grant using the Black-Scholes option-pricing model in accordance
with SFAS No. 123R using the following weighted-average assumptions: expected
dividend yield 0%; risk-free interest rate of 4.23%; volatility of 116% and
an
expected term of 10 years. These options, valued at $51,000, were recorded
as
deferred compensation and will be expensed monthly until September 2010.
At
September 30, 2007, principal payments made under the mandatory prepayment
provisions had reduced the Note balance to $153,664. On October 1, 2007 the
Company paid the remaining unpaid principal of the $250,000 August 24, 2006
notes payable, together with all accrued interest, to the unrelated
party.
On
August
24, 2006, the Company received gross proceeds of $110,000 (net proceeds of
$100,000, after expenses) in connection with a financing provided equally by
two
unrelated parties. These notes bear interest at 10% per year, and both interest
and principal were due on January 21, 2007. In connection with the financing,
the Company issued 10,000 shares of its common stock at a fair market value
on
the date of grant of $39,800 or $3.98 per share which was recorded as a discount
on notes payable to be amortized over the term of the Notes. For the nine months
ended September 30, 2007, amortization of this debt discount amounted to $7,960
and is included in interest expense. In addition, the Company paid a total
cash
fee of $23,434 in connection with the above promissory notes for placement
agent
fees and related expenses. Accordingly, these fees were treated as deferred
issuance cost to be amortized over their respective note terms. For the nine
months ended September 30, 2007, amortization of deferred issuance cost amounted
to $10,954. On January 21, 2007 the Company paid the August 24, 2006 notes
payable of $110,000, together with all accrued interest, to the two unrelated
parties.
On
each
of October 20, 2006 and November 9, 2006 the Company received gross proceeds
of
$2,500,000 ($2,375,000 net proceeds) or $5,000,000 ($4,750,000 net proceeds)
in
the aggregate in connection with a financing provided by Gottbetter Capital
Master, Ltd., an unaffiliated accredited institutional investor
(”Gottbetter”).
In
connection with an extension until February 1, 2008 of repayment of principal
on
the Senior Notes described above, the Company granted to Gottbetter an
additional five year Series D warrants to purchase 500,000 shares of its common
stock at an exercise price of $0.68 per share which warrants expire on September
27, 2012. These warrants were treated as a discount on the secured promissory
note and were valued at $252,361 to be amortized over the 4-month extension.
The
fair market value of each stock option was estimated on the date of grant using
the Black-Scholes option-pricing model in accordance with SFAS No. 123R using
the following weighted-average assumptions: expected dividend yield 0%;
risk-free interest rate of 4.23%; volatility of 116% and an expected term of
5
years.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE (continued)
For
the
nine months September 30, 2007, amortization of the debt discount amounted
to
$1,208,594.
The
promissory notes are as follows at September 30, 2007:
Notes
payable
|
|
$
|
5,153,665
|
|
Less:
unamortized discount on notes payable
|
|
|
(3,075,587
|
)
|
Notes
payable, net
|
|
$
|
2,078,078
|
|
Less
current portion
|
|
|
(1,686,269
|
)
|
Notes
payable, net of discount of $2,829,252, less current
portion
|
|
$
|
391,809
|
|
On
August
31, 2007 we received gross proceeds of $250,000 in connection with a financing
provided by Vicis Capital Master Fund, an unaffiliated accredited investor.
In
connection with the financing, we issued a 31-day Convertible Note to Vicis
in
the original principal amount of $250,000.
On
September 28, 2007 we received gross proceeds of $2,000,000 (net proceeds of
$1,691,445 after repayment of the $250,000 31-day August 31, 2007
Convertible Note, interest and closing expenses) in connection with a financing
provided by Vicis Capital Master Fund, an unaffiliated accredited institutional
investor (the “Investor”). In connection with the financing, pursuant to the
terms of a Securities Purchase Agreement, we issued 200 shares of Series B
Convertible Preferred Stock (a “Series B Preferred Stock”), a seven year Series
F Warrant to purchase 1,500,000 shares of our common stock at a price of $2.25
per share and a seven year Series G Warrant to purchase 1,000,000 shares of
our
common stock at a price of $2.50 per share. As security for our obligations,
we,
along with our subsidiaries, MDwerks, Xeni Medical, Xeni Financial, Xeni
Billing and PPS entered into Security Agreements with the Investor,
pursuant to which we granted a security interest in all of our assets, except
for the accounts receivable and certain contract rights of Xeni Financial
Services, Corp., to the Investor.
Our
subsidiaries, MDwerks, Xeni Medical, Xeni Financial, Xeni Billing and
PPS are also parties to Guaranty Agreements, pursuant to which they have
agreed to unconditionally guaranty our obligations under the Series B Preferred
Stock and the documents entered into by us in connection the sale of the Series
B Preferred Stock.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE (continued)
In
connection with the sale of the Series B Preferred Stock, we entered into a
Registration Rights Agreement, pursuant to which we agreed to register for
resale, the shares of our common stock into which the Series B Preferred Stock
is convertible and the shares of our common stock for which the Series F
Warrants and the Series G Warrants are exercisable.
In
connection with the Sale of the Series B Preferred Stock the Company entered
into an Amendment, Consent and Waiver agreement with Gottbetter Capital Master,
Ltd. (the “Consent and Waiver Agreement”).
The
following summary description of the material agreements entered into in
connection with the transaction described above.
Securities
Purchase Agreement
The
Securities Purchase Agreement provides for the sale of (i) 200 shares of Series
B Preferred Stock (ii) Series F Warrants to purchase an aggregate of 1,500,000
shares of Common Stock and (iii) Series G Warrants to purchase an aggregate
of
1,000,000 shares of Common Stock. Pursuant to the Securities Purchase Agreement,
the aggregate purchase price for the Series Preferred Stock, the Series F
Warrants and the Series G Warrants was $2 million. Payment was made by 1,691,445
in cash, the conversion of $251,555 in principal and interest of the 31-day
Convertible Note, dated August 31, 2007, issued by the Company to the Purchaser
in the original principal amount of $250,000 and deduction of certain closing
expenses.
The
Securities Purchase Agreement provides to the Investor, for a period of eighteen
months after the closing date, a right of first refusal with respect to
subsequent placements of equity or equity equivalent securities by
us.
The
Securities Purchase Agreement contains certain restrictions on our ability
to:
(i) declare dividends; (ii) reclassify, combine or reverse split our Common
Stock; (iii) incur liens; (iii) incur certain types of indebtedness; (iv) issue
classes of securities senior to, or
parri
passu
with,
the Series B Preferred Stock; (v) liquidate or sell a substantial portion of
our
assets; (vi) enter into transactions that would result in a Change of Control
(as defined in the Securities Purchase Agreement); (vi) amend our charter
documents in a way that adversely affects the rights of the Investor; (vii)
except through Xeni Financial, make loans to, or advances or guarantee the
obligations of, third parties; (viii) make intercompany transfers; (ix) engage
in transactions with officers, directors, employees or affiliates; (x) divert
business to other business entities; (xi) make investments in securities or
evidences of indebtedness (excluding of loans made by Xeni Financial) in excess
of $250,000 in a calendar year; and (xii) file registration
statements.
