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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 (Mark One)

 

x   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2008

 

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 registrant 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

(Registrant's telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 

Large accelerated filer o    Accelerated filer o

Non-accelerated filer o      Smaller reporting company x

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 August 13, 2008

 

Transitional Small Business Disclosure Format (Check one): Yes  o  No x

 

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MDWERKS, INC.

FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2008

 

INDEX

 

		Page
PART I - FINANCIAL INFORMATION
	Item 1 - Consolidated Financial Statements
	Consolidated Balance Sheets As of June 30, 2008 (Unaudited) and December 31, 2007	3
	Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2008 and 2007	4
	Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2008 and 2007	5
	Notes to Unaudited Consolidated Financial Statements	6-20
	Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations	21-26
	Item 3 - Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4 - Controls and Procedures	27
PART II - OTHER INFORMATION
	Item 1 - Legal Proceedings	28
	Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	28
	Item 3 - Defaults Upon Senior Securities	28
	Item 4 - Submission of Matters to a Vote of Security Holders	28
	Item 5 - Other Information	28
	Item 6 - Exhibits	28

 

2

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MDWERKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		June 30, 2008 (Unaudited)			December 31, 2007 (1)
ASSETS
Current assets:
Cash		$	1,253,368		$	320,903
Certificates of deposit			3,000,000			—
Notes receivable			1,044,832			1,652,079
Accounts receivable, net of allowance of $100,000 for June 30, 2008			768,700			66,985
Prepaid expenses and other			176,639			215,073
Total current assets			6,243,539			2,255,040
Long-term assets:
Available-for-sale securities, at fair market value			717,600			—
Property and equipment, net of accumulated depreciation of $112,904 for June 30, 2008 and $92,995 for December 31, 2007			106,269			115,902
Debt issuance and offering costs, net of accumulated amortization of $403,264 for June 30, 2008 and $273,997 for December 31, 2007			467,844			400,246
Total assets		$	7,535,252		$	2,771,188
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable, net		$	1,660,938		$	2,942,842
Mandatory Redeemable Convertible Series B Preferred Stock, $.001 par value, 1,250 shares authorized;1,000 shares issued and outstanding at June 30, 2008 and 250 shares authorized; 200 shares issued and outstanding at December 31, 2007, net			1,250,000			1,346,326
Loans payable			—			109,559
Accounts payable			319,828			351,482
Accrued expenses			843,475			686,917
Deferred revenue			7,261			11,296
Total current liabilities			4,081,502			5,448,422
Long-term liabilities:
Notes payable, net of discount of $2,566,395 at December 31, 2007, less current portion			—			65,763
Deferred revenues, less current portion			—			1,613
Total liabilities			4,081,502			5,515,798
Stockholders' equity (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 at June 30, 2008 and December 31, 2007			—			—
Common stock, $.001 par value, 100,000,000 shares authorized; 12,940,065 shares issued and outstanding			12,940			12,940
Additional paid-in capital			46,616,792			33,732,690
Accumulated deficit			(43,258,782	)		(36,490,240	)
Accumulated other comprehensive income/gain			82,800			—
Total stockholders' equity (deficiency)			3,453,750			(2,744,610	)
Total liabilities and stockholders' equity (deficiency)		$	7,535,252		$	2,771,188

 (1) Derived from audited financial statements

The accompanying notes should be read in conjunction with the unaudited consolidated financial statements

3

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MDWERKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2008			2007			2008			2007
		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue:
Service fees		$	148,208		$	116,812		$	310,450		$	236,720
Financing income			90,344			15,963			131,563			29,940
Claims purchase revenue			23,697			—			23,697			—
Total revenue			262,249			132,775			465,710			266,660
Operating expenses:
Compensation			2,408,892			1,426,431			3,310,994			2,843,752
Consulting expenses			73,238			241,741			138,719			404,438
Professional fees			165,263			100,139			329,951			225,686
Selling, general and administrative			497,136			479,595			788,026			888,614
Total operating expenses			3,144,529			2,247,906			4,567,690			4,362,490
Loss from operations			(2,882,280	)		(2,115,131	)		(4,101,980	)		(4,095,830	)
Other income (expense):
Interest income			656,106			18,470			658,030			46,709
Interest expense			(1,898,320	)		(508,638	)		(2,664,959	)		(1,026,136	)
Loss on extinguishment of debt			—			—			(660,122	)		—
Other income			340			165			489			165
Total other income (expense)			(1,241,874	)		(490,003	)		(2,666,562	)		(979,262	)
Net loss		$	(4,124,154	)	$	(2,605,134	)	$	(6,768,542	)	$	(5,075,092	)
NET LOSS PER COMMON SHARE - basic and diluted		$	0.32		$	0.21		$	0.52		$	0.40
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING - basic and diluted			12,940,065			12,688,856			12,940,065			12,634,761

