MDWK MDWerks Inc (QB)

 

 

MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 8 — STOCKHOLDERS’ EQUITY

 

Common stock  

 

The Company is authorized to issue 200,000,000 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. At September 30, 2009, there are 17,990,208 shares issued and outstanding.

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, of which 1,000 shares are designated Series A Convertible Preferred stock and 1,500 shares are designated Series B Convertible Preferred stock.

 

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 set forth in the Certificate of Designations Designating Series A Convertible Preferred stock. 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, 2009, 27.3 shares of Series A Convertible Preferred Stock were converted into 546,667 shares of common stock leaving one (1) Series A Convertible Preferred Stock outstanding at September 30, 2009.

The Company is authorized to issue 1,500 shares of Series B Convertible Preferred stock, $0.001 par value with such designations, rights and preferences as set forth in the Certificate of Designations Designating Series B Convertible Preferred stock.  On September 28, 2007, 200 shares of Series B convertible preferred stock were issued with the September Securities Purchase Agreement.  On January 18, 2008, 50 shares of Series B convertible preferred stock were issued with the January Securities Purchase Agreement.  On March 31, 2008, 750 shares of Series B convertible preferred stock shares were issued with the March Securities Purchase Agreement.  At September 30, 2009 and December 31, 2008, there were 1,000 issued and outstanding shares of Series B convertible preferred stock (See Note 7).

 

Common stock options

 

A summary of the status of the Company's outstanding stock options at September 30, 2009 and changes during the period ending on that date is as follows:

 

 

MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

 

NOTE 8 — STOCKHOLDERS’ EQUITY (continued)

Common stock options (continued)

  

In connection with previously granted stock options and the issuance of common stock to certain employees, consultants and directors in May 2009, the Company recognized stock-based compensation expense of $329,357 for the nine months ended September 30, 2009 and $2,197,482 for the nine months ended September 30, 2008.  The Company recognized stock-based compensation expense of $6,154 for the three months ended September 30, 2009 and $280,760 for the three months ended September 30, 2008.

 

At September 30, 2009, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of operations is approximately $11,000, 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 September 30, 2009 and changes during the period is as follows:

 

 

NOTE 9 - RESTATEMENT

The Company has effected a restatement of its financial results for the period ended September 30, 2008 (the “Restatement”). After reviewing certain accounting principles the Company had applied in previously issued financial statements, management determined that the Company’s accounting for Mandatorily Redeemable Convertible Series B Preferred Stock should have been recorded as Temporary Equity and not Debt and that previously issued Mandatorily Redeemable Convertible Series B Preferred Stock should not have been recorded as an extinguishment of debt when new Mandatorily Redeemable Convertible Series B Preferred Stock was issued on March 31, 2008. Consequently, management has restated its quarterly financial statements for the three and nine months ending September 30, 2008. For the three months ended September 30, 2008, these changes decreased net loss by $1,550,000 due to a decrease in interest expense. For the nine months ended September 30, 2008, these changes decreased net loss by $3,994,204 due to a decrease in interest expense of $3,334,082 and due to the elimination of the loss on extinguishment of debt of $660,122. These changes also decreased current liabilities $2,500,000, increased temporary equity $2,638,192 and decreased stockholder’s deficiency $138,192. These changes in presentation of the Company’s Mandatorily Redeemable Convertible Series B Preferred Stock did not impact the cash balance at the end of the period.

 

MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 10 — 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 nine months ended September 30, 2009 and September 30, 2008 was $57,219 and $74,555, respectively.

Future minimum operating lease commitments at September 30, 2009 are as follows:

 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Overview

 

During 2008, we shifted our focus from the electronic medical claims processing, funding and collection solutions and began focusing our efforts on purchasing and financing leases as well as directly selling digital medical equipment and services that provide a lower cost solution to physicians for converting medical records to a digital format as well as being able to create EMR with original intake forms.  The Company will also begin selling the digital medical equipment leases directly to the healthcare facilities as part of our licensing arrangement with the outside vendor that we are currently purchasing the leases from.  To date we have not sold any digital medical equipment; however since December 2008, we have financed six leases of such equipment and expect to derive approximately $410,000 in revenue from such financing activities over 36 to 48 month periods.  The digital pen and associated services can improve billing time and accuracy and allows for substantial savings on paper and record storage versus traditional EMR.