Events
of
default under the Securities Purchase Agreement include: (i) default in the
payment of dividends on or the failure to redeem the Series B Preferred Stock
when due; (ii) failure to perform the covenants contained in the Securities
Purchase Agreement or the related transaction documents; (iii) failure to file,
or cause to become effective, a registration statement covering the shares
of
Common Stock underlying the Series F Warrants, the Series G Warrants and the
Series B Preferred Stock within the timeframes required by the Registration
Rights Agreement or the failure to keep such registration effective as required
by the Registration Rights Agreement; (iv) suspension from listing on the OTC
Bulletin Board or other exchange for 10 consecutive trading days; (v) the
failure to timely deliver shares of Common Stock upon conversion of the Series
B
Preferred Stock or exercise of the Series F Warrants or the Series G Warrants;
(vi) default in the payment of indebtedness in excess of $250,000; (vii) a
judgment entered against us in excess of $250,000; and (viii) insolvency,
bankruptcy and similar circumstances.
The
Securities Purchase Agreement also contains customary representations,
warranties, covenants and indemnification provisions for transactions of the
type entered into between the Company and Investor.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE (continued)
Series
B Preferred Stock
The
Certificate of Designations, which designates the rights, preferences,
privileges and terms of the Series B Preferred Stock (the “Certificate of
Designations”) provides that the Series B Preferred Stock will rank senior to
other classes of Common Stock and preferred stock that are currently outstanding
as to distributions of assets upon liquidation, dissolution or winding up and
as
to payment of dividends on shares of equity securities.
Each
share of Series B Preferred Stock is entitled to cumulative dividends at the
annual rate of 8% of the stated value of the Series B Preferred Stock. The
stated value of each share of Series B Preferred Stock is $10,000. Dividends
are
payable in cash or additional shares of Series B Preferred Stock.
Each
share of Series B Preferred Stock is convertible, at any time, at the option
of
the holder, into the number of shares of Common Stock determined by dividing
the
stated value of the Series B Preferred Stock by the conversion price. The
initial conversion price of the Series B Preferred Stock is $2.25 per
share.
The
conversion price is subject to adjustment for stock splits, dividends,
subdivisions, distributions, reorganizations and similar transactions.
Furthermore, the conversion price is also subject to adjustment in the event
of
the issuance of securities for a price below the conversion price then in effect
or the issuance of convertible securities with an exercise or conversion price
that is less than the then current conversion price for the shares of Series
B
Preferred Stock.
To
the
extent that any shares of Series B Preferred Stock remain outstanding on
September 28, 2008, each holder thereof shall have the option to either require
us to redeem such holder’s shares of Series B Preferred Stock or convert such
holder’s shares of Series B Preferred Stock into shares of Common Stock at the
conversion price then in effect.
The
Series B Preferred Stock also provides the holders thereof with the option
to
require us to redeem shares of Series B Preferred Stock in the event of a Change
of Control (as defined in the Certificate of Designations).
The
Series B Preferred Stock will vote on matters submitted to our stockholders
as
if the Series B Preferred Stock had been converted into shares of Common Stock
pursuant to the terms of the Certificate of Designations. To the extent the
holders of Series B Preferred Stock are required to vote separately, as a class,
the affirmative vote of the holders of a majority of the outstanding shares
of
Series B Preferred Stock will be required to approve the matter to be voted
upon.
Series
F Warrants
The
Series F Warrants are exercisable at a price of $2.25 per share for a period
of
seven years from the date of issuance. The Series F Warrants may be exercised
on
a cashless basis. The exercise price will be subject to adjustment in the event
of subdivision or combination of shares of our common stock and similar
transactions, distributions of assets, issuances of shares of common stock
with
a purchase price below the exercise price of the Series F Warrants, issuances
of
any rights, warrants or options to purchase shares of our common stock with
an
exercise price below the exercise price of the Series F Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series F Warrants.
Series
G Warrants
The
Series G Warrants are exercisable at a price of $2.50 per share for a period
of
seven years from the date of issuance. The Series G Warrants may be exercised
on
a cashless basis. The exercise price will be subject to adjustment in the event
of subdivision or combination of shares of our common stock and similar
transactions, distributions of assets, issuances of shares of common stock
with
a purchase price below the exercise price of the Series G Warrants, issuances
of
any rights, warrants or options to purchase shares of our common stock with
an
exercise price below the exercise price of the Series G Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series G Warrants.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE (continued)
Security
Agreement
We,
along
with our subsidiaries MDwerks, Xeni Medical, Xeni Financial, Xeni Billing,
and
PPS entered into Security Agreements with the Investor. The Security Agreements
provide for liens in favor of the Investor on all of our assets, including
the
assets of each of our subsidiaries, except for the accounts receivable and
certain contract rights of Xeni Financial Services, Corp.
Guaranty
Agreement
Our
subsidiaries, MDwerks, Xeni Medical, Xeni Financial, Xeni Billing, and
PPS entered into Guaranty Agreements with the Investor, pursuant to which
they have agreed to unconditionally guaranty our obligations under the Series
B
Preferred Stock and the documents entered into by us in connection with the
sale
of the Series B Preferred Stock.
Registration
Rights Agreement
We
entered into a Registration Rights Agreement with the Investor. The Registration
Rights Agreement requires us to file a registration statement covering the
resale of the shares underlying the Series B Preferred Stock, the Series F
Warrants and the Series G Warrants within 365 calendar days after the closing
date. We are required to cause such registration statement to become effective
on or before the date which is 485 calendar days after the filing of such
registration statement. In addition to it being an event of default under the
Securities Purchase Agreement, if we fail to file such registration statement
in
the time frame required, fail to cause it to become effective in the time frame
required, or fail to maintain the effectiveness of the registration statement
as
required by the Registration Rights Agreement, we will be required to pay a
cash
penalty in the amount of 2% of the aggregate stated value of the Series B
Preferred Stock for each month, or part thereof, that the registration statement
is not filed or effective, as the case may be. The cash penalty is limited
to
15% of the aggregate stated value of the Series B Preferred Stock.
The
Registration Rights Agreement also provides for piggyback registration
rights.
Amendment,
Consent & Waiver Agreement
In
connection with the transactions described above, we entered into the Consent
and Waiver Agreement with Gottbetter Capital Master, Ltd. (“Gottbetter”),
whereby, among other things: (i) Gottbetter consented to the transactions
described above, (ii) Gottbetter agreed to delay, until February 1, 2008,
principal payments under the Senior Secured Convertible Note issued by the
Corporation to Gottbetter on October 19, 2006 (the “October Note”) and under the
Senior Secured Convertible Note issued by the Corporation to Gottbetter on
November 9, 2006 (the “November Note”), (iii) Gottbetter agreed that its right
of first refusal with respect to subsequent financings will be on a
pro
rata, pari passu
basis
with Vicis and (v) Gottbetter released its security interest in certain
collateral of Xeni Financial.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
4 — NOTES PAYABLE (continued)
Series
D Warrant
In
consideration of Gottbetter entering into the Consent and Waiver Agreement,
we
issued to Gottbetter a Series D Warrant to purchase 500,000 shares of our Common
Stock. The Series D Warrant is exercisable at a price of $2.25 per share for
a
period of five years from the date of issuance. The Series D Warrant may be
exercised on a cashless basis. The exercise price will be subject to adjustment
in the event of subdivision or combination of shares of our common stock and
similar transactions, distributions of assets, issuances of shares of common
stock with a purchase price below the exercise price of the Series D Warrant,
issuances of any rights, warrants or options to purchase shares of our common
stock with an exercise price below the exercise price of the Series D Warrant,
issuances of convertible securities with a conversion price below the exercise
price of the Series D Warrant.