 

The accompanying notes should be read in conjunction with the unaudited consolidated financial statements

4

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MDWERKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Six Months Ended June 30,
		2008			2007
		(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss		$	(6,768,542	)	$	(5,075,092	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			19,909			22,691
Amortization of debt issuance cost			—			8,720
Amortization of debt discount			2,135,875			814,858
Amortization of deferred offering costs			129,261			89,000
Amortization of deferred compensation			22,168			133,020
Stock-based compensation			1,916,722			1,795,443
Common stock issued for services			—			150,000
Changes in assets and liabilities:
Certificates of deposit			(3,000,000	)		—
Notes receivable			607,247			(308,678	)
Accounts receivable			(801,715	)		29,450
Allowance for doubtful accounts			100,000			—
Prepaid expenses and other			38,434			4,505
Accounts payable			(31,654	)		(64,743	)
Accrued expenses			156,558			7,127
Deferred revenues			(5,648	)		(40,102	)
Total adjustments			1,287,157			2,641,291
Net cash used in operating activities			(5,481,385	)		(2,433,801	)
Cash flows from investing activities:
Purchase of property and equipment			(10,276	)		(4,652	)
Net cash used in investing activities			(10,276	)		(4,652	)
Cash flows from financing activities:
Repayment of notes payable			(1,269,445	)		(134,514	)
Repayment of loan payable			(109,559	)		(2,916	)
Proceeds from sale of Mandatory Redeemable Series B preferred stock			8,000,000			—
Placement fees and other expenses paid			(196,870	)		—
Net cash provided by (used in) financing activities			6,424,126			(137,430	)
Net increase (decrease) in cash			932,465			(2,575,883	)
Cash - beginning of period			320,903			3,146,841
Cash - end of period		$	1,253,368		$	570,958
Supplemental disclosure of cash flow information:
Cash paid for:
Interest		$	250,279		$	208,115

 

The accompanying notes should be read in conjunction with the unaudited consolidated financial statements

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

 

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 three 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, advances and claims purchasing 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 planned to offer healthcare providers a payment improvement process for “out of network” claims, but never became operational and is a dormant entity.

 

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 may need 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 financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenue, including institutional financing described in Note 4, provide the opportunity for the Company to continue as a going concern.

 

The Company has raised $8 million in gross proceeds in the first quarter of 2008 through the sale of Mandatory Redeemable Series B Convertible Preferred Stock. As reflected in the accompanying consolidated financial statements, the Company has stockholders’ equity of $3,453,750 and working capital of $2,162,037 at June 30, 2008.

 

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-Q 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, 2007 and notes thereto and other pertinent information contained in the Form 10-K of the Company for the year ended December 31, 2007 as filed with the Securities and Exchange Commission (the ‘‘Commission’’). The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of what the results will be for the full fiscal year ending December 31, 2008.

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

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. At June 30, 2008, the Company was approximately $3,846,000 in excess of the $100,000 per bank, per company limit. The Company has not experienced any losses on these accounts.

Certificates of deposit

 

At June 30, 2008, the Company had six certificates of deposit totaling $3,000,000. Each certificate of deposit, bearing interest at 2.85%, has a 9-month maturity date and may be redeemed without penalty.

 

Available-for-sale securities

 

The Company records available-for sale securities at the fair market value based upon stock prices as quoted on the OTC Bulletin Board. At June 30, 2008, the Company recorded $717,600 which represented 920,000 shares at a price of $0.78 per share.