We also can provide term loans, factor receivables and finance medical equipment to improve our client’s cash flows.

Through March 31, 2009, all of our revenue was derived from our prior line of business, the electronic medical claims processing, funding and collection solution business.  This part of our business was not deemed viable any longer and was closed down on February 27, 2009.

 Our present operations will continue to be subject to risks inherent in the establishing and acquiring of new businesses, 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 revenue 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, revenue 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 collectibility is reasonably assured. We have identified the policy below as critical to our business operations and understanding of our financial results:

 

Through February 2009, the Company, through its subsidiaries, provided advance funding for medical claims and term loan services to unaffiliated healthcare providers that were customers of the Company. The customer advances were 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 were repaid through the remittance of payments of customer medical claims, by Payers, directly to the Company. The Company could 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 were recognized as revenue when earned. There was no right of cancellation or refund provisions in these arrangements and the Company had no further obligations once the services were rendered.

The Company, through its subsidiaries, also provided notes and claims purchasing for medical claims to unaffiliated healthcare providers that were customers of the Company. The customer advances were repaid through the remittance of payments of customer medical claims, by Payers.  The Company could charge 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 were recognized as revenue when earned. Under certain circumstances, there were warranties and refund provisions in these arrangements and the agreements are non-cancellable without our consent.

Revenue derived from fees related to billing and collection services were generally recognized when the customer’s accounts receivable were collected.  Revenue from implementation fees were generally recognized over the term of the customer’s agreement. Revenue derived from maintenance, administrative and support fees were generally recognized at the time the services were provided to the customer.

The Company, through its subsidiaries, provides purchasing and financing of medical equipment and software leases from an unaffiliated healthcare customer. The customer assigns the rights to these leases and the Company is repaid directly from the monthly lease payments from the lessees.  The Company can receive interest, an administrative fee and other charges. These interest charges, administrative fees and other charges are recognized as revenue when earned. There is currently no right of cancellation or refund provisions in these arrangements and the Company currently has no further obligations once the services are rendered.  The underlying equipment contains a warranty from the manufacturer.

Results of Operations

  For the Nine Months Ended September 30, 2009 Versus the Nine Months Ended September 30, 2008

 

Revenue

 

For the nine months ended September 30, 2009, we recorded total revenue of $366,283.  Of this total, we recorded service fee revenue of $90,764, accounting for 24.8% of total revenue, and financing income of $275,519, accounting for 75.2% of total revenue.  For the nine months ended September 30, 2008, we recorded total revenue of $702,360. Of this total, we recorded service fee revenue of $420,212, accounting for 59.8% of total revenue, financing income of $195,464, accounting for 27.8% of total revenue, and claims purchase revenue of $86,684, accounting for 12.4% of total revenue.   The decrease in revenue from 2008 resulted primarily from the closing down of our advance funding and claims processing, billing and collecting business.

 

Operating Expenses

  

For the nine months ended September 30, 2009, total operating expenses were $2,983,021 as compared to $5,937,613 for the nine months ended September 30, 2008, a net decrease of $2,954,592 or 49.8%. Included in this net decrease for the nine months ended September 30, 2009 is the following:

 

1.

We recorded compensation expense of $1,176,156 as compared to $4,144,549 for the nine months ended September 30, 2008. This $2,968,393 or 71.6% decrease was primarily attributable to amortization of stock options of $248,108 and executive bonuses of $106,250 during the nine months ended September 30, 2009 versus amortization of stock options of $2,197,482 and executive bonuses of $453,131 during the nine months ended September 30, 2008 and to lower salaries due to fewer employees needed for the digital pen business; and

2.

Consulting expense amounted to $533,084 as compared to $168,349 for the nine months ended September 30, 2008, an increase of $364,735, or 216.7%. This increase resulted from the addition of outside business development consultants; and

3.

Professional fees amounted to $583,781 as compared to $492,901 for the nine months ended September 30, 2008, an increase of $90,880, or 18.4%. This increase was attributable to amortization of deferred offering costs and legal fees related to SEC filings and general corporate fund raising matters; and

4.

Selling, general and administrative expenses were $690,000 as compared to $1,131,814 for the nine months ended September 30, 2008, a decrease of $441,814, or 39.0%. This decrease resulted from lower bad debt expense and lower employee benefits and payroll taxes due to lower salaries for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

 

For the nine months ended September 30, 2009 and 2008, selling, general and administrative expenses consisted of the following:

 

 

Other Income (Expenses)

 

For the nine months ended September 30, 2009, interest and other income was $50,423 as compared to $1,084,420 for the nine months ended September 30, 2008, a decrease of $1,033,997. This decrease was principally due to the restructuring of notes receivable during the nine months ended September 30, 2008.