Amended
& Restated Notes
In
order
to memorialize the extension of the principal payment date to February 1, 2008
in the October Note and the November Note, we issued to Gottbetter an amended
and restated October Note and an amended and restated November Note.
In
accordance with SFAS No. 133 and Emerging Issues Task Force Issue 00-19 (‘‘EITF
00-19’’), ‘‘Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled in, a Company's Own Stock’’, the Company is required to
record the fair value of the embedded beneficial conversion feature (ECF) and
warrants as a liability since the Company has to use its ‘‘best efforts’’ to
file a registration statement and maintain its effectiveness for a period of
two
years from the effective date. In connection with the initial sales of the
Series A Preferred Stock, the initial estimated fair values allocated to the
ECF
were $913,777 which was recorded as a deemed dividend. The initial fair value
allocated to the warrants of $768,751 was allocated to warrant liability. For
the nine months ended September 30, 2006, the Company revalued these warrants
resulting in a loss on valuation of warrant liability of $192,914.
NOTE
5 — LOAN PAYABLE
The
Company has a loan payable to an unrelated individual in the amount of $69,559.
The loan bears interest at 8% per annum and is payable on a monthly basis.
The
loan shall be repaid proportionally upon repayment of certain of the Company’s
notes receivable.
The
Company also has a loan payable to a customer of the Company in the amount
of
$250,000. This customer has provided this non-interest bearing loan to assist
with interim financing and to fund equipment purchases incurred on behalf of
the
customer. During October 2007, $210,000 of this loan payable has been repaid
to
the customer.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
6 — STOCKHOLDERS’ DEFICIENCY
Common
stock
The
Company is authorized to issue 100,000,000 shares of Common stock, $.001 par
value, with such designations, rights and preferences as may be determined
from
time to time by the Board of Directors. As of September 30, 2007, there are
12,940,065 shares issued and outstanding.
During
August, 2007, two shareholders converted a total of three shares of the
Company’s Series A convertible preferred stock into 60,000 shares of common
stock.
Preferred
stock
The
Company is authorized to issue 10,000,000 shares of preferred stock, $.001
par
value, with such designations, rights and preferences as may be determined
from
time to time by the Board of Directors. As of September 30, 2007, there are
no
preferred stock shares issued and outstanding.
The
Company is authorized to issue 1,000 shares of Series A Convertible Preferred
stock, $0.001 par value with such designations, rights and preferences as may
be
determined from time to time by the Board of Directors. Between February 1,
2006
and September 30, 2006, the Company sold 28.3 Units to accredited investors.
Each unit consists of one share of our Series A Convertible Preferred Stock,
par
value $.001 per share, and a detachable, transferable Series A Warrant to
purchase 20,000 shares of our common stock, at a purchase price of $3.00 per
share. Between August 11, 2006 and September 30, 2007, 26.3 shares of Series
A
Convertible Preferred Stock were converted into 526,667 shares of common stock
leaving 2 Series A Convertible Preferred Stock outstanding as of September
30,
2007.
The
Company is authorized to issue 250 shares of Series B Convertible Preferred
stock, $0.001 par value with such designations, rights and preferences as may
be
determined from time to time by the Board of Directors. On September 28, 2007,
200 shares of Series B preferred stock were issued in connection with the
Securities Purchase Agreement. As of September 30, 2007, there are 200 Series
B
Convertible Preferred Stock shares issued and outstanding.
Common
stock options
A
summary
of the status of the Company's outstanding stock options as of September 30,
2007 and changes during the period ending on that date is as
follows:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2006
|
|
|
2,876,250
|
|
$
|
3.04
|
|
|
|
|
Granted
|
|
|
175,000
|
|
|
0.67
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
Forfeited
|
|
|
(20,000
|
)
|
$
|
1.39
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
3,031,250
|
|
$
|
2.91
|
|
$
|
0
|
|
Options
exercisable at end of period
|
|
|
1,377,082
|
|
$
|
2.74
|
|
|
|
|
Weighted-average
fair value of options granted during the period
|
|
$
|
0.67
|
|
|
|
|
|
|
|
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
6 — STOCKHOLDERS’ DEFICIENCY
Common
stock options (continued)
The
following information applies to options outstanding at September 30,
2007:
|
|
Options
Outstanding
|
|
Options
Exercisable
|
|
Range
of Exercise Prices
|
|
Shares
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
$0.67
|
|
|
175,000
|
|
|
10.00
|
|
$
|
0.67
|
|
|
33,333
|
|
$
|
0.67
|
|
$1.39
|
|
|
105,000
|
|
|
9.25
|
|
$
|
1.39
|
|
|
85,000
|
|
$
|
1.39
|
|
$2.25
|
|
|
1,025,000
|
|
|
9.00
|
|
$
|
2.25
|
|
|
683,333
|
|
$
|
2.25
|
|
$3.25
|
|
|
190,000
|
|
|
8.25
|
|
$
|
3.25
|
|
|
63,333
|
|
$
|
3.25
|
|
$3.40
|
|
|
860,000
|
|
|
8.25
|
|
$
|
3.40
|
|
|
286,667
|
|
$
|
3.40
|
|
$4.00
- 4.25
|
|
|
676,250
|
|
|
8.75
|
|
$
|
4.03
|
|
|
225,416
|
|
$
|
4.03
|
|
|
|
|
3,031,250
|
|
|
|
|
$
|
2.91
|
|
|
1,377,082
|
|
$
|
2.74
|
|
In
connection with previously granted stock options, the Company recognized
stock-based compensation expense of $2,506,281 for the nine months ended
September 30, 2007 and $1,878,572 for the nine months ended September 30,
2006.
As
of
September 30, 2007, the total future compensation expense related to non-vested
options not yet recognized in the consolidated statement of operations is
approximately $1,787,604, which will be recognized through September
2010.
