As
filed with the Securities and Exchange Commission on May 23,
2008
Registration
No. 333-132296
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
MDWERKS,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
7389
|
33-1095411
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
Windolph
Center, Suite I
1020
N.W. 6th Street
Deerfield
Beach, FL 33442
(954)
389-8300
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Howard
B. Katz
Chief
Executive Officer
MDwerks,
Inc.
Windolph
Center, Suite I
1020
N.W. 6th Street
Deerfield
Beach, FL 33442
(954)
389-8300
(Name,
address, including zip code, and telephone number, including area code, of
registrant’s agent for service)
Copies
to:
Stephen
P. Katz, Esq.
Peckar
& Abramson, P.C.
70
Grand Avenue
River
Edge, NJ 07661
(201)
343-3434
Approximate
date of proposed sale to the public: as soon as practicable after the
registration statement becomes effective.
If
any of
the securities being registered on this form are to be offered on a delayed
on
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. 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. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer o
|
|
Accelerated
filer o
|
|
Non-accelerated
filer o
|
|
Smaller
reporting company x
|
CALCULATION
OF REGISTRATION FEE
|
Title of each class of
securities to be registered
|
|
Amount to be
Registered (1)
|
|
Proposed
Maximum
offering price
per share
|
|
Proposed
maximum
aggregate offering
price
|
|
Amount of
registration fee
|
|
||||
|
|
|
|
|
|
|||||||||
|
Common
Stock, par value $0.001 per share
|
3,882,020
|
(2)
|
$
|
0.55
|
(3)
|
$
|
2,135,111
|
$
|
83.91
|
||||
|
(1)
|
In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of shares that may be issued and resold to
prevent
dilution resulting from stock splits, stock dividends or similar
transactions as well as anti-dilution provisions applicable to shares
underlying the Series B Convertible Preferred
Stock.
|
|
(2)
|
Represents
shares of the Registrant’s common stock being registered for resale that
may be acquired upon the conversion of Series B Convertible Preferred
Stock issued to the selling stockholder named in the prospectus or
a
prospectus supplement.
|
|
(3)
|
Estimated
based upon the average of the bid and asked price on the OTC Bulletin
Board on May 22, 2008, pursuant to Rule 457(g) of the Securities
Act of
1933 solely for the purpose of computing the amount of the registration
fee.
|
EXPLANATORY
NOTE
The
registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
PROSPECTUS
MDWERKS,
INC.
3,882,020
Shares of Common Stock
This
prospectus relates to the sale by the Selling Securityholder identified in
this
prospectus of up to an aggregate of 3,882,020 shares of common stock, par value
$0.001 per share, issuable upon the conversion of Series B Convertible Preferred
Stock. All of such shares of common stock are being offered for resale by the
Selling Securityholder.
We
will
not receive any of the proceeds from the sale of the shares of common stock
that
is subject to this prospectus by the Selling Securityholder. See ‘‘Use of
Proceeds.’’
We
will
bear all costs relating to the registration of the common stock subject to
this
prospectus, other than the Selling Securityholder’s accounting costs or
commissions.
Sales
of
shares of common stock sold pursuant to this prospectus may be at fixed,
negotiated or market prices.
Our
common stock is quoted on the regulated quotation service of the OTC Bulletin
Board under the symbol ‘‘MDWK.OB.’’ The last sales price of our common stock on
May 22, 2008, as reported by the OTC Bulletin Board was $0.55 per
share.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act) until the Registration
Statement filed with the Securities and Exchange Commission (the “SEC”) is
declared effective. This prospectus is not an offer to sell these securities
and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ THIS ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED ‘‘RISK FACTORS’’ BEGINNING
ON PAGE 5 WHICH DESCRIBES MATERIAL RISK FACTORS THAT YOU SHOULD CONSIDER BEFORE
INVESTING.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is May __,
2008.
TABLE
OF CONTENTS
|
PAGE
|
|
|
PROSPECTUS
SUMMARY
|
1
|
|
SUMMARY
RISK FACTORS
|
4
|
|
RISK
FACTORS
|
5
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
|
20
|
|
USE
OF PROCEEDS
|
22
|
|
MARKET
FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
22
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
23
|
|
BUSINESS
|
31
|
|
Introduction
|
31
|
|
Market
for Our Solutions and Services
|
33
|
|
Industry
Analysis
|
36
|
|
Market
Needs
|
37
|
|
Market
Strategy
|
38
|
|
Media
Marketing
|
38
|
|
Non-Media
Marketing
|
39
|
|
Sales
Methods
|
39
|
|
Revenue
Generation
|
39
|
|
New
Lines of Business
|
40
|
|
Competition
|
40
|
|
History
of the Company and Certain Transactions
|
44
|
|
Corporate
Information Regarding the Company and its
Subsidiaries
|
54
|
|
Employees
|
55
|
|
Intellectual
Property
|
55
|
|
Properties
|
55
|
|
Government
Regulation
|
55
|
|
Legal
Proceedings
|
55
|
|
Directors
and Executive Officers
|
55
|
|
Board
of Director Composition and Committees
|
58
|
|
Director
Compensation
|
58
|
|
Audit
Committee Financial Expert
|
60
|
|
Executive
Officer Employment Agreements
|
60
|
|
Indemnification
of Directors and Officers
|
61
|
|
Code
of Ethics
|
62
|
|
Compliance
with Section 16(a) of the Securities Exchange Act of
1934
|
62
|
|
Incentive
Compensation Plan
|
62
|
|
Executive
Compensation
|
65
|
|
Security
Ownership of Certain Beneficial Owners and Management
|
68
|
|
Certain
Relationships and Related Transactions
|
69
|
|
SELLING
SECURITYHOLDER
|
70
|
|
DESCRIPTION
OF SECURITIES
|
72
|
i
|
PAGE
|
|
|
Capital
Stock
|
72
|
|
Series
A Convertible Preferred Stock
|
72
|
|
Series
B Convertible Preferred Stock
|
73
|
|
Common
Stock
|
74
|
|
Miscellaneous
Warrants
|
74
|
|
Series
A Warrants
|
74
|
|
Class
C Warrant
|
75
|
|
Senior
Notes
|
75
|
|
Series
D Warrants
|
76
|
|
Series
E Warrants
|
76
|
|
Series
H Warrant
|
76
|
|
Series
I Warrant
|
76
|
|
Registration
Rights
|
77
|
|
Trading
Information
|
77
|
|
Transfer
Agent
|
77
|
|
Anti-Takeover
Effect of Delaware Law, Certain By-Law Provisions
|
77
|
|
PLAN
OF DISTRIBUTION
|
78
|
|
WHERE
YOU CAN FIND MORE INFORMATION
|
79
|
|
LEGAL
MATTERS
|
79
|
|
EXPERTS
|
79
|
|
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
|
79
|
You
should rely only on the information contained in this prospectus and in any
prospectus supplement we may file after the date of this prospectus. We have
not
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it.
The
Selling Securityholder will not make an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that
the
information appearing in this prospectus or any supplement is accurate as of
the
date on the front cover of this prospectus or such supplement only, regardless
of the time of delivery of this prospectus or such supplement or of any sale
of
common stock or warrants. Our business, financial condition, results of
operations and prospects may have changed since that date.
ii
PROSPECTUS
SUMMARY
The
following summary highlights aspects of the offering. This prospectus does
not
contain all of the information that may be important to you. You should read
this entire prospectus carefully, including the ‘‘Risk Factors’’ section and the
financial statements, related notes and the other more detailed information
appearing elsewhere in this prospectus before making an investment decision.
Unless otherwise indicated, all references to ‘‘we’’, ‘‘us’’, ‘‘our’’, the
‘‘Company’’ and similar terms, as well as references to the ‘‘Registrant’’ in
this prospectus, refer to MDwerks, Inc. (including its subsidiaries), and not
to
the Selling Securityholder.
Overview
We
are
engaged in the business of electronic insurance claims processing, billing
and
coding, and advance funding and purchasing of claims for healthcare providers
based upon receivables owed from third-party payers such as insurance companies.
We offer a comprehensive selection of electronic medical claims processing,
funding, purchasing and collection solutions to the healthcare provider
industry. Our services, which are easily accessible through an Internet web
browser, help doctors, hospital based practices, and other healthcare providers
and their vendors significantly improve daily insurance claims transaction
administration and management as follows:
| • |
Increase
office efficiencies and lower collection
costs;
|
| • |
Reduce
administrative workload;
|
| • |
Improve
claims accuracy before submission to, and increase acceptance by,
third-party payers;
|
| • |
Reduce
payment cycle time;
|
| • |
Improve
cash flow management;
|
| • |
Increase
revenue control;
|
| • |
Leverage
receivables through competitive short-term financing
arrangements;
|
| • |
Improve
information management, financial security and provider regulatory
compliance;
|
| • |
Provide
“end-to-end” solution for claims management;
and
|
| • |
Fully
automate the revenue process by the use of electronic claims and
remittance advice and payment
reconciliation.
|
We
conduct our business through three wholly-owned subsidiaries of our wholly-owned
subsidiary, MDwerks Global Holdings, Inc., namely: Xeni Medical Systems, Inc.
(“Xeni Systems”); Xeni Medical Billing, Corp. (“Xeni Billing”); and, Xeni
Financial Services, Corp. (“Xeni Financial” and, together with Xeni Systems and
Xeni Billing, the “Xeni Companies”).
Business
Services
Claims
Management Services
Our
CLAIMwerks™
solutions, which are offered through Xeni Systems, can provide actual contract
based, insurance company comparable screening and analysis of medical claims
directly from a healthcare provider’s practice management system, so that
deficiencies and errors can be corrected before they are submitted to insurance
companies for electronic payment. Our CLAIMwerks™
solutions and services improve a healthcare provider’s ability to process and
manage claims for reimbursement from third-party payers by consolidating the
process (including clearinghouse, contract management and remittance functions).
As part of our CLAIMwerks™
services, we integrate transactions involving insurance claims by providing
a
single interface for the healthcare provider, the payer (such as an insurance
company) and the lender (when the healthcare provider elects to take advantage
of receivables financing).
1
Xeni
Systems collects transaction fees from healthcare providers for: the analysis,
automated processing, electronic submission, and reporting of claim information;
management of healthcare provider contracts for pricing and rules; electronic
remittance of payments; explanations of benefits (payments) (EOBs) made
available from payers; and, reconciliation and posting of the payments and
EOBs.
Fees may also be generated from third-party lenders for the valuation of
processed claims that are used as collateral, as well as administrative tasks
related to the disbursement of funds. Fees may also be collected from
clearinghouses and insurance companies for submitting more accurate claims,
once
certain volume levels are achieved. One-time implementation fees may be
collected for initial set-up and training.
Although
we do not currently offer asset and wealth management services, we may have
the
opportunity to offer asset and wealth management services through third-party
sources. We expect to receive referral or administrative handling fees for
these
services.
Billing
Services
Our
BILLwerks™
solutions provide value added billing services, leveraging the Xeni Systems
technology solutions and services for improved efficiencies. As part of our
BILLwerks™
solutions, Xeni Billing offers collections and appeals services, as well as
solutions for the collection of old existing medical claim submissions. Our
BILLwerks™
solutions are designed to operate in an integrated fashion with the solutions
and services offered by Xeni Systems, there are fewer manual and paper functions
to be performed in the combined claims management processing/billing solutions
process offered by Xeni Systems and Xeni Billing. This can enhance a healthcare
provider’s claims related operations and controls even more than using the
stand-alone solutions offered by Xeni Systems.
Xeni
Billing typically charges providers (directly or as a subcontractor of Xeni
Systems) fees as a percentage of collected claims. Xeni Billing also shares
fees
(as a channel associate) with Xeni Systems for supporting its claims process
and
information management. Additionally, Xeni Billing can collect one-time set-up
fees, appeals and third-party appeals work fees and consulting fees for
customization or support of the healthcare provider outside the scope of
services. Finally, Xeni Billing may share in claims revenue recovered when
contracted to perform reviews of unpaid claims that were submitted to payers
prior to use of our automated claims submission solutions and
services.
Financing Services
Our
FUNDwerks™
solutions can electronically manage loans, loan repayments and the movement
of
funds through linked bank accounts.
Through
Xeni Financial, we can offer to lend or arrange lending from third parties
to
healthcare providers on a short-term, revolving line of credit and sometimes
on
a term loan basis. The loans are secured by medical claims receivable, which
may
be processed by Xeni Systems. Like Xeni Billing, Xeni Financial leverages the
solutions and services offered by Xeni Systems to value the claims, score risk,
document and track claims payment status, verify remittance of payments from
insurance companies and sweep funds to the appropriate accounts with the
assistance of electronic and automated processes. Xeni Financial is able to
arrange loans at attractive rates and terms, since it has not had to invest
significant capital to develop or make a major hardware and software purchase
of
a system to make loans secured by receivables. It also does not need to maintain
a large workforce as it can manage many of its business processes through the
solutions and services offered by Xeni Systems. Xeni Financial can lend to
healthcare providers on the merit of the receivables and can even lend on
Medicare claims.
Xeni
Financial can also offer to purchase medical claims at a significant discount
to
face value. The claims Xeni
Financial may purchase
include
claims for the treatment of worker’s compensation-related injuries or diseases
or reimbursement of benefits under
private
industry health and pension plans governed by the Employee Retirement Income
Security Act of 1974 (as
amended, “ERISA”).
Claims may be purchased directly from a provider or from a vendor or supplier
of
worker’s compensation prescription medication or durable medical equipment.
Xeni
Financial is responsible for collecting the value of purchased claims for its
own account. Xeni Financial can leverage Xeni Billing and third party collectors
to perform the collection services. Xeni Financial incurs the fees and expenses
of collection and the costs, including interest expense, of carrying the claims
on its own account. At the same time, Xeni Financial gains
the
opportunity to increase the return on its financing solutions.
Consulting
Services
Although
we provide Internet-based solutions that do not require our customers to
purchase new hardware or software, healthcare providers can take advantage
of
customized and premium enhancements through our third-party associates,
including medical billing services and automated appeals of adjudicated claims.
Consulting services are also available to enhance healthcare provider practices
or business operations.
2
Workers’
Compensation, Durable Medical Equipment and Pharmacy Claim
Services
Our
current products and services have been focused on improving the ability of
healthcare providers to (i) collect on commercial and government insurance
claims and (ii) enhance their cash flow controls. We have decided to expand
our
current service offerings to include the electronic processing, management
and
funding of workers’ compensation, durable medical equipment and pharmacy
claims.
By
using
our present technology, we plan to offer a greatly improved electronic workers’
compensation, durable medical equipment and pharmacy claims collections and
remittance process to our clients in place of today’s existing error-ridden,
paper-based method. Many provider practices avoid workers’ compensation patients
because of the time, effort, and cost associated with getting paid, thereby
forgoing perhaps as much as 10% to 25% of their revenue. MDwerks can greatly
improve the ability of healthcare providers to be paid on workers’ compensation
claims and enable them to continue to provide or expand these
services.
We
can
manage claims transactions electronically from three perspectives in connection
with workers’ compensation claims: the provider, the insurance company payer and
the lender (when the provider elects to take advantage of our receivables
financing). Our system can manage each workers’ compensation claim transaction
by leveraging our tools to automatically analyze claims and record collections,
appeals and funding. Because we designed our products and services to operate
in
a fully-integrated electronic environment with provider and payer systems,
there
are fewer manual and paper functions to perform in the combined claims
processing/billing solution, which should result in reduced errors as well
as
fewer payment delays and lower collection costs.
Through
Xeni Billing, MDwerks can offer collections and appeals services for workers’
compensation claims. This allows healthcare providers to outsource these tasks
from their offices and focus resources in other areas.
Through
Xeni Financial, MDwerks can offer funding to healthcare providers on a
short-term, revolving line of credit or term loan basis, or in some cases can
purchase healthcare providers’ receivables. Receivables are secured by claims
processed through the MDwerks System. Our system also can include MDwerks’ tools
to help lenders value claims, score risk, document and track claims payments,
verify remittance and sweep funds to appropriate bank accounts with electronic
and automated processes.
MDwerks
can collect transaction fees for automated processing, submission, reporting
and
analysis of workers’ compensation claims information and management of payer
contracts rules and pricing. Fees can be collected for information management
on
processed claims that are used as collateral and for administrative tasks
related to the movement of funds among bank accounts. Fees can also be collected
from clearinghouses and insurance companies to which MDwerks sends cleaner
claims electronically. One-time fees can be charged for initial set-up and
training.
For
a
detailed description of our business, see the section entitled
‘‘BUSINESS.’’
Corporate
Information
Our
common stock is quoted on the OTC Bulletin Board (‘‘OTCBB’’) under the symbol
‘‘MDWK.OB’’.
MDwerks,
Inc. is a corporation organized under the laws of the State of Delaware,
originally formed on July 22, 2003.
MDwerks
Global Holdings, Inc. is a corporation organized under the laws of the State
of
Florida, originally formed on October 23, 2003.
3
Xeni
Medical Systems, Inc. is a corporation organized under the laws of the State
of
Delaware, originally formed on July 21, 2004.
Xeni
Financial Services, Corp. is a corporation organized under the laws of the
State
of Florida, originally formed on February 3, 2005.
Xeni
Medical Billing, Corp. is a corporation organized under the laws of the State
of
Delaware, originally formed on March 2, 2005.
Patient
Payment Solutions, Inc. (“PPS”) is a corporation organized under the laws of the
State of Florida, originally formed on May 30, 2007. PPS planned to offer
healthcare providers a payment improvement process for “out-of-network” claims,
but it never commenced operations.
Our
principal executive office is located at Windolph Center, Suite I, 1020 N.W.
6th
Street, Deerfield Beach, Florida 33442, and our telephone number is (954)
389-8300. Our website address is www.mdwerks.com.
Information on our website is not part of this prospectus and the registration
statement relating to this prospectus and should not be relied upon with regard
to this Offering.
For
a
complete description of our corporate organization and our corporate history
see
‘‘Business’’.
The
Offering
By
means
of this prospectus, one of our stockholders is offering to sell up to 3,882,020
shares of common stock that such stockholder may at a later date acquire from
conversion of Series B Convertible Preferred Stock. In this prospectus, we
refer
to this person as the “Selling Securityholder”.
As
of May
22, 2008, we had approximately 12,940,065 shares of common stock issued and
outstanding. The number of outstanding shares of common stock does not include
57,566,346 shares that may be issued pursuant to the exercise of warrants
previously issued by the Company, 40,000 shares of common stock that may be
issued upon conversion of currently outstanding shares of Series A Convertible
Preferred Stock, 13,333,334 shares of common stock that may be issued upon
conversion of currently outstanding shares of Series B Convertible Preferred
Stock, 2,777,778 shares of common stock that may be issued upon conversion
of our Senior Notes, and options to purchase 5,654,250 shares of common stock
under our 2005 Incentive Compensation Plan.
We
will
not receive any proceeds from the sale of common stock offered by the Selling
Securityholder. We will not receive any proceeds in connection with the
conversion of shares of Series B Convertible Preferred Stock into shares of
common stock.
SUMMARY
RISK FACTORS
The
purchase of the securities offered by the prospectus involves a high degree
of
risk. See the ‘‘Risk Factors’’ section of this prospectus for a more complete
discussion of these risks, including the following:
| • |
We
have a limited operating history, making it difficult to accurately
forecast our revenues and appropriately plan our
expenses.
|
| • |
We
have historically incurred net losses and may not be profitable
in the
future. For the year ended December 31, 2007, our net losses were
approximately $9.9 million. For the three months ended March 31,
2008, our
net losses were approximately $2.6 million. Since our inception,
our
accumulated deficit, as of March 31, 2008, was approximately $39.1
million.
|
| • |
Our
independent registered public accountants have noted that we have
suffered
recurring losses from operations that raise substantial doubt about
our
ability to continue as a going
concern.
|
| • |
We
may need to raise additional capital in the
future.
|
| • |
Our
common stock is ‘‘penny stock’’ and may be difficult to
trade.
|
4
| • |
A
significant number of our shares are eligible for sale, and their
sale
could depress the market price of our
stock.
|
RISK
FACTORS
We
have a limited operating history, making it difficult to accurately forecast
our
revenues and appropriately plan our expenses.
We
began
operations as Xeni Systems, when, in October, 2004, Xeni Systems acquired
substantially all of the assets of MEDwerks, LLC. MEDwerks, LLC, commenced
operations in 2000 and focused the majority of its capital and time developing
software programs for the medical transaction system employed by us. From its
inception, MEDwerks, LLC incurred substantial net losses in each fiscal year
of
operation. MEDwerks, LLC closed down its business operations in October, 2003,
before ever launching its products and services commercially. Xeni Financial
was
formed in February, 2005, and currently provides its products and services
only
to customers of Xeni Systems. Xeni Billing was formed in March, 2005, and
currently provides its products and services only to customers of Xeni Systems.
MDwerks Global Holdings, Inc. was originally formed in October, 2003, for the
purpose of operating a business as a provider of telecommunications products
and
services. In April, 2004, MDwerks Global Holdings, Inc. discontinued its
telecommunications business and in December, 2004, it began to focus on
developing the business of Xeni Systems. Pursuant to share exchange agreements,
MDwerks Global Holdings, Inc. acquired Xeni Systems, Xeni Financial and Xeni
Billing as wholly-owned subsidiaries. In November, 2005, we acquired MDwerks
Global Holdings, Inc., as a wholly-owned subsidiary and we operate the
businesses of MDwerks Global Holdings, Inc., and the Xeni Companies as our
sole
lines of business. Accordingly, we should be viewed as an entity with a very
limited operating history.
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 developing 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. As with any investment in a company with a limited operating
history, ownership of our securities may involve a high degree of risk and
is
not recommended if an investor cannot reasonably bear the risk of a total loss
of his or her investment.
We
have historically incurred net losses and may not be profitable in the future.
In addition, we intend to continue to spend resources on maintaining and
strengthening our business and this may cause our operating expenses to increase
and operating results to decrease.
Our
net
loss attributable to common stockholders for the year ended December 31, 2007
was approximately $9.9 million. Our net loss attributable to common stockholders
for the three months ended March 31, 2008 was approximately $2.6 million. Since
our inception, our accumulated deficit as of March 31, 2008, was
approximately $39.1 million. We expect to continue to incur additional
substantial operating and net losses for the foreseeable future. The profit
potential of our business model is unproven, and, to be successful, we must,
among other things, develop and market products and services that would be
widely accepted by potential users of such products and services at prices
that
will yield a profit. If our products and services cannot be commercially
developed and launched, and do not achieve or sustain broad market acceptance
we
will not achieve sufficient revenues to continue to operate our
business.
If
we
continue to incur losses in future periods, we may be unable to retain employees
or fund investments in our systems development, sales and marketing programs,
research and development and business plan. There can be no assurance that
we
will ever obtain sufficient revenues to exceed our cost structure, service
our
debt obligations and achieve profitability. If we do achieve profitability,
there can be no assurance that we will sustain or increase profitability in
the future.
5
The
report of our independent registered public accountants contains the following
statement with which we concur: ‘‘The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a
going
concern. As discussed in Note 1 to the financial statements, the Company has
suffered recurring losses from operations that raises substantial doubt about
its ability to continue as a going concern.’’
We
may need to raise additional capital in the future and may need to initiate
other operational strategies to continue our
operations.
As
of
March 31, 2008, we had a cash balance of approximately $6.9
million. The amount of cash available to us may be insufficient for us to
implement our business plan as anticipated and may require us to seek additional
debt or equity financing in the future, as we may be unable to generate
sufficient cash flow from our operations. As our business develops, we may
need
to raise capital through the incurrence of additional long-term or short-term
indebtedness or the issuance of additional equity securities in private or
public transactions in order to complete further investments. This could result
in dilution of existing equity positions, increased interest expense, decreased
net income and diminished shareholder’s value. In addition, significant capital
requirements associated with such investments may impair our ability to pay
dividends (although we do not anticipate paying any dividends on our common
stock in the foreseeable future) or interest on indebtedness or to meet our
operating needs. There can be no assurance that acceptable financing for future
investments can be obtained on suitable terms, if at all.
Competition
from providers of similar products and services could adversely affect our
revenues and financial condition.
We
compete in a rapidly evolving, highly competitive and fragmented market. We
expect competition to intensify in the future. There can be no assurance that
we
will be able to compete effectively. We believe that the main competitive
factors in the medical transactions processing, billing, payment and financing
industry include effective marketing and sales, brand recognition, product
quality, ease of product use, niche marketing and segmentation and value
propositions. Competitive factors also include the features, functionality
and
cost of products and services. Many of our competitors are established,
profitable and have strong attributes in many, most or all of these areas.
They
may be able to leverage their existing relationships to offer alternative
products or services on more attractive terms or with better customer support.
Other companies may also enter our markets with better products or services,
greater financial and human resources and/or greater brand recognition.
Competitors may continue to improve or expand current products and introduce
new
products. We may be perceived as relatively too small or untested to be awarded
business relative to the competition. To be competitive, we will have to invest
significant resources in business development, advertising and marketing. We
may
also have to rely on strategic partnerships for critical branding and
relationship leverage, which partnerships may or may not be available or
sufficient. We cannot assure that we will have sufficient resources to make
these investments or that we will be able to make the advances necessary to
be
competitive. Increased competition may result in fee reductions, reduced gross
margin and loss of market share. Failure to compete successfully against current
or future competitors will result in less revenue and have a material adverse
effect on our business, operating results and financial condition.
If
our technology is not operational and usable, it could adversely affect our
business.
Xeni
Financial and Xeni Billing rely almost exclusively on the technology of Xeni
Systems. We believe that neither Xeni Financial nor Xeni Billing can operate
as
a stand-alone business, but will provide products and services that are
ancillary to the products and services of Xeni Systems. As a result, the success
of our business proposition is materially and substantially dependent on the
technology of Xeni Systems (and the availability, operability and use of such
technology in whole or in part). If the technology of Xeni Systems is not
usable, we will be unable to operate, as our systems are dependent upon such
technology.
6
Our
products and services were designed and built using certain key technologies
and
licenses from a limited number of suppliers. We will depend on these other
companies for software updates, technical support and possibly for system
management or for new product development. Although we believe there might
be
alternative suppliers for some or all of these technologies, it would take
a
significant period of time and money to establish relationships with alternative
suppliers and substitute their technologies for technologies currently being
used. The loss of any of our relationships with these suppliers could result
in
system shut downs and/or the inability to offer services we offer, or intend
to
offer, which could result in a material adverse effect on our business,
operating results and financial condition.
If
our systems fail, it could interrupt operations and could adversely impact
us.
Our
operations are dependent upon our ability to support our highly complex network
infrastructure and avoid damage from fires, earthquakes, floods, hurricanes,
power losses, war, terrorist attacks, telecommunications failures and similar
natural or manmade events. The occurrence of a natural disaster, intentional
or
unintentional human error or action, or other unanticipated problem could cause
interruptions in the services that we provide. Additionally, the failure of
our
third-party backbone providers to provide the data communications capacity
that
we require, as a result of natural disaster, operational disruption or any
other
reason could cause interruptions in the services that we provide. Any damage
or
failure that causes interruptions in our operations could result in loss of
revenues from clients, loss of clients, monetary damage, or increased costs
of
operations, any or all of which could have a material adverse effect on our
business, operating results and financial condition.