 

For the nine months ended September 30, 2009, interest expense was $1,302,573 as compared to $1,229,015 for the nine months ended September 30, 2008, an increase of $73,558. This increase was primarily due to higher notes payable.

Net Loss Before Deemed Preferred Stock Dividend

We reported a net loss of $3,868,888 for the nine months ended September 30, 2009 as compared to a net loss of $5,379,848 for the nine months ended September 30, 2008.

Deemed Preferred Stock Dividend

During the nine months ended September 30, 2009 and 2008, we recorded $4,318,662 and $3,286,414, respectively for a deemed preferred stock dividend arising from a beneficial conversion feature for warrants attached to Series B Convertible Preferred Stock issued and from dividends accrued on the Series B Convertible Preferred Stock.  Dividends are payable in cash or additional shares of Series B Preferred Stock and are not payable until there are profits, surplus or other funds available for the payment of such dividends.

Net Loss Attributable to Common Shareholders

We reported a net loss attributable to common shareholders of $8,187,550, or $0.50 per common share for the nine months ended September 30, 2009 as compared to net loss attributable to common shareholders of $8,666,262, or $0.67 per common share for the nine months ended September 30, 2008.

For the Three Months Ended September 30, 2009 Versus the Three Months Ended September 30, 2008

 

Revenue

 

For the three months ended September 30, 2009, we recorded total revenue of $93,300. Of this total, we recorded service fee revenue of $7,840, accounting for 8.4% of total revenue, and financing income of $85,460, accounting for 91.6% of total revenue.  For the three months ended September 30, 2008, we recorded total revenue of $236,650. Of this total, we recorded service fee revenue of $109,762, accounting for 46.4% of total revenue, financing income of $63,901, accounting for 27.0% of total revenue, and claims purchase revenue of $62,987, accounting for 26.6% of total revenue.   The decrease in revenue from 2008 resulted primarily from the closing down of our advance funding and claims processing, billing and collecting business.

Operating Expenses

For the three months ended September 30, 2009, total operating expenses were $751,586 as compared to $1,369,923 for the three months ended September 30, 2008, a net decrease of $618,337 or 45.1%. Included in this net decrease for the three months ended September 30, 2009 is the following:

 

1.

We recorded compensation expense of $211,807 as compared to $833,555 for the three months ended September 30, 2008. This $621,748 or 74.6% decrease was primarily attributable to amortization of stock options of $6,154 and executive bonuses of $13,750  during the three months ended September 30, 2009 versus amortization of stock option of $280,760 and executive bonuses of $58,750 during the three months ended September 30, 2008 and lower salaries due to fewer employees needed for the digital pen business; and

2.

Consulting expense amounted to $153,596 as compared to $29,630 for the three months ended September 30, 2008, an increase of $123,966 or 418.4%. This increase resulted from the addition of outside business development consultants; and

3.

Professional fees amounted to $232,185 as compared to $162,950 for the three months ended September 30, 2008, an increase of $69,235, or 42.5%. This expense was attributable to an increase in amortization of deferred offering costs and legal fees related to SEC filings and general corporate matters; and

4.

Selling, general and administrative expenses were $153,998 as compared to $343,788 for the three months ended September 30, 2008, a decrease of $189,790, or 55.2%. This decrease resulted from lower bad debt expense, lower information technology expenses, and lower employee benefits and payroll taxes due to lower salaries for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008.

For the three months ended September 30, 2009 and 2008, selling, general and administrative expenses consisted of the following:

 

 

Other Income (Expenses)

 

For the three months ended September 30, 2009, interest and other income was $13,050 as compared to $425,901 for the three months ended September 30, 2008, a decrease of $412,851. This decrease was principally due to restructuring of notes receivable during the three months ended June 30, 2008.

 

For the three months ended September 30, 2009, interest expense was $392,634 as compared to $348,138 for the three months ended September 30, 2008, an increase of $44,496. This increase was primarily due to higher notes payable.

Net Loss Before Deemed Preferred Stock Dividend

We reported a net loss of $1,037,870 for the three months ended September 30, 2009 as compared to a net loss of $1,055,510 for the three months ended September 30, 2008.