Advertising

 

The Company expenses advertising costs as incurred. Advertising costs charged to operations were $0 and $26,639 for the six months ended June 30, 2008 and 2007, 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.

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

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 collectibility 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.

 

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 payers (the ‘‘Payers’’). The advances are repaid through the remittance of payments of customer medical claims, by Payers, 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 term loans to unaffiliated companies are generally recognized as revenue when earned. Revenue from term loans can include interest, administrative fees and other charges.

 

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.

Revenue derived from claims purchased from unaffiliated healthcare providers are generally recognized when the claims are paid and the funds are collected.

 

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 loss by the weighted average number of shares of common stock and potentially dilutive securities outstanding during each period. For the three months ended June 30, 2008 and 2007, the Company had outstanding options to purchase an aggregate of 5,632,530 and 2,856,250 shares of common stock, respectively, and warrants to purchase an aggregate of 57,566,346 and 2,566,345 shares of common stock, respectively, 40,000 and 100,000 shares of common stock, respectively, issuable upon conversion of Series A preferred stock, 13,333,334 and 0 shares of common stock, respectively, issuable upon conversion of Series B preferred stock, and 1,913,580 and 2,222,222 shares of common stock, respectively, issuable upon conversion of notes payable which could potentially dilute future earnings per share. Diluted loss per common share has not been presented for the six months ended June 30, 2008 and 2007 since the impact of the stock options and warrants would be antidilutive.

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Stock-based compensation

 

In January 2006, 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 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 has adopted SFAS 159 effective January 1 , 2008.

 

In December 2007, the FASB issued two new pronouncements, SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements- an amendment of ARB No. 51 and SFAS No. 141 (revised 2007) Business Combinations. Both pronouncements call for prospective reporting only and would not effect any current (or currently contemplated) transactions by the Company.

In May 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and results of operations.

 

In May 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public Company Accounting Oversight Board's amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have a material impact on the preparation of our consolidated financial statements.

 

 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.

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

 NOTE 2 — ACCOUNTS AND NOTES RECEIVABLE

 

Accounts receivable are recorded when revenue has been recognized but not yet collected. The Company had $868,700 of accounts receivable as of June 30, 2008 and $66,985 as of December 31, 2007 from claims purchased, implementation, processing, collection, and other fees, and disbursements not yet collected.

 

At June 30, 2008, the Company advanced five healthcare providers under lines of credit and note agreements aggregating $1,044,832. Advances under the lines of credit are due to be repaid out of providers’ claims collections, as defined in the agreement. The notes receivable under note agreements are payable as the provider collects certain receivables. The Company charged the healthcare providers interest and other charges as defined in the agreements. At December 31, 2007, the Company had $1,652,079 of 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 June 30, 2008, no amounts were past due, however, the Company recorded a $100,000 allowance for doubtful accounts for receivables due from one customer.

 

NOTE 3 — AVAILABLE-FOR-SALE SECURITIES

On June 16, 2008, the Company restructured one healthcare provider’s notes receivable which were due and payable to the Company on June 15, 2008. Certain notes were paid off and the remaining balance was consolidated into a new promissory note with a new maturity date of June 15, 2009. As consideration for the changes to the terms of these notes, among other fees, the Company was given 920,000 restricted shares of the healthcare provider’s common stock when the stock was valued at $0.69 per share as quoted on the OTC Bulletin Board. This was recorded as interest income of $634,800. At June 30, 2008, the stock price increased to $0.78 per share resulting in an $82,800 increase in the value of the Available-for-sale securities. The Company will revalue these securities on a quarterly basis. These revaluations will correspondingly adjust the Accumulated other comprehensive income/gain reported in the Equity section of the Balance Sheet.

NOTE 5 — 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. These notes bore interest at 7% per year, and both interest and principal were paid in full on October 1, 2007.

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 bore interest at 10% per year, and both interest and principal were paid in full on the January 21, 2007 maturity date.