If
we do not protect our proprietary technology and intellectual property rights
against infringement or misappropriation and defend against third parties
assertions that we have infringed on their intellectual property rights, we
may
lose our competitive advantage, which could impair our ability to grow our
revenues.
A
United
States patent application regarding certain aspects of our systems was filed
by
our predecessor,
MEDwerks, LLC, on April 15, 2002. On November 15, 2007, the US Patent Office
issued an office action indicating that it will not allow a patent based upon
our current claims. Our patent counsel, DLA Piper US LLP, is in the process
of
modifying our patent application based upon the US Patent Office’s action and
will submit a response to the office action. If the response from the US Patent
Office to our modified application and our response is unfavorable or only
partially successful, the process may be extended up to 3 years and we could
incur substantial expenses in prosecuting the patent. We plan to undertake
prosecution of the patent filing to its conclusion, if practical and
economical.
There
is
no assurance that the patent application will be successfully completed and
if
completed, there can be no assurance that the patent will afford meaningful
protection of our intellectual property rights. Despite efforts to protect
our
intellectual property rights, unauthorized parties may attempt to copy aspects
of our systems or our source code to software or to obtain or use information
that is proprietary. The scope of any intellectual property rights that we
have
is uncertain and is not sufficient to prevent infringement claims against us
or
claims that we have violated the intellectual property rights of third parties.
While we know of no basis for any claims of this type, the existence of and
ownership of intellectual property can be difficult to verify and we have not
made an exhaustive search of all patent filings. If any of our proprietary
rights are misappropriated or we are forced to defend our intellectual property
rights, we will have to incur substantial costs. We may not have the financial
resources to prosecute any infringement claims that we may have or defend
against any infringement claims that are brought against us, or choose to defend
such claims. Even if we do, defending or prosecuting our intellectual property
rights will divert valuable working capital and management’s attention from
business and operational issues.
If
we are unable to retain key personnel it will have an adverse effect on our
business. We do not maintain ‘‘key man’’ life insurance policies on our key
personnel.
Our
operations have been and will continue be dependent on the efforts of Mr. Howard
Katz, our Chief Executive Officer, Mr. Solon Kandel, our President, and Mr.
Vincent Colangelo, our Chief Financial Officer and Corporate Secretary. The
commercialization of our products and the development of improvements to our
products and systems, as well as the development of new products is dependent
on
retaining the services of certain technical personnel who were involved in
the
development of MDwerks’ products and services. The loss of key management, the
inability to secure or retain such key legacy personnel with unique knowledge
of
our products and services and the technology and programming employed as part
of
our products and services, the failure to transfer knowledge from legacy
personnel to current personnel, or an inability to attract and retain sufficient
numbers of other qualified management personnel would adversely delay and affect
our business, products and services and could have a material adverse effect
on
our business, operating results and financial condition.
7
We
do not
have ‘‘key man’’ life insurance policies for Mr. Katz, Mr. Kandel or Mr.
Colangelo. Even if we were to obtain ‘‘key man’’ insurance for Mr. Katz, Mr.
Kandel or Mr. Colangelo, of which there can be no assurance, the amount of
such
policies may not be sufficient to cover losses experienced by us as a result
of
the loss of Mr. Katz, Mr. Kandel or Mr. Colangelo.
If
we fail to attract skilled personnel, it could adversely affect our
business.
Our
future success depends, in large part, on our ability to attract and retain
highly skilled personnel. If we are unable to attract or retain qualified
personnel in the future or if there are any delays in hiring required personnel,
particularly technical, sales, marketing and financial personnel, it could
materially adversely affect our business, operating results and financial
condition.
We
will
need to expand our sales operations and marketing operations in order to
increase market awareness of our products and generate revenues. New sales
personnel and marketing personnel will require training and it will take time
to
achieve full productivity. Competition for such personnel is intense. We cannot
be certain that we will successfully attract and retain additional qualified
personnel.
The
use of independent sales representatives or distributors will subject us to
certain risks.
We
presently generate revenue from the efforts of independent sales representatives
and we expect to generate a substantial portion of our revenue from independent
sales representatives or distributors. Such representatives and distributors
may
not be required to meet sales quotas and our ability to manage independent
sales
representatives or distributors to performance standards is unknown. Failure
to
generate revenue from these sales representatives or distributors would have
a
negative impact on our business.
Our
business may subject us to risks related to nationwide or international
operations.
If
we
offer our products and services on a national, or even international, basis,
distribution would be subject to a variety of associated risks, any of which
could seriously harm our business, financial condition and results of
operations.
These
risks include:
| • |
greater
difficulty in collecting accounts
receivable;
|
| • |
satisfying
import or export licensing and product certification
requirements;
|
| • |
taxes,
tariffs, duties, price controls or other restrictions on out-of-state
companies, foreign currencies or trade barriers imposed by states
or
foreign countries;
|
| • |
potential
adverse tax consequences, including restrictions on repatriation
of
earnings;
|
| • |
fluctuations
in currency exchange rates;
|
| • |
seasonal
reductions in business activity in some parts of the country or the
world;
|
| • |
unexpected
changes in local, state, federal or international regulatory
requirements;
|
| • |
burdens
of complying with a wide variety of state and foreign
laws;
|
8
| • |
difficulties
and costs of staffing and managing national and foreign
operations;
|
| • |
different
regulatory and political climates and/or political
instability;
|
| • |
the
impact of economic recessions in and outside of the United States;
and
|
| • |
limited
ability to enforce agreements, intellectual property and other rights
in
foreign territories.
|
We
are subject to substantial government regulation, which may adversely affect
the
way we conduct our business and the costs of conducting our
business.
The
healthcare industry is highly regulated and is subject to changing political,
economic and regulatory influences. Federal and state legislatures have
periodically considered programs to reform or modify the United States
healthcare system at both the federal and state level and to change healthcare
financing and reimbursement systems, such as the Balanced Budget Act of 1997
and
the Medicare Modernization Act of 2003. These programs may contain proposals
to
increase governmental involvement in healthcare, lower reimbursement rates
or
otherwise change the environment in which healthcare industry participants
operate. Current or future government regulations or healthcare reform measures
may affect our business. Healthcare industry participants may respond by
reducing their investments or postponing investment decisions, including
investments in our products and services.
Our
medical billing, financing and collection activities are governed by numerous
federal and state civil and criminal laws. Federal and state regulators use
these laws to investigate healthcare providers and companies that provide
lending, billing and collection services. In connection with these laws, we
may
be subjected to federal or state government investigations and possible
penalties may be imposed, false claims actions may have to be defended, private
payers may file claims against us, and we may be excluded from Medicare,
Medicaid or other government-funded healthcare programs. Some of these laws
may
carry strict liability provisions that impose responsibilities and liabilities
on us without any wrongdoing or negligence on our part.
We
may
become the subject of false claims litigation or additional investigations
relating to our lending, billing and collection activities, even when simply
passing on claims originating from and edited by third parties for content.
Any
such proceeding or investigation could have a material adverse effect on our
business, operating results and financial condition.
Under
the
Health Insurance Portability and Accountability Act of 1996 (as
amended, “HIPAA”)
final rules were
published regarding standards for electronic transactions as well as standards
for privacy and security of individually identifiable health information. The
HIPAA rules set new or higher standards for the healthcare industry in handling
healthcare transactions and information, with penalties for noncompliance.
We
have incurred and we will continue to incur costs to comply with these rules.
Compliance with these rules may prove to be more costly than we currently
anticipate. Failure to comply with such rules may have a material adverse effect
on our business and may subject us to civil and criminal penalties as well
as
loss of customers.
We
will
rely upon third parties to provide data elements to process electronic medical
claims in a HIPAA-compliant format. While we believe we will be fully and
properly prepared to process electronic medical claims in a HIPAA-compliant
format, there can be no assurance that third parties, including healthcare
providers and payers, will likewise be prepared to supply all the data elements
required to process electronic medical claims and make electronic remittance
under HIPAA’s standards. We have made and expect to continue to make investments
in product enhancements to support customer operations that are regulated by
HIPAA. Responding to HIPAA’s impact may require us to make investments in new
products or charge higher prices.
HIPAA,
in
part, governs the collection, use, storage and disclosure of health information
for the purpose of safeguarding the privacy and security of such information.
Persons who believe health information has been misused or disclosed improperly
may file complaints against offending parties, which may lead to investigation
and potential civil and criminal penalties from federal or state
governments.
9
The
passage of HIPAA is part of a wider healthcare reform initiative. We expect
that
the debate on healthcare reform will continue. We also expect that the federal
government as well as state governments will pass laws and issue regulations
addressing healthcare issues and reimbursement of healthcare providers. We
cannot predict whether the governmental-bodies regulators will enact new
legislation and regulations, and, if enacted, whether such new developments
will
have an adverse affect our business, operating results or financial
condition.
The
Gramm-Leach-Bliley Act may govern our lending practices as related to
safeguarding personal customer information.
Many
healthcare providers that are potential clients may have existing systems
that do not generate electronic files in a HIPAA-compliant format, which will
limit the amount of services we can provide to and the amount of revenues that
can be generated from such healthcare providers.
Many
healthcare providers have practice management systems that do not have
electronic interfaces that produce a HIPAA-compliant form. If the interface
does
not exist, they must purchase a new system from a third party, which may be
expensive and an undesirable business proposition for such healthcare providers.
If claims cannot be submitted electronically, the claims data must be manually
entered into our system, which can be time consuming and duplicative of work
already done by a healthcare provider. Manually entering the data also subjects
claims to greater risk of human error in the data entry process. While we
believe we can provide solutions to healthcare providers to enable them to
establish electronic interfaces to submit claims electronically in a
HIPAA-compliant manner, there can be no assurance healthcare providers will
be
willing to implement the solutions that we propose. If healthcare providers
can
not supply electronic medical claims and such claims are processed manually
rather than electronically, services that we can provide will be greatly limited
and our ability to generate revenues from such providers will be curtailed,
which could result in a material adverse affect on our business, operating
results or financial condition.
We
may make errors in processing information provided by our clients or sellers
of
claims and, as a result, we may suffer losses.
We
will
receive detailed information provided by clients and sellers of claims.
Even if clients and sellers of claims provide full and accurate disclosure
of all material information to be submitted as part of a claim for payment,
such
information may be misinterpreted or incorrectly analyzed. Mistakes by our
systems or personnel may cause us to incur liability to our clients and others
in connection with such mistakes.
Solutions
and services that we offer may subject us to product liability
claims.
Solutions
that we sell may fail to perform in a variety of ways, and services that we
provide may not meet customer expectations, including shipping a product which
is either late, does not meet customer requirements or expectations, or is
lost,
damaged, stolen or corrupted, or which faces frequent Internet service
interruptions, which take it off-line. Such problems would seriously harm our
credibility, market acceptance of our products and the value of our brands.
In
addition, such problems may result in liability for damages arising out of
product liability of our products and services. The occurrence of some of these
types of problems may seriously harm our business, operating results and
financial condition.
Our
systems are subject to certain security risks that can adversely affect our
operations.
Despite
the implementation of security measures, our systems may be vulnerable to
unauthorized access, computer viruses and other disruptive problems. Companies
have experienced, and may experience, interruptions in service as a result
of
the accidental or intentional actions of Internet users, current and former
employees or others. Unauthorized access could also potentially jeopardize
the
security of customers’ and our confidential information stored in our computer
systems, which may result in liability to customers and also may deter potential
customers from using our products and services. Although we intend to continue
to implement industry-standard security measures, such measures have been
circumvented in the past, and there can be no assurance that measures that
we
implement will not be circumvented in the future. Eliminating computer viruses
and alleviating other security problems may require interruptions, delays or
cessation of service to our customers, such interruptions, delays or cessation
of services may result in a loss of customers or subject us to potential
liability for actions out of such interruptions, delays or cessation of
services.
10
If
we fail to enter into a banking relationship to offer our lending services,
it
will limit our ability to provide funding services and it will adversely affect
our business.
We
will
need to enter into agreements with financial institutions to enable us to offer
sufficient funds for the lending services that we plan to offer customers.
The
lending services that we will offer will allow customers to utilize receivables
to receive advance funding from such financial institutions through us. To
date,
we do not have any such agreement with any financial institution. There can
be
no assurance that we will be able to enter into such an agreement with a
financial institution. If we fail to enter into such an agreement with a
financial institution we may not generate sufficient funds to offer our lending
services in a meaningful fashion, which could result in a material adverse
effect on our business, operating results and financial condition.
If
we fail to recover the value of amounts that we lend to healthcare providers
or
the value of claims we purchase from healthcare providers, it will adversely
affect our business.
With
respect to loans we extend to providers or claims we purchase from
providers, we expect to experience charge offs in the future. A charge off
occurs when all or part of the principal of a particular loan is no longer
recoverable and will not be repaid or when all or part of a purchased claim
proves unrecoverable. If we were to experience material losses on our loan
portfolio or our portfolio of purchased claims, it would have a material adverse
effect on our ability to fund our business, and to the extent the losses exceed
our provision for loan losses, it could have a material adverse effect on our
revenues, net income and assets.
Other
commercial finance companies have experienced charge offs. In addition, like
other commercial finance companies, we may experience missed and late payments,
failures by clients to comply with operational and financial covenants in their
loan agreements and client performance below that which it expected when we
originated the loan. Any of the events described in the preceding sentence
may
be an indication that our risk of loss with respect to a particular loan or
purchased claim has materially increased.
We
intend to make loans to privately owned small and medium-sized companies, which
present a greater risk of loss than larger companies.
Our
loan
portfolio will consist primarily of commercial loans to small and medium-sized,
privately owned medical practices, and to vendors and suppliers, such as
diagnostic companies. Compared to larger, publicly-owned firms, these companies
generally have more limited access to capital and higher funding costs, may
be
in a weaker financial position and may need more capital to expand or compete.
These financial challenges may make it difficult for clients to make scheduled
payments of interest or principal on loans. Accordingly, advances made to these
types of clients entail higher risks than advances made to companies that are
able to access traditional credit sources.
Numerous
factors may affect a client’s ability to make scheduled payments on its loan,
including the failure to meet its business plan or a downturn in its industry.
In part because of their smaller size, our clients may:
| • |
experience
significant variations in operating
results;
|
| • |
depend
on the management talents and efforts of a single individual or a
small
group of persons for their success, the death, disability or resignation
of whom could materially harm the client’s financial condition or
prospects;
|
11
| • |
have
less skilled or experienced management personnel than larger companies;
or
|
| • |
could
be adversely affected by policy or regulatory changes and changes
in
reimbursement policies of insurance
companies.
|
Accordingly,
any of these factors could impair a client’s cash flow or result in other
events, such as bankruptcy, which could limit that client’s ability to repay its
obligations to us, and may lead to losses in our loan portfolio and a decrease
in our revenues, net income and assets and result in a material adverse effect
on our business, operating results and financial condition.
Additional
risks may arise in our purchased claims business.
We
are
subject to business-related risks specific to the purchase of claims. The claims
we may purchase include medical claims for medical benefits under
workers’
compensation laws for job-related injuries or diseases or
reimbursement of benefits involving private industry health and pension plans
governed by the Employee Retirement Income Security Act of 1974 (as amended,
“ERISA”). Our collections under purchased claims may be insufficient to recover
our costs of investment (including the initial purchase price of the claims
and
any interest or other carrying costs while we await payment of such claims)
and the costs of related support operations. We purchase claims
generated by healthcare providers. These claims typically are obligations that
an insurance payer is obligated to adjudicate for payment or has failed to
reimburse. The claims may be purchased directly from a provider or from a vendor
or supplier of workers’ compensation prescription medication or durable medical
equipment.
Many
of
the purchased claims consist of claims purchased shortly
after inception or account balances under claims that the provider, vendor
or supplier already has attempted to collect. We purchase claims at a
significant discount to face value. Although we estimate that our recoveries
will exceed the amounts paid for the purchased claims, actual recoveries will
vary and may be less than the amounts expected, and may even be less than the
purchase prices initially paid for such claims. In addition, the timing or
amounts to be collected on those purchased claims cannot be assured. If cash
flows from our purchased claims operations are less than anticipated as a result
of our inability to collect purchased claims in whole or in part, or if the
costs of collection or the interest costs of financing the purchase and carrying
of purchased claims exceed expected levels, we may have difficulty servicing
our
debt obligations and may not be able to purchase new claims or extend new loans,
and our future growth and profitability would be materially adversely affected.
There can be no assurance that our operating performance will be sufficient
to
service our debt, finance the purchase of new claims or make new loans to
healthcare providers.
Our
lack of operating history makes it difficult to accurately judge the credit
performance of our loan portfolio or our portfolio of purchased claims and,
as a
result, increases the risk that the allowance for loan losses or purchased
claims losses may prove inadequate.
Our
lending services depend on the creditworthiness of our clients. While we will
conduct general due diligence and a general review of the creditworthiness
of
each of our clients, this review requires the application of significant
judgment by our management, which judgment may not be correct. Similarly, our
claims purchasing activities depend on the creditworthiness of the account
debtors with respect to the claims we purchase. This review requires the
application of significant judgment by our management which judgment may not
be
correct.
We
will
maintain an allowance for loan losses and an allowance for purchased claim
losses on our consolidated financial statements in an amount that reflects
our
judgment concerning the potential for losses inherent in our loan portfolio
and
our purchased claims portfolio. Because we have not yet recorded any loan
charge-offs or purchased claims charge-offs, our reserve rate was developed
independent of the historical performance of our loan portfolio and our
purchased claims portfolio. Because our lack of operating history and the
relative lack of seasoning of our portfolio make it difficult to judge the
credit performance of our portfolio, there can be no assurance that the
estimates and judgment with respect to the appropriateness of our allowance
for
losses are accurate. Our allowance may not be adequate to cover credit losses
in
our portfolio as a result of unanticipated adverse changes in the economy or
events adversely affecting specific clients, industries or markets. If our
allowance for losses is not adequate, our net income will suffer, and our
financial performance and condition could be significantly
impaired.
12
We
may not have all of the material information relating to a potential client
at
the time that we make a credit decision with respect to that potential client,
or at the time we advance funds to the client, which may subject us to a greater
risk of loss on loans that we make.
We
may
suffer losses on loans or make advances that we would not have made if we had
all of the material information about clients.
There
is
generally no publicly available information about the privately owned companies
to which we will typically lend. Therefore, we must rely on our clients and
the
due diligence efforts of our employees to obtain the information that we will
consider when making credit decisions. To some extent, our employees depend
and
rely upon the management of these companies to provide full and accurate
disclosure of material information concerning their business, financial
condition and prospects. If our employees do not have access to all of the
material information about a particular client’s business, financial condition
and prospects, or if a client’s accounting records are poorly maintained or
organized, we may not make a fully informed credit decision which may lead,
ultimately, to a failure or inability to recover the loan in its
entirety.
We
may not have all of the material information relating to an account debtor
with
respect to a potential purchased claim at the time that we make a credit
decision with respect to such potential purchased claim, or at the time we
actually acquire the claim, which may subject us to a greater risk of loss
on
claims that we purchase.
We
may
suffer losses on purchased
claims or we may acquire claims that we otherwise would not have acquired if
we
had all of the material information about the underlying account
debtors.
There
is
generally no publicly available information about the privately owned companies
from which we typically purchase claims. Therefore, we must rely on our clients
and the due diligence efforts of our employees to obtain the information that
we
will consider when making purchase decisions. To some extent, our employees
depend and rely upon the management of these companies to provide full and
accurate disclosure of material information concerning their business, financial
condition and prospects. If our employees do not have access to all of the
material information about a particular client’s business, financial condition
and prospects, or if a client’s accounting records are poorly maintained or
organized, we may not make a fully informed purchase decision which may lead,
ultimately, to a failure or inability to recover the value of the purchased
claim.
We
may make errors in evaluating information accurately reported by our clients
and, as a result, we may suffer losses on loans or advances that we would not
have made if we had properly evaluated the information.
We
intend
to make loans primarily secured by claims receivable and not based on detailed
financial information provided to us by our clients or personal creditworthiness
or personal credit guarantees. Even if clients provide us with full and accurate
disclosure of all material information concerning their businesses, and even
if
we require personal credit guarantees from our clients, we may misinterpret
or
incorrectly analyze credit performance related information. Mistakes by our
staff may cause us to make loans that we otherwise would not have made, to
fund
advances that we otherwise would not have funded or result in losses on one
or
more existing loans.
13
We
may make errors in evaluating information accurately reported by sellers of
claims that we acquire and, as a result, we may suffer losses on claims that
we
would not have purchased if we had properly evaluated the information.
We
intend
to purchase
claims
not necessarily based on detailed financial information provided to us by
sellers of claims or personal creditworthiness or personal credit guarantees.
Even if sellers of claims provide us with full and accurate disclosure of all
material information concerning the claims available for purchase, and even
if
we require personal credit guarantees from sellers of claims, we may
misinterpret or incorrectly analyze credit performance related information.
Mistakes by our staff may cause us to acquire claims that we otherwise would
not
have purchased or result in losses on one or more existing purchased
claims.
A
client’s or seller’s fraud could cause us to suffer losses.
A
client
or seller could defraud us by, among other things:
| • |
directing
the proceeds of collections of its accounts receivable to bank accounts
other than established lockboxes or re-directing elsewhere governmental
account sweeps that are supposed to go from client bank accounts
to our
lockboxes;
|
| • |
creating
and submitting false, inaccurate or misleading medical
claims;
|
| • |
selling
false, inaccurate or misleading medical
claims;
|
| • |
failing
to accurately record accounts receivable
aging;
|
| • |
overstating
or falsifying records creating or showing accounts receivable;
or
|
| • |
providing
inaccurate reporting of other financial
information.
|
The
failure of a client or seller of claims to accurately create and submit claims
or report its financial position, compliance with loan covenants or eligibility
for additional borrowings could result in the loss of some or the entire
principal of a particular loan or loans, or claim or claims, as the case may
be,
including, in the case of revolving loans, amounts we may not have advanced
had
we possessed complete and accurate information and in the case of purchased
claims, claims we may not have acquired had we possessed complete and accurate
information.
Our
concentration of loans to a limited number of borrowers within a particular
industry, such as the healthcare industry, and our concentration of purchased
claims within a particular industry, such as the healthcare industry, could
impair our revenues, if the industry were to experience economic difficulties.
Defaults
by our clients or by account debtors with respect to claims we purchase may
be
correlated with economic conditions affecting particular industries. As a
result, if the healthcare industry were to experience economic difficulties,
the
overall timing and amount of collections on our loans to clients or on our
purchased claims portfolio may differ from what we expected and result in
material harm to our revenues, net income and assets.
The
dependence by our clients on reimbursement revenues could cause us to suffer
losses in several instances:
| • |
If
clients fail to comply with operational covenants and other regulations
imposed by insurance companies or other payers, they may lose their
eligibility to continue to receive reimbursements under the program
or
incur monetary penalties, either of which could result in the client’s
inability to make scheduled
payments.
|
| • |
If
reimbursement rates do not keep pace with increasing costs of services
to
eligible recipients, or funding levels decrease as a result of increasing
pressures from carriers to control healthcare costs, clients may
not be
able to generate adequate revenues to satisfy their
obligations.
|
14
| • |
If
a healthcare client were to default on its loan, we may be unable
to
invoke our rights to pledged receivables directly as the law prohibits
the
initial payment of amounts owed to healthcare providers under the
Medicare
and Medicaid programs to be directed to any entity other than the
actual
providers. Consequently, a court order would be needed to enforce
collection directly against these governmental payers or re-direction
of
accounts, set-offs or other disposition of payments received by providers
on government claims that have not been forwarded to the lockbox.
There is
no assurance that we would be successful in obtaining this type of
court
order.
|
| • |
In
addition, our purchased claims portfolio is dependent on reimbursement
revenues. If we fail to comply with operational covenants and other
regulations imposed by insurance companies or other payers, we may
lose
eligibility to continue to receive reimbursements under the program
or
incur monetary penalties, either of which could adversely affect
our
revenues, net income and assets.
|
We
may be unable to recognize or act upon an operational or financial problem
with
a client in a timely fashion so as to prevent a loss of our loan to that client.
Our
clients may experience operational or financial problems that, if not timely
addressed by us, could result in a substantial impairment or loss of the value
of the loan to the client. We may fail to identify problems, because our client
did not report them in a timely manner or, even if the client did report the
problem, we may fail to address it quickly enough, adequately enough or at
all.
As a result, we could suffer loan losses, which could have a material adverse
effect on our revenues, net income and results of operations.
The
collateral securing a loan may not be sufficient to protect us from a partial
or
complete loss if the loan becomes non-performing, and we are required to
foreclose.
While
most of our loans will be secured by a lien on specified collateral of the
client, there is no assurance that the collateral securing any particular loan
will protect us from suffering a partial or complete loss if the loan becomes
non-performing and we move to foreclose on the collateral. The collateral
securing our loans is subject to inherent risks that may limit our ability
to
recover the principal of a non-performing loan. Risks that may affect the value
of accounts receivable in which we may take a security interest include, among
other things, the following:
| • |
problems
with the client’s underlying agreements with insurance carriers, which
result in greater than anticipated, disputed
accounts;
|
| • |
unrecorded
liabilities;
|
| • |
the
disruption or bankruptcy of key obligor who is responsible for material
amounts of the accounts receivable;
|
| • |
the
client misrepresents, or does not keep adequate records of, claims
or
important information concerning the amounts and aging of its accounts
receivable; or
|
| • |
the
client’s government claims that are being sent to a client controlled
account and then ‘‘swept’’ (directed) to a lockbox are stopped by client
from being swept or are re-directed by client, which may require
judicial
action or relief.
|
Any
one
or more of the preceding factors could materially impair our ability to recover
principal in a foreclosure on the related loan.
Our
advance funding loans are not fully covered by the value of tangible assets
or
collateral of the client and, consequently, if any of these loans becomes
non-performing, we could suffer a loss of some or all of our value in the loan.
The
risks
inherent in advance lending based upon receivables include, among other things,
the following:
15
| • |
reduced
use of or demand for the client’s services and, thus, reduced cash flow of
the client to service the loan as well as reduced value of the client
as a
going concern;
|
| • |
poor
accounting systems of the client, which adversely affect the ability
to
accurately predict the client’s cash
flows;
|
| • |
economic
downturns, political events, regulatory changes, litigation or acts
of
terrorism that affect the client’s business, financial condition and
prospects; and
|
| • |
poor
management performance.
|
Errors
by or dishonesty of our employees could result in loan losses or losses on
claims purchased.
We
will
rely heavily on the performance and integrity of our employees in making initial
credit decisions with respect to loans and claims purchasing and in servicing
the loans and claims purchased after they have closed. Because there is
generally little or no publicly available information about the clients to
whom
we will finance, we cannot independently confirm or verify the information
employees provide for use in making credit, purchasing and funding
decisions. Errors by employees in assembling, analyzing or recording information
concerning clients could cause us to originate loans or purchases or fund
subsequent advances or purchases that we would not otherwise originate or
fund. This could result in losses. Losses could also arise if any employees
were
dishonest. A dishonest employee could collude with clients to misrepresent
the
creditworthiness of a prospective client or to provide inaccurate reports
regarding the client’s compliance with the covenants in its loan or purchase
agreement. If, based on an employee’s dishonesty, we made a loan to a client
that was not creditworthy or failed to exercise our rights under a loan
agreement against a client that was not in compliance with covenants in the
agreement, we could lose some or the entire principal of the loan or purchase.