Deemed Preferred Stock Dividend

During the three months ended September 30, 2009 and 2008, we recorded $1,339,494 and $1,489,584, respectively for a deemed preferred stock dividend arising from a beneficial conversion feature for warrants attached to Series B Convertible Preferred Stock issued and from dividends accrued on the Series B Convertible Preferred Stock.  Dividends are payable in cash or additional shares of Series B Preferred Stock and are not payable until there are profits, surplus or other funds available for the payment of such dividends.

Net Loss Attributable to Common Shareholders

We reported a net loss attributable to common shareholders of $2,377,364, or $0.13 per common share for the three months ended September 30, 2009 as compared to net loss attributable to common shareholders of $2,545,094, or $0.20 per common share for the three months ended September 30, 2008.

Liquidity and Capital Resources

 

Historically we used the proceeds from the sales of preferred stock through September 30, 2009 and proceeds from notes and loans payable for working capital purposes and to fund our gross notes, accounts and leases receivable of $2,718,244 owed to us at September 30, 2009. We will continue to advance funds under note agreements to providers that subscribe to our financial services lending solutions.

We believe we have sufficient funds and prospective business activity to conduct our business and operations as they are currently undertaken through the first quarter of 2010 during which time the Company will be pursuing additional financing.   We currently have no material commitments for capital expenditures.

Cash flows

 

At September 30, 2009, we had cash of $1,420,171.  On April 21, 2009, we received cash of approximately $3,100,000, in connection with a loan from Vicis.  The cash proceeds are being used for our corporate operations.

 

Net cash used in operating activities was $2,940,110 for the nine months ended September 30, 2009 as compared to $3,645,323 for the nine months ended September 30, 2008, a decrease of $705,213. This decrease is primarily attributable to a decrease in the net loss and the following:

 

1.

Gottbetter and Vicis debt offering costs of $337,269 and debt discount costs of $747,784, as compared to debt related costs during the nine months ended September 30, 2008 of $1,115,451;

2.

Stock-based compensation of $329,357 versus stock-based compensation expense of $2,197,482 for the nine months ended September 30, 2008;

3.

A net increase in notes receivable, accounts receivable, leases receivable, and prepaid expenses aggregating $913,437 principally related to the increases in notes receivables, as compared to a net increase of  $1,632,343 for the nine months ended September 30, 2008;

4.

A net increase in accounts payable and accrued expenses related to an increase in operating activities aggregating $405,321, as compared to a decrease of $99,003 for the nine months ended September 30, 2008.

 

Net cash used in investing activities was $0, as compared to $2,018,434 for the nine months ended September 30, 2008.  For the nine months ended September 30, 2008, $2,000,000 was invested in certificates of deposit.

Net cash provided by financing activities was $3,136,474 for the nine months ended September 30, 2009 as compared to net cash provided by financing activities of $6,007,459 for the nine months ended September 30, 2008.  During the nine months ended  September 30, 2009, proceeds  of $3,851,375 was received from a new Note, offset by note repayments of a previous $300,000 note loaned to us by DOF and note placement and other note related costs totaling $414,901.  During the nine months ended September 30, 2008 proceeds of $8,000,000 was received from the sale of Series B Preferred Stock, offset by repayments of notes and loans payable totaling $1,795,671 and note placement and other note related costs totaling $196,870.

 

Off Balance Sheet Arrangements

 

We had no off balance sheet arrangements at September 30, 2009.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable

ITEM 4. CONTROLS AND PROCEDURES

 

 

The Company has established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known on a timely basis to the officers who certify its financial reports and to other members of senior management and the Company’s board of directors. Based on their evaluation as of September 30, 2009, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

(b)   Changes in Internal Control over Financial Reporting

 

There were no changes to internal controls over financial reporting that occurred during the three months ended September 30, 2009, that have materially affected, or are reasonably likely to materially impact our internal controls over financial reporting.

PART II — OTHER INFORMATION

 

Item 1 — Legal Proceedings

 

No material developments in our litigation previously reported.

    

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

 

Item 3 — Defaults Upon Senior Securities

 

None.

 

Item 4 — Submissions of Matters to a Vote of Security Holders

 

Item 5 — Other Information

 

None.

 

Item 6 — Exhibits

 

 

 

 

 

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.