Common
stock warrants
A
summary
of the status of the Company's outstanding stock warrants granted as of December
31, 2006 and changes during the period is as follows:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at December 31, 2006
|
|
|
2,566,345
|
|
$
|
2.67
|
|
Granted
|
|
|
3,000,000
|
|
|
2.33
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Outstanding
at September 30, 2007
|
|
|
5,566,345
|
|
$
|
2.49
|
|
Common
stock issuable upon exercise of warrants
|
|
|
5,566,345
|
|
$
|
2.49
|
|
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
6 — STOCKHOLDERS’ DEFICIENCY
Common
stock warrants (continued)
|
|
Common
Stock issuable upon
exercise
of warrants outstanding
|
|
Common
Stock issuable upon
Warrants
Exercisable
|
|
Range
of
Exercise
Price
|
|
Number
Outstanding
at
September 30,
2007
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
at
September 30,
2007
|
|
Weighted
Average
Exercise
Price
|
|
$1.25
|
|
|
199,000
|
|
|
2.88
|
|
$
|
1.25
|
|
|
199,000
|
|
$
|
1.25
|
|
$1.50
|
|
|
56,667
|
|
|
3.74
|
|
$
|
1.50
|
|
|
56,667
|
|
$
|
1.50
|
|
$2.25
|
|
|
2,486,111
|
|
|
5.93
|
|
$
|
2.25
|
|
|
2,486,111
|
|
$
|
2.25
|
|
$2.50
|
|
|
1,640,400
|
|
|
4.71
|
|
$
|
2.50
|
|
|
1,640,400
|
|
$
|
2.50
|
|
$3.00
|
|
|
579,167
|
|
|
1.62
|
|
$
|
3.00
|
|
|
579,167
|
|
$
|
3.00
|
|
$3.25
|
|
|
375,000
|
|
|
4.05
|
|
$
|
3.25
|
|
|
375,000
|
|
$
|
3.25
|
|
$3.76
|
|
|
225,000
|
|
|
2.05
|
|
$
|
3.76
|
|
|
225,000
|
|
$
|
3.76
|
|
$4.00
|
|
|
5,000
|
|
|
2.05
|
|
$
|
4.00
|
|
|
5,000
|
|
$
|
4.00
|
|
|
|
|
5,566,345
|
|
|
|
|
$
|
2.49
|
|
|
5,566,345
|
|
$
|
2.49
|
|
Registration
rights
The
Company filed a ‘‘resale’’ registration statement with the SEC covering all
shares of common stock and shares of common stock underlying the warrants
(including shares of common stock and underlying warrants issued to the
Placement Agent) issued in connection with the September 13, 2005 Private
Placement. The Company agreed that it will maintain the effectiveness of the
‘‘resale’’ registration statement from the effective date through and until the
earlier of two years and the time at which exempt sales pursuant to Rule 144(k)
may be permitted. The Company agreed to use its best efforts to respond to
any
SEC comments to the ‘‘resale’’ registration statement on or prior to the date
which is 20 business days from the date such comments were received, but in
any
event not later than 30 business days from the date such comments were received.
The ‘‘resale’’ registration statement became effective on December 7,
2006.
In
the
event the ‘‘resale’’ registration statement had not been filed with the SEC on
or prior to the date which is 180 days after the last closing date of the
Private Placement, each investor in the Private Placement would have received
as
liquidating damages an additional number of shares of common stock equal to
2%
of the total number of shares of common stock purchased by the investor in
the
Private Placement for each month (or portion thereof) that the Registration
Statement was not filed, provided that the aggregate increase in such shares of
common stock as a result of the delinquent filing would in no event exceed
20%
of the original number of shares of common stock purchased in the Private
Placement.
In
the
event that the Company had failed to respond to SEC comments to the Registration
Statement within 30 business days, each investor in the Private Placement would
have received an additional number of shares of common stock equal to 2% of
the
total number of shares of common stock purchased by the investor in the Private
Placement for each month (or portion thereof) that a response to the comments
to
the Registration Statement has not been submitted to the SEC, provided that
the
aggregate increase in such shares shall in no event exceed 20% of the original
number of shares of common stock purchased in the Private
Placement.
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2007
NOTE
6 — STOCKHOLDERS’ DEFICIENCY
Registration
rights (continued)
Pursuant
to the February 1, 2006 Series A Convertible Preferred Private Placement
Subscription documents, we agreed to file a registration statement with the
Securities and Exchange Commission to register the shares and warrants held
by
the selling security holders for resale. That registration statement was
declared effective on December 7, 2006. We have agreed to maintain the
effectiveness of the registration statement from the effective date through
and
until the earlier of two years following December 31, 2005 (which was the
termination date of the first private placement described above) or the earlier
of two years following June 28, 2006 (which was the effective date of the
termination of the second private placement described above) and such time
as
exempt sales pursuant to Rule 144(k) under the Securities Act of 1933 (‘‘Rule
144(k)’’) may be permitted for purchasers of Units.
We
also
entered into a Registration Rights Agreement and amendment thereto with
Gottbetter. The amended Registration Rights Agreement required us to file a
registration statement covering the resale of 2,777,778 shares of common stock
underlying the Senior Notes. The registration statement covering the resale
of
the shares of common stock underlying the Senior Notes became effective on
December 7, 2006. In addition to it being an event of default under the Senior
Notes, if we fail to maintain the effectiveness of the registration statement
as
required by the Registration Rights Agreement, the exercise price of the Series
D and the Series E Warrants will immediately be reduced by $0.25 per share
and
then reduced by an additional $0.10 per share for each thirty day period
thereafter that the registration statement is not filed or effective, as the
case may be, up to a maximum reduction of $0.65.
We
also
entered into a Registration Rights Agreement with the Investor. The Registration
Rights Agreement requires us to file a registration statement covering the
resale of the shares underlying the Series B Preferred Stock, the Series F
Warrants and the Series G Warrants within 365 calendar days after the closing
date. We are required to cause such registration statement to become effective
on or before the date which is 485 calendar days after the filing of such
registration statement. In addition to it being an event of default under the
Securities Purchase Agreement, if we fail to file such registration statement
in
the time frame required, fail to cause it to become effective in the time frame
required, or fail to maintain the effectiveness of the registration statement
as
required by the Registration Rights Agreement, we will be required to pay a
cash
penalty in the amount of 2% of the aggregate stated value of the Series B
Preferred Stock for each month, or part thereof, that the registration statement
is not filed or effective, as the case may be. The cash penalty is limited
to
15% of the aggregate stated value of the Series B Preferred Stock.
The
Registration Rights Agreement also provides for piggyback registration
rights.
NOTE 7
— COMMITMENTS
Lease
agreements
The
Company sub-leases its facility, on a month-to-month basis, under a master
lease
expiring July 2008. Rent expense for the nine months ended September 30, 2007
was $70,626.
Overview
We
offer
a comprehensive technology-based selection of electronic medical claims
processing, funding and collection solutions to the healthcare provider industry
through an Internet Web browser. Our services help doctors, hospital based
practices, and other healthcare providers and their vendors to significantly
improve daily insurance claims transaction administration and
management.
Our
Xeni
Medical Systems, Inc. ("Xeni Medical") CLAIMwerks™ solutions can provide actual
contract based, insurance company comparable screening and analysis of medical
claims directly from a client’s practice management system, so that deficiencies
and errors can be corrected before they are submitted to insurance companies
for
electronic payment. Further, the matching, settlement and posting of
private insurance company claims payments is electronically performed for
clients, minimizing the bookkeeping and investigation necessary to determine
payment status and collection actions.
Since
the
system has the capability of analyzing value and risk of claims payment, clients
may also qualify for pre-approved revolving line of credit advances on claims
processed by our Xeni Financial Services, Corp. ("Xeni Financial") FUNDwerks™
solution. FUNDwerks™ can electronically manage loans, loan repayments and
the movement of funds through linked bank accounts administered by us for banks
or finance companies; clients can receive electronic advance funding on claims
they select within five business days on commercially favorable
terms.