Further, if we determine to pursue remedies against a dishonest employee, the
costs of pursuing such remedies could be substantial and there can be no
assurance that we will be able to obtain an adequate remedy against a dishonest
employee to offset losses caused by such employee.
If
interest rates rise, some of our existing clients may be unable to service
interest on their loans.
Virtually
all of our loans will bear interest at floating interest rates. To the extent
interest rates increase, monthly interest obligations owed by clients will
also
increase. Some clients may not be able to make the increased interest payments,
resulting in defaults on their loans.
Loans
could be subject to equitable subordination by a court and thereby increase
the
risk of loss with respect to such loans.
Courts
have, in some cases, applied the doctrine of equitable subordination to
subordinate the claim of a lending institution against a borrower to claims
of
other creditors of the borrower, when the lending institution is found to have
engaged in unfair, inequitable or fraudulent conduct. The courts have also
applied the doctrine of equitable subordination when a lending institution
or
its affiliates are found to have exerted inappropriate control over a client,
including control resulting from the ownership of equity interests in a client.
Payments on one or more of our loans, particularly a loan to a client in which
we also hold equity interests, may be subject to claims of equitable
subordination. If, when challenged, these factors were deemed to give us the
ability to control or otherwise exercise influence over the business and affairs
of one or more of its clients, this control or influence could constitute
grounds for equitable subordination. This means that a court may treat one
or
more of our loans as if it were common equity in the client. In that case,
if
the client were to liquidate, we would be entitled to repayment of its loan
on
an equal basis with other holders of the client’s common equity only after all
of the client’s obligations relating to its debt and preferred securities had
been satisfied. One or more successful claims of equitable subordination against
us could have a material adverse effect on our business, operating results
and
financial condition.
16
We
may incur lender liability as a result of our lending activities.
In
recent
years, a number of judicial decisions have upheld the right of borrowers to
sue
lending institutions on the basis of various evolving legal theories,
collectively termed ‘‘lender liability.’’ Generally, lender liability is founded
on the premise that a lender has either violated a duty, whether implied or
contractual, of good faith and fair dealing owed to the borrower or has assumed
a degree of control over the borrower resulting in the creation of a fiduciary
duty owed to the borrower or its other creditors or shareholders. We may be
subject to allegations of lender liability. There can be no assurance that
these
claims will not arise or that we will not be subject to significant liability
if
a claim of this type did arise. Such liability could result in a material
adverse effect on our business, operating results and financial
condition.
Our
lending and claims purchasing activities, as well as our claims management
solutions, are subject to additional governmental regulations, and future
regulations may make it more difficult for us to operate on a profitable
basis.
Our
healthcare advance lending and claims purchasing business, as well as our claims
management solutions, are subject to numerous federal and state laws and
regulations, which, among other things, may (i) require us to obtain and
maintain certain licenses and qualifications, (ii) limit the interest rates,
fees and other charges that we are permitted to collect, (iii) limit or
prescribe certain other terms of our financed receivables arrangements with
clients, and (iv) subject us to certain claims, defenses and rights of offset,
or (v) change the way we process, send, secure, format, receive or otherwise
use
or interact with claims information or data. Although we believe that our
current business plan is in compliance with statutes and regulations applicable
to our business, there can be no assurance that we will be able to maintain
such
compliance without incurring significant expense. The failure to comply with
such statutes and regulations could have a material adverse effect upon us.
Furthermore, the adoption of additional statutes and regulations, changes in
the
interpretation and enforcement of current statutes and regulations, or the
expansion of the business into jurisdictions that have adopted more stringent
regulatory requirements than those in which we currently conduct business could
have a material adverse effect upon our business, operating results and
financial condition.
There
can
be no assurance that currently proposed or future healthcare legislation or
other changes in the administration or interpretation of governmental provider
payment programs (‘‘Government Programs’’) will not have an adverse effect on us
or that payments under Government Programs will remain at levels comparable
to
present levels or will be sufficient to cover the costs allocable to patients
eligible for reimbursement pursuant to such programs. Concern about the
potential effects of the proposed reform measures has contributed to the
volatility of prices of securities of companies in healthcare and related
industries, and may similarly affect the price of our securities in the
future.
In
addition, certain private reform efforts have been instituted throughout the
healthcare industry, including the capitation of certain healthcare
expenditures. Capitation is the pre-payment of certain healthcare costs by
third-party payers (typically health maintenance organizations and other managed
healthcare concerns), based upon a predetermined monthly fee for the aggregate
patient lives under any given healthcare provider’s care. The healthcare
provider then provides healthcare to such patients when and as needed, and
assumes the risk that its prepayments will cover its costs and provide a profit
for all of such services rendered. Since capitation essentially reduces or
eliminates clients’ need for claims management solutions and/or accounts
receivable that are the primary source of payment for our financed receivables,
capitation could materially adversely affect our business, operating results
and
financial condition.
We
have not paid dividends and do not expect to do so in the future.
We
have
not paid any cash dividends on our common stock. For the foreseeable future,
it
is anticipated that earnings, if any, which may be generated from operations
will be used to finance our growth and that dividends will not be paid to
holders of common stock.
17
Our
certificate of incorporation, our bylaws and applicable state law contains
provisions that preserve current management.
Provisions
of state law, our articles of incorporation and our by-laws may discourage,
delay or prevent a change in our management team that stockholders may consider
favorable. These provisions include:
| • |
authorizing
the issuance of ‘‘blank check’’ preferred stock without any need for
action by stockholders;
|
| • |
eliminating
the ability of stockholders to call special meetings of
stockholders;
|
| • |
permitting
stockholder action by written consent;
and
|
| • |
establishing
advance notice requirements for nominations for election to the board
of
directors or for proposing matters that can be acted on by stockholders
at
stockholder meetings.
|
These
provisions could allow our Board of Directors to affect the investor’s rights as
a stockholder since the Board of Directors can make it more difficult for
preferred stockholders or common stockholders to replace members of the Board.
Because the Board of Directors is responsible for appointing the members of
the
management team, these provisions could in turn affect any attempt to replace
the current or future management team.
Our
Common Stock is considered ‘‘penny stock’’ and may be difficult to
trade.
The
SEC
has adopted regulations that generally define “penny stock” to be an equity
security that has a market or exercise price of less than $5.00 per share,
subject to specific exemptions. The market price of our common stock is less
than $5.00 per share and, therefore, subject to ‘‘penny stock’’ rules pursuant
to Section 15(g) of the Exchange Act. This designation requires any broker
or
dealer selling these securities to disclose certain information concerning
the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules
may
restrict the ability of brokers or dealers to sell our common stock and may
affect the ability of investors to sell their shares. In addition, since our
common stock is currently only quoted on the OTCBB, investors may find it
difficult to obtain accurate quotations of our common stock and may experience
a
lack of buyers to purchase such stock or a lack of market makers to support
the
stock price.
A
significant number of our shares are eligible for sale, and their sale could
depress the market price of our stock.
Sales
of
a significant number of shares of our common stock in the public market pursuant
to our registration statement, which became effective on December 7, 2006,
could
harm the market price of our common stock. As additional shares of common stock
may be sold in the public market, the supply of common stock will increase,
which could decrease its price. Additionally, some or all of our shares of
common stock may be offered from time to time in the open market pursuant to
Rule 144 (“Rule 144”) under the Securities Act of 1933 (as amended, the
“Securities Act”), and these sales may have a depressive effect on the market
for shares of common stock.
There
is no public market for our Common Stock other than
OTCBB.
There
is
no public market for our common stock other than the market that exists in
the
common stock of the Company on the OTCBB. There can be no assurance that any
other trading market will develop in the common stock of the Company, or that
the OTCBB market trading will be sustained.
18
Until
November, 2005, we were a public shell company. There are certain risks
associated with transactions with public shell companies generally, including
increased SEC scrutiny and regulation and lack of analyst coverage of the
Company.
In
November, 2005, we succeeded to the business of MDwerks Global Holdings, Inc.
and the Xeni Companies pursuant to a merger of a wholly owned subsidiary of
ours
into MDwerks Global Holdings, Inc. (the ‘‘Merger’’). As a result of the Merger,
MDwerks Global Holdings, Inc. became our wholly owned subsidiary and we began
to
operate its business and the businesses of the Xeni Companies as our sole line
of business. Until such time, the Company was and had been effectively a public
shell company with no material assets or operations whose only value was that
it
maintained current filings with the SEC and a class of securities that was
offered for sale pursuant to the OTCBB. The Merger provided an immediate benefit
for the then existing stockholders of the Company that might not have been
readily available, or available at all, to other stockholders who either
acquired their shares of stock in connection with the purchase of securities
in
the offering that closed at the time of the Merger, or otherwise.
Substantial
additional risks are associated with a public shell merger transaction such
as
absence of accurate or adequate public information concerning the public shell;
undisclosed liabilities; improper accounting; claims or litigation from former
officers, directors, employees or stockholders; contractual obligations;
regulatory requirements and others. Although management performed due diligence
on the Company, there can be no assurance that such risks do not occur. The
occurrence of any such risk could materially adversely affect the Company’s
results of operations, financial condition and stock price. In addition, the
cost of operations of the Company has increased as a result of the Merger due
to
legal, regulatory, and accounting requirements imposed upon a company with
a
class of registered securities and based upon the acquisition by the Company
of
an operating company.
Additional
risks may exist since the Merger involved a ‘‘reverse merger’’ or ‘‘reverse
public offering.’’ Security analysts of major brokerage firms may not provide
coverage of the Company since there is no incentive to brokerage firms to
recommend the purchase of the common stock. No assurance can be given that
brokerage firms will want to conduct any secondary public offerings on behalf
of
the Company in the future.
There
has been a limited active public market for the Common Stock, and prospective
investors may not be able to resell their shares at or above the price at which
they purchase shares of common stock, if at all.
Shares
of
our common are traded on the OTCBB. We plan on seeking to retain the OTCBB
status of the Company so that the registered securities of the Company will
have
the benefit of a trading market, but will likely be traded only in the OTCBB
market for the foreseeable future, although listing on a national exchange
such
as the American Stock Exchange, or NASDAQ Small Cap market may be sought, but
is
not assured. There is no guarantee that if such listing is pursued the Company
will meet the listing requirements or that such efforts to list the Company’s
common stock on any national or regional exchange or the NASDAQ Small Cap market
will be successful, or if successful, will be maintained, including but not
limited to requirements associated with maintenance of a minimum net worth,
minimum stock price and ability to establish a sufficient number of market
makers. As a result, the reported prices for the Company’s securities may be:
(i) arbitrarily determined, as a result of the valuation ascribed to the shares
in transactions by the Company and adopted for purposes of securities offerings;
and (ii) the result of market forces, and as such reported prices may not
necessarily indicate the value of the traded shares or of the Company.
Furthermore, there has been a limited to no public market for our common stock.
An active public market for our common stock may not develop or be sustained.
The offering price of the securities offered in this offering is not indicative
of future market prices.
The
market price of our securities may fluctuate significantly in response to
factors, some of which will be beyond our control, such as the announcement
of
new products or product enhancements by the Company or its competitors;
developments concerning intellectual property rights and regulatory approvals;
quarterly variations in our competitors’ results of operations; changes in
earnings estimates or recommendations by securities analysts; developments
in
our industry; and general market conditions and other factors, including factors
unrelated to our operations.
19
The
stock
market in general may experience extreme price and volume fluctuations. In
particular, market prices of securities of technology companies have experienced
fluctuations that often have been unrelated or disproportionate to the operating
results of these companies. Market fluctuations could result in extreme
volatility in the price of the common stock, which could cause a decline in
the
value of the common stock. Prospective investors should also be aware that
price
volatility might be exacerbated if the trading volume of the common stock is
low.
There
are additional costs of being a public company and those costs may be
significant.
We
are a
publicly traded company, and, accordingly, subject to the information and
reporting requirements of the United States securities laws. The United States
securities laws require, among other things, review, audit and public reporting
of the Company’s financial results, business activities and other matters. The
public company costs of preparing and filing annual and quarterly reports,
proxy
statements and other information with the SEC and furnishing audited reports
to
stockholders, which we estimate will be approximately $250,000 per year, will
cause our expenses to be higher than they would be if we were privately-held.
In
addition, the Company incurred estimated expenses of approximately $100,000
in
connection with the preparation of the registration statement and related
documents with respect to the registration of the common stock required to
be
registered pursuant to the Company’s undertaking to file a registration
statement as described herein. These increased costs may be material and may
include the hiring of additional employees and/or the retention of additional
consultants and professionals. Failure by the Company to comply with the federal
or state securities laws could result in private or governmental legal action
against the Company and/or its officers and directors, which could have a
detrimental effect on the business and finances of the Company, the value of
the
Company’s stock and the ability of stockholders to resell their
stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This
prospectus contains ‘‘forward-looking statements’’ 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 prospectus. 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, from providers of services similar to those offered
by
us;
|
| • |
unexpected
costs and operating deficits, and lower than expected sales and
revenues;
|
| • |
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
prospectus.
|
20
All
statements, other than statements of historical facts, included in this
prospectus 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 prospectus,
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 prospectus. 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 prospectus are reasonable,
no one can assure investors that these plans, intentions or expectations will
be
achieved. Important factors that could cause actual results to differ materially
from expectations expressed herein are described under ‘‘Risk Factors’’ and
elsewhere in this prospectus. These cautionary statements and risk factors
qualify all forward-looking statements attributable to information provided
in
this prospectus and on behalf of us or persons acting on our
behalf.
Information
regarding market and industry statistics contained in this prospectus 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. 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. See ‘‘Risk Factors’’ for a more detailed discussion of uncertainties
and risks that may have an impact on future results.
21
USE
OF PROCEEDS
The
Selling Securityholder will receive all of the proceeds from the sale of the
shares of our common stock offered for sale by it under this prospectus. We
will
not receive any proceeds from the resale of shares of our common stock by the
Selling Securityholder covered by this prospectus or from the conversion of
the
Series B Convertible Preferred Stock.
MARKET
FOR OUR COMMON STOCK AND
RELATED
STOCKHOLDER MATTERS
Our
common stock has been quoted on the OTC Bulletin Board since November 16,
2005, under the symbol MDWK.OB. Prior to that date, there was no active market
for our common stock. As of May 22, 2008, there were approximately 330 holders
of record of our common stock.
The
following table sets forth the high and low sales prices for our common stock
for the periods indicated as reported by the OTC Bulletin Board.
|
High
|
|
Low
|
|||||
|
Fiscal
Year 2006
|
|||||||
|
First
Quarter
|
$
|
4.25
|
$
|
2.40
|
|||
|
Second
Quarter
|
5.00
|
2.45
|
|||||
|
Third
Quarter
|
4.25
|
2.60
|
|||||
|
Fourth
Quarter
|
3.60
|
1.16
|
|||||
|
Fiscal
Year 2007
|
|||||||
|
First
Quarter
|
$
|
1.50
|
$
|
0.47
|
|||
|
Second
Quarter
|
1.30
|
0.35
|
|||||
|
Third
Quarter
|
1.55
|
0.60
|
|||||
|
Fourth
Quarter
|
0.74
|
0.35
|
|||||
|
Fiscal
Year 2008
|
|||||||
|
First
Quarter
|
$
|
1.20
|
$
|
0.38
|
|||
|
Second
Quarter (through May 22, 2008)
|
0.85
|
0.47
|
|||||
The
last
reported price for our Common Stock on the OTC Bulletin Board on May 22, 2008,
was $0.55 per share.
The
prices reported on the OTC Bulletin Board as high and low sales prices vary
from
inter-dealer bids which state inter-dealer quotations. Such inter-dealer bids
(and reported high and low sales prices) do not include retail mark-ups,
mark-downs or commissions. Such prices do not necessarily represent actual
transactions.
We
have
not declared or paid any dividends on our common stock and do not anticipate
declaring or paying any cash dividends on our common stock in the foreseeable
future. We currently expect to retain future earnings, if any, to finance the
growth and development of our business. The holders of our common stock are
entitled to dividends when and if declared by our Board from legally available
funds.
22
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 Finance 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
favorable terms.
Additionally,
clients may choose to complete the claims management cycle by subscribing to
the
Xeni Billing’s 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 HIPAA.
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 existing 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,
Massachusetts, Texas, New York and New Jersey, which contain high concentrations
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 developing 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.
23
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 SEC’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, claim purchasing 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 payers 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.
For
the Year Ended December 31, 2007 Versus the Year Ended December 31,
2006
Revenue
For
the
year ended December 31, 2007, we recorded total revenue of $577,251. Of this
total, we recorded service fee revenue of $470,149, accounting for 81.4% of
total revenue and financing income of $107,102, accounting for 18.6% of total
revenue. For the year ended December 31, 2006, we recorded total revenue of
$427,778. Of this total, we recorded service fee revenue of $355,429, accounting
for 83.1% of total revenue and financing income of $72,349, accounting for
16.9%
of total revenue.
Operating
Expenses
Our
operating expenses decreased for the year ended December 31, 2007, from the
year
ended December 31, 2006, as a result of reduced compensation and selling,
general and administrative expenses.
For
the
year ended December 31, 2007, total operating expenses were $8,022,031 as
compared to $9,036,301 for the year ended December 31, 2006, a decrease of
$1,014,270. Included in this decrease for the year ended December 31, 2007,
are
the following:
1. We
recorded compensation expense of $5,286,985 for the year ended December 31,
2007, as compared to $5,732,372 for the year ended December 31, 2006. This
$445,387 decrease was attributable to non-cash compensation expense for stock
option grants during 2007 in the amount of $3,196,046 as compared to $3,911,640
in 2006. We expect cash and non-cash 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;
24
2. Consulting
expense amounted to $760,284 for the year ended December 31, 2007, as compared
to $943,500 for the year ended December 31, 2006, a decrease of $183,216, or
19.4%. This decrease resulted from lower costs in 2007 associated with obtaining
financing as opposed to 2006 and the transferring of outside business
development consultant expense to compensation expense due to the hiring of
new
employees;
3. Professional
fees amounted to $411,917 for the year ended December 31, 2007, as compared
to
$358,969 for the year ended December 31, 2006, an increase of $52,948, or 14.8%.
This increase was attributable to an increase in our legal fees related to
additional SEC filings, the Series B Preferred Stock offering, and other
corporate matters; and
4. Selling,
general and administrative expenses were $1,562,845 for the year ended December
31, 2007, as compared to $2,001,460 for the year ended December 31, 2006, a
decrease of $438,615, or 21.9%. This decrease resulted from the reduction of
outside sales consultants, a decrease in investor relations costs in the current
year and a loss on notes payable conversions in the prior year for which there
is no comparable expense in 2007.
For
the
years ended December 31, 2007, and 2006, selling, general and administrative
expenses consisted of the following:
|
2007
|
2006
|
||||||
|
Sales
Commission
|
$
|
68,849
|
$
|
201,674
|
|||
|
Advertising
and promotion
|
92,899
|
196,750
|
|||||
|
Employee
benefits and payroll taxes
|
385,679
|
333,601
|
|||||
|
Other
selling, general and administrative
|
1,015,418
|
1,269,435
|
|||||
|
$
|
1,562,845
|
$
|
2,001,460
|
||||
Other
Income (Expenses)
For
the
year ended December 31, 2007, interest expense was $2,484,835 as compared to
$905,374 for the year ended December 31, 2006, an increase of $1,579,461. This
increase was due to an increase in borrowings and amortization of debt discount
and deferred fees in connection with our notes payable. Additionally in 2006,
in
connection with the granting of 90,000 warrants related to certain notes
payable, we recorded interest expense of $335,273.
During
the year ended December 31, 2006, we recorded a loss on the revaluation of
warrant liability of $192,914 related to the change in fair value of the
warrants during this period.
Net
Loss
As
a
result of these factors, we reported a net loss of $9,882,330 for the year
ended
December 31, 2007, as compared to a net loss of $9,675,046 for the year ended
December 31, 2006.
Deemed
Dividend arising from beneficial conversion on Preferred Stock and Other
Charges
During
the year ended December 31, 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 year ended December 31, 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 the Xeni Companies. 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.
25
Net
Loss Attributable to Common Shareholders
We
reported a net loss attributable to common shareholders of $9,882,330 for the
year ended December 31, 2007, as compared to net loss attributable to common
shareholders of $10,835,063 for the year ended December 31, 2006. This
translates to an overall per share loss available to shareholders of ($.77)
for
the year ended December 31, 2007, as compared to a per share loss of ($.91)
for
the year ended December 31, 2006.
Liquidity
and Capital Resources
We
used
the proceeds from the sales of preferred stock and notes and loans payable
through December 31, 2007, for working capital purposes and for funding our
notes receivables of which we have $1,652,079 owed to us at December 31, 2007.
We will continue to advance funds under note agreements to providers that
subscribe to our MDwerks financial services solutions.
As
of
December 31, 2007, we had a cash balance of $320,903. The amount of cash
available to us at December 31, 2007 was not sufficient for us to service our
current indebtedness and implement our business plan as anticipated and required
us to seek additional financing as detailed in the Vicis Capital Master Fund
(“Vicis”) financings of $500,000 on January 18, 2008 and $6,809,794 net proceeds
on March 31, 2008 as discussed in the Liquidity and Capital Resources for the
three months ended March 31, 2008.
Cash
flows
At
December 31, 2007, we had cash of $320,903.
Net
cash
used in operating activities was $4,967,641 for the year ended December 31,
2007, as compared to $3,614,120 for the year ended December 31, 2006, an
increase of $1,353,521. This increase is primarily attributable to an increase
in our net loss and:
1. Stock-based
compensation of $3,346,046 is primarily related to lower issuances of stock
options to employees and shares of our common stock to consultants, versus
$4,334,140 for the year ended December 31, 2006;
2. Loss
on
valuation of warrant liability for the year ended December 31, 2007, of $0
versus $192,914 through September 30, 2006, due to the revaluation of our
warrant liability to fair value for the year ended December 31,
2006;
3. Amortization
of debt discount related to the Gottbetter, Grenier and Goldner Notes of
$2,021,396, deferred compensation of $266,040, Gottbetter and Vicis debt
offering costs of $207,202, and Goldner and Grenier debt issuance costs of
$10,954, compared to debt discount related to the Gottbetter Notes of $354,190,
deferred compensation of $291,487, Gottbetter debt offering costs of $43,361
and
Goldner and Grenier debt issuance costs of $12,480 during the year ended
December 31, 2006;
4 No
settlement expense for the year ended December 31, 2007 versus $180,827 for
the
conversion of $40,000 of notes payable to common stock for the year ended
December 31, 2006;
5. No
interest expense in connection with the grant of warrants versus $460,572 for
the year ended December 31, 2006; and
6. A
net
increase in notes receivable, accounts receivable and prepaid expenses
aggregating $1,331,056 principally related to the increase in funding of notes
receivable to providers that subscribe to our MDwerks financial services
solution and other healthcare providers.
26
Net
cash
used in investing activities was $5,209 for the year ended December 31, 2007,
as
compared to $110,457 for the year ended December 31, 2006, and is principally
related to the acquisition of computer and office equipment and
furniture.
Net
cash
provided by financing activities was $2,146,912 for the year ended December
31,
2007, as compared to $6,104,954 for the year ended December 31, 2006. For the
year ended December 31, 2007, we received gross proceeds from the sale of Series
B Convertible Preferred Stock of $2,000,000 reduced by placement fees and other
expenses paid of $116,810 and we received net proceeds from notes payable of
$575,000 and $250,000 and a loan payable of $250,000. During 2007, we made
notes
payable repayments of $598,362 and loans payable repayments of $212,916. For
the
year ended December 31, 2006, we received gross proceeds from notes payable
of
$4,750,000 from Gottbetter and $360,000 from three qualified investors which
were offset by placement fees of $263,264. We also received proceeds from the
sale of Series A Convertible Preferred Stock of $1,700,000 reduced by placement
fees and other expenses paid of $313,923. During 2006, we made notes payable
repayments of $101,634 and loans payable repayments of $26,225.
Off
Balance Sheet Arrangements
We
had no
off balance sheet arrangements as of December 31, 2007.
Results
of Operations
For
the Three Months Ended March 31, 2008 Versus the Three Months Ended March 31,
2007
Revenue
For
the
three months ended March 31, 2008, we recorded total revenue of $203,461. Of
this total, we recorded service fee revenue of $162,242, accounting for 79.7%
of
total revenue, and financing income of $41,219, accounting for 20.3% of total
revenue. For the three months ended March 31, 2007, we recorded total revenue
of
$133,885 of total revenue. Of this total, we recorded service fee revenue of
$119,908, accounting for 89.6% of total revenue and financing income of $13,977,
accounting for 10.4% of total revenue.
Operating
Expenses
Our
operating expenses significantly decreased for the three months ended March
31,
2008 from the three months ended March 31, 2007 principally as a result of
decreased stock option compensation.
For
the
three months ended March 31, 2008, total operating expenses were $1,423,161
as
compared to $2,114,584 for the three months ended March 31, 2007, a decrease
of
$691,423 or 32.7%. Included in this decrease for the three months ended March
31, 2008 are the following:
|
1.
|
We
recorded compensation expense of $902,102 as compared to $1,417,321
for
the three months ended March 31, 2007. This $515,219 or 36.4% decrease
was
attributable to non-cash compensation expense for stock option grants
during 2007; and
|
27
|
2.
|
Consulting
expense amounted to $65,481 as compared to $162,697 for the three
months
ended March 31, 2007, a decrease of $97,216, or 59.8%. This decrease
resulted from lower financing costs and outside business development
and
information technology consultants expense.; and
|
|
3.
|
Professional
fees amounted to $164,688 as compared to $125,547 for the three months
ended March 31, 2007, an increase of $39,141, or 31.2%. 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 $290,890 as compared to
$409,019
for the three months ended March 31, 2007, a decrease of $118,129,
or
28.9%. This decrease resulted from a reduction in advertising, sales
travel and trade shows.
|
For
the
three months ended March 31, 2008 and 2007, selling, general and administrative
expenses consisted of the following:
|
|
March
31,
2008
|
March
31,
2007
|
|||||
|
Sales
commissions
|
$
|
5,120
|
$
|
27,585
|
|||
|
Advertising
and promotion
|
2,001
|
34,293
|
|||||
|
Employee
benefits and payroll taxes
|
111,625
|
108,927
|
|||||
|
Other
selling, general and administrative
|
172,144
|
238,214
|
|||||
|
|
$
|
290,890
|
$
|
409,019
|
|||
Other
Income (Expenses)
For
the
three months ended March 31, 2008, interest income was $1,924 as compared to
$28,239 for the three months ended March 31, 2007, a decrease of $26,315. This
decrease was principally due to a decrease in interest-bearing cash
deposits.
For
the
three months ended March 31, 2008, interest expense was $766,639 as compared
to
$517,498 for the three months ended March 31, 2007, an increase of $249,141.
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 loss on extinguishment of this debt was $660,880.