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

 

NOTE 5 — NOTES PAYABLE (continued)

 

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. (in liquidation) “Gottbetter’’, an unaffiliated accredited institutional investor. Pursuant to the terms of a Securities Purchase Agreement that we entered into with Gottbetter in connection with the financing, we issued two senior secured convertible promissory notes to Gottbetter, each in the original principal amount of $2,500,000 at an initial conversion price of $2.25 per share (each a ‘‘Senior Note’’ and collectively, the ‘‘Senior Notes’’), five-year Series D Warrants to purchase 375,000 shares of our common stock at a price of $2.25 per share (‘‘Series D Warrants’’) and five-year Series E Warrants, as amended, to purchase 541,666 shares of our common stock at a price of $2.25 per share (‘‘Series E Warrants’’).

In connection with an extension until February 1, 2008 of repayment of principal on the Senior Notes described above, the Company granted to Gottbetter additional five year Series D warrants to purchase 500,000 shares of its common stock at an exercise price of $2.25 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 amortized over the 4-month extension. The fair market value of each stock warrant 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.

In order to memorialize the extension of the principal payment date to February 1, 2008, we issued to Gottbetter an amended and restated version of the Senior Note that we issued to Gottbetter on October 20, 2006 and an amended and restated version of the Senior Note that we issued to Gottbetter on November 9, 2006.

In connection with obtaining the consent and waiver of Gottbetter to the financing provided by Vicis Capital Master Fund, an unaffiliated accredited investor (“Vicis”) described below, we entered into the Gottbetter Consent Agreement, pursuant to which Gottbetter agreed to waive its anti-dilution rights under the Series D Warrants, Series E Warrants and promissory notes that we previously issued to Gottbetter and Gottbetter consented to the financing provided by Vicis.

 

On December 3, 2007 we received gross proceeds of $575,000 in connection with a financing provided by Vicis. In connection with the financing, we issued a Convertible Note to Vicis in the original principal amount of $575,000 (the “Note”). The Note bears interest at the rate of 8% per year. Subject to certain prepayment provisions, unpaid principal and interest due under the Note was due and payable on December 2, 2008. On March 31, 2008 both interest and principal on this Note were paid in full as part of the March Securities Purchase Agreement described below.

 

11

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

 

NOTE 5 — NOTES PAYABLE (continued)

 

		Shares			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at December 31, 2007			3,514,250		$	2.57		$	0
Granted			2,145,000			0.73			—
Exercised			—			—			—
Forfeited			(26,720	)		3.18			—
Outstanding at June 30, 2008			5,632,530		$	1.87		$	106,260
Options exercisable at end of period			4,443,833		$	2.02		$	106,260
Weighted-average fair value of options granted during the period			0.73

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

 

NOTE 7 — STOCKHOLDERS’ EQUITY

Common stock options (continued)

 

The following information applies to options outstanding at June 30, 2008:

 

		Options Outstanding									Options Exercisable
Range of Exercise Prices		Shares			Weighted Average  Remaining  Contractual Life (Years)			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price
$0.38			483,000			9.50		$	0.38			483,000		$	0.38
$0.60			220,000			9.75		$	0.60			73,333		$	0.60
$0.67			175,000			9.25		$	0.67			33,333		$	0.67
$0.75			1,925,000			9.75		$	0.75			1,925,000		$	0.75
$1.39			105,000			8.50		$	1.39			95,000		$	1.39
$2.25			1,016,650			8.25		$	2.25			683,333		$	2.25
$3.25			181,650			7.50		$	3.25			126,667		$	3.25
$3.40			858,330			7.50		$	3.40			573,333		$	3.40
$4.00 - 4.25			667,900			8.00		$	4.03			450,834		$	4.08
			5,632,530					$	1.59			4,443,833		$	2.02

 

In connection with previously granted stock options, the Company recognized stock-based compensation expense of $1,916,722 for the six months ended June 30, 2008 and $1,795,443 for the six months ended June 30, 2007.