Additionally,
clients may choose to complete the claims management cycle by subscribing to
the
Xeni Medical Billing, Inc. ("Xeni Billing") BILLwerks™ services, which can
include patient billing and collections and/or managing third party appeals
on
the provider’s behalf.
There
is
no major hardware or software investment required to use the Company’s Web-based
systems. All transactions are designed to comply with the Health Insurance
Portability and Accountability Act of 1996 (‘‘HIPAA’’).
On
May
30, 2007, we formed a new subsidiary, Patient Payment Solutions, Inc. ("PPS"),
to improve collections for heath care providers that perform services
“out-of-network”. As of September 30, 2007, PPS has not begun to generate
revenue and has incurred minimal expenses.
We
offer
our services to physician and clinical service group practices, hospitals,
rehabilitation centers, nursing homes and certain related practice vendors
by
using internal and external resources. Internal resources consist mainly of
specialized sales executives with industry knowledge and/or a portfolio of
contacts. External resources consist primarily of independent sales
representatives as well as channel associates, such as vendors of practice
management systems and medical industry specific sales groups such as office
management consultants. These sales resources can leverage an existing customer
base and contacts. Our marketing is based on prioritizing potential subscribers
by size, location and density, need for our products and services and
distribution opportunities. Accordingly, we are focusing our initial marketing
efforts in geographic areas such as California, Florida, Texas, New York and
New
Jersey. Each of these states contains a high concentration of prospective
clients.
Because
we have had a limited operating history, it is difficult to accurately forecast
our revenues and expenses. Additionally, our operations will continue to be
subject to risks inherent in the establishment of a new business, including,
among other things, efficiently deploying our capital, developing our product
and services offerings, developing and implementing our marketing campaigns
and
strategies and developing awareness and acceptance of our products. Our ability
to generate future revenues will be dependent on a number of factors, many
of
which are beyond our control, including the pricing of other services, overall
demand for our products, market competition and government
regulation.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations
are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We
apply
the Securities and Exchange Commission
’
s Staff
Accounting
Bulletin 104 for revenue recognition. In general, we record revenue when
persuasive evidence of an arrangement exists, services have been rendered or
product delivery has occurred, the sales price to the customer is fixed or
determinable, and collectability is reasonably assured. We have identified
the
policy below as critical to our business operations and understanding of our
financial results:
Revenues
derived from fees related to claims and contract management services are
generally recognized when services are provided to the customer. We provide
advance funding for medical claims and term loan services to unaffiliated
healthcare providers. These arrangements typically require us to advance funds
to these unaffiliated healthcare providers (our customers) in exchange for
liens
on the receivables related to invoices remitted to their clients for services
performed. The advances are generally repaid through the remittance of payments
of receivables by their payors directly to us. We may withhold from these
advances interest, a fee charged in consideration of administration of advance
funding and loans and other charges as well as the amount of receivables
relating to prior advances that remain unpaid after a specified number of days.
These interest charges, administrative fees and other charges are recognized
as
revenue when earned and are calculated on a daily basis.
Revenues
derived from fees related to billing and collection services are generally
recognized when the customer's accounts receivable are collected. Revenues
from
implementation fees are generally recognized over the term of the customer
agreement. Revenues derived from maintenance, administrative and support fees
are generally recognized at the time the services are provided to the
customer.
Results
of Operations
For
the Nine Months Ended September 30, 2007 Versus the Nine Months Ended September
30, 2006
Revenue
For
the
nine months ended September 30, 2007, we recorded total revenue of $403,233.
Of
this total, we recorded service fee revenue of $356,540, or 88.4% and financing
income of $46,693 or 11.6%. For the nine months ended September 30, 2006, we
recorded total revenue of $298,850. Of this total, we recorded service fee
revenue of $262,292, or 87.8% and financing income of $36,558 or
12.2%.
Operating
Expenses
Our
operating expenses significantly increased for the nine months ended September
30, 2007 from the nine months ended September 30, 2006 principally as a result
of higher compensation and consulting expenses, offset by lower selling, general
and administrative expenses.
For
the
nine months ended September 30, 2007, total operating expenses were $6,196,794
as compared to $5,287,920 for the nine months ended September 30, 2006, an
increase of $908,874 or 17.2%. Included in this increase for the nine months
ended September 30, 2007 is the following:
|
1.
|
We
recorded compensation expense of $4,073,320 as compared to $3,193,895
for
the nine months ended September 30, 2006. This $879,425 or 27.5%
increase
was attributable to the hiring of permanent sales, operations and
executive staff and the recording of stock-based compensation expense
under FAS 123R for previous period stock option grants. The increase
in
compensation expense related to the new and existing permanent
employees
was $251,716, or 7.9%. The stock-based compensation expense for
the nine
months ended September 30, 2007 was $2,506,281 as compared to $1,878,572
for the nine months ended September 30, 2006, an increase of $627,709,
or
19.6%. We expect cash and stock-based compensation expense to increase
as
we hire additional administrative, sales and technical personnel
and
record the expense of both current and future stock option grants;
and
|
|
2.
|
Consulting
expense amounted to $562,798 as compared to $399,126 for the nine
months
ended September 30, 2006, an increase of $163,672, or 41.0%. For
the nine
months ended September 30, 2007 and 2006, we paid consultants for
business
advisory services, temporary information technology support and
various
other services; and
|
|
3.
|
Professional
fees amounted to $299,901 as compared to $277,906 for the nine
months
ended September 30, 2006, an increase of $21,995, or 7.9%. This
expense
was attributable to accounting fees for the audit of our financial
statements and SEC filings and legal fees related to SEC filings,
the
Series A and Series B Convertible Preferred Stock offerings,
the
Convertible Notes Payable and other corporate matters;
and
|
|
4.
|
Selling,
general and administrative expenses were $1,260,775 as compared
to
$1,416,993 for the nine months ended September 30, 2006, a
decrease of
$156,218, or 11.0%. This decrease was principally attributable
to a loss
of $180,736 on settlement of notes payable related to the issuance
of
common shares for debt conversion that was recorded during
the nine months
ended September 30,
2006.
|
For
the
nine months ended September 30, 2007 and 2006, selling, general and
administrative expenses consisted of the following:
|
|
2007
|
|
2006
|
|
Sales
commissions
|
|
$
|
64,422
|
|
$
|
140,807
|
|
Advertising
and promotion
|
|
|
93,593
|
|
|
103,816
|
|
Employee
benefits and payroll taxes
|
|
|
316,502
|
|
|
276,960
|
|
Other
selling, general and administrative
|
|
|
786,258
|
|
|
895,410
|
|
|
|
$
|
1,260,775
|
|
$
|
1,416,993
|
|
Other
Income (Expenses)
For the
nine months ended September 30, 2007, interest income was $60,201 as compared
to
$5,671 for the nine months ended September 30, 2006, an increase of $54,530.
This increase was due to an increase in interest-bearing cash
deposits.
For
the
nine months ended September 30, 2007, interest expense was $1,526,737 as
compared to $380,039 for the nine months ended September 30, 2006, an increase
of $1,146,698. This increase was due to an increase in borrowings and
amortization of debt discount and deferred fees in connection with our notes
payable.