Net
Loss Attributable to Common Shareholders
We
reported a net loss attributable to common shareholders of $2,644,388 for the
three months ended March 31, 2008 as compared to net loss attributable to common
shareholders of $2,469,958 for the three months ended March 31, 2007. This
translates to an overall per share loss available to shareholders of ($.20)
for
the three months ended March 31, 2008, as compared to a per share loss of ($.20)
for three months ended March 31, 2007.
28
Liquidity
and Capital Resources
We
used
the proceeds from the sales of preferred stock through March 31, 2008 and
proceeds from notes and loans payable for working capital purposes and to fund
our notes receivable of which we have $1,636,091 owed to us at March 31, 2008.
We will continue to advance funds under note agreements to providers that
subscribe to our financial services lending solutions.
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, 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 bore interest at 10% per year, and both interest and
principal were paid in full on the January 21, 2007 maturity date.
On
August
31, 2007, we received gross proceeds of $250,000 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 $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 Convertible
Note, interest and closing expenses) in connection with a 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 will
become due and payable on December 2, 2008.
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 to conduct our business and operations as
they
are currently undertaken for the balance of the fiscal year.
29
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.
Cash
flows
At
March
31, 2008, we had cash of $6,928,582.
Net
cash
used in operating activities was $583,605 for the three months ended March
31,
2008 as compared to $1,286,390 for the three months ended March 31, 2007, a
decrease of $702,785. This decrease is primarily attributable to the net effect
of an increase in our net loss and:
|
1.
|
Gottbetter
debt offering costs of $73,698 and Gottbetter debt discount costs
of
$1,264,742, compared to debt related costs during the three months
ended
March 31, 2007 of $461,268;
|
|
2.
|
Stock-based
compensation of $381,505 versus stock-based compensation expense
of
$910,653 for the three months ended March 31, 2007 primarily related
to
issuance of stock options in 2007 to
employees;
|
|
3.
|
A
net decrease in notes receivable, accounts receivable and prepaid
expenses
aggregating $15,078 principally related to the reduction in notes
receivables from providers that subscribe to our MDwerks financial
services solution;
|
|
4.
|
An
increase in accounts payable, accrued expenses, and deferred revenue
related to an increase in operating activities aggregating
$168,796.
|
Net
cash
used in investing activities was $0 for the three months ended March 31, 2008,
as compared to $1,716 for the three months ended March 31, 2007.
Net
cash
provided by financing activities was $7,191,284 due to the proceeds from the
sale of Series B Preferred Stock for the three months ended March 31, 2008,
as
compared to net cash used by financing activities of $127,545 due to repayments
of notes and loan payable for the three months ended March 31,
2007.
Off
Balance Sheet Arrangements
We
had no
off balance sheet arrangements as of March 31, 2008.
30
BUSINESS
Introduction
We
are
engaged in the business of electronic insurance claims processing, billing
and
coding, and advance funding and purchasing of claims for healthcare
providers based upon receivables owed from third-party payers such as insurance
companies. We offer a comprehensive selection of electronic medical claims
processing, funding, purchasing and collection solutions to the healthcare
provider industry. Our services, which are easily accessible through an Internet
web browser, help doctors, hospital based practices, and other healthcare
providers and their vendors significantly improve daily insurance claims
transaction administration and management as follows:
| • |
Increase
office efficiencies and lower collection
costs;
|
| • |
Reduce
administrative workload;
|
| • |
Improve
claims accuracy before submission to, and increase acceptance by,
third-party payers;
|
| • |
Reduce
payment cycle time;
|
| • |
Improve
cash flow management;
|
| • |
Increase
revenue control;
|
| • |
Leverage
receivables through competitive short-term financing
arrangements;
|
| • |
Improve
information management, financial security and provider regulatory
compliance;
|
| • |
Provide
“end-to-end” solution for claims management;
and
|
| • |
Fully
automate the revenue process by the use of electronic claims and
remittance advice and payment
reconciliation.
|
We
conduct our business through three wholly-owned subsidiaries of our wholly-owned
subsidiary, MDwerks Global Holdings, Inc., namely: Xeni Medical Systems, Inc.
(“Xeni Systems”); Xeni Medical Billing, Corp. (“Xeni Billing”); and Xeni
Financial Services, Corp. (“Xeni Financial” and, together with Xeni Systems and
Xeni Billing, the “Xeni Companies”).
Claims
Management Services
Our
CLAIMwerks™
solutions, which are offered through Xeni Systems, can provide actual contract
based, insurance company comparable screening and analysis of medical claims
directly from a healthcare provider’s practice management system, so that
deficiencies and errors can be corrected before they are submitted to insurance
companies for electronic payment. Our CLAIMwerks™
solutions and services improve a healthcare provider’s ability to process and
manage claims for reimbursement from third-party payers by consolidating the
process (including clearinghouse, contract management and remittance functions).
As part of our CLAIMwerks™
services, we integrate transactions involving insurance claims by providing
a
single interface for the healthcare provider, the payer (such as an insurance
company) and the lender (when the healthcare provider elects to take advantage
of receivables financing).
Xeni
Systems collects transaction fees from healthcare providers for: the analysis,
automated processing, electronic submission, and reporting of claim information;
management of healthcare provider contracts for pricing and rules; electronic
remittance of payments; explanations of benefits (payments) (EOBs) made
available from payers; and, reconciliation and posting of the payments and
EOBs.
Fees may also be generated from third-party lenders for the valuation of
processed claims that are used as collateral, as well as administrative tasks
related to the disbursement of funds. Fees may also be collected from
clearinghouses and insurance companies for submitting more accurate claims,
once
certain volume levels are achieved. One-time implementation fees may be
collected for initial set-up and training.
31
Although
we do not currently offer asset and wealth management services, we may have
the
opportunity to offer asset and wealth management services through third-party
sources. We expect to receive referral or administrative handling fees for
these
services.
Billing
Services
Our
BILLwerks™
solutions provide value added billing services, leveraging the Xeni Systems
technology solutions and services for improved efficiencies. As part of our
BILLwerks™
solutions, Xeni Billing offers collections and appeals services, as well as
solutions for the collection of old existing medical claim submissions. Our
BILLwerks™
solutions are designed to operate in an integrated fashion with the solutions
and services offered by Xeni Systems, there are fewer manual and paper functions
to be performed in the combined claims management processing/billing solutions
process offered by Xeni Systems and Xeni Billing. This can enhance a healthcare
provider’s claims related operations and controls even more than using the
stand-alone solutions offered by Xeni Systems.
Xeni
Billing typically charges providers (directly or as a subcontractor of Xeni
Systems) fees as a percentage of collected claims. Xeni Billing also shares
fees
(as a channel associate) with Xeni Systems for supporting its claims process
and
information management. Additionally, Xeni Billing can collect one-time set-up
fees, appeals and third-party appeals work fees and consulting fees for
customization or support of the healthcare provider outside the scope of
services. Finally, Xeni Billing may share in claims revenue recovered when
contracted to perform reviews of unpaid claims that were submitted to payers
prior to use of our automated claims submission solutions and
services.
Financing Services
Our
FUNDwerks™
solutions electronically manage loans, loan repayments and the movement of
funds
through linked bank accounts.
Through
Xeni Financial, we can offer to lend or arrange lending from third parties
to
healthcare providers on a short-term, revolving line of credit and sometimes
on
a term loan basis. The loans are secured by medical claims receivable, which
may
be processed by Xeni Systems. Like Xeni Billing, Xeni Financial leverages the
solutions and services offered by Xeni Systems to value the claims, score risk,
document and track claims payment status, verify remittance of payments from
insurance companies and sweep funds to the appropriate accounts with the
assistance of electronic and automated processes. Xeni Financial is able to
arrange loans at attractive rates and terms, since it has not had to invest
significant capital to develop or make a major hardware and software purchase
of
a system to make loans secured by receivables. It also does not need to maintain
a large workforce as it can manage many of its business processes through the
solutions and services offered by Xeni Systems. Xeni Financial can lend to
healthcare providers on the merit of the receivables and can even lend on
Medicare claims.
Xeni
Financial can also offer to purchase medical claims at a significant discount
to
face value. The claims Xeni
Financial may purchase
include
claims for the treatment of worker’s compensation-related injuries or diseases
or reimbursement of benefits under
private
industry health and pension plans governed by the ERISA.
Claims may be purchased directly from a provider or from a vendor or supplier
of
worker’s compensation prescription medication or durable medical equipment.
Xeni
Financial is responsible for collecting the value of purchased claims for its
own account. Xeni Financial can leverage Xeni Billing and third party collectors
to perform the collection services. Xeni Financial incurs the fees and expenses
of collection and the costs, including interest expense, of carrying the claims
on its own account. At the same time, Xeni Financial gains
the
opportunity to increase the return on its financing solutions.
Consulting
Services
Although
we provide Internet-based solutions that do not require our customers to
purchase new hardware or software, healthcare providers can take advantage
of
customized and premium enhancements through our third-party associates,
including medical billing services and automated appeals of adjudicated claims.
Consulting services are also available to enhance healthcare provider practices
or business operations.
Workers’
Compensation, Durable Medical Equipment and Pharmacy Claim
Services
Our
current products and services have been focused on improving the ability of
healthcare providers to (i) collect on commercial and government insurance
claims and (ii) enhance their cash flow controls. We have decided to expand
our
current service offerings to include the electronic processing, management
and
funding of workers’ compensation, durable medical equipment and pharmacy
claims.
32
By
using
our present technology, we plan to offer a greatly improved electronic workers’
compensation, durable medical equipment and pharmacy claims collections and
remittance process to our clients in place of today’s existing error-ridden,
paper-based method. Many provider practices avoid workers’ compensation patients
because of the time, effort, and cost associated with getting paid, thereby
forgoing perhaps as much as 10% to 25% of their revenue. MDwerks can greatly
improve the ability of healthcare providers to be paid on workers’ compensation
claims and enable them to continue to provide or expand these
services.
We
can
manage claims transactions electronically from three perspectives in connection
with workers’ compensation claims: the provider, the insurance company payer and
the lender (when the provider elects to take advantage of our receivables
financing). Our system can manage each workers’ compensation claim transaction
by leveraging our tools to automatically analyze claims and record collections,
appeals and funding. Because we designed our products and services to operate
in
a fully-integrated electronic environment with provider and payer systems,
there
are fewer manual and paper functions to perform in the combined claims
processing/billing solution, which should result in reduced errors as well
as
fewer payment delays and lower collection costs.
Through
Xeni Billing, MDwerks can offer collections and appeals services for workers’
compensation claims. This allows healthcare providers to outsource these tasks
from their offices and focus resources in other areas.
Through
Xeni Financial, MDwerks can offer funding to healthcare providers on a
short-term, revolving line of credit or term loan basis, or in some cases can
purchase healthcare providers’ receivables. Receivables are secured by claims
processed through the MDwerks System. Our system also can include MDwerks’ tools
to help lenders value claims, score risk, document and track claims payments,
verify remittance and sweep funds to appropriate bank accounts with electronic
and automated processes.
MDwerks
can collect transaction fees for automated processing, submission, reporting
and
analysis of workers’ compensation claims information and management of payer
contracts rules and pricing. Fees can be collected for information management
on
processed claims that are used as collateral and for administrative tasks
related to the movement of funds among bank accounts. Fees can also be collected
from clearinghouses and insurance companies to which MDwerks sends cleaner
claims electronically. One-time fees can be charged for initial set-up and
training.
Market
for Our Solutions and Services
Healthcare
providers face serious challenges in processing claims submitted to third-party
payers, as well as in getting correct and prompt payment from payers. Claims
must be prepared by gathering data from the front office to the back, with
processing often occurring at different times and locations for each procedure.
Many healthcare providers’ current billing systems require the performance of
different steps by different third-party sources. Claims can move among the
healthcare provider’s internal staff, through a practice management system and
across multiple offices, to billing, editing engines, clearinghouse, contract
management, banking and other resources.
The
need
for security and privacy of patient information requires complex data
management. Claims may be processed on the payer end through out-of-network
claims administrators, re-pricing organizations, third-party administrators,
managed care organizations, independent physician associations, and preferred
provider organizations. Further, healthcare providers face continuing pressure
from payers to accept lower fees on changing definitions of covered claims,
with
variations in customary remittance values. At the same time, payers require
precise documentation and justification for covered claims.
Claims
may be rejected for a variety of reasons including medical necessity,
eligibility, coding errors, tardiness, deductibles, referrals,
pre-certifications and improper documentation. Lack of access to basic, but
important, claim information and the lack of real-time data and feedback may
waste office hours and affect reimbursement. Repetitive paperwork and phone
conversations dealing with disputes, errors and rejections may be typical
occurrences in the provider’s office. Additionally, the failure, or inability,
to match claims against existing contracts, when added to these other factors,
can make it extremely difficult to determine how much and when the healthcare
provider will be paid.
33
Management
of the status of claims and valuation, remittance and validation of proper
payment and disbursement requires detailed real time information. If claims
are
not being compared to contracts in real time, and if robust tracking and
auditing mechanisms are not in place, then the availability and transparency
of
data cannot be optimized. As a result, the healthcare provider’s financial
managers may only estimate results, with varying degrees of volatility, cash
flow predictability and accuracy. Moreover, they may miss, ignore or abandon
incorrect or partial payments.
The
challenges faced in connection with claims management can result in lost
revenue, volatile and unsatisfactory cash flow, inaccurate reporting,
inefficient management of operations and attendant increases in office workload,
expenses and costs of borrowing. In the past, healthcare providers have been
required to use a patchwork of internal and third-party resources to address
these problems, with mixed results. For example, billing and practice management
systems attempt to address the claims processing market predominantly by selling
proprietary hardware and software products (and maintenance and upgrades or
customization), with various degrees of success in features and benefits. They
may or may not generate HIPAA compliant electronic forms from their systems,
and
if they do, such forms may be mapped and formatted in different ways, leading
to
potential errors and problems with acceptance and payment. Ultimately, they
offer tools that require office staff and/or external resources to perform
critical claims management functions.
Claims-related
management challenges have also greatly impacted the borrowing abilities of
healthcare providers. Healthcare providers typically borrow by factoring their
receivables arising out of non-Medicare insurance claims, personally guarantying
a loan with their own credit, bundling large provider claims for sale to wealthy
private investors or taking an expensive asset-based loan against claims
receivables at a significant discount with significant required reserves.
Lenders typically have not been able to offer short-term, revolving credit
lines
on receivables arising out of insurance claims, because of the existing
difficulty in qualifying them as low risk, high quality, and commoditized
collateral. Lenders remain concerned about safely and accurately assessing
either the true value or the payment risk associated with any given claim or
group of claims. Any solution to this problem is further complicated by the
lender’s resistance to risking the purchase of an inadequate or expensive
customized solution to serve this market.
Short-term,
revolving lines of credit on medical receivables require a solution that
mitigates the uncertainty of quickly and accurately assessing the true market
value of claims, their aging and cycle times and their inherent lending risk
through a complex series of verifications and evaluations. Assessment, and
the
subsequent presentation of results, must be accomplished in a real time, secure
environment. Cycle times for claims remittances must be short (ideally at or
below 45-60 days). Additionally, the cost of administering and processing must
leave net interest margins that justify the loan.
We
believe our integrated suite of solutions and services are the first to market
offering healthcare providers and their lenders comprehensive, cost efficient
and superior claims processing and management solutions over the Internet.
Our
integrated systems can become a healthcare provider’s single source platform for
integrating claims management and funding functions. Our solutions and services
quickly improve claims accuracy, valuation and remittance success, enable
outsourced payer contract management, facilitate prompt financing of claims,
and
produce superior cash and information management. Our technology also offers
benefits to small and medium healthcare provider practices with limited
resources and staff, allowing them to perform or facilitate the performance
of
tasks and functions previously only available to much larger practices capable
of purchasing more sophisticated and expensive tools and hiring more people
to
use them. It also allows many financial institutions to lend to healthcare
providers on qualified receivables, at risk and cost factors not previously
available. With our products and services, healthcare providers of a variety
of
specialties and sizes have the ability to leverage an ‘‘end-to-end’’ claims
management solution.
34
By
combining automated batched and real time functionality into a proprietary
‘‘end
to end’’ claims management and funding system, we believe that our solutions and
services offer superior value and competitive advantages, including the
following:
| • |
Reduced
Workload: Healthcare
providers can reduce and/or eliminate manual, labor intensive, repetitive
and inefficient administrative functions. The level of reduction
depends
on many factors, including the type of practice management and billing
systems in use, number of staff members and their training and skills
in
operating existing systems, practice size and mix and contractual
relationships with payers, and how paper intensive or electronic
their
existing process may be.
|
| • |
“Pay
as You Go”: Fees
charged to healthcare providers for processing insurance claims typically
are fixed monthly or calculated as a percentage of each claim’s contract
valuation or predicted value, based on history and regional Medicare
tables for reference, if, for example, if a healthcare provider is
out-of-network. The use of our solutions and services does not require
high up-front investment, hardware and software purchases, or payment
based on number of claims submitted or the amount of billed
claims.
|
| • |
Superior
Cash Management: In
as little as five business days or less, healthcare providers can
borrow
funds from us at competitive short-term rates against a determined
value
of each submitted claim. Healthcare providers and lenders can choose
amounts or categories of claims for funding, including Medicare claims.
Financial institutions have an automated risk profile and lending
process
available to them on a daily claim-by-claim basis, which is customized
to
their own lending parameters, without the necessity of building new
lending tools.
|
| • |
Increased
Efficiency/Lower Costs: Claims
that we process are ‘‘flagged’’ for potential errors as they are received,
based on a combination of proprietary technology and use of the same
type
of rules engine as many insurance companies. Healthcare providers
managing
their own claims can edit flagged claims using simple prompts, so
a
‘‘cleaner’’ claim can be submitted to the payer. Claim values are
determined daily against actual contracts and payment tables, when
available, and are adjusted for history and changes in insurance
plans.
Healthcare providers can know almost exactly how much they will get
paid
on claims. Also, multiple healthcare provider locations can be connected
to capture information earlier and more
accurately.
|
| • |
Superior
Information Management: Healthcare
providers have access to daily reports on claims status, their expected
(not just billed) value, and tools for tracking, auditing and confirming
claims remittance, verification and payment. This means they can
spend
less time trying to determine what is owed and by whom and more time
taking action to collect what is
owed.
|
| • |
Web-based,
User Friendly Technology: The
solutions and services that we offer can be accessed over the Internet
using standard Microsoft Explorer software (or most other browser
software) on standard Windows desktop hardware and software. The
systems
are designed to be used ‘‘off the shelf’’ with no need to purchase
additional hardware or software, and are designed to support large
numbers
of users. They also can be easily expanded to accommodate future
growth.
|
| • |
Integrated
Functions: Healthcare
providers can integrate and consolidate, through a single source,
multiple
claims processing and management functions within their offices,
across
multiple offices and across third-party vendors, including insurance
companies, banks and
clearinghouses.
|
We
believe that the technology that we deploy offers the following competitive
advantages:
| • |
First
in Marketplace: We
believe we are one of the first application service providers to
offer a
fully electronic comprehensive bundled service that provides web-based
insurance claims management, billing services and lending services
(for
both borrowers and lenders). This creates a unique, cost effective
advantage in capturing clients and developing brand
loyalty.
|
35
| · |
Barriers
to Entry: We
believe potential competitors face significant barriers to
duplicating what we have to offer, including the
following:
|
Process: Aggregating
and integrating healthcare providers, insurance companies and financial
institutions in a legally compliant manner requires a very complex business
process.
Cost
to Develop: Matching
features and benefits of our systems would require substantial investment
and
substantial time and technical resources.
Extensive/Proprietary
Feature Set: We
offer
an extensive and unique feature set.
Complex
to Build: The
solutions and services that we offer were developed as a multi-tiered high
availability solution, requiring substantial software engineering expertise.
Solutions were derived from expertise in insurance, banking, medical, legal
and
other industries, requiring more than just technical production.
Extensive
Compliance Issues: We
operate amidst a highly regulated environment. For example, we must operate
in
accordance with HIPAA, the Financial Holding Company Act and the
Gramm-Leach-Bliley Act. Requirements for handling patient information and
claims
securely are complex and may serve as a major development challenge to some
competitors. Furthermore, we must operate in accordance with state regulations
regarding fee-splitting with medical professionals.
| · |
Features
Appeal to Lenders: Our
solutions and services appeal to lenders, because lenders do not
have to
negotiate to purchase receivables, acquire a system to process
claims for
financing or buy hardware and software from us. At the same time,
asset
based loan assessments can be performed against actual claims value
and
status on a daily basis, potentially increasing the value and collateral
associated with a loan and reducing
risk.
|
| · |
Contract
management is critical to maximizing
reimbursement: Complying
with terms for getting paid on a claim, accurately valuing the
claim and
monitoring pricing for each contract creates more reliable receivables
security for desired loans.
|
| · |
Superior
Claims Engine: We
aggregate the entire insurance carrier network through the use
of a
combination of third-party and proprietary claims engine functions.
This
enables healthcare providers to have access to all insurance carriers
for
electronic claims handling through a single
solution.
|
| · |
Module
Independence: Many
components of our solutions and services can be utilized independently
of
each other, making different technologies rapidly available, and
allowing
us to adapt quickly to new client
requests.
|
Industry
Analysis
Industry
Size
Healthcare
has been called the single largest industry in the United States. According
to
the Centers for Medicare and Medicaid Services (‘‘CMS’’), it is expected to
reach $3.0 trillion plus over the next three years. The national healthcare
expenditure projections are produced annually by the Office of the Actuary
at
the CMS. They are based on historical national health expenditures and a
model
framework that incorporates actuarial, econometric, and judgmental factors.
National health expenditures are forecast to reach $3.3 trillion by 2012,
growing at a mean annual rate of 7.3%. During this period, health spending
is
expected to grow 2.5% per year faster than nominal gross domestic product
(GDP),
so that by 2012 it will constitute approximately 18.8% of GDP compared to
its
2000 level of 13.8%.
36
The
general term ‘‘Healthcare’’ encompasses a multitude of products and services. In
2007, CMS forecasted $2.33 trillion in health expenditures expected to be
distributed by type of expenditure as follows:
The
source of payment for 2007 expenditures was distributed as follows: (source:
CMS): Private health insurance: $806.2 billion, federal: $789.5 billion,
out-of-pocket payments: $261.9 billion, state and local: $299.2 billion,
and
other private funds: $169.0 billion.
Market
Needs
Technology
has provided increased efficiency, especially in the delivery of healthcare.
However, one of the most troubled areas is the medical claims billing,
processing, and payment area. This segment continues to suffer errors and
inefficiencies, as well as large amounts of paper transactions and piecemeal
solutions, leaving a significant claims management burden in the provider’s back
office.
Claims
processing is a chief contributor, since the vast majority of claim transactions
require a large amount of manual intervention. Healthcare is unlike many
other
businesses in that the value of the service is determined retrospectively.
This
negative aspect of the business becomes more evident and pronounced when
coupled
with workers’ compensation and personal injury medical services, which have
additional administrative hurdles to overcome to receive payment. These facts,
combined with a paper and manual work dependent system, result in significant
inefficiencies in the claims, filings payment and reconciliation process.
Our
system can greatly reduce these inefficiencies by automating and replacing
many
manual labor-intensive, paper-ridden processes with fully electronic processes,
which increase the information available to manage and collect outstanding
claims. Medical claims processed in the United States escalated from just
5
billion in 1990 to more than 10 billion at the turn of the 21st century and
this
figure has been steadily increasing. According to the AMA, the average number
of
claims generated per doctor is 440 claims per month.
Payers
realize the importance of moving claim transactions to electronic media through
the Internet. From the payers’ perspective, administrative costs could be
substantially lowered if claims were submitted electronically and were accurate
enough to be adjudicated by a computer system without any requirement for
manual
intervention and/or resubmission. Payers could also save administrative costs
by
implementing electronic payment systems, including electronic explanation
of
payments.
HIPAA
requires payers to move to electronic claim transactions and establish format
standards. Although payers continue to make significant technology investments
to comply, as well as for their own e-commerce objectives, providers are
behind
in technical expertise and system resources necessary to effect change, and
are
burdened with paying for systems and processes to become compliant. As HIPAA
compliance is now enforceable by fines, the pressure for secure and compliant
solutions has become greater than ever.
37
HIPAA
has
compelled health plans, clearing houses and other healthcare providers to
move
to a uniform electronic format. Specifically, HIPAA requires standard electronic
formats for the following transactions:
| · |
Healthcare
claims or equivalent encounter
information;
|
| · |
Healthcare
payment and remittance advice;
|
| · |
Coordination
of benefits when separate plans have differing payment
responsibilities;
|
| · |
Health
claims status when providers inquire about claims they have
submitted;
|
| · |
Plan
enrollment and dis-enrollment;
|
| · |
Health
plan eligibility;
|
| · |
Health
plan premium payments;
|
| · |
Referral
certifications and authorizations;
|
| · |
First
reports of injuries or illnesses;
|
| · |
Health
claims attachments used to justify services;
and
|
| · |
Other
transactions the federal government may specify in the
future.
|
We
view
this highly inefficient market as our primary opportunity. Our solutions
and
services can significantly decrease the cost of claims processing for both
providers and payers, and can also create a new asset class consisting of
claims, against which financial institutions can lend.
Market
Strategy
We
plan
to sell 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 will consist mainly
of
specialized sales executives with industry knowledge and/or a portfolio of
contacts. External resources will 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 expect to focus our initial marketing efforts in geographic
areas that contain high concentrations of prospective clients, such as
California, Florida, Massachusetts, Texas, New York and New Jersey. Since
part
of our business involves management and review of healthcare provider contracts
with payers, and their contracts tend to be similar by region, we believe
that a
concentration of marketing efforts in areas with high concentrations of
prospective clients will also reduce costs (for example, by reducing processing
of repetitive contract pricing and increasing set-up efficiencies for field
reps) as well as increasing revenues.
Media
Marketing
Our
advertising strategy prioritizes spending to facilitate sales goals. We expect
to utilize internal and external resources to develop advertising mediums
to open the appropriate sales opportunities, which may include the
following:
| · |
Business-to-business
advertising;
|
38
| · |
Search
engine and Web-site advertising;
|
| · |
Direct
marketing;
|
| · |
Magazine/trade
journal advertising;
|
| · |
Trade-show
advertising, slogans and headlines;
and
|
| · |
Media
advertising (television, radio, billboards, Internet,
etc.).
|
Non-Media
Marketing
We
expect
to accelerate client acquisition by marketing through independent sales and
affinity business representatives. Typical independent sales representatives
are
already selling other products and services of other companies to the same
target market and may be looking for new, non-competitive lines to promote.
Affinity business representatives sell their own complimentary products or
services, and may see our solutions and services as a new product line,
enhancement or up-sell to their existing line. Affinity business representatives
are expected to include vendors and suppliers of healthcare providers, such
as
clearinghouses, diagnostic services and medical supply companies, as well
as
billing and practice management product sellers. Banks and insurance companies
can make excellent affinity business representatives, as we offer
‘‘off-the-shelf’’ access to the lucrative healthcare provider community for a
new lending product, with tremendous up-selling opportunities, including
by
co-branding and return referrals to the other services that they
represent.