 

As of June 30, 2008, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of operations is approximately $633,000, 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 June 30, 2008 and changes during the period is as follows:

		Shares			Weighted Average Exercise Price
Outstanding at December 31, 2007			5,733,012		$	2.42
Granted			54,333,334			0.75
Exercised			—			—
Forfeited			(2,500,000	)		(2.35	)
Outstanding at June 30, 2008			57,566,346		$	0.85
Common stock issuable upon exercise of warrants			57,566,346		$	0.85

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2008

NOTE 7 — STOCKHOLDERS’ EQUITY

Common stock warrants (continued)

Common Stock issuable uponexercise of warrants outstanding											Common Stock issuable upon Warrants0Exercisable
Range of Exercise Price		Number Outstanding at June 30, 2008			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price			Number Exercisable at June 30, 2008			Weighted Average Exercise Price
$0.75			54,333,334			9.66		$	0.75			54,333,334		$	0.75
$1.25			199,000			1.97		$	1.25			199,000		$	1.25
$1.50			56,667			2.99		$	1.50			56,667		$	1.50
$2.25			1,527,778			3.64		$	2.25			1,527,778		$	2.25
$2.50			640,400			0.38		$	2.50			640,400		$	2.50
$3.00			579,167			0.87		$	3.00			579,167		$	3.00
$3.76			225,000			1.30		$	3.76			225,000		$	3.76
$4.00			5,000			1.30		$	4.00			5,000		$	4.00
			57,566,346					$	0.85			57,566,346		$	0.85

NOTE 8 — COMMITMENTS

 

Lease agreements

 

On February 1, 2008, the Company was assigned a master lease on its facility and a 5-year lease option was exercised which extends the master lease until July 2013. Rent expense for the six months ended June 30, 2008 and June 30, 2007 was $47,147 and $46,222, respectively.

Future minimum operating lease commitments as of June 30, 2008 are as follows:

Year Ending December 31		Amount
2008		$	23,273
2009			47,896
2010			50,291
2011			52,805
2012			31,683
		$	205,948

 

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		June 30, 2008			June 30,  2007
Employee benefits and payroll taxes		$	232,770		$	216,613
Information technology			81,662			116,974
Occupancy and office expenses			113,575			99,266
Other selling, general and administrative			360,019			455,761
		$	788,026		$	888,614

 

Other Income (Expenses)

 

For the six months ended June 30, 2008, interest income was $658,030 as compared to $46,709 for the six months ended June 30, 2007, an increase of $611,321. This increase was principally due to restructuring the notes receivable described below.

 

On June 16, 2008, the Company restructured one healthcare provider’s notes receivable which were due and payable to the Company on June 15, 2008. Certain notes were paid off and the remaining balance was consolidated into a new promissory note with a new maturity date of June 15, 2009. As consideration for the changes to the terms of these notes, the Company was given 920,000 restricted shares of the healthcare provider’s common stock when the stock was valued at $0.69 per share as quoted on the OTC Bulletin Board. This was recorded as interest income of $634,800. At June 30, 2008, the stock price increased to $0.78 per share requiring an $82,800 increase in the value of the Available-for-sale securities. The Company will revalue these securities on a quarterly basis. These revaluations will correspondingly adjust the Accumulated other comprehensive income/ gain reported in the Equity section of the Balance Sheet.

For the six months ended June 30, 2008, interest expense was $2,664,959 as compared to $1,026,136 for the six months ended June 30, 2007, an increase of $1,638,823. This increase was due to an increase in borrowings and amortization of debt discount and deferred fees in connection with our notes payable.

On March 31, 2008, the Company received net proceeds of $6,809,794 in connection with a financing provided by Vicis. Along with this financing, the Mandatory Redeemable Convertible Series B Preferred Stock issued in connection with the September 28, 2007 financing of $2,000,000 and the January 18, 2008 financing of $500,000 were returned and considered debt extinguishment and a new Note Payable to Vicis for $10,000,000 was recorded. The transaction resulted in a change to the debt discount which was recorded as a $660,122 loss on extinguishment of debt.

Net Loss

 

We reported a net loss of $6,768,542 for the six months ended June 30, 2008 as compared to net loss of $5,075,092 for the six months ended June 30, 2007. This translates to an overall per share loss of ($.52) for the six months ended June 30, 2008 as compared to a per share loss of ($.40) for the six months ended June 30, 2007.