In
accordance with Emerging Issues Task Force Issue 00-19 (‘‘EITF 00-19’’),
‘‘Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock’’, we recorded a loss on the revaluation of
warrant liability of $192,914 related to the change in fair value of the
warrants during nine months ended September 30, 2006.
Net
Loss
As
a
result of these factors, we reported a net loss of $7,259,932 for the nine
months ended September 30, 2007 as compared to a net loss of $5,559,843 for
the
nine months ended September 30, 2006.
Deemed
Dividend arising from beneficial conversion on Preferred Stock and Other
Charges
During
the nine months ended September 30, 2006, we recorded a deemed dividend arising
from a beneficial conversion feature of preferred stock of $913,777 which
relates to our Series A Convertible Preferred Stock. This non-cash item is
related to the beneficial conversion features on our Series A Convertible
Preferred Stock. In addition, for the nine months ended September 30, 2006,
we
issued 76,000 shares of the Company's common stock to certain shareholders
pursuant to agreements to offset the effect of dilutive financings of Xeni
Medical, Xeni Billing and Xeni Financial. The shares issued were valued at
the
fair market value at the date of issuance of $246,240 and were treated as an
additional charge to the loss attributable to common shareholders.
Net
Loss Attributable to Common Shareholders
We
reported a net loss attributable to common shareholders of $7,259,932 for the
nine months ended September 30, 2007 as compared to net loss attributable to
common shareholders of $6,719,860 for the nine months ended September 30, 2006.
This translates to an overall per share loss available to shareholders of ($.57)
for the nine months ended September 30, 2007 as compared to a per share loss
of
($.57) for nine months ended September 30, 2006.
For
the Three Months Ended September 30, 2007 Versus the Three Months Ended
September 30, 2006
Revenue
For
the
three months ended September 30, 2007, we recorded total revenue of $136,573.
Of
this total, we recorded service fee revenue of $119,820, or 87.7% and financing
income of $16,753 or 12.3%. For the three months ended September 30, 2006,
we
recorded total revenue of $158,113. Of this total, we recorded service fee
revenue of $147,726, or 93.4% and financing income of $10,387 or
6.6%.
Operating
Expenses
Our
operating expenses significantly decreased for the three months ended September
30, 2007 from the three months ended September 30, 2006 principally as a result
of decreased compensation expense, professional fees and selling, general and
administrative expenses.
For
the
three months ended September 30, 2007, total operating expenses were $1,835,304
as compared to $2,484,610 for the three months ended September 30, 2006, a
decrease of $649,306 or 26.1%. Included in this decrease for the three months
ended September 30, 2007 compared to the three months ended September 30, 2006
is the following:
|
1.
|
We
recorded compensation expense of $1,229,568 as compared to $1,730,160
for
the three months ended September 30, 2006. This $500,592 or 28.9%
decrease
was principally attributable to the recording of lower stock-based
compensation expense under FAS 123R in the amount of $614,089,
offset by
$113,497 in higher salaries for employees. The stock-based compensation
expense for the three months ended September 30, 2007 was $710,847
as
compared to $1,324,936 for the three months ended September 30,
2006. We
expect cash and stock-based compensation expense to increase as
we hire
additional administrative, sales and technical personnel and record
the
expense of both current and future stock option grants;
and
|
|
2.
|
Consulting
expense amounted to $158,360 as compared to $144,081 for the
three months
ended September 30, 2006, an increase of $14,279, or 9.9%. For
the three
months ended September 30, 2007 and 2006, we paid consultants
for business
advisory services, temporary information technology support and
various
other services; and
|
|
3.
|
Professional
fees amounted to $74,215 as compared to $153,782 for the three
months
ended September 30, 2006, a decrease of $79,567, or 51.7%.
This
expense reduction was principally attributable to
lower accounting fees for the audit of our financial statements and
SEC filings and legal fees related to SEC filings and stock
offerings for
the three months ended September 30, 2007 versus the three
months ended
September 30,
2006.
|
|
4.
|
Selling,
general and administrative expenses were $372,161 as compared to
$456,587
for the three months ended September 30, 2006, a decrease of $84,426,
or
18.5%.
|
For
the
three months ended September 30, 2007 and 2006, selling, general and
administrative expenses consisted of the following:
|
|
2007
|
|
2006
|
|
Sales
commissions
|
|
$
|
18,440
|
|
$
|
35,378
|
|
Advertising
and promotion
|
|
|
21,435
|
|
|
23,783
|
|
Employee
benefits and payroll taxes
|
|
|
99,889
|
|
|
97,993
|
|
Other
selling, general and administrative
|
|
|
232,397
|
|
|
299,433
|
|
|
|
$
|
372,161
|
|
$
|
456,587
|
|
Other
Income (Expenses)
For the
three months ended September 30, 2007, interest income was $13,492 as compared
to $1,123 for the three months ended September 30, 2006, an increase of $12,369.
This increase was due to an increase in interest-bearing cash
deposits.
For
the
three months ended September 30, 2007, interest expense was $500,601 as compared
to $372,291 for the three months ended September 30, 2006, an increase of
$128,310. This increase was due to an increase in borrowings and amortization
of
debt discount and deferred fees in connection with our notes
payable.
In
accordance with Emerging Issues Task Force Issue 00-19 (‘‘EITF 00-19’’),
‘‘Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock’’, we recorded a loss on the revaluation of
warrant liability of $0 compared to a gain of $1,030,338 related to the change
in fair value of the warrants during three months ended September 30,
2006.
Net
Loss
As
a
result of these factors, we reported a net loss of $2,184,840 for the three
months ended September 30, 2007 as compared to a net loss of $1,670,829 for
the
three months ended September 30, 2006.
Net
Loss Attributable to Common Shareholders
We
reported a net loss attributable to common shareholders of $2,184,840 for the
three months ended September 30, 2007 as compared to net loss attributable
to
common shareholders of $1,670,829 for the three months ended September 30,
2006.
This translates to an overall per share loss available to shareholders of ($.17)
for the three months ended September 30, 2007 as compared to a per share loss
of
($.14) for three months ended September 30, 2006.
Liquidity
and Capital Resources
We
used
the proceeds from the sales of common stock through September 30, 2007 and
proceeds from notes and loans payable for working capital purposes and to fund
our notes receivable of which we have $1,010,549 owed to us at September 30,
2007. We will continue to advance funds under note agreements to providers
that
subscribe to our financial services lending solutions.
From
March 22, 2006 through September 28, 2006, we sold 28.3 units in a private
placement to accredited investors pursuant to the terms of a Confidential
Private Placement Memorandum, dated February 1, 2006, and private placement
subscription agreements executed and delivered by each investor on or before
the
closing of the private placement. In connection with the sale of the 28.3 units,
we received net proceeds of $1,426,391.
On
August
24, 2006, we received gross proceeds of $250,000 (net proceeds of $236,566,
after expenses) in connection with a financing provided by an unrelated party.
In connection with the financing, we issued a secured promissory note in the
original principal amount of $250,000 (the ‘‘Note’’) and a three year warrant to
purchase 111,111 shares of our common stock at a price of $2.25 per share.