We
believe independent representatives will offer us access to healthcare providers
based on existing relationships, as well as pre-determined variable costs
of
subscriber acquisition tied to sales or referral success. We believe we will
rapidly gain field presence, experienced personnel and credibility without
investing in, and building, resources from the ground up. Multiple resources
can
be engaged in minimal time to acquire subscriber prospects.
Sales
Methods
Sales
will be generated by conventional methods which may include direct sales
calls,
trade shows, seminars, dinners, webcasts and direct mail. Lead generation
will
include Internet presence and third-party referral sources. We also expect
to
obtain sales from strategic business alliances.
Revenue
Generation
We
expect
to generate revenues derived from healthcare providers, their payers and
lenders, as well as strategic associates that pay referral fees. Examples
include the following:
CLAIMwerks™
Subscription Fees: Healthcare
providers are typically charged a percentage of the value of every claim
that we
process for administration of claims, including claims remittances through
various accounts, with a minimum monthly fee; occasionally, other payment
arrangements are made.
FUNDwerks™
Fees: Providers
are typically charged an increased percentage (from that charged for
CLAIMwerks™)
of the
value of every claim that we process in consideration of administration of
the
loan, including for its settlement and posting, with a minimum monthly fee.
A
provider cannot subscribe to FUNDwerks™
without
also subscribing to CLAIMwerks™,
the
underlying technology platform.
BILLwerks™
Fees: Providers
are typically charged a percentage of the value of every claim that is collected
by Xeni Billing for collections, appeals and patient letter billing services;
occasionally, other payment arrangements are made. Like FUNDwerks™,
BILLwerks™
billing
functionality is a value-added service to CLAIMwerks™
solutions and cannot be subscribed to separately.
Support
Fees:
Healthcare providers and financial institutions are typically charged a one-time
setup and training fee.
39
Payer
and Clearinghouse Fees: We
may
be able to charge payers and clearinghouses fees per clean claim submitted,
based on achieving minimum volume requirements.
Financial
Institution Fees: Lenders
may pay basis points or other fees to us based on the value of each new claim
loaned against, for accessing and using the lending tools that we
offer.
Customization
and Consulting Fees: Clients
will be charged for any non-standard client support, consulting and any
customization, such as for electronic interfaces from the healthcare provider’s
existing legacy management system to our systems.
Referral
Fees: Lenders,
billing companies and others may generate referral or administrative fees
for
cross or up selling of their products.
New
Lines of Business
We
plan
to capitalize on our proven technology and apply it to solving the more complex
administrative issues associated with Workers’
Compensation and Personal Injury claims. We expect to generate new revenue
derived from healthcare providers, their payers and lenders, as well as
strategic associates who pay referral fees.
Providers
can also be charged a percentage of the value or discount fee for every workers’
compensation claim that we process in consideration of administration of
the
loan or purchases, including settlement and posting, with a minimum monthly
fee.
We
also
plan to generate additional revenues through strategic
acquisitions.
Competition
The
market for medical claims-related products and services is generally highly
competitive and subject to constant change as a result of new product
introductions, technological developments and market activities of industry
participants. We anticipate competition from a number of public and private
companies involved in the business of medical claims transaction processing
and
solutions, including editing engines, claims management and/or practice
management systems, clearinghouses, and medical receivable funding companies.
We
are also aware that other companies offer products and services with some
or
many features similar to those that we offer. However, we are not aware of
any
direct competition that offers in one system the full set of comprehensive
features that we offer, including our proprietary combination of automation,
batching and real time functionality, especially as it relates to our planned
workers’ compensation, durable medical equipment and pharmacy claims services.
Some of the various types of services or systems that offer aspects found
in the
suite of products that we offer include the following:
| · |
Claims
Management /Practice Management Systems: Claims
management and/or practice management systems are used by all
forms of
healthcare providers and medical billing companies. They offer
such
services as eligibility verification, claim scrubbing, claim
status
inquiry, claim submission and remittance, comprehensive reporting,
patient
statement processing and patient scheduling, although we believe
only a
few offer the full range of services that we
offer.
|
For
example, AthenaHealth is a Web-based practice management system offering
subscribers all the above services, including a sophisticated rules engine
similar to ours, and charges on a flat monthly fee per provider and/or a
percentage of revenue collected, depending on the products and services
selected. AthenaHealth offers products and services that are similar to ours,
however, we do not believe they offer advance funding features. Most critically,
the use of AthenaHealth products and services is dependent on the purchase
or
subscription to the AthenaHealth practice management system, requiring a
change
of technology, management, use of tools and processes in the provider’s
office.
40
We
understand OrthoMart provides a web based practice management system that
offers services for commercial and government claims, including workers’
compensation type claims. We do not believe OrthoMart provides contract-based
claims analysis, advance funding or automated account reconciliation functions.
Like AthenaHealth and similar competitors, the provision of OrthoMart solutions
may require a significant change in the provider’s office, and continue to
rely on the combination of their system tools and office or external resources
to perform many critical functions, which may be simplified or eliminated
by our
solutions. Our solutions connect into practice management systems and help
enhance and optimize their use by the provider through the performance of
functions outside of the office and by not requiring a fundamental change
of
process and technology in the office.
We
believe other practice management systems, such as the EZDME web-based solution,
cater only to processing durable medical equipment type claims and require
the
healthcare provider to purchase or subscribe to an array of ‘‘add-on’’ modules
to take advantage of a complete package of tools and services. By comparison,
our services are packaged as bundled services offering end-to-end solutions.
Additionally, these competitors are marketed as an alternative to the healthcare
provider’s current billing system. Our products and services are designed to
‘‘plug in’’ to, and work in conjunction with, a healthcare provider’s existing
system to simplify and accelerate the means of claims payment.
| · |
Clearinghouses: A
clearinghouse functions primarily as a conduit between a healthcare
provider and payer by electronically transmitting claims, or converting
claims to paper format when necessary. Currently, there are many
clearinghouses in operation and competition is fierce amongst
them.
|
Although
many clearinghouses boast about their particular ‘‘claim scrubbing’’ features,
these are typically limited to the most basic editing functions, namely
validating for format and completeness. Some clearinghouses claim to maintain
or
access payer specific databases. Such databases allow potential editing
enhancements, but not analysis of claims prior to submission. They also are
not
verifying and fixing claims against specific contracts, rules and fee schedules
applicable to the specific provider and particular claim. One advantage
clearinghouses do have is their ability to meet the specific data requirements
of designated payers. However, we offer this same advantage, by contracting
directly with clearinghouses such as Emdeon and including their value added
services with our own. The end result is that all the unique features offered
by
clearinghouses are passed on to our clients, eliminating the need for a
healthcare provider’s separate clearinghouse submission and
expense.
One
competitor, Providerpay.com, claims it will process a healthcare provider’s
submissions against payer-specific edits, send the claim on to the payer,
advance funds on a line of credit and deposit those funds into the provider’s
operating account within two business days. Providerpay.com also claims to
process the payment and deposit it to the provider’s account. The healthcare
provider may access certain information regarding the history of submitted
claims, including claims status.
Providerpay.com’s
website states that Providerpay.com is a cooperative effort of P5, Inc.,
and a
bank, and involves technology that may be patent protected or patent pending.
Providerpay.com is advertised as ‘‘complete payment
solutions’’.
41
Providerpay.com
appears to have some Web-based tools for performing data-based edits, like
other
clearinghouses, and then funding on a line of credit with a bank. There is
no
indication the edits are based on actual payer contracts or an outsourced
contract management system with automated, batched and/or real time
functionality. There is no indication of eligibility, pre-certification or
referral analysis. The loan is not advertised as a revolving line of credit,
but
rather a more conventional type of loan as described below. Similarly, it
is
unclear Providerpay.com automates/batches reconciliation, settlement and
account
management for all providers and payers, or posts critical information back
to
the provider’s practice management system. Rather, its website and published
online help documentation seems to indicate the potential for extensive user
interaction with its system. This user intervention may include providers
performing their own reconciliation and sending and managing claims through
multiple sources and clearinghouses. Finally, there is no indication of billing
or collection services, either as a separate or integrated feature of their
system. Additionally, Providerpay.com’s website does not indicate funding or
electronic submission and/or remittance reconciliation for workers’
compensation, durable medical equipment and pharmacy claims.
| · |
Editing
Engines: Some
form of ‘‘editing engine’’ is integrated into most practice management or
claims management systems, as well as clearinghouses. These engines
allow
healthcare providers to submit ‘‘cleaner’’ claims to payers, thereby
reducing the percentage of rejections, reductions or denials. The
significant difference with most editing engines, however, is that
the
healthcare provider maintains them, which can be costly and time
consuming. Our clients do not have to continually monitor and update
the
rules engine to ensure the proper edits are in place.
|
| · |
Medical
Receivables Funding: Until
recently, a healthcare provider’s options for immediate cash flow were
mostly limited to bank loans based on personal credit and personal
guarantees, sales of claims to factoring companies, or bundling
of claims
in large volume practices for sale to wealthy private investors.
Collateral security could include medical equipment and office
assets such
as fixtures and furnishings, as well as compensating
balances.
|
A
bank
loan is reflected on a healthcare provider’s balance sheet as a debt, and
requires repayment of the debt with cash. Factoring companies actually purchase
claims from healthcare providers, creating ‘‘off balance sheet’’ funding. This
may seem like an attractive offer and quick solution for healthcare providers;
however, it requires selling a claim for a significantly reduced price, as the
‘‘purchase’’ amount is determined to a great extent by the estimated risk and
time that it will take for a particular payer to adjudicate or deny payment
of
the claims, as well as allowing for a substantial discount on the claims,
because of the typically significant variation in billing-to-collection ratios
experienced by most healthcare providers.
True
advance funding of medical receivables is a relatively new service in the
healthcare industry. One competitor offering these services is Medical Capital
Financing, which purports to lend up to 85% of the estimated reimbursement
on a
weekly basis, calculated as an aggregate value based on past billing and
collection history. The fees charged to the healthcare provider are also
based
on such factors as size of practice, size of weekly receivables, and average
turnaround time. Triad Capital is another competitor. It currently only offers
lending to healthcare providers with net receivables of $50,000 or more,
funds
on a weekly basis, and charges a set-up fee with an average fee of 3-4 percent
of the value of every invoice purchased. It will also purchase aged and
charged-off invoices.
First
Capital Funding Corporation (‘‘First Capital’’) represents a typical medical
receivables funding service. It currently arranges for funding of up to 85%
of
net receivables (as determined by First Capital) within 48 hours. First Capital
merely performs a due diligence audit of outstanding receivables and then
finds
a lending source to provide funding. One significant disadvantage of First
Capital is that the healthcare provider has no control over the loaned amounts
each month. The amount is established at the time of application and remains
the
same throughout the term of the contract.
42
Providerpay.com
offers a funding service with some features bearing some similarity to ours.
Providerpay.com states that it will provide a line of credit within two business
days of a claim passing certain claim edits and submitted only through its
clearinghouse. Interest, guarantee types, asset security and covered payer
claims are undisclosed. Comprehensive integrated claims management and billing
solutions do not appear to be offered. Claims must be funded only through
its
clearinghouse and only with a single bank. Our revolving line of credit
capabilities appear more extensive, including in areas critical to the
automation and reduction of administrative workload and human intervention,
as
well as information demanded of a complete claims management and payment
solutions for providers and lenders. For instance, all of our solutions and
services are designed to work with multiple clearinghouses and
lenders.
Despite
the increasing business of medical receivable purchasing and/or funding
services, we distinguish ourselves by offering a short-term (120 days or
less)
revolving line of credit, where the primary security is intended to be the
claims receivables and not other provider assets or personal credit. As an
asset-based loan, Medicare claims can be leveraged. Since claims are flagged
and
scrubbed before submission, and are valued against actual payer contracts
and
rules, valuation is enhanced, risk is reduced and costs of money can be more
competitive. Since we can offer to advance funds to healthcare providers
in as
little as five business days or less from the date of claim submission for
payment, coupled with low administrative fees, and a proprietary combination
of
automated or batched reconciliation, posting, settlement, reporting and billing
solutions we believe this service to be a major marketing advantage. Our
new
offerings extend this advantage to the very unique workers’ compensation,
durable medical equipment and pharmacy claims processing, purchasing and/or
funding market.
43
Competitive
Analysis – Feature Comparison Chart
|
Features
|
|
MDwerks
|
|
ProviderPay
|
|
EMDEON
|
|
ATHENA
|
|
OrthoMart
|
|
EZDME
|
|
HIPAA-compliant
EDI
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
Processes
commercial and Medicare claims
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
Processes
Worker’s Comp and Personal Injury claims
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
Processes
DME and Pharmacy claims
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
Electronic
claim submission to Medical Insurance
companies
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
Electronic
claim submission to Causality Insurance
companies
|
|
X
|
|
|
|
|
|
|
X
|
|
X
|
|
|
Online
claim status inquiry
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Online
patient eligibility verification
|
|
X
|
|
|
|
X
|
|
X
|
|
|
|
|
|
Fully
managed network Payer Contract Service
|
|
X
|
|
|
|
|
|
X
|
|
|
|
|
|
In-depth
real-time clinical claim edits and error
analysis
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
|
|
Automatic
data table updates (CPTs, ICDs, and Fee
Schedules)
|
|
X
|
|
|
|
X
|
|
X
|
|
|
|
|
|
Advanced
reporting and statistical analysis
|
|
X
|
|
|
|
|
|
X
|
|
|
|
|
|
Electronic
remittance processing (ERA)
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
Automatic
payment posting and reconciliation
|
|
X
|
|
|
|
X
|
|
|
|
|
|
X
|
|
Funding/Purchasing
of medical receivables
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
Full
Web-based platform (ASP)
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
Full
conversion of all paper ERA’s to electronic HIPAA-compliant
EDI
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Billing and Collections Service
|
|
X
|
|
|
|
|
|
X
|
|
|
|
|
History
of the Company and Certain Transactions
Background
After
five years of research, development and testing with strategic and ‘‘name
brand’’ resources, the designer of Xeni Systems’ products, MEDwerks, LLC,
substantially completed the product development cycle for the products offered
by Xeni Systems. The solutions developed by MEDwerks, LLC were tested with
two
doctors and two banks. In October, 2003, MEDwerks, LLC ceased operations,
due to
a lack of continuing operating capital. In October, 2004, substantially all
of
the assets of MEDwerks, LLC were acquired by Xeni Systems pursuant to a
Contribution and Stockholders Agreement (the ‘‘Contribution Agreement’’) in
exchange for MEDwerks, LLC receiving approximately a 67% equity interest
in Xeni
Systems. The purpose of the Contribution Agreement transaction was to launch
and
market the MDwerks System commercially, utilizing a growth oriented management
team of seasoned professionals. Xeni Systems successfully obtained investment
and financing of $450,000 and positioned the technology for demonstration
and
pre-commercial sale.
44
Merger
Transaction
On
October 12, 2005, MDwerks, Inc. (which was then named Western Exploration,
Inc.), MDwerks Global Holdings, Inc. and MDwerks Acquisition Corp., a Florida
corporation (“Acquisition Corp.”), and wholly-owned subsidiary of MDwerks, Inc.,
entered into an Agreement of Merger and Plan of Reorganization pursuant to
which, on November 16, 2005, Acquisition Corp. was merged with and into MDwerks
Global Holdings, Inc., with MDwerks Global Holdings, Inc. surviving as a
wholly-owned subsidiary of MDwerks, Inc. (the “Merger”). MDwerks, Inc. acquired
all of the outstanding capital stock of MDwerks Global Holdings, Inc. in
exchange for issuing shares of Common Stock of MDwerks, Inc. to MDwerks Global
Holdings Inc.’s stockholders at a ratio of 0.158074 shares of Common Stock for
each share of MDwerks Global Holdings, Inc. common stock outstanding at the
effective time of the Merger. Upon the closing of the Merger, we changed
our
corporate name from “Western Exploration, Inc.” to “MDwerks, Inc.” and succeeded
to the business of MDwerks Global Holdings, Inc. as our sole line of business
under the direction of MDwerks Global Holdings, Inc.’s management.
Private
Placement Financings
In
connection with the Merger described above, we completed the closing of a
private placement offering of our securities in which we sold an aggregate
of
approximately 64 Units to accredited investors in the private placement
offering, pursuant to the terms of a Confidential Private Placement Memorandum
dated June 13, 2005, as supplemented. Each Unit consisted of 10,000 shares
of
common stock and a warrant to purchase 10,000 shares of common stock. Each
warrant entitles the holder to purchase 10,000 shares of common stock at
an
exercise price of $2.50 per share. The Units were offered by Brookshire
Securities Corporation, as placement agent, pursuant to a placement agent
agreement under which the placement agent, in addition to a percentage of
gross
proceeds of the private placement offering, received 96,000 shares of common
stock and a warrant to purchase up to an aggregate of 64,000 shares of common
stock. We realized gross proceeds from the private placement offering of
$1,600,000, before payment of commissions and expenses.
On
June
28, 2006, we completed a private placement offering of units, pursuant to
the
terms of a Confidential Private Placement Memorandum dated February 1, 2006.
Each unit consisted of one share of Series A Convertible Preferred Stock
and a
detachable three-year Series A Warrant to purchase twenty thousand (20,000)
shares of our common stock at an exercise price of $3.00 per share (“Series A
Preferred Units”). We sold an aggregate of 28.3 Series A Convertible Preferred
Units to accredited investors in this private placement. As of April 30,
2008,
26.3 shares of Series A Convertible Preferred Stock had been converted into
526,667 shares of common stock. The Series A Preferred Units were offered
by
Brookshire Securities Corporation, as placement agent. The placement agent,
in
addition to a percentage of gross proceeds of the second private placement,
received 170,000 shares of common stock and, for nominal consideration, a
warrant to purchase up to an aggregate of 56,667 shares of common stock at
an
exercise price of $1.50 per share. We realized gross proceeds from the second
private placement of $1,700,000, before payment of commissions and
expenses.
Pursuant
to the Private Placement Subscription documents, we agreed to file a
registration statement with the SEC to register the shares and warrants held
by
the selling security holders for resale. That registration statement, which
includes this prospectus, 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 may be permitted
for
purchasers of Units.
45
Institutional
Financings
On
each
of October 20, 2006, and November 9, 2006, we received net proceeds of
$2,375,000 for a total aggregate net proceeds of $4,750,000 in connection
with a
financing provided by Gottbetter Capital Master, Ltd., an unaffiliated
accredited institutional investor (“Gottbetter”). 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 (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 to purchase 375,000 shares
of our common stock at a price of $3.25 per share (“Series E
Warrants”).
Securities
Purchase Agreement
The
Gottbetter Securities Purchase Agreement provides to Gottbetter, for so long
as
the Senior Notes remain outstanding, a right of first refusal to purchase
securities offered by MDwerks, Inc., except for the issuance of Excluded
Securities (as defined in the Gottbetter Securities Purchase Agreement).
The
Gottbetter Securities Purchase Agreement also contains restrictions against
issuing shares of our Common Stock for a price per share that is less than
the
price at which our Common Stock is traded on any national exchange or market.
This restriction also covers the issuance of convertible securities with
an
exercise or conversion price that is lower than the price at which our Common
Stock is traded on any national exchange or market.
Senior
Notes
The
Senior Notes bear interest at the rate of 8% per year, payable monthly in
arrears, commencing December 1, 2006. Subject to certain mandatory prepayment
provisions, and events of default, unpaid principal and interest due under
the
Senior Notes, as amended, will become due and payable on January 1, 2011.
The Senior Notes require monthly principal payments until the January 2,
2011
maturity date. The Senior Notes are convertible, at the option of the holder,
into shares of our common stock at a price of $2.25 per share (the “Conversion
Price”), subject to adjustment for stock splits, stock dividends, or similar
transactions, sales of our common stock at a price per share below the
Conversion Price or the issuance of convertible securities or options or
warrants to purchase shares of our common stock at an exercise price or
conversion price that is less than the Conversion Price.
The
Senior Notes provide for optional redemption by us at a redemption price
equal
to 110% of the face amount redeemed plus accrued interest.
Events
of
default will result in a default rate of interest of 15% per year and the
holder
may require that the Senior Note be redeemed at the Event of Default Redemption
Price (as defined in the Senior Notes). The Event of Default Redemption Price
includes various premiums depending on the nature of the event of default.
Events
of
default include, but are not limited to,: (i) the failure to keep the
registration statement covering shares underlying the Senior Notes, the Series
D
Warrants and the Series E Warrants effective, as required by the Registration
Rights Agreement that we entered into with Gottbetter; (ii) suspension from
trading on the OTC Bulletin Board; (iii) failure to timely deliver shares
in the
event the Senior Notes are converted; (iv) failure to reserve adequate shares
for conversion of the Senior Notes; (v) failure to pay principal, interest
or
late charges when due; (vi) any default in the payment of other indebtedness
in
excess of $250,000; (vii) bankruptcy events; and (viii) judgments against
us in
excess of $250,000.
The
Senior Notes also provide that in the event of a Change of Control (as defined
in the Senior Notes), the holder may require that such holder’s Senior Note be
redeemed at the Change of Control Redemption Price (as defined in the Senior
Notes). The Change of Control Redemption Price includes certain premiums
in the
event a Senior Note is redeemed in the event of a Change of
Control.
46
Series
D Warrants
The
Series D Warrants are exercisable at a price of $2.25 per share for a period
of
five years from the date of issuance. The Series D 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 D 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 D Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series D Warrants.
Series
E Warrants
The
Series E Warrants, as amended, are exercisable at a price of $2.25 per share
for
a period of five years from the date of issuance. The Series E 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 E 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 E Warrants,
issuances of convertible securities with a conversion price below the exercise
price of the Series E Warrants.
Security
Agreement
We
entered into a Security Agreement with Gottbetter on October 19, 2006. The
Security Agreement provided for a lien in favor of Gottbetter on all of our
assets. On September 28, 2007, Gottbetter released from the scope of its
lien
Xeni Financial’s Accounts
(as
defined in the New York Uniform Commercial Code) and documents relating to
Accounts, as well as Xeni Financial’s Payment
Intangibles (as defined New York Uniform Commercial Code), contract rights
and
causes of action.
Guaranty
Agreements
Our
subsidiaries entered into a Guaranty Agreement with Gottbetter, pursuant
to
which they have agreed to unconditionally guaranty our obligations under
the
Senior Notes and the documents entered into by us in connection the sale
of the
Senior Notes.
Registration
Rights Agreement
We
also
entered into a Registration Rights Agreement and amendments thereto with
Gottbetter. Pursuant to the amended Registration Rights Agreement we were
required 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,
which includes this prospectus, 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.
On
August
31, 2007, we received net proceeds of $250,000 in connection with a financing
provided by Vicis Capital Master Fund (“Vicis”), 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 (the “Vicis Convertible
Note”).
On
September 28, 2007, we received net proceeds of $1,633,190, after repayment
of the Vicis Convertible Note, interest and closing expenses in connection
with
a financing provided by Vicis. 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.
47
The
following are summary descriptions of the material agreements entered into
in
connection with the September 28, 2007, financing described above and such
descriptions are qualified in its entirety by reference to the full agreements
filed either as exhibits hereto or to previous SEC filings.
Securities
Purchase
Agreement
The
Securities Purchase Agreement provided 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
B
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 Vicis Convertible Note and deduction of certain closing
expenses.
The
Securities Purchase Agreement provides to Vicis, 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 pari
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 Vicis; (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 Vicis.
Series
B Preferred Stock
In
connection with the sale of the Series B Preferred Stock, on September 27,
2007,
we filed a
Certificate of Designations, which designate the rights, preferences, privileges
and terms of the Series B Preferred Stock (the “Certificate of Designations”).
The Certificate of Designations was subsequently amended and restated on
March
31, 2008, in connection with the March 31, 2008, financing provided by Vicis,
described below (the “March 2008 Vicis Financing”). For a description of the
Certificate of Designations, as amended and restated, please see our disclosure
regarding the March 2008 Vicis Financing below.
48
Series
F Warrants
The
Series F Warrants were
exercisable at a price of $2.25 per share for a period of seven years from
the
date of issuance. On March 31, 2008, the Series F Warrants were cancelled
in
connection with the March 2008 Vicis Financing.
Series
G Warrants
The
Series G Warrants were
exercisable at a price of $2.50 per share for a period of seven years from
the
date of issuance, with the same provisions as the Series F warrants. On March
31, 2008, the Series G Warrants were cancelled in connection with the March
2008
Vicis Financing.
Security
Agreement
We,
along
with our subsidiaries MDwerks, Xeni Medical, Xeni Financial, Xeni Billing,
and
PPS entered into Security Agreements with Vicis. The Security Agreements
provide
for liens in favor of Vicis 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 Vicis, 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 Vicis. The Registration
Rights
Agreement was
amended and restated in connection with the March 2008 Vicis Financing and
is
more fully described below.
Amendment,
Consent and
Waiver
In
connection with the transactions described above, we entered into an
Amendment, Consent and Waiver with Gottbetter (the “Consent and Waiver
Agreement”), 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.
Also
in
connection with the transactions described above, the conversion price of
the
Gottbetter Series E Warrants was reduced to $2.25 per share subject to further
adjustment, and the number of Warrant Shares for which such warrants may
be
exercised was increased to 541,666 and 2/3 shares subject to further
adjustment.
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.
Amended
and
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.
49
On
December 3, 2007, we received net 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 will
become due and payable on December 2, 2008.
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 at a price of $2.50
per
share.
The
Securities Purchase Agreement, dated January 18, 2008, by and between Vicis
and
us (the “January Securities Purchase Agreement”) provides that our obligations
to Vicis under the Series B Preferred Stock, the January Securities Purchase
Agreement and the various transaction documents entered into in connection
with
the January Securities Purchase Agreement (the “January Transaction Documents”)
are secured by a lien on all of our assets pursuant to the Security Agreement,
dated September 28, 2007, between us and Vicis.
The
January Securities Purchase Agreement further provides that our obligations
under the Series B Preferred Stock, the January Securities Purchase Agreement
and the January Transaction Documents are guaranteed by each of our subsidiaries
pursuant to the terms of the Guaranty Agreements previously entered into
between
Vicis and each of our subsidiaries in September, 2007.
The
January Securities Purchase Agreement also provides that the guaranty
obligations of our subsidiaries in connection with the January Securities
Purchase Agreement and the January Transaction Documents are secured by the
liens on all of the assets of each our subsidiaries, except for the accounts
receivable and certain contract rights of Xeni Financial Services, Corp.,
created pursuant to the Security Agreements, previously entered into by and
between our subsidiaries and Vicis in September, 2007.
On
March
1, 2008, the Company and Gottbetter amended the Senior Notes to extend the
maturity date of the Senior Notes to January 1, 2011, and to delay principal
payments under the Senior Notes until March 1, 2008.
On
March
31, 2008, we received net proceeds of $6,809,794 in connection with the March
2008 Vicis Financing. In connection with the March 2008 Vicis 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.
In
connection with the sale of the March 2008 Vicis Financing, we amended and
restated the Registration Rights Agreement, dated September 28, 2007, by
and
between Vicis and us (as amended and restated, the “Amended and Restated
Registration Rights Agreement”), pursuant to which, among other things, we
agreed, to register for resale all of the shares of our common stock into
which
the outstanding Series B Preferred Stock is convertible and all of the shares
of
our common stock for which the Series H Warrant is exercisable.