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 For the Three Months Ended June 30, 2008 Versus the Three Months Ended June 30, 2007

 

Revenue

 

For the three months ended June 30, 2008, we recorded total revenue of $262,249. Of this total, we recorded service fee revenue of $148,208, accounting for 56.5% of total revenue, financing income of $90,344, accounting for 34.4% of total revenue, and claims purchase revenue of $23,697, accounting for 9.1% of total revenue. For the three months ended June 30, 2007, we recorded total revenue of $132,775. Of this total, we recorded service fee revenue of $116,812, accounting for 88.0% of total revenue and financing income of $15,963, accounting for 12.0% of total revenue.

 

Operating Expenses

  

For the three months ended June 30, 2008, total operating expenses were $3,144,529 as compared to $2,247,906 for the three months ended June 30, 2007, an increase of $896,623 or 39.9%. Included in this increase for the three months ended June 30, 2008 is the following:

 

1.

We recorded compensation expense of $2,408,892 as compared to $1,426,431 for the three months ended June 30, 2007. This $982,461 or 68.9% increase was mainly attributable to stock options granted in April 2008 of $1,535,211 and executive bonuses of $339,381 paid during the three months ended June 2008 versus amortization of prior year stock option grants of $884,794 and executive bonuses of $54,375 during the three months ended June 2007; and

 

2.

Consulting expense amounted to $73,238 as compared to $241,741 for the three months ended June 30, 2007, a decrease of $168,503, or 69.7%. This decrease resulted from lower financing costs and outside business development and information technology consultants expense; and

 

3.

Professional fees amounted to $165,263 as compared to $100,139 for the three months ended June 30, 2007, an increase of $65,124, or 65.0%. This expense was attributable to an increase in legal fees related to additional SEC filings, and Series B Convertible Preferred Stock offerings, higher accounting fees for SEC filings and other corporate matters; and

 

4.

Selling, general and administrative expenses were $497,136 as compared to $479,595 for the three months ended June 30, 2007, an increase of $17,541, or 3.7%. This increase resulted from an increase in bad debts offset by a reduction in advertising, sales travel, trade shows and investor relation expenses.

 

For the three months ended June 30, 2008 and 2007, selling, general and administrative expenses consisted of the following:

 

		June 30, 2008			June 30,  2007
Employee benefits and payroll taxes			121,145			107,686
Information technology			75,402			54,906
Occupancy and office expenses			66,866			54,335
Other selling, general and administrative			233,723			262,668
		$	497,136		$	479,595

 

Other Income (Expenses)

 

For the three months ended June 30, 2008, interest income was $656,106 as compared to $18,470 for the three months ended June 30, 2007, an increase of $637,636. This increase was principally due to restructuring the notes receivable described below.

 

On June 16, 2008, the Company restructured one healthcare provider’s notes receivable which were due and payable to the Company on June 15, 2008. Certain notes were paid off and the remaining balance was consolidated into a new promissory note with a new maturity date of June 15, 2009. As consideration for the changes to the terms of these notes, the Company was given 920,000 restricted shares of the healthcare provider’s common stock when the stock was valued at $0.69 per share as quoted on the OTC Bulletin Board. This was recorded as interest income of $634,800. At June 30, 2008, the stock price increased to $0.78 per share requiring an $82,800 increase in the value of the Available-for-sale securities. The Company will revalue these securities on a quarterly basis. These revaluations will correspondingly adjust the Accumulated other comprehensive income/ gain reported in the Equity section of the Balance Sheet.

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Other Income (Expenses) (continued)

For the three months ended June 30, 2008, interest expense was $1,898,320 as compared to $508,638 for the three months ended June 30, 2007, an increase of $1,389,682. This increase was due to an increase in borrowings and amortization of debt discount and deferred fees in connection with our notes payable.

Net Loss

 

We reported a net loss of $4,124,154 for the three months ended June 30, 2008 as compared to net loss of $2,605,134 for the three months ended June 30, 2007. This translates to an overall per share loss of ($.32) for the three months ended June 30, 2008 as compared to a per share loss of ($.21) for three months ended June 30, 2007.

Liquidity and Capital Resources

 

We used the proceeds from the sales of preferred stock through June 30, 2008 and proceeds from notes and loans payable for working capital purposes and to fund our notes receivable of $1,044,832 and accounts receivable of $768,700 owed to us at June 30, 2008. We will continue to advance funds under note agreements to providers that subscribe to our financial services lending solutions.