The
Note bears interest at the rate of 7% per year, payable monthly in arrears
and
will become due and payable on August 24, 2007. This Note is subject to certain
mandatory prepayment provisions as defined in the secured promissory note.
At
September 30, 2007, principal payments made under the mandatory prepayment
provisions had reduced the Note balance to $213,850. In connection with this
note, our subsidiary, Xeni Financial, entered into a security and guaranty
agreement whereby Xeni Financial has agreed to guaranty repayment of the note
and grant a security interest in a client Revolving Line of Credit Loan
Agreement including two promissory notes in the original principal amounts
of
$250,000 and $121,068 issued by that client to Xeni Financial, which were
consolidated into a single promissory note in the amount of $180,165 on December
5, 2006.
On
August
24, 2006, we received gross proceeds of $110,000 (net proceeds of $100,000,
after expenses) in connection with a financing provided equally by two unrelated
parties. These notes bear interest at 10% per year, and both interest and
principal were paid on the January 21, 2007 maturity date.
On
each
of October 20, 2006 and November 9, 2006 we received gross proceeds of
$2,500,000 ($2,375,000 net proceeds) for a total of $5,000,000 in the aggregate
($4,750,000 net proceeds in the aggregate) in connection with a financing
provided by Gottbetter Capital Master, Ltd., an unaffiliated accredited
institutional investor.
On
August
31, 2007 we received gross proceeds of $250,000 in connection with a financing
provided by Vicis Capital Master Fund, an unaffiliated accredited investor.
In
connection with the financing, we issued a Convertible Note to Vicis in the
original principal amount of $250,000.
On
September 28, 2007 we received gross proceeds of $2,000,000 (net proceeds of
$1,691,445 less repayment of the $250,000 August 31, 2007 Vicis Capital Master
Fund Convertible Note, interest and closing expenses) in connection with a
financing provided by Vicis Capital Master Fund, an unaffiliated accredited
institutional investor.
While
we
have sufficient funds to conduct our business and operations as they are
currently undertaken into the next quarter, our ability to continue to implement
our revenue and profit growth strategy beyond the next quarter will be adversely
affected and the Company may have to curtail operations if we are unable to
consummate a sufficient amount of additional private placement transactions
or
debt financing, which we are currently pursuing.
We
currently have no material commitments for capital expenditures.
Cash
flows
At
September 30, 2007, we had cash of $1,771,111.
Net
cash
used in operating activities was $3,309,989 for the nine months ended September
30, 2007 as compared to $2,270,394 for the nine months ended September 30,
2006,
an increase of $1,039,595. This increase is primarily attributable to an
increase in our net loss and:
|
1.
|
Gottbetter
debt offering costs of $133,500 and Gottbetter, Goldner and Grenier
debt
discount and debt issuance costs of $1,208,594 and $10,954, respectively,
compared to debt related costs during the nine months ended September
30,
2006 of $31,913;
|
|
2.
|
Stock-based
compensation of $2,506,281 versus stock-based compensation expense
of
$1,878,572 for the nine months ended September 30, 2006 primarily
related
to issuance of stock options to
employees;
|
|
3.
|
No
settlement expense versus settlement expense in the amount
of $180,827 for
the conversion of $40,000 of notes payable to common stock
for the nine
months ended September 30,
2006;
|
|
4.
|
No
loss on valuation of warrant liability versus loss on valuation
of warrant
liability of $192,914 through September 30, 2006 due to the revaluation
of
our warrant liability to fair
value;
|
|
5.
|
No
interest expense in connection with grant of warrants, versus
interest
expense of $335,273 through September
30,2006;
|
|
6.
|
A
net increase in notes receivable, accounts receivable and prepaid
expenses
aggregating $537,541 principally related to the increase in
funding of
notes receivable to providers that subscribe to our MDwerks
financial
services solution;
|
|
7.
|
An
increase in accounts payable, accrued expenses, and deferred
revenue
related to an increase in operating activities aggregating
$244,457.
|
Net
cash
used in investing activities was $5,209 for the nine months ended September
30,
2007 as compared to $71,728 for the nine months ended September 30, 2006 and
is
principally related to the acquisition of computer and office equipment and
furniture.
Net
cash
provided by financing activities was $1,939,468 due to the proceeds from the
sale of Series B Preferred Stock for the nine months ended September 30, 2007
as
compared to net cash provided by financing activities of $1,716,471 due to
net
proceeds from the sale of Series A Convertible Preferred Stock for the nine
months ended September 30, 2006.
Off
Balance Sheet Arrangements
We
had no
off balance sheet arrangements as of September 30, 2007.
Cautionary
Language Regarding Forward-Looking Statements and Industry
Data
This
report contains ‘‘forward-looking statements’’ within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties,
many of which are beyond our control. Our actual results could differ materially
and adversely from those anticipated in such forward-looking statements as
a
result of certain factors, including those set forth below and elsewhere in
this
report. Important factors that may cause actual results to differ from
projections include, but are not limited to, for example:
|
·
|
adverse
economic conditions;
|
|
·
|
inability
to raise sufficient additional capital to implement our business
plan;
|
|
·
|
intense
competition, including entry of newly-developed alternative drug
technologies;
|
|
·
|
unexpected
costs and operating deficits, and lower than expected sales and
revenue;
|
|
·
|
adverse
results of any legal proceedings;
|
|
·
|
inability
to satisfy government and commercial customers using our
technology;
|
|
·
|
the
volatility of our operating results and financial
condition;
|
|
·
|
inability
to attract or retain qualified senior management personnel, including
sales and marketing, and technology personnel;
and
|
|
·
|
other
specific risks that may be alluded to in this
report.
|
All
statements, other than statements of historical facts, included in this report
regarding our strategy, future operations, financial position, estimated revenue
or losses, projected costs, prospects and plans and objectives of management
are
forward-looking statements. When used in this report, the words ‘‘will,’’
‘‘may,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘expect,’’
‘‘project,’’ ‘‘plan’’ and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the
date
of this report. We do not undertake any obligation to update any forward-looking
statements or other information contained herein. Potential investors should
not
place undue reliance on these forward-looking statements. Although we believe
that our plans, intentions and expectations reflected in or suggested by the
forward-looking statements in this report are reasonable, no one can assure
investors that these plans, intentions or expectations will be
achieved.
Information
regarding market and industry statistics contained in this report is included
based on information available to us that we believe is accurate. It is
generally based on academic and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed
or
included data from all sources, and we cannot assure investors of the accuracy
or completeness of the data included in this report. Forecasts and other
forward-looking information obtained from these sources are subject to the
same
qualifications and the additional uncertainties accompanying any estimates
of
future market size, revenue and market acceptance of products and services.
We
have no obligation to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements.
ITEM
3.
CONTROLS
AND PROCEDURES
We
maintain ‘‘disclosure controls and procedures,’’ as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms,
and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the ‘‘Evaluation’’), under the supervision and with the
participation of our Chief Executive Officer (‘‘CEO’’) and Chief Financial
Officer (‘‘CFO’’), of the effectiveness of the design and operation of our
disclosure controls and procedures (‘‘Disclosure Controls’’) as of the end of
the period covered by this report pursuant to Rule 13a-15 of the Exchange Act.
Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls
were effective as of the end of the period covered by this report.
We
have
also evaluated our internal controls for financial reporting, and there have
been no significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of their last
evaluation.
Our
management, including our CEO and CFO, does not expect that our Disclosure
Controls and internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems,
no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making
can
be faulty, and that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management or board override
of the control. The design of any system of controls also is based in part
upon
certain assumptions about the likelihood of future events, and there can be
no
assurance that any design will succeed in achieving its stated goals under
all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
not be detected. CEO and CFO Certifications appearing immediately following
the
signatures section of this report there are Certifications of the CEO and the
CFO. The Certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this
report, which you are currently reading is the information concerning the
Evaluation referred to in the Section 302 Certifications and this information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding.
Evaluation
of disclosure controls and procedures and remediation
In
connection with the Restatement, under the direction of the Company’s
management, we have reevaluated certain disclosure controls and procedures
and
internal control over financial reporting. In connection with the Restatement,
we identified a material weakness in our internal controls and procedures
relating to the accounting treatment of our series A preferred stock and related
warrants.
To
our
knowledge, as of the date of this filing, we have remediated such material
weakness in our internal controls and procedures.
In
connection with this Form 10-QSB, under the direction of our Chief Executive
Officer, we have evaluated our disclosure controls and procedures as of
September 30, 2007, including the remedial actions discussed above, and we
have
concluded that, as of September 30, 2007, our disclosure controls and procedures
are effective.
It
should
be noted that while our management believe our disclosure controls and
procedures provide a reasonable level of assurance, they do not expect that
our
disclosure controls and procedures or internal controls will prevent all error
and all fraud. A control system, no matter how well conceived or operated,
can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect
the
fact that there are resource constraints, and the benefits of controls must
be
considered relative to their costs. Because of the inherent limitations in
all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have
been
detected. These inherent limitations include the realities that judgments,
in
decision making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the controls. The design of any system of internal control is based
in part upon certain assumptions above the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
PART
II — OTHER INFORMATION
Item
1 — Legal Proceedings
None
Item
2 — Unregistered Sales of Equity Securities and Use of
Proceeds
During
the three months ended September 30, 2007, two Series A preferred stockholders’
converted three shares of Series A Preferred Stock into 60,000 shares of common
stock.
On
September 28, 2007, the Company received gross proceeds of $2,000,000 (net
proceeds of $1,691,445 after repayment of the $250,000 31-day August 31,
2007 Convertible Note, interest and closing expenses) in connection with a
financing provided by Vicis Capital Master Fund, an unaffiliated accredited
institutional investor. In connection with the financing, pursuant to the terms
of a Securities Purchase Agreement, we issued 200 shares of Series B Convertible
Preferred Stock (a “Series B Preferred Stock”), a seven year Series F Warrant to
purchase 1,500,000 shares of our common stock at a price of $2.25 per share
and
a seven year Series G Warrant to purchase 1,000,000 shares of our common stock
at a price of $2.50 per share.
Item
3 — Defaults Upon Senior Securities
None.
Item
4 — Submissions of Matters to a Vote of Security Holders
None.
Item
5.
Other
Information
None
Item
6.
Exhibits
|
31.1
|
Section
302 Certification of Principal Executive
Officer
|
|
31.2
|
Section
302 Certification of Principal Financial
Officer
|
|
32.1
|
Section
906 Certification of Principal Executive
Officer
|
|
32.2
|
Section
906 Certification of Principal Financial
Officer
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
MDWERKS,
INC.
|
November
13, 2007
|
|
/s/ Howard
B.
Katz
|
|
Howard
B. Katz
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
November
13, 2007
|
|
/s/ Vincent
Colangelo
|
|
Vincent
Colangelo
|
|
|
Exhibit
31.1
CERTIFICATION
I,
Howard
B. Katz, certify that:
1.
|
I
have reviewed this quarterly report on Form 10-QSB of MDwerks,
Inc.
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant
and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures as of the end of the period
covered
by this report based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant's internal control
over
financial reporting that occurred during the registrant's most
recent
fiscal quarter that has materially affected, or is reasonably likely
to
materially affect, the registrant's internal control over financial
reporting;
|
5.
|
The
registrant's other certifying officer and I have disclosed, based
on our
most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability
to record,
process, summarize and report financial information;
and
|
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control
over financial reporting.
|
|
|
|
|
|
|
Dated:
November 13, 2007
|
|
/s/ Howard
B.
Katz
|
|
Howard
B. Katz
Chief
Executive Officer
|
Exhibit
31.2
CERTIFICATION
I,
Vincent Colangelo, certify that:
1.
|
I
have reviewed this quarterly report on Form 10-QSB of MDwerks,
Inc.
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such
statements
were made, not misleading with respect to the period covered by
this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial
information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant
and have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including
its
consolidated subsidiaries, is made known to us by others within
those
entities, particularly during the period in which this report is
being
prepared;
|
|
(b)
|
Evaluated
the effectiveness of the registrant's disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures as of the end of the period
covered
by this report based on such evaluation;
and
|
|
(c)
|
Disclosed
in this report any change in the registrant's internal control
over
financial reporting that occurred during the registrant's most
recent
fiscal quarter that has materially affected, or is reasonably likely
to
materially affect, the registrant's internal control over financial
reporting;
|
5.
|
The
registrant's other certifying officer and I have disclosed, based
on our
most recent evaluation of internal control over financial reporting,
to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design
or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability
to record,
process, summarize and report financial information;
and
|
|
|
|
|
|
|
Dated:
November 13, 2007
|
|
/s/ Vincent
Colangelo
|
|
Vincent
Colangelo
Chief
Financial Officer
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In
connection with the filing of the Quarterly Report on Form 10-QSB for the period
ended September 30, 2007 as filed with the Securities and Exchange Commission
(the ‘‘Report’’) by MDwerks Inc. (the ‘‘Registrant’’), I, Howard B. Katz, Chief
Executive Officer of the Registrant, hereby certify that:
|
1.
|
The
Report fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934, as amended,
and
|
|
2.
|
The
information contained in the Report fairly presents, in all material
respects, the financial conditions and results of operations of
Registrant.
|
|
|
|
|
|
|
Dated:
November 13, 2007
|
|
/s/ Howard
B.
Katz
|
|
Howard
B. Katz
Chief
Executive Officer
|
Exhibit
32.2
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In
connection with the filing of the Quarterly Report on Form 10-QSB for the period
ended September 30, 2007 as filed with the Securities and Exchange Commission
(the ‘‘Report’’) by MDwerks Inc. (the ‘‘Registrant’’), I, Vincent Colangelo,
Chief Financial Officer of the Registrant, hereby certify that:
|
1.
|
The
Report fully complies with the requirements of section 13(a) or 15(d)
of
the Securities Exchange Act of 1934, as amended,
and
|
|
|
|
|
|
|
Dated:
November 13, 2007
|
|
/s/ Vincent
Colangelo
|
|
Vincent
Colangelo
Chief
Financial Officer
|
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