In
connection with obtaining the consent and waiver of Gottbetter to the March
2008
Vicis Financing, we entered into an Amendment, Consent and Waiver (the
“Gottbetter Consent Agreement”), pursuant to which (i) we issued to Gottbetter a
five-year Series I warrant to purchase one million shares of our common stock
at
an exercise price of $0.75 per share; (ii) 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 (iii) Gottbetter
consented to the March 2008 Vicis Financing.
50
The
following summary description of the material agreements entered into in
connection with the March 2008 Vicis Financing described above and the terms
of
the Series B Preferred Stock is qualified in its entirety by reference to
the
copies of such material agreements and the Amended and Restated Certificate
of
Designations for the Series B Preferred Stock filed as exhibits to our Current
Report on Form 8-K filed with the SEC on April 2, 2008.
March
Securities Purchase Agreement
The
March
Securities Purchase Agreement provided for the sale by us to Vicis of (i)
750
shares of Series B Preferred Stock (ii) and the Series H Warrant to
purchase an aggregate of 53,333,334 shares of common stock. Pursuant to the
March Securities Purchase Agreement, the aggregate gross purchase price for
the
Series B Preferred Stock and the Series H Warrant was $7,500,000, which was
paid
by wire transfer of immediately available funds and the surrender for
cancellation of a promissory note that we issued to Vicis in the principal
amount of $575,000. Principal and accrued interest under the promissory note,
and $100,000 of Vicis’
expenses were applied against the purchase price.
The
March
Securities Purchase Agreement provides to Vicis, 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 right of
first
refusal is on a pro rata basis (based upon the amount invested) with
Gottbetter.
The
March
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 pari 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
March Securities Purchase Agreement); (vii) amend our charter documents in
a way
that adversely affects the rights of Vicis; (viii) except through Xeni Financial
Services, Corp., make loans to, or advances or guarantee the obligations
of,
third parties; (ix) make intercompany transfers; (x) engage in transactions
with
officers, directors, employees or affiliates; (xi) divert business to other
business entities; (xii) make investments in securities or evidences of
indebtedness (excluding of loans made by Xeni Financial Services, Corp.)
in
excess of $250,000 in a calendar year; and (xiii) file registration
statements.
Events
of
default under the March 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)
suspension from listing on the OTC Bulletin Board or other exchange for 10
consecutive trading days; (iv) the failure to timely deliver shares of common
stock upon conversion of the Series B Preferred Stock or exercise of the
Series
H Warrant ; (v) default in the payment of indebtedness in excess of $250,000;
(vi) a judgment entered against us in excess of $250,000; and (vii) insolvency,
bankruptcy and similar circumstances.
The
March
Securities Purchase Agreement further provides that our obligations to Vicis
under the Series B Preferred Stock, the March Securities Purchase Agreement
and
the various transaction documents entered into in connection with the March
Securities Purchase Agreement (the “March Transaction Documents”) are secured by
a lien on all of our assets pursuant to the Security Agreement, dated September
28, 2007, between us and Vicis (the “Company Security Agreement”). The Company
Security Agreement is more fully described below and is attached as an exhibit
to our Current Report on Form 8-K, which was filed with the SEC on October
2,
2007.
The
March
Securities Purchase Agreement further provides that our obligations under
the
Series B Preferred Stock, the March Securities Purchase Agreement and the
March
Transaction Documents are guaranteed by each of our subsidiaries pursuant
to the
terms of the guaranty agreements, dated September 28, 2007, between Vicis
and
each of our subsidiaries (the “Guaranty Agreements”). The Guaranty Agreements
are more fully described below and are attached as exhibits to our Current
Report on Form 8-K, which was filed with the SEC on October 2, 2007.
51
The
March
Securities Purchase Agreement also provides that the guaranty obligations
of our
subsidiaries in connection with the March Securities Purchase Agreement and
the
March Transaction Documents are secured by the liens on all of the assets
of
each of our subsidiaries, except for the accounts receivable and certain
contract rights of Xeni Financial Services, Corp., created pursuant to the
security agreements entered into by and between our subsidiaries and Vicis
on
September 28, 2007 (the “Guarantor Security Agreements”). The Guarantor Security
Agreements are more fully described below and are attached as exhibits to
our
Current Report on Form 8-K, which was filed with the SEC on October 2, 2007.
The
March
Securities Purchase Agreement also contains customary representations,
warranties, covenants and indemnification provisions for transactions of
the
type entered into between the Company and Vicis.
Series
B Preferred Stock
On
March
31, 2008,
we
filed an amended and restated Certificate of Designations (as amended and
restated, the “Certificate of Designations”) with the Secretary of State of the
State of Delaware.
The
Certificate of Designations, which designates the rights, preferences,
privileges and terms of the Series B Preferred Stock, 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 12% 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 $0.75 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
March
31, 2010, 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.
Holders
of Series B Preferred Stock have 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).
Holders
of Series B Preferred Stock are entitled to 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.
As
of May
22, 2008, there were 1,000 shares of Series B Preferred Stock issued and
outstanding.
52
Series
H Warrant
The
Series H Warrant is exercisable at a price of $0.75 per share for a period
of
ten years from the date of issuance. The Series H Warrant may be exercised
on a
cashless basis to the extent that the resale of shares of common stock
underlying the Series H Warrant is not covered by an effective registration
statement. 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 H 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 H Warrant, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series H Warrant.
As
of
May
22,
2008, the outstanding Series H Warrant was exercisable for an aggregate of
53,333,334 shares or our common stock.
Company
Security Agreement
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
lien
granted pursuant to the Company Security Agreement would, in addition to
securing the obligations previously secured thereby, secure our obligations
in
connection with the March Securities Purchase Agreement, the March Transaction
Documents and the Series B Preferred Stock issued in connection with the
March
Securities Purchase Agreement. The Company Security Agreement provides for
a
lien on all of our assets in favor of Vicis.
Guaranty
Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
Guaranty Agreements would, in addition to applying to the obligations previously
guaranteed thereby, apply to our obligations in connection with the March
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to the January Securities Purchase Agreement.
The Guaranty Agreements provide for unconditional guaranties of the obligations
guaranteed thereunder.
Guarantor
Security Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
security interests granted by our subsidiaries pursuant to the Guarantor
Security Agreements would, in addition to securing the obligations previously
secured thereunder, secure the obligations of our subsidiaries under the
Guaranty Agreements insofar as those obligations related to the January
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to March Securities Purchase Agreement. The
Guarantor Security Agreements provide for liens in favor of Vicis on all
of the
assets of each of our subsidiaries, except for the accounts receivable and
certain contract rights of Xeni Financial Services, Corp.
Amended
and Restated Registration Rights Agreement
Pursuant
to the Amended and Restated Registration Rights Agreement, 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
H
Warrant is exercisable.
The
Amended and Restated Registration Rights Agreement requires us to file a
registration statement covering the resale of the shares underlying the Series
B
Preferred Stock and the Series H Warrant within 60 days after the closing
date.
We are only required to register up to thirty percent of the number of
outstanding shares of common stock in such registration statement and then
file
subsequent registration statements after the later of (i) sixty days following
the sale of the securities covered by the initial registration statement
or any
subsequent registration statement and (ii) six months following the effective
date of the initial registration statement or any subsequent registration
statement. We are required to cause the initial registration statement to
become
effective on or before the date that is 150 calendar days after the closing
date
if the SEC does not review the registration statement or 180 calendar days
after
the closing if the registration statement receives a full review by the SEC.
If
we fail to file a registration statement in the time frame required, fail
to
file a request for acceleration in the time frame required, or fail to maintain
the effectiveness of a registration statement as required by the Registration
Rights Agreement, we will be required to pay a cash penalty in the amount
of
1.5% of the aggregate stated value of the Series B Preferred Stock for each
month, or part thereof, that such registration statement is not filed or
effective, as the case may be. The cash penalty is limited to 9% of the
aggregate stated value of the Series B Preferred Stock. The cash penalty
will not apply to the registration of shares of common stock underlying the
Series H Warrant. The Registration Rights Agreement also provides for piggyback
registration rights.
53
Gottbetter
Consent Agreement
In
connection with obtaining the consent and waiver of Gottbetter to the financing
provided by Vicis, 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.
Series
I Warrant
As
consideration for Gottbetter entering into the Gottbetter Consent Agreement,
we
issued to Gottbetter a Series I Warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $0.75 per share. The Series I Warrant
is
exercisable for a period of five years from the date of issuance. The Series
I
Warrant may be exercised on a cashless basis to the extent that the resale
of
shares of common stock underlying the Series I Warrant is not covered by
an
effective registration statement. 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
I
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
I
Warrant and issuances of convertible securities with a conversion price below
the exercise price of the Series I Warrant.
As
of
May
22,
2008, the outstanding Series I Warrant was exercisable for an aggregate of
1,000,000 shares or our common stock.
Corporate
Information Regarding the Company and its Subsidiaries
MDwerks,
Inc. is a corporation organized under the laws of the State of Delaware,
originally formed on July 22, 2003.
MDwerks
Global Holdings, Inc. is a corporation organized under the laws of the State
of
Florida, originally formed on October 23, 2003.
Xeni
Medical Systems, Inc. is a corporation organized under the laws of the State
of
Delaware, originally formed on July 21, 2004.
Xeni
Financial Services, Corp. is a corporation organized under the laws of the
State
of Florida, originally formed on February 3, 2005.
Xeni
Medical Billing, Corp. is a corporation organized under the laws of the State
of
Delaware, originally formed on March 2, 2005.
Patient
Payment Solutions, Inc. (“PPS”) is a corporation organized under the laws of the
State of Florida, originally formed on May 30, 2007. PPS planned to offer
healthcare providers a payment improvement process for “out-of-network” claims,
but it never commenced operations.
54
Employees
We
employ
approximately 20 people who devote their full business time to our activities
and 1 person who devotes some business time to our activities.
Intellectual
Property
A
United
States patent application regarding certain aspects of our systems was filed
by
our predecessor, MEDwerks, LLC, on April 15, 2002. On November 15, 2007,
the US
Patent Office issued an office action indicating that it will not allow a
patent
based upon the claims of our application. Our patent counsel, DLA Piper US
LLP,
is in the process of modifying our patent application based upon the US Patent
Office’s action and will submit a response to the office action. If the response
from the US Patent Office to our modified application is unfavorable or only
partially successful, when compared to prior protected art, the process may
be
extended up to 3 years and we could incur substantial expenses in prosecuting
the patent. We plan to undertake prosecution of the patent filing to conclusion,
if practical and economical.
Properties
The
Company sub-leased its facility, on a month-to-month basis, under a Master
Lease
expiring July 30, 2008. On February 1, 2008, the Company was assigned the
Master Lease and a five-year lease option was exercised, which extends the
Master Lease until June 30, 2013.
Government
Regulation
See
Risk
Factors – ‘‘We are subject to substantial government
regulations.’’
Legal
Proceedings
We
are
not a party to any material pending legal proceedings.
Directors
and Executive Officers
The
following table sets forth information regarding the members of our Board
of
Directors and our executive officers. The directors listed below will serve
until the next annual meeting of our stockholders.
|
Name
|
Age
|
Position
|
||
|
Howard
Katz
|
66
|
Chief
Executive Officer and Director
|
||
|
Solon
Kandel
|
48
|
President
and Director
|
||
|
Vincent
Colangelo
|
65
|
Chief
Financial Officer and Secretary
|
||
|
Gerard
Maresca
|
62
|
Vice
President of Business Development
|
||
|
Stephen
M. Weiss
|
54
|
Chief
Operating Officer
|
||
|
David
M. Barnes
|
65
|
Director
|
||
|
Peter
Dunne
|
50
|
Director
|
||
|
Paul
Kushner
|
61
|
Director
|
||
|
Shad
Stastney
|
39
|
Director
|
||
|
Chris
Phillips
|
37
|
Director
|
55
The
principal occupation for the past five years (and, in some instances, for prior
years) of each of our directors and officers are as follows:
Howard
B. Katz
became,
effective as of November 16, 2005, our Chief Executive Officer and a Member
of
our Board of Directors. Mr. Katz is also the Chief Executive Officer and a
Director of our wholly-owned subsidiary MDwerks Global Holdings, Inc., which
positions he has held since June, 2005. Since July, 2004, Mr. Katz has been
a
Director and Chief Executive Officer of Xeni Medical Systems, Inc., and Mr.
Katz
has been the sole Director and Chief Executive Officer of Xeni Medical Billing
Corp. since March, 2005, and has been the sole Director and Chief Executive
Officer of Xeni Financial Services, Corporation since February, 2005. From
December, 2002, until October, 2004, Mr. Katz was Chief Executive Officer of
ViewPoint Exams International, Inc., a company that facilitated independent
medical examinations in connection with insurance and litigation matters. From
August, 1998, to December, 2002, Mr. Katz was the Chief Executive Officer of
Imagine Networks, Inc., a company based in New York City that engaged in prepaid
telecommunications and financial services. Mr. Katz served on the Board of
Directors of American United Global, Inc., a publicly traded company from April,
1996, until August, 2005. Mr. Katz has over 35 years of operating, financial
and
senior management experience, in both public and private companies. His
responsibilities have included numerous progressive positions as CFO, President
and CEO of ‘‘high tech’’, software development and other high growth businesses,
including one involving banking transactions. Mr. Katz was President of National
Fiber Network, Inc. which later became MetroMedia Fiber Network, Inc. and
reached a peak public market capitalization of over $30 billion. Mr. Katz has
been a principal in, or helped consummate, numerous public offerings and other
successful business ventures. Mr. Katz received an MBA from New York
University.
Solon
L. Kandel
became,
effective as of November 16, 2005, our President and a member of our Board
of
Directors. Mr. Kandel is also the President and a Director of MDwerks Global
Holdings, Inc., which he has held since June, 2005. Since July, 2004, Mr. Kandel
has been a Director and President of Xeni Medical Systems, Inc., and Mr. Kandel
has been President of Xeni Medical Billing Corp. since March, 2005, and has
been
President of Xeni Financial Services, Corporation since February, 2005. Since
November, 2000, Mr. Kandel has been the Chief Executive Officer and Managing
Member of The Ashwood Group, L.L.C., a venture development and business
consulting company based in Boca Raton, Florida. From April, 1999, to October,
2000, Mr. Kandel was the President, Chief Executive Officer of Independent
Wireless One, Inc., a wireless voice, data and Internet Company based in Albany,
New York. From April, 1999, to April, 2002, Mr. Kandel also served as a member
of the Board of Directors of Independent Wireless One, Inc. Mr. Kandel has
enjoyed over 15 years of progressive and diverse operating and senior management
experience, ranging from start-up to large, multi-billion dollar company
environments. Prior to business management, Mr. Kandel performed corporate
and
banking transactions law for several years and was a Senior Attorney at McCaw
Cellular Communications. Mr. Kandel received a JD from Rutgers University School
of Law and is a Truman Scholar.
Vincent
Colangelo
became,
effective as of November 16, 2005, our Chief Financial Officer. Since July,
2005, until becoming our Chief Financial Officer, Mr. Colangelo provided
consulting services to us. From March, 2004, to November, 2005, Mr. Colangelo
was the President and Principal Consultant of Weston Business Advisors, Inc.,
a
business consulting company based in Weston, Florida. From January, 2003, to
March, 2004, Mr. Colangelo was the President of Cartridge World Florida in
Weston, Florida, a master franchisee for the State of Florida for a world wide
print cartridge refilling organization. From September, 1995, to December,
2002,
Mr. Colangelo was the President and Principal Consultant of Birchwood
Associates, Inc., a business consulting company based in Weston, Florida. Mr.
Colangelo has over 35 years of financial executive and operational management
experience. As a principal of the management consulting firms, Mr. Colangelo
provided interim CFO, COO and general financial consulting services to clients
ranging from small businesses to Fortune 100 companies. Mr. Colangelo brings
to
us a unique combination of financial management skills, industry experience
and
familiarity with our product line. Mr. Colangelo was also President of a
start-up multi-national publishing company and worked at Xerox’s world
headquarters as a consolidations and regulatory reporting manager and as a
financial planning manager. Mr. Colangelo received an MBA and a BBA from Iona
College and is a New York State CPA.
56
Stephen
M. Weiss
became,
effective as of May 29, 2007, our Chief Operating Officer. Prior to this Mr.
Weiss served from November 16, 2005, as our Chief Technology Officer. Mr. Weiss
has provided consulting services to us and served as acting Chief Technology
Officer of MDwerks Global Holdings, Inc. since March, 2005. From March, 2002,
to
March, 2005, Mr. Weiss was the Chief Technology Officer and Chief Operating
Officer of Enterprise Technology Corporation, a financial software services
consulting company that served many Fortune 500 clients. From September, 1999,
to November, 2001, Mr. Weiss was the Chief Technology Officer at Imagine
Networks, Inc., where he designed and managed the development of electronic
payment systems linked to telecommunications pre-paid systems. Prior to joining
Imagine Networks, Inc., he co-founded AstraTek, a software products and
consulting firm that developed products and consulting services for financial
and technology companies including Microsoft, IBM and Citrix. Mr. Weiss also
served as Vice President at Bankers Trust Company for over 13 years, where
he
developed a number of advanced communication systems, including a global
cryptography-based authentication system and links in Tokyo between the bank’s
back office systems and the Bank of Japan’s money transfer and clearance
systems. Mr. Weiss received a BA from Buffalo State College.
Gerard
Maresca
became,
effective February 1, 2007, our Vice President of Business Development. From
February 14, 2006, to February 1, 2007, Mr. Maresca served as our Chief
Operating Officer. From November 16, 2005, until February 14, 2006, Mr. Maresca
was our Vice President of Business Development. Prior to joining us, since
January, 2004, Mr. Maresca operated a technology and business consulting company
called GMAR, Inc. From February, 2000, to October, 2003, Mr. Maresca was the
Executive Vice President and Chief Technology Officer of MEDwerks, LLC, and
was
responsible for development of our products. Mr. Maresca has 28 years of
technology, engineering, and program management experience, focused on hardware
and software development of computer based products. Mr. Maresca has served
as a
hardware and software system architect, with experience in Internet and web
applications. While Product Director at Intel Corp. (‘‘Intel’’) for 9 ½ years,
he managed development of Intel’s i860 program parallel microprocessor, product
marketing, manufacturing and R&D, as well as new business development and
client support. Mr. Maresca was also Vice President at Diagnostic Retrieval
Systems, Inc., for 8 years until he began working with MEDwerks, LLC. Mr.
Maresca received a BSEC from Brooklyn Polytech and a MSCS from Columbia
University. He holds five United States patents and has published.
David
M. Barnes
became,
effective as of November 16, 2005, a member of the Board of Directors and serves
on our Audit Committee as Chairman and is also a member of our Compensation
Committee. Mr. Barnes has also served as Chief Financial Officer of Neah Power
Systems, Inc., (NPWS:OTCBB), since April, 2006, and was Chief Financial Officer
of Cyber Defense Systems, Inc., (CYDF:OTCBB), from August, 2005, through
November, 2007. In addition, Mr. Barnes was a Director, Executive Vice President
and Chief Financial Officer of American United Global, Inc., now Solar Thin
Films, Inc. (SLTN:OTCBB), from April, 1996, through July, 2006. Mr. Barnes
is
also a member of the Board of Directors, Audit Committee and Compensation
Committee of China Direct, Inc. (CDS:ASE), Searchhelp, Inc. (SHLP:OTCBB),
Medical Solutions Management Inc. (MSMI:OTCBB) and Thinkpath,Inc.
(THPHF:OTCBB). On March 7, 2008, Thinkpath, Inc., filed a bankruptcy petition
under Chapter 11 of the U.S. Bankruptcy Code.
Peter
Dunne
became,
effective as of November 16, 2005, a member of our Board of Directors and serves
on our Compensation Committee. Mr. Dunne has spent over 25 years in
communications management. Currently he is President and partner of Franklin
Communications, LLC, a full service graphic services company, a position he
has
held since July, 2002. From March, 2002, to July, 2002, he was Regional General
Manager for Kelmscott Communications, LLC overseeing Franklin Communications,
Trade Litho, Little River Press, and Lauderdale Graphics. From September, 2000,
to July, 2002, he held the position of Regional Controller for the same
companies. From September, 1982, to September, 2000, he was Vice President
and
Controller of Franklin Communications. Mr. Dunne’s other experiences include
positions in Dataco, a national data entry service business, and Robertson
Leasing Corp, an equipment leasing company, both formerly divisions of Robertson
Financial Corporation. Mr. Dunne is Vice Chairman of the Board of Directors
of
the Printing Association of Florida and on the CEO Advisory Board to the
Printing Industries of America.
57
Paul
Kushner
became,
effective June 22, 2006, a member of our Board of Directors and serves on our
Audit Committee. Mr. Kushner has been President and Owner of Asset Indemnity
Brokerage Corp., an insurance brokerage firm since July, 1994. Mr. Kushner
started his career in the surety industry in 1967 and has been world regional
bond manager for American International Group (AIG) and special representative
to Norway for the introduction of surety bonds in the United States. In 1987,
he
was the New York Manager of American International Group, Domestic and
International Operations.
Shad
Stastney
became,
effective April 24, 2008, a member of our Board of Directors. Mr. Stastney
is
the Chief Operating Officer and Head of Research for Vicis Capital LLC, a
company he jointly founded in 2004. Mr. Stastney also jointly founded Victus
Capital Management LLC in 2001. From 1998 through 2001, Mr. Stastney worked
with
the corporate equity derivatives origination group of Credit Suisse First
Boston, eventually becoming a Director and Head of the Hedging and Monetization
Group, a joint venture between derivatives and equity capital markets. In 1997,
he joined Credit Suisse First Boston’s then-combined convertible/equity
derivative origination desk. From 1994 to 1997, he was an associate at the
law
firm of Cravath, Swaine and Moore in New York, in their tax and corporate
groups, focusing on derivatives. Mr. Stastney is also a director of Ambient
Corporation, a developer of communications technologies and Medical Solutions
Management, Inc., a medical solution management company. He graduated from
the
University of North Dakota in 1990 with a BA in Political Theory and History,
and from the Yale Law School in 1994 with a JD degree focusing on corporate
and
tax law.
Chris
Phillips
became,
effective April 24, 2008, a member of our Board of Directors. Mr. Phillips
has
been a managing director for Vicis Capital, LLC since February 2008. From 2004
through January 2008, Mr. Phillips served as President and CEO of Apogee
Financial Investments, Inc., a merchant bank that owns 100% of Midtown Partners
& Co., LLC, a FINRA licensed broker-dealer. From 2000 through January 2008,
he also served as managing member of TotalCFO, LLC, which provides consulting
and CFO services to a number of public and private companies and high net worth
individuals. From November 2007 through January 2008 Mr. Phillips served
as the CEO and Chief Accounting Officer of OmniReliant Holdings, Inc. (OTCBB:
ORHI). Presently, he is a member of the Board of Directors OmniReliant Holdings,
Inc., Precision Aerospace Components, Inc. (OTCBB: PAOS) and a few private
companies. Mr. Phillips received a BS in Accounting and Finance and a Masters
of
Accountancy, with a concentration in Tax, both from the University of Florida.
Mr. Phillips is a Florida CPA.
Board
of Director Composition and Committees
Our
Board
of Directors is comprised of seven directors, Messrs. Katz, Kandel, Barnes,
Dunne, Kushner, Stastney and Phillips. David M. Barnes and Peter Dunne serve
as
members of our Compensation Committee and David M. Barnes and Paul Kushner
serve
as members of our Audit Committee. We have independent parties serving on each
of the Audit Committee and the Compensation Committee.
The
following non-management directors received compensation from MDwerks, Inc.
in
the amounts set forth in the chart below for the twelve months ended December
31, 2007, December 31, 2006, and December 31, 2005. Messrs. Stastney and
Phillips will not be compensated for their services but will be reimbursed
for
reasonable expenses incurred by them in attending board meetings. We intend
to
continue to compensate non-management directors through the issuance of stock
awards including, without limitation, incentive stock options, restricted stock
awards, stock grants and or stock appreciation rights. The value attributable
to
any Option Awards in the following chart is computed in accordance with FAS
123R. No other item of compensation was paid to any director of the Company
other than reimbursement of expenses:
58
DIRECTOR
COMPENSATION
|
Name
|
Year
|
Fees
Earned
or Paid in
Cash
|
Stock
Awards
|
Option
Awards
|
Non-
Equity
Incentive
Plan
Compen-
sation
|
Non-
qualified
Deferred
Compen-
sation
Earnings
|
All Other
Compen-
sation
|
Total
|
|||||||||||||||||
|
David M.
Barnes
|
2007
|
$
|
20,000
|
$
|
25,000
|
1 |
$
|
54,0002
|
—
|
—
|
—
|
$
|
99,000
|
||||||||||||
|
|
2006
|
$
|
14,000
|
$
|
87,500
|
3 |
$
|
165,7504
|
—
|
—
|
—
|
$
|
267,250
|
||||||||||||
|
|
2005
|
$
|
3,500
|
—
|
—
|
—
|
—
|
—
|
$
|
3,500
|
|||||||||||||||
|
|
|
||||||||||||||||||||||||
|
Peter
Dunne
|
2007
|
$
|
14,000
|
—
|
$
|
12,0005
|
—
|
—
|
—
|
$
|
26,000
|
||||||||||||||
|
|
2006
|
$
|
14,000
|
—
|
$
|
342,8006
|
—
|
—
|
—
|
$
|
356,800
|
||||||||||||||
|
|
2005
|
$
|
3,500
|
—
|
—
|
—
|
—
|
—
|
$
|
3,500
|
|||||||||||||||
|
|
|
||||||||||||||||||||||||
|
Paul
Kushner
|
2007
|
$
|
14,000
|
—
|
$
|
12,0005
|
—
|
—
|
—
|
$
|
26,000
|
||||||||||||||
|
|
2006
|
$
|
7,000
|
—
|
$
|
360,8007
|
—
|
—
|
—
|
$
|
367,800
|
||||||||||||||
|
|
2005
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
1
|
On
May 29, 2007, the Company issued 50,000 shares of common stock
to a David
M. Barnes in consideration for services rendered. The shares were
issued
at the fair value at the date of the issuance of $25,000 or $0.50
per
share. The Company recorded stock-based consulting expense of
$25,000.
|
|
2
|
Consists
of Incentive Stock Options to purchase 150,000 shares of common
stock at a
price of $0.38 per share granted on December 31, 2007, and vesting
on
December 31, 2007.
|
|
3
|
On
June 19, 2006, the Company authorized the issuance of 75,000 shares
of
common stock to David M. Barnes in consideration for services rendered.