On January 18, 2008, we received net proceeds of $500,000 in connection with a financing provided by Vicis. In connection with the financing, we and Vicis entered into a Securities Purchase Agreement, dated January 18, 2008 (the “January Securities Purchase Agreement”), pursuant to which we issued 50 shares of Series B Preferred Stock, a seven year Series F Warrant to purchase 375,000 shares of our common stock at a price of $2.25 per share and a seven year Series G Warrant to purchase 250,000 shares of our common stock a price of $2.50 per share.

On March 31, 2008, we received net proceeds of $6,809,794 in connection with a financing provided by Vicis. In connection with the financing, we and Vicis entered into a Securities Purchase Agreement, dated March 31, 2008 (the “March Securities Purchase Agreement”), pursuant to which we issued 750 shares of Series B Convertible Preferred Stock, par value $0.001 ( “Series B Preferred Stock”), a ten year Series H Warrant to purchase 53,333,334 shares of our common stock at a price of $0.75 per share (the “Series H Warrant”), and pursuant to which Vicis surrendered for cancellation all Series F Warrants and all Series G Warrants held by Vicis, which warrants were exercisable in the aggregate for 3,125,000 shares of our common stock.

We believe we have sufficient funds and prospective business activity to conduct our business and operations as they are currently undertaken for the next 12 months.

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 may need 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 financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management believes that the actions presently being taken to further implement its business plan and generate revenue, including institutional financing described in Note 4, provide the opportunity for the Company to continue as a going concern.

 

We currently have no material commitments for capital expenditures.

 

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Cash flows

 

At June 30, 2008, we had cash of $1,253,368.

 

Net cash used in operating activities was $5,481,385 for the six months ended June 30, 2008 as compared to $2,433,801 for the six months ended June 30, 2007, an increase of $3,047,584. This increase is primarily attributable to an increase in our net loss and the purchasing of $3 million in certificates of deposit:

 

1.

Gottbetter and Vicis debt offering costs of $129,261 and debt discount costs of $2,135,875, compared to debt related costs during the six months ended June 30, 2007 of $903,858;

 

2.

Stock-based compensation of $1,916,722 versus stock-based compensation expense of $1,795,443 for the six months ended June 30, 2007 primarily related to issuance of stock options in 2008 to employees;

 

3.

A net increase in certificates of deposit, notes receivable, accounts receivable, allowance for doubtful accounts and prepaid expenses aggregating $3,056,034 principally related to the increase in certificates of deposit.

 

4.

An increase in accounts payable, accrued expenses, and deferred revenue related to an increase in operating activities aggregating $119,256.

 

Net cash used in investing activities was $10,276 for the six months ended June 30, 2008 as compared to $4,652 for the six months ended June 30, 2007.

 

Net cash provided by financing activities was $6,424,126 due to the proceeds from the sale of Series B Preferred Stock for the six months ended June 30, 2008 as compared to net cash used by financing activities of $137,430 due to repayments of notes and loan payable for the six months ended June 30, 2007.

 

Off Balance Sheet Arrangements

 

We had no off balance sheet arrangements as of June 30, 2008.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our Company has financial instruments that are subject to interest rate risk, principally fixed-rate debt obligations and customer financing assets. Historically, we have not experienced material gains or losses on these instruments due to interest rate changes.

ITEM 4. CONTROLS AND PROCEDURES

 

(a)	Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report (the “Evaluation Date”). Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to MDwerks, Inc., including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to MDwerks, Inc. management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. 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. Our evaluation of controls provides a reasonable assurance that control issues and instances of fraud, if any, within MDwerks, Inc. can be detected. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud.

 

(b)	Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2007, our internal control over financial reporting is effective based on these criteria.

 

(c) Changes in Internal Control over Financial Reporting

 

Our management has also evaluated our internal controls over 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.

This annual report does not include an attestation report of our public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

 

None

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

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

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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.
August 14, 2008		/s/ Howard B. Katz
		Howard B. Katz
		Chief Executive Officer
August 14, 2008		/s/ Vincent Colangelo
		Vincent Colangelo
		Chief Financial Officer

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