On
June 22, 2006, the Company issued 25,000 of these authorized shares
of
common stock at the fair value at the date of the issuance of $87,500
or
$3.50 per share. The Company recorded stock-based compensation
of
$87,500.
|
|
4
|
Consists
of Incentive Stock Options to purchase 44,000 shares of common
stock and
Non-qualified Stock Options to purchase 31,000 shares of common
stock both
at a price of $2.25 per share granted on October 11, 2006, and
vesting in
⅓ increments starting on October 11, 2006, and on each of the next
two
anniversaries of the date of the grant.
|
|
5
|
Consists
of Incentive Stock Options to purchase 35,000 shares of common
stock at a
price of $0.38 per share granted on December 31, 2007, and vesting
on
December 31, 2007.
|
|
6
|
Consists
of Incentive Stock Options to purchase 25,000 shares of common
stock and
Non-qualified Stock Options to purchase 50,000 shares of common
stock both
at a price of $4.00 per share granted on June 19, 2006 and vesting
in ⅓
increments on each anniversary of the grant, and Non-qualified
Stock
Options to purchase 25,000 shares of common stock at a price of
$2.25 per
share granted on October 11, 2006, and vesting in ⅓ increments starting on
October 11, 2006, and on each of the next two anniversaries of
the date of
the grant.
|
|
7
|
Consists
of Incentive Stock Options to purchase 23,500 shares of common
stock and
Non-qualified Stock Options to purchase 51,500 shares of common
stock both
at a price of $4.25 per share granted on June 22, 2006, and vesting
in ⅓
increments on each anniversary of the grant, and Non-qualified
Stock
Options to purchase 25,000 shares of common stock at a price of
$2.25 per
share granted on October 11, 2006, and vesting in ⅓ increments starting on
October 11, 2006, and on each of the next two anniversaries of
the date of
the grant.
|
59
Audit
Committee Financial Expert
David
M.
Barnes serves on our Audit Committee as the audit committee financial expert.
Mr. Barnes is independent (as such term is used in Item 7(d) (3) (iv) of
Schedule 14A under the Exchange Act).
Executive
Officer Employment Agreements
Effective
January 1, 2006, each of Howard B. Katz, Solon L. Kandel, Vincent Colangelo,
and
Stephen W. Weiss entered into an employment agreement with us. The employment
agreement with Mr. Katz was extended on December 31, 2007, to a term expiring
on
December 31, 2010. The employment agreement with Mr. Colangelo extends for
a
term expiring on December 31, 2009. The employment agreement with Mr. Weiss
extends for a term expiring on December 31, 2010. The employment agreement
with
Mr. Kandel expired on December 31, 2007, and is being extended on a
month-to-month basis. Pursuant to these employment agreements, Mr. Katz has
agreed to devote substantially all of his time, attention and ability, and
Messrs. Kandel, Colangelo and Weiss have each agreed to devote all of their
time, attention and ability, to our business as our Chief Executive Officer,
President, Chief Financial Officer, Chief Operating Officer, respectively.
The
employment agreements provide that Messrs. Katz, Kandel, Colangelo, and Weiss
will receive a base salary during calendar year 2007 at an annual rate of
$225,000, $200,000, $175,000, and $165,000 for services rendered in such
positions. During calendar years 2008 and 2009 under the employment agreements
for Messrs. Katz, Colangelo and Weiss, their annual base salaries will be
increased to $300,000 and $330,000, respectively, for Mr. Katz, $200,000 and
$220,000, respectively, for Mr. Colangelo and $185,000 and $200,000,
respectively for Mr. Weiss. Mr. Colangelo agreed to defer payment of $20,000
of
his 2008 annual base salary increase of $25,000. During calendar years 2010,
under the employment agreements for Messrs. Katz and Weiss, the annual base
salary will be increased to $363,000 for Mr. Katz and $215,000 for Mr. Weiss..
In addition, each executive may be entitled to receive, at the sole discretion
of our board of directors, cash bonuses based on the executive meeting and
exceeding performance goals. The cash bonuses range from 15% of the executive’s
annual base salary for Mr. Weiss, up to 100% of the executive’s annual base
salary for Messrs. Kandel and Colangelo, and up to 150% of the executive’s
annual base salary for Mr. Katz. The cash bonuses for Messrs. Katz, Kandel,
Colangelo and Weiss include a minimum bonus due of 40%, 25% 25%, and 15%
respectively. Each of our executive officers is entitled to participate in
our
2005 Incentive Compensation Plan. We have also agreed to pay or reimburse each
executive officer up to a specified monthly amount for the business use of
his
or her personal car and cell phone. The employment agreements provide for
termination by us upon death or disability (defined as 90 aggregate days of
incapacity during any 365-consecutive day period) of the executive or upon
conviction of a felony or any crime involving moral turpitude, or willful and
material malfeasance, dishonesty or habitual drug or alcohol abuse by the
executive, related to or affecting the performance of his duties. In the event
any of the employment agreements are terminated by us without cause, such
executive will be entitled to compensation for the balance of the term of his
employment agreement or, if longer, for up to three years in the case of Messrs.
Katz and Weiss and up to two years in the case of Mr. Colangelo. Messrs. Katz,
Kandel and Colangelo also have the right, if terminated without cause, to
accelerate the vesting of any stock options or other awards granted under our
2005 Incentive Compensation Plan. We intend to obtain commitments for key-man
life insurance policies for our benefit on the lives of Messrs. Katz, Kandel
and
Colangelo equal to three times their respective annual base salary. In addition
to the key-man life insurance policies, we have agreed to maintain throughout
the term of each employment agreement 15-year term life insurance policies
on
the lives of Messrs. Katz, Kandel and Colangelo, with benefits payable to their
designated beneficiaries, and to pay all premiums in connection with those
policies.
In
the
event of a change of control of our company, Messrs. Katz and Colangelo may
terminate their employment with us within six months after such event and will
be entitled to continue to be paid pursuant to the terms of their respective
employment agreements.
60
The
employment agreements also contain covenants (a) restricting the executive
from
engaging in any activities competitive with our business during the terms of
such employment agreements and one year thereafter, (b) prohibiting the
executive from disclosure of confidential information regarding us at any time
and (c) confirming that all intellectual property developed by the executive
and
relating to our business constitutes our sole and exclusive
property.
The
foregoing summaries of our employment agreements are qualified by reference
to
the full texts of the form of each of the Senior Executive Level Employment
Agreement and Executive Level Employment Agreement, filed as Exhibits 10.1
and
10.2 to our Current Report on Form 8-K, filed with the SEC on January 5, 2006,
respectively, as Exhibit 10.1 to our Current Report on Form 8-K, filed with
the
SEC on February 2, 2007, as Exhibit 10.1 to our Current Report on Form 8-K,
filed with the SEC on January 4, 2008, and as Exhibit 10.1 to our Current Report
on Form 8-K, filed with the SEC on March 29, 2008, all of which are incorporated
herein in their entirety.
Currently,
we do not have an employment agreement with Gerard Maresca and, therefore,
his
employment is on an ‘‘at-will’’ basis
Indemnification
of Directors and Officers
As
permitted by the provisions of the Delaware General Corporation Law (the
‘‘DGCL’’), we have the power to indemnify any person made a party to an action,
suit or proceeding by reason of the fact that they are or were a director,
officer, employee or agent of ours, against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred by them in
connection with any such action, suit or proceeding if they acted in good faith
and in a manner which they reasonably believed to be in, or not opposed to,
our
best interest and, in any criminal action or proceeding, they had no reasonable
cause to believe their conduct was unlawful. Termination of any action, suit
or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, does not, of itself, create a presumption that
the
person did not act in good faith and in a manner which they reasonably believed
to be in or not opposed to our best interests, and, in any criminal action
or
proceeding, they had no reasonable cause to believe their conduct was
unlawful.
We
must
indemnify a director, officer, employee or agent who is successful, on the
merits or otherwise, in the defense of any action, suit or proceeding, or in
defense of any claim, issue, or matter in the proceeding, to which they are
a
party because they are or were a director, officer, employee or agent, against
expenses actually and reasonably incurred by them in connection with the
defense.
We
may
provide to pay the expenses of officers and directors incurred in defending
a
civil or criminal action, suit or proceeding as the expenses are incurred and
in
advance of the final disposition of the action, suit or proceeding, upon receipt
of an undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that they
are not entitled to be indemnified.
The
DGCL
also permits a corporation to purchase and maintain liability insurance or
make
other financial arrangements on behalf of any person who is or was
|
·
|
a
director, officer, employee or agent of
ours,
|
|
·
|
or
is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other
enterprises.
|
Such
coverage may be for any liability asserted against them and liability and
expenses incurred by them in their capacity as a director, officer, employee
or
agent, or arising out of their status as such, whether or not the corporation
has the authority to indemnify them against such liability and
expenses.
Insofar
as indemnification for liabilities arising under the Securities Act, as amended,
may be permitted to officers, directors or persons controlling our company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in such
Act and is therefore unenforceable.
61
Code
of Ethics
We
adopted a code of ethics that applies to our officers, directors and employees,
including our chief executive officer and chief financial officer.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Section
16(a) of the Securities Exchange Act of 1934 (as amended, the “Exchange Act”),
which requires executive officers and directors, and persons who beneficially
own more than ten percent (10%) of the common stock of a company with a class
of
securities registered under the Exchange Act, to file initial reports of
ownership and reports of changes in ownership with the SEC, is not currently
applicable to us.
Incentive
Compensation Plan
In
November, 2005, we approved the MDwerks, Inc. 2005 Incentive Compensation Plan
(the ‘‘Incentive Plan’’). The Incentive Plan covers grants of stock options,
grants of equity securities, dividend equivalents and other customary items
covered by such plans. Persons eligible to receive awards under the Incentive
Plan are the officers, directors, employees, consultants and other persons
who
provide services to us or any Related Entity (as defined in the Incentive
Plan).
The
Incentive Plan is administered by our Compensation Committee; however, the
Board
of Directors can exercise any power or authority granted to the Compensation
Committee under the Incentive Plan, unless expressly provided otherwise in
the
Incentive Plan.
We
have
reserved 10,000,000 shares of our authorized Common Stock for issuance pursuant
to grants under the Incentive Plan.
The
following executives received grants of stock options from MDwerks, Inc.,
through March 31, 2008:
OUTSTANDING
EQUITY AWARDS AT MARCH 31, 2008
|
|
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||
|
Name and Principal
Position
|
Number of
Securities
Underlying
Unexercised
Options
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
|
Option
Exercise
Price
|
Option
Expiration
Date
|
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
|
Market
Value of
Shares
or Units
of Stock
That
Have
Not
Vested
|
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
|
|||||||||||||||||||
|
Howard
Katz
|
16,667
|
8,333
|
(1)
|
—
|
$
|
3.25
|
12/28/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Chief
Executive
|
283,333
|
141,667
|
(2)
|
—
|
$
|
3.40
|
1/2/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Officer
and
|
83,333
|
166,667
|
(3)
|
—
|
$
|
4.00
|
6/18/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Director
|
333,333
|
166,667
|
(4)
|
—
|
$
|
2.25
|
10/10/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
50,000
|
—
|
—
|
$
|
1.39
|
12/26/2016
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
|
263,000
|
—
|
—
|
$
|
0.38
|
12/31/2017
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Vincent
Colangelo
|
16,667
|
8,333
|
(1)
|
—
|
$
|
3.25
|
12/28/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Chief
Financial
|
83,333
|
41,667
|
(2)
|
—
|
$
|
3.40
|
1/2/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Officer
and
|
25,000
|
50,000
|
(3)
|
—
|
$
|
4.00
|
6/18/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Secretary
|
50,000
|
25,000
|
(4)
|
—
|
$
|
2.25
|
10/10/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
15,000
|
—
|
—
|
$
|
1.39
|
12/26/2016
|
—
|
—
|
—
|
—
|
||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Solon
Kandel
|
16,667
|
8,333
|
(1)
|
—
|
$
|
3.25
|
12/28/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
President
and
|
200,000
|
100,000
|
(2)
|
—
|
$
|
3.40
|
1/2/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Director
|
25,000
|
50,000
|
(3)
|
—
|
$
|
4.00
|
6/18/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
66,667
|
33,333
|
(4)
|
—
|
$
|
2.25
|
10/10/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Gerard
Maresca
|
16,667
|
8,333
|
(1)
|
—
|
$
|
3.25
|
12/28/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Vice
President,
|
3,333
|
1,667
|
(2)
|
—
|
$
|
3.40
|
1/2/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Business
|
8,333
|
16,667
|
(3)
|
—
|
$
|
4.00
|
6/18/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Development
|
16,667
|
8,333
|
(4)
|
—
|
$
|
2.25
|
10/10/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Stephen
M. Weiss
|
16,667
|
8,333
|
(1)
|
—
|
$
|
3.25
|
12/28/2015
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Chief
Operating
|
3,333
|
1,667
|
(2)
|
—
|
$
|
3.40
|
1/2/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
Officer
|
8,333
|
16,667
|
(3)
|
—
|
$
|
4.00
|
6/18/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
16,667
|
8,333
|
(4)
|
—
|
$
|
2.25
|
10/10/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
|
|
10,000
|
5,000
|
(5)
|
—
|
$
|
1.39
|
12/26/2016
|
—
|
—
|
—
|
—
|
|||||||||||||||||
62
|
1
|
Consists
of Options vesting on December 28, 2008.
|
|
2
|
Consists
of Options vesting on January 2, 2009.
|
|
3
|
Consists
of Options vesting ½ on June 18, 2008 and vesting ½ on June 18,
2009.
|
|
4
|
Consists
of Options vesting on October 10, 2008.
|
|
5
|
Consists
of Options vesting on December 26,
2008.
|
As
of
April 30, 2008 , the following awards have been granted to the executive
officers named in this prospectus under the Incentive Plan:
|
Name
of Grantee
|
Incentive
Stock
Options
|
Non-Qualified
Stock Options
|
Percentage of
all Options
Granted to
Employees
|
|||||||
|
Howard
Katz
|
446,750
|
1 |
2,566,250
|
2 |
65.9
|
%
|
||||
|
Solon
Kandel
|
53,750
|
3 |
446,250
|
4 |
10.9
|
%
|
||||
|
Vincent
Colangelo
|
153,750
|
5 |
261,250
|
6 |
9.1
|
%
|
||||
|
Gerard
Maresca
|
50,750
|
7 |
29,250
|
8 |
1.7
|
%
|
||||
|
Stephen
Weiss
|
150,750
|
9 |
44,250
|
10 |
4.3
|
%
|
||||
The
following awards have been granted to the executive officers named in this
prospectus under the Incentive Plan in the last fiscal year which ended December
31, 2007:
|
Name
of Grantee
|
Incentive
Stock Options
|
Non-Qualified
Stock Options
|
Percentage of
all Options
Granted to
Employees
in Last
Fiscal Year
|
|||||||
|
Howard
Katz
|
263,000
|
11 |
0
|
100.0
|
%
|
|||||
|
Solon
Kandel
|
0
|
0
|
0.0
|
%
|
||||||
|
Vincent
Colangelo
|
0
|
0
|
0.0
|
%
|
||||||
|
Gerard
Maresca
|
0
|
0
|
0.0
|
%
|
||||||
|
Stephen
Weiss
|
0
|
0
|
0.0
|
%
|
||||||
63
|
1
|
Consists
of (i) options to purchase 25,000 shares of Common Stock at a price
of
$3.25 per share, granted on December 29, 2005, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
25,000 shares of Common Stock at a price of $3.40 per share, granted
on
January 3, 2006, and vesting in ⅓ increments on each anniversary date of
the date of grant, (iii) options to purchase 3,750 shares of Common
Stock
at a price of $4.00 per share, granted on June 19, 2006, and vesting
in ⅓
increments on each anniversary date of the date of the grant (iv)
options
to purchase 263,000 shares of Common Stock at a price of $0.38
per share,
granted on December 31, 2007, and vesting immediately and (v) options
to
purchase 130,000 shares of Common Stock at a price of $0.75 per
share,
granted on April 10, 2008, and vesting immediately .
|
|
2
|
Consists
of (i) options to purchase 400,000 shares of Common Stock at a
price of
$3.40 per share, granted on January 3, 2006, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
246,250 shares of Common Stock at a price of 4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant, (iii) options to purchase 500,000 shares of
Common
Stock at a price of $2.25 per share, granted on October 11, 2006,
and
vesting in ⅓ increments on October 11, 2006, and each subsequent
anniversary date of the date of the grant , (iv) options to purchase
50,000 shares of Common Stock at a price of $1.39 per share, granted
on
December 27, 2006, and vesting immediately and (v) options to purchase
1,370,000 shares of Common Stock at a price of $0.75 per share,
granted on
April 10, 2008, and vesting immediately. All Non-qualified Stock
Options
granted to Mr. Katz are owned with his spouse as Tenants in the
Entireties.
|
|
3
|
Consists
of (i) options to purchase 25,000 shares of Common Stock at a price
of
$3.25 per share, granted on December 29, 2005, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
25,000 shares of Common Stock at a price of $3.40 per share, granted
on
January 3, 2006, and vesting in ⅓ increments on each anniversary date of
the date of grant. and (iii) options to purchase 3,750 shares of
Common
Stock at a price of $4.00 per share, granted on June 19, 2006,
and vesting
in ⅓ increments on each anniversary date of the date of the
grant.
|
|
4
|
Consists
of (i) options to purchase 275,000 shares of Common Stock at a
price of
$3.40 per share, granted on January 3, 2006, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
71,250 shares of Common Stock at a price of 4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant, and (iii) options to purchase 100,000 shares
of Common
Stock at a price of $2.25 per share, granted on October 11, 2006,
and
vesting in ⅓ increments on October 11, 2006, and each subsequent
anniversary date of the date of the grant. All Non-qualified Stock
Options
granted to Mr. Kandel are owned with his spouse as Tenants in the
Entireties.
|
|
5
|
Consists
of (i) options to purchase 25,000 shares of Common Stock at a price
of
$3.25 per share, granted on December 29, 2005, and vesting in ⅓ increments
on each anniversary date of the date of grant, and (ii) options
to
purchase 25,000 shares of Common Stock at a price of $3.40 per
share,
granted on January 3, 2006, and vesting in ⅓ increments on each
anniversary date of the date of grant. (iii) options to purchase
3,750
shares of Common Stock at a price of $4.00 per share, granted on
June 19,
2006, and vesting in ⅓ increments on each anniversary date of the date of
the grant and (iv) options to purchase 100,000 shares of Common
Stock at a
price of $0.75 per share, granted on April 10, 2008, and vesting
immediately .
|
|
6
|
Consists
of (i) options to purchase 100,000 shares of Common Stock at a
price of
$3.40 per share, granted on January 3, 2006, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
71,250 shares of Common Stock at a price of 4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant, (iii) options to purchase 75,000 shares of Common
Stock
at a price of $2.25 per share, granted on October 11, 2006, and
vesting in
⅓ increments on October 11, 2006, and each subsequent anniversary
date of
the date of the grant, and (iv) options to purchase 15,000 shares
of
Common Stock at a price of $1.39 per share, granted on December
27, 2006,
and vesting on December 27, 2006. All Non-qualified Stock Options
granted
to Mr. Colangelo are owned with his spouse as Tenants in the
Entireties.
|
|
7
|
Consists
of (i) options to purchase 25,000 shares of Common Stock at a price
of
$3.25 per share, granted on December 29, 2005, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
5,000 shares of Common Stock at a price of $3.40 per share, granted
on
January 3, 2006, and vesting in ⅓ increments on each anniversary date of
the date of grant and (iii) options to purchase 20,750 shares of
common
stock at a price of 4.00 per share, granted on June 19, 2006, and
vesting
in ⅓ increments on each anniversary date of the date of the
grant.
|
|
8
|
Consists
of (i) options to purchase 4,250 shares of Common Stock at a price
of 4.00
per share, granted on June 19, 2006, and vesting in ⅓ increments on each
anniversary date of the date of the grant, and (ii) options to
purchase
25,000 shares of Common Stock at a price of $2.25 per share, granted
on
October 11, 2006, and vesting in ⅓ increments on October 11, 2006, and
each subsequent anniversary date of the date of the
grant.
|
|
9
|
Consists
of (i) options to purchase 25,000 shares of Common Stock at a price
of
$3.25 per share, granted on December 29, 2005, and vesting in ⅓ increments
on each anniversary date of the date of grant, (ii) options to
purchase
5,000 shares of Common Stock at a price of $3.40 per share, granted
on
January 3, 2006, and vesting in ⅓ increments on each anniversary date of
the date of grant, (iii) options to purchase 20,750 shares of common
stock
at a price of 4.00 per share, granted on June 19, 2006, and vesting
in ⅓
increments on each anniversary date of the date of the grant and
(iv)
options to purchase 100,000 shares of Common Stock at a price of
$0.75 per
share, granted on April 10, 2008, and vesting
immediately.
|
64
|
10
|
Consists
of (i) options to purchase 4,250 shares of Common Stock at a price
of
$4.00 per share, granted on June 19, 2006, and vesting in ⅓ increments on
each anniversary date of the date of grant, (ii) options to purchase
25,000 shares of Common Stock at a price of $2.25 per share, granted
on
October 11, 2006, and vesting in ⅓ increments on October 11, 2006, and
each subsequent anniversary date of the date of the grant, and
(iii)
options to purchase 15,000 shares of Common Stock at a price of
$1.39 per
share, granted on December 27, 2006, and vesting in ⅓ increments on
December 27, 2006, and each subsequent anniversary date of the
date of the
grant.
|
|
11
|
Consists
of options to purchase 263,000 shares of Common Stock at a price
of $0.38
per share, granted on December 31, 2007, and vesting
immediately
|
Executive
Compensation
The
primary objective of our executive compensation program is to attract and retain
qualified, energetic managers who are enthusiastic about our mission and
culture. A further objective of our compensation program is to provide
incentives and reward each manager for their contribution. In addition, we
strive to promote an ownership mentality among key leadership and the Board
of
Directors.
Our
Compensation Committee reviews and approves, or in some cases recommends for
the
approval of the full Board of Directors, the annual compensation for our
Executive Officers. Regarding most compensation matters, including executive
and
director compensation, our management provides recommendations to the
Compensation Committee; however, the Compensation Committee does not delegate
any of its functions to others in setting compensation. Our Compensation
Committee does not include any Executive Officers. We do not currently engage
any consultant to advise the Company on executive and/or director compensation
matters.
In
measuring our Executive Officers’ contributions, the Compensation Committee
considers numerous factors including our growth, strategic business
relationships and financial performance. Stock price performance has not been
a
factor in determining annual compensation because the price of our common stock
is subject to a variety of factors outside of our control. We do not have an
exact formula for allocating between cash and non-cash
compensation.
Annual
executive officer compensation generally consists of a base salary and annual
bonus component, as well as periodic stock option grants. It is the Compensation
Committee’s intention to set total executive cash compensation sufficiently high
enough to attract and retain a strong motivated leadership team, but not so
high
that it creates a negative perception with our stakeholders. Each of our
executive officers receives stock option grants under our 2005 Incentive
Compensation Plan. Each executive’s current and prior compensation is considered
in setting future compensation. In addition, we review the compensation
practices of other companies. To some extent, our compensation plan is based
on
the market and the companies we compete against for executive management. The
elements of our plan (e.g., base salary, bonus and stock options) are similar
to
the elements used by many companies.
Stock
options are granted to include a long-term component to the Executive’s overall
compensation package. The Company has no pension plan, non-equity incentive
plan
or deferred compensation arrangement. The number of stock options granted to
each executive officer is made on a discretionary rather than a formula basis
by
the Compensation Committee. The Company does not have a specific program, plan
or practice to time stock option grants. The pricing of stock option grants
are
based upon the stock’s opening price on the date of the grant.
Each
of
our executive officers, except for the VP of Business Development, has an
employment agreement with the Company that outlines salary and benefit
arrangements. These agreements have similar terms, which include, but are not
limited to: base salaries; annual bonuses; reimbursements of certain expenses;
group health, disability, and life insurances; and, termination provisions.
These agreements have initial terms of one, two or three years.
65
The
following executives received compensation from MDwerks, Inc., in the amounts
set forth in the chart below for the twelve months ended December 31, 2007,
December 31, 2006, and December 31, 2005. The value attributable to any Option
Awards in the following chart is computed in accordance with FAS 123R. No other
item of compensation was paid to any officer or director of the Company other
than reimbursement of expenses:
SUMMARY
COMPENSATION TABLE
|
Name
and
Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
Non-
Equity
Incentive
Plan
Compen-
sation
|
Non-
qualified
Deferred
Compen-
sation
Earnings
|
All
Other
Compen-
sation
|
Total
|
|||||||||||||||||||
|
Howard
Katz
|
2007
|
$
|
225,000
|
$
|
103,413
|
1 |
—
|
$
|
94,680
|
2 |
—
|
—
|
$
|
51,000
|
3 |
$
|
474,093
|
|||||||||||
|
Chief
Executive
|
2006
|
$
|
195,000
|
$
|
87,778
|
4 |
—
|
$
|
3,406,150
|
5 |
—
|
—
|
$
|
51,000
|
3 |
$
|
3,739,928
|
|||||||||||
|
Officer
and Director
|
2005
|
$
|
79,231
|
—
|
—
|
$
|
81,250
|
6 |
—
|
—
|
$
|
50,769
|
7 |
$
|
211,250
|
|||||||||||||
|
|
|
|||||||||||||||||||||||||||
|
Vincent
Colangelo
|
2007
|
$
|
175,000
|
8 |
$
|
53,596
|
9 |
—
|
—
|
—
|
—
|
$
|
12,000
|
10 |
$
|
240,596
|
||||||||||||
|
Chief
Financial
|
2006
|
$
|
150,000
|
$
|
44,100
|
11 |
$
|
81,000
|
12 |
$
|
848,600
|
13 |
—
|
—
|
$
|
12,000
|
10 |
$
|
1,135,700
|
|||||||||
|
Officer
and Secretary
|
2005
|
$
|
50,385
|
—
|
—
|
$
|
81,250
|
6 |
—
|
—
|
$
|
25,500
|
14 |
$
|
157,135
|
|||||||||||||
|
|
|
|||||||||||||||||||||||||||
|
Solon
Kandel
|
2007
|
$
|
200,000
|
15 |
$
|
52,019
|
16 |
—
|
—
|
$
|
13,800
|
17 |
$
|
265,819
|
||||||||||||||
|
President
and
|
2006
|
$
|
175,000
|
$
|
50,527
|
18 |
—
|
$
|
1,407,950
|
19 |
—
|
—
|
$
|
13,800
|
17 |
$
|
1,647,277
|
|||||||||||
|
Director
|
2005
|
$
|
53,846
|
—
|
—
|
$
|
81,250
|
6 |
—
|
—
|
$
|
46,154
|
20 |
$
|
181,250
|
|||||||||||||
|
|
||||||||||||||||||||||||||||
|
Gerard
Maresca
|
2007
|
$
|
150,000
|
—
|
—
|
—
|
—
|
—
|
$
|
1,968
|
21 |
$
|
151,968
|
|||||||||||||||
|
Vice
President,
|
2006
|
$
|
150,000
|
—
|
—
|
$
|
166,090
|
22 |
—
|
—
|
$
|
2,290
|
23 |
$
|
318,380
|
|||||||||||||
|
BusinessDevelopment
|
2005
|
$
|
40,296
|
—
|
—
|
$
|
81,250
|
6 |
—
|
—
|
$
|
90,185
|
24 |
$
|
211,731
|
|||||||||||||
|
|
||||||||||||||||||||||||||||
|
Stephen
M. Weiss
|
2007
|
$
|
160,000
|
$
|
17,885
|
—
|
—
|
—
|
—
|
$
|
4,800
|
25 |
$
|
182,685
|
||||||||||||||
|
Chief
Operating
|
2006
|
$
|
150,000
|
$
|
20,828
|
—
|
$
|
186,640
|
26 |
—
|
—
|
$
|
4,800
|
25 |
$
|
362,268
|
||||||||||||
|
Officer
|
2005
|
$
|
33,391
|
—
|
—
|
$
|
81,250
|
6 |
—
|
—
|
$
|
67,000
|
27 |
$
|
181,641
|
|||||||||||||
|
1
|
Consists
of $5,170 bonus paid during 2007 and $98,243 bonus paid during
2008.
|
|
2
|
Consists
of Incentive Stock Options to purchase 263,000 shares of Common Stock
at a
price of $0.38 per share, granted on December 31, 2007, and vesting
on
December 31, 2007.
|
|
3
|
Consists
of an auto allowance of $18,000, a business use of home allowance
of
$30,000 and a contribution of $3,000 towards the Company’s medical
Flexible Spending account.
|
|
4
|
Consists
of $51,389 bonus paid during 2006 and $36,389 bonus paid during
2007.
|
|
5
|
Consists
of Incentive Stock Options to purchase: (i) 25,000 shares of Common
Stock
at a price of $3.40 per share, granted on January 3, 2006, and vesting
in
⅓ increments on each anniversary date of the date of grant; and, (ii)
3,750 shares of Common Stock at a price of $4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant and Non-qualified Stock Options to purchase: (i)
400,000
shares of Common Stock at a price of $3.40 per share, granted on
January
3, 2006, and vesting in ⅓ increments on each anniversary date of the date
of grant, (ii) 246,250 shares of Common Stock at a price of $4.00
per
share, granted on June 19, 2006, and vesting in ⅓ increments on each
anniversary date of the date of the grant, (iii) 500,000 shares of
Common
Stock at a price of $2.25 per share, granted on October 11, 2006,
and
vesting in ⅓ increments on October 11, 2006, and each subsequent
anniversary date of the date of the grant, and (iv) 50,000 shares
of
Common Stock at a price of $1.39 per share, granted on December 27,
2006,
and vesting on December 27, 2006. All Non-qualified Stock Options
granted
to Mr. Katz are owned with his spouse as Tenants in the
Entireties.
|
66
|
6
|
Consists
of Incentive stock options to purchase 25,000 shares of Common Stock
at a
price of $3.25 per share, granted on December 29, 2005, exercisable
at a
price of $3.25 per share, and vesting in ⅓ increments on each anniversary
date of the date of grant.
|
|
7
|
Prior
to becoming an employee of the Company on September 26, 2005, Mr.
Katz was
compensated for his services to the Company in his capacity as a
consultant. $18,333 was paid to Mr. Katz and $32,436 was paid to
Greater
Condor Evaluations, Inc., an entity owned and controlled by Mr. Katz
for
such services.
|
|
8
|
Consists
of $160,000 salary paid during 2007 and $15,000 paid during
2008.
|
|
9
|
Consists
of $738 bonus paid during 2007 and $52,858 paid during
2008.
|
|
10
|
Consists
of an auto allowance of $9,000 and a contribution of $3,000 towards
the
Company’s medical Flexible Spending account.
|
|
11
|
Consists
of a $26,377 bonus paid during 2006 and $17,723 bonus paid in
2007.
|
|
12
|
Consists
of $81,000 for services rendered to the Company, paid as 25,000 shares
of
Common Stock issued on February 28, 2006.
|
|
13
|
Consists
of Incentive Stock Options to purchase: (i) 25,000 shares of Common
Stock
at a price of $3.40 per share, granted on January 3, 2006, and vesting
in
⅓ increments on each anniversary date of the date of grant; and, (ii)
3,750 shares of Common Stock at a price of $4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant and Non-qualified Stock Options to purchase: (i)
100,000
shares of Common Stock at a price of $3.40 per share, granted on
January
3, 2006, and vesting in ⅓ increments on each anniversary date of the date
of grant, (ii) 71,250 shares of Common Stock at a price of $4.00
per
share, granted on June 19, 2006, and vesting in ⅓ increments on each
anniversary date of the date of the grant, (iii) 75,000 shares of
Common
Stock at a price of $2.25 per share, granted on October 11, 2006,
and
vesting in ⅓ increments on October 11, 2006, and each subsequent
anniversary date of the date of the grant , and (iv) 15,000 shares
of
Common Stock at a price of $1.39 per share, granted on December 27,
2006,
and vesting on December 27, 2006. All Non-qualified Stock Options
granted
to Mr. Colangelo are owned with his spouse as Tenants in the
Entireties.
|
|
14
|
Prior
to becoming an employee of the Company on September 26, 2005, Mr.
Colangelo was compensated for his services to the Company in his
capacity
as a consultant. $25,500 was paid to Weston Business Advisors, Inc.,
a
corporation owned and controlled by Mr. Colangelo for such
services.
|
|
15
|
Consists
of $175,000 salary paid during 2007 and $25,000 paid during
2008.
|
|
16
|
Consists
of a $14,714 bonus paid during 2007 and $37,305 paid during
2008.
|
|
17
|
Consists
of an auto allowance of $10,800 and a contribution of $3,000 towards
the
Company’s medical Flexible Spending account.
|
|
18
|
Consists
of a $29,302 bonus paid during 2006 and $21,225 bonus paid in
2007.
|
|
19
|
Consists
of Incentive Stock Options to purchase: (i) 25,000 shares of Common
Stock
at a price of $3.40 per share, granted on January 3, 2006, and vesting
in
⅓ increments on each anniversary date of the date of grant: and (ii)
3,750
shares of Common Stock at a price of $4.00 per share, granted on
June 19,
2006, and vesting in ⅓ increments on each anniversary date of the date of
the grant and Non-qualified Stock Options to purchase: (i) 275,000
shares
of Common Stock at a price of $3.40 per share, granted on January
3, 2006,
and vesting in ⅓ increments on each anniversary date of the date of grant;
(ii) 71,250 shares of Common Stock at a price of $4.00 per share,
granted
on June 19, 2006, and vesting in ⅓ increments on each anniversary date of
the date of the grant; and, (iii) 100,000 shares of Common Stock
at a
price of $2.25 per share, granted on October 11, 2006, and vesting
in ⅓
increments on October 11, 2006, and each subsequent anniversary date
of
the date of the grant. All Non-qualified Stock Options granted to
Mr.
Kandel are owned with his spouse as Tenants in the
Entireties.
|
|
20
|
Prior
to becoming an employee of the Company on September 26, 2005, Mr.
Kandel
was compensated for his services to the Company in his capacity as
a
consultant. $33,333 was paid to Mr. Kandel as consulting fees and
$12,821
was paid to The Ashwood Group, LLC, an entity owned and controlled
by Mr.
Kandel for such services.
|
|
21
|
Consists
of an auto allowance of $1,800 and a contribution of $168 towards
the
Company’s medical Flexible Spending
account.
|
67
|
22
|
Consists
of Incentive Stock Options to purchase: (i) 5,000 shares of Common
Stock
at a price of $3.40 per share, granted on January 3, 2006, and vesting
in
⅓ increments on each anniversary date of the date of grant; and, (ii)
20,750 shares of Common Stock at a price of $4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant and Non-qualified Stock Options to purchase: (i)
4,250
shares of Common Stock at a price of $4.00 per share, granted on
June 19,
2006, and vesting in ⅓ increments on each anniversary date of the date of
the grant; and, (ii) 25,000 shares of Common Stock at a price of
$2.25 per
share, granted on October 11, 2006, and vesting in ⅓ increments on October
11, 2006, and each subsequent anniversary date of the date of the
grant
|
|
23
|
Consists
of an auto allowance of $1,800 and a contribution of $490 towards
the
Company’s medical Flexible Spending account.
|
|
24
|
Prior
to becoming an employee of the Company on September 26, 2005, Mr.
Maresca
was compensated for his services to the Company in his capacity as
a
consultant. $90,185 was paid to GMAR, Inc., a corporation owned and
controlled by Mr. Maresca for such services.
|
|
25
|
Consists
of an auto allowance of $1,800 and a contribution of $3,000 towards
the
Company’s medical Flexible Spending account.
|
|
26
|
Consists
of Incentive Stock Options to purchase: (i) 5,000 shares of Common
Stock
at a price of $3.40 per share, granted on January 3, 2006, and vesting
in
⅓ increments on each anniversary date of the date of grant; and, (ii)
20,750 shares of Common Stock at a price of $4.00 per share, granted
on
June 19, 2006, and vesting in ⅓ increments on each anniversary date of the
date of the grant and Non-qualified Stock Options to purchase: (i)
4,250
shares of Common Stock at a price of $4.00 per share, granted on
June 19,
2006, and vesting in ⅓ increments on each anniversary date of the date of
the grant; and, (ii) 25,000 shares of Common Stock at a price of
$2.25 per
share, granted on October 11, 2006, and vesting in ⅓ increments on October
11, 2006, and each subsequent anniversary date of the date of the
grant;
and (iii) options to purchase 15,000 shares of Common Stock at a
price of
$1.39 per share, granted on December 27, 2006, and vesting in ⅓ increments
on December 27, 2006, and each subsequent anniversary date of the
date of
the grant.
|
|
27
|
Prior
to becoming an employee of the Company on September 26, 2005, Mr.
Weiss
was compensated for his services to the Company in his capacity as
a
consultant. $67,000 was paid to Argent Consulting Services, Inc.,
a
corporation owned and controlled by Mr. Weiss for such
services.
|
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth information regarding the number of shares of Common
Stock beneficially owned on April 30, 2008, by each person who is known by
the
Company to beneficially own 5% or more of the Company’s Common Stock, each of
the Company’s directors and executive officers, and all of the Company’s
directors and executive officers, as a group:
|
Name of Beneficial Owner
|
Common
Shares
Owned
|
Presently
Exercisable
Options or
Options
Exercisable
Within
60 Days
|
Shares
Beneficially
Owned
|
Percentage
of Class
|
|||||||||
|
Howard
B. Katz
|
1,141,814
|
1 |
2,613,000
|
3,754,814
|
2 |
24.1
|
%
|
||||||
|
Solon
Kandel
|
922,781
|
333,333
|
1,256,114
|
2 |
9.5
|
%
|
|||||||
|
Vincent
Colangelo
|
25,000
|
315,000
|
340,000
|
2 |
2.6
|
%
|
|||||||
|
Stephen
Weiss
|
65,809
|
163,333
|
229,412
|
2 |
1.7
|
%
|
|||||||
|
Gerard
Maresca
|
136,849
|
53,333
|
190,182
|
2 |
1.5
|
%
|
|||||||
|
David
M. Barnes
|
75,000
|
275,000
|
350,000
|
2 |
2.6
|
%
|
|||||||
|
Peter
Dunne
|
53,430
|
176,667
|
230,097
|
2 |
1.8
|
%
|
|||||||
|
Paul
Kushner
|
141,290
|
176,667
|
317,957
|
2 |
2.4
|
%
|
|||||||
|
Shad
Stastney
|
—
|
—
|
—
|
0.0
|
%
|
||||||||
|
Chris
Phillips
|
—
|
—
|
—
|
0.0
|
%
|
||||||||
|
Directors
and officers as a group (10 persons):
|
2,561,973
|
4,106,333
|
6,668,306
|
39.1
|
%
|
||||||||
|
Persons
known to beneficially own more than 5% of the outstanding Common
Stock:
|
|||||||||||||
|
MEDwerks.com
Corp 3
|
2,139,316
|
0
|
2,139,316
|
16.5
|
%
|
||||||||
|
AJKN
Partnership 3
|
853,481
|
0
|
853,481
|
6.6
|
%
|
||||||||
|
AJLN
Partnership 3
|
853,481
|
0
|
853,481
|
6.6
|
%
|
||||||||
|
AJMN
Partnership 3
|
853,481
|
0
|
853,481
|
6.6
|
%
|
||||||||
68
| 1 |
Includes
113,813 shares of common stock owned by 73142 Corp., an entity controlled
by Howard Katz as the sole officer and director. Mr. Katz is not a
shareholder of 73142 Corp.
|
| 2 |
Includes
presently exercisable options, as disclosed under Director Compensation
and Executive Compensation and certain options that become exercisable
within 60 days of May 22, 2008.
|
| 3 |
Dr.
Jacob Nudel, MDwerks’ former chairman, exercises investment and voting
control of the shares beneficially owned by Medwerks.com Corp. Dr.
Nudel
is General Partner of and exercises dispositive voting control of
the
shares beneficially owned by AJKN Limited Partnership, AJLN Limited
Partnership and AJMN Limited Partnership, but is only a 1% limited
partner
of each of these entities.
|
Stephen
Katz, the son of Howard Katz, the Company’s Chief Executive Officer, is a
partner at Peckar & Abramson, P.C., which is the Company’s outside legal
counsel. The Company is charged Peckar & Abramson’s standard billing rates
for legal services rendered. Stephen Katz owns: 174,000 restricted shares of
the
Common Stock of the Company; Incentive Stock Options to purchase 44,000 shares
of Common Stock at a price of $2.25 per share granted on October 11, 2006,
and
vesting in ⅓ increments starting on October 11, 2006, and on each of the next
two anniversaries of the date of the grant; and, Non-Qualified Stock Options
to
purchase 131,000 shares of Common Stock at a price of $2.25 per share granted
on
October 11, 2006, and vesting in ⅓ increments starting on October 11, 2006, and
on each of the next two anniversaries of the date of the grant.
69
SELLING
SECURITYHOLDER
Up
to
3,882,020 shares of our common stock that may be acquired upon the conversion
of
Series B Preferred Stock issued to the Selling Securityholder are being offered
by this prospectus, all of which are being registered for sale for the account
of the Selling Securityholder.
Each
of
the transactions by which the Selling Securityholder acquired its securities
from us was exempt under the registration provisions of the Securities Act.
The
shares of our common stock referred to above are being registered to permit
public sales of the shares, and the Selling Securityholder may offer the shares
for resale from time to time pursuant to this prospectus. The Selling
Securityholder also may sell, transfer or otherwise dispose of all or a portion
of its shares in transactions exempt from the registration requirements of
the
Securities Act, or pursuant to another effective registration statement covering
such shares. We from time to time may include additional selling securityholders
in supplements or amendments to this prospectus.
The
shares of our common stock being offered by the Selling Securityholder are
those
issuable to the Selling Securityholder upon conversion of the Series B Preferred
Stock. We are registering the shares of our common stock in order to permit
the
Selling Securityholder to offer the shares for resale from time to time. Except
for the ownership of the Series B Preferred Stock and Series H Warrant issued
pursuant to the Securities Purchase Agreement, certain loans made by the Selling
Securityholder to us that were converted into shares of Series B Preferred
Stock
and the transactions involving the Selling Securityholder described under the
heading “Institutional
Financings”,
the
Selling Securityholder has not had any relationship with us within the past
three years.
The
table
below lists the Selling Securityholder and other information regarding the
beneficial ownership of the shares of common stock held by the Selling
Securityholder. The second column lists the number of shares of common stock
beneficially owned by the Selling Securityholder, based on its ownership of
the
Series B Preferred Stock and the Series H Warrant, as of May 23, 2008, assuming
full conversion of the Series B Preferred Stock held by the Selling
Securityholder that may be converted within 60 days after May 23,
2008.
The
third
column lists the shares of our common stock being offered by this prospectus
by
the Selling Securityholder.
In
accordance with the terms of the Amended and Restated Registration Rights
Agreement with the Selling Securityholder, this prospectus covers the
resale of up to 3,882,020 shares of common stock issuable upon conversion of
the
Series B Preferred Stock. Because the conversion price of the Series B Preferred
Stock may be adjusted, the number of shares that actually will be issued may
be
more or less than the number of shares being offered by this prospectus. The
fourth column assumes the sale of all of the shares offered by the Selling
Securityholder pursuant to this prospectus.
The
Selling Securityholder may sell all, some or none of its shares in this
offering.
Beneficial
ownership is determined in accordance with the rules of the SEC that consider
shares to be beneficially owned by any person who has voting or investment
power
with respect to the shares. Except as otherwise noted in the Selling
Securityholder table below, the Selling Securityholder has never held an office,
been a director or had any other material relationship with the Company. The
Selling Securityholder is not a registered broker-dealer or an affiliate of
a
broker-dealer.
70
The
following table sets forth:
|
·
|
the
name of the Selling Securityholder,
|
|
·
|
the
number of shares of common stock beneficially owned by the Selling
Securityholder prior to this offering and the number of shares being
offered by the Selling
Securityholder,
|
|
·
|
the
number of shares of common stock beneficially owned by the Selling
Securityholder after this offering,
|
|
·
|
the
percentage of common stock beneficially owned by the Selling
Securityholder before and after the
offering.
|
|
|
Beneficial Ownership
Before Offering (1)(2)(3)
|
Shares
Being
|
Beneficial
Ownership
After Offering (2)
|
|||||||||||||
|
Name of Selling Securityholder
|
Number
|
Percent
|
Offered
|
Number
|
Percent
|
|||||||||||
|
Vicis
Capital Master Fund (1)
|
645,709
|
(2)
|
4.99%
|
(3)
|
3,882,020
|
645,709
|
(2)
|
4.99
|
%
|
|||||||
|
All
shares to be sold pursuant to this prospectus are held directly by
Vicis
Capital Master Fund. Vicis Capital LLC, a registered investment advisor,
acts as investment advisor to Vicis Capital Master Fund. Shad Stastney,
the Chief Operating Officer and Head of Research for Vicis Capital
LLC and
Chris Phillips, the Managing Director of Vicis Capital LLC are both
directors of the Company.
|
|
(2)
|
Represents
12,500 shares of common stock held by the Selling Securityholder
and
633,209 shares of common stock issuable pursuant to the exercise
of the
Series H Warrant held by the Selling Securityholder and/or the conversion
of Series B Preferred Stock held by the Selling Securityholder within
sixty (60) days after the date of this prospectus. Does not include
any
shares that may be issued pursuant to the Series H Warrant and the
Series
B Preferred Stock to the extent the Series H Warrant is not exercisable
and the Series B Preferred Stock is not convertible within sixty
(60) days
after the date of this prospectus. As of the date of this Prospectus
the
Series B Preferred Stock may be converted into an aggregate of 13,333,334
shares of common stock, subject to the limitation that a conversion
of
Series B Preferred Stock by the Selling Securityholder may not result
in
the Selling Securityholder owning in excess of 4.99% of the outstanding
shares of common stock of the Company, unless the Selling Securityholder
gives the Company at least sixty-one (61) days notice of the waiver
of
such limitation. As of the date of this Prospectus the Series H Warrant
is
exercisable for an aggregate of 53,333,334 shares of Common Stock,
subject
to the limitation that the exercise of the Series H Warrant may not
result
in the Selling Securityholder owning in excess of 4.99% of the outstanding
shares of common stock of the Company, unless the Selling Securityholder
gives the Company at least sixty-one (61) days notice of the waiver
of
such limitation.
|
| (3) |
Based
upon 12,940,065 shares outstanding as of the date of this Prospectus
and
an additional 633,709 shares of common stock (or an aggregate of
13,573,744) that would be outstanding assuming conversion of Series
B
Preferred Stock that is convertible within sixty (60) days of the
date of
this Prospectus and/or exercise of the Series H Warrant for all shares
that may be purchased thereunder within sixty (60) days after this
date of
this Prospectus.
|
71
DESCRIPTION
OF SECURITIES
Capital
Stock
We
are
authorized to issue 100 million shares of common stock, par value $0.001 per
share, and 10 million shares of preferred stock, par value $0.001 per
share.
All
of
our shares of common stock have equal rights and privileges with respect to
voting, liquidation and dividend rights. Each share of common stock entitles
the
holder thereof (a) to one non-cumulative vote for each share held of record
on
all matters submitted to a vote of the stockholders; (b) to participate equally
and to receive any and all such dividends as may be declared by the board of
directors; and (c) to participate pro rata in any distribution of assets
available for distribution upon liquidation. Holders of our common stock have
no
preemptive rights to acquire additional shares of common stock or any other
securities. Our common stock is not subject to redemption and carries no
subscription or conversion rights.
Our
certificate of incorporation also provides that the board of directors has
the
flexibility to set new classes, series, and other terms and conditions of the
preferred shares. Preferred shares may be issued from time to time in one or
more series in the discretion of the board of directors. The board has the
authority to establish the number of shares to be included in each such series,
and to fix the designation, powers, preferences and rights of the shares of
each
such series and the qualifications, limitations and restrictions
thereof.
Preferred
shares may be issued in the future by the board without further stockholder
approval and for such purposes as the board deems in the best interest of our
company including future stock splits and split-ups, stock dividends, equity
financings and issuances for acquisitions and business combinations. In
addition, such authorized but unissued common and preferred shares could be
used
by the board of directors for defensive purposes against a hostile takeover
attempt, including (by way of example) the private placement of shares or the
granting of options to purchase shares to persons or entities sympathetic to,
or
contractually bound to support, management. We have no such present arrangement
or understanding with any person. Further, the common and preferred shares
may
be reserved for issuance upon exercise of stock purchase rights designed to
deter hostile takeovers, commonly known as a ‘‘poison pill.’’
Series
A Convertible Preferred Stock
The
Company currently has two (2) shares of the originally issued twenty-eight
and
one-third (28.3) shares of Series A Convertible Preferred Stock (the ‘‘Series A
Preferred Stock’’) outstanding. The following description of the Series A
Preferred Stock is qualified in its entirety by reference to the form of
Certificate of Designation fixing the rights, powers and privileges of the
Series A Preferred Stock, a copy of which is available from the Company upon
request.
Conversion. The
holders of Series A Preferred Stock are entitled at any time to convert their
shares of Series A Preferred Stock into common stock, without any further
payment therefor. Each share of Series A Preferred Stock is initially
convertible into 20,000 shares of common stock. The number of shares of common
stock issuable upon conversion of the Series A Preferred Stock is subject to
adjustment upon the occurrence of certain events, including, among others,
a
stock split, reverse stock split or combination of the Company’s Common Stock;
an issuance of common stock or other securities of the Company as a dividend
or
distribution on the common stock; a reclassification, exchange or substitution
of the common stock; or a capital reorganization of the Company. Upon a merger
or consolidation of the Company with or into another company, or any transfer,
sale or lease by the Company of substantially all of its common stock or assets,
the Series A Preferred Stock will be treated as Common Stock for all purposes,
including the determination of any assets, property or stock to which holders
of
the Series A Preferred Stock are entitled to receive, or into which the Series
A
Preferred Stock is converted, by reason of the consummation of such merger,
consolidation, sale or lease.
72
Voting
Rights. Holders
of Series A Preferred Stock are entitled to vote their shares on an
as-if-converted to common stock basis, and shall vote together with the holders
of the common stock, and not as a separate class. Holders of Series A Preferred
Stock shall also have any voting rights to which they are entitled by
law.
Liquidation
Rights. In
the
event of any voluntary or involuntary liquidation, dissolution or winding-up
of
the Company, holders of Series A Preferred Stock will be entitled to receive
out
of assets of the Company available for distribution to its shareholders, before
any distribution is made to holders of its common stock, liquidating
distributions in an amount equal to $60,000 per share. After payment of the
full
amount of the liquidating distributions to which the holders of the Series
A
Preferred Stock are entitled, holders of the Series A Preferred Stock will
receive liquidating distributions pro rata with holders of common stock, based
on the number of shares of common stock into which the Series A Preferred Stock
is convertible at the conversion rate then in effect.
Redemption. The
Series A Preferred Stock may not be redeemed by the Company at any
time.
Dividends. Holders
of Series A Preferred Stock will not be entitled to receive dividends, if
any.
Series
B Convertible Preferred Stock
The
Company currently has 1,000 shares of Series B Convertible Preferred Stock
outstanding of which 750 shares are convertible into shares of common stock
that
may be sold pursuant to this prospectus. The following description of the Series
B Preferred Stock is qualified in its entirety by reference to the form of
Amended and Restated Certificate of Designation fixing the rights, powers and
privileges of the Series B Preferred Stock, a copy of which has been filed
as an
exhibit to our Current Report on Form 8-K, filed with the SEC on April 2, 2008,
and is available from the Company upon request.
Conversion.
Subject
to the limitations on conversion contained in the Certificate of Designations,
the holders of Series B Preferred Stock are entitled at any time to convert
their shares of Series B Preferred Stock into common stock, without any further
payment therefor. Each share of Series B Preferred Stock is initially
convertible into the number shares of common stock determined by dividing the
stated value of such share of Series B Preferred Stock by the conversion price.
As of May 22, 2008, the outstanding shares of Series B Preferred Stock were
convertible into an aggregate of 13,333,334 shares of common stock. The
conversion price and the number of shares of common stock issuable upon
conversion of the Series B Preferred Stock is subject to adjustment upon the
occurrence of certain events, including, among others, issuances of securities
for a price (or containing and exercise or conversion price) that is less than
the conversion price then in effect, a stock split, reverse stock split or
combination of the Company’s Common Stock; an issuance of common stock or other
securities of the Company as a dividend or distribution on the common stock;
a
reclassification, exchange or substitution of the common stock; or a capital
reorganization of the Company. Upon a merger or consolidation of the Company
with or into another company, or any transfer, sale or lease by the Company
of
substantially all of its common stock or assets, the Series B Preferred Stock
will be treated as common stock for all purposes, including the determination
of
any assets, property or stock to which holders of the Series B Preferred Stock
are entitled to receive, or into which the Series B Preferred Stock is
converted, by reason of the consummation of such merger, consolidation, sale
or
lease.
Stated
Value.
The
stated value of each share of Series B Preferred Stock is $10,000.
Conversion
Price.
The
conversion price of each share of Series B Preferred Stock is
$0.75.
Voting
Rights.
Holders
of Series B Preferred Stock are entitled to vote their shares on an
as-if-converted to common stock basis, subject to the limitations on conversion
set forth in the Certificate of Designations, and shall vote together with
the
holders of the common stock, and not as a separate class. Holders of Series
B
Preferred Stock shall also have any voting rights to which they are entitled
by
law.
Liquidation
Rights.
In the
event of any voluntary or involuntary liquidation, dissolution or winding-up
of
the Company, holders of Series B Preferred Stock will be entitled to receive
out
of assets of the Company available for distribution to its shareholders, before
any distribution is made to holders of its common stock and any other class
of
preferred stock, liquidating distributions in an amount equal to $10,000 per
share plus accrued but unpaid dividends.
73
Redemption.
The
Series B Preferred Stock is redeemable at the option of the holders thereof
at
any time on or after March 31, 2010. Each share of Series B Preferred Stock
is
also redeemable, at the option of the holder, at 125% of its stated value in
the
event of a Change of Control (as defined in the Certificate of
Designations).
Dividends.
Each
share of Series B Preferred Stock is entitled to cumulative dividends at the
annual rate of 12% of the stated value of the Series B Preferred
Stock.
Common
Stock
The
holders of common stock are entitled to one vote per share. The Company’s
Certificate of Incorporation does not provide for cumulative voting. The holders
of common stock are entitled to receive ratably such dividends, if any, as
may
be declared by the Board of Directors out of legally available funds. However,
the current policy of the Board of Directors is to retain earnings, if any,
for
the operation and expansion of the Company. Upon liquidation, dissolution or
winding-up of the Company, the holders of common stock are entitled to share
ratably in all assets of the Company which are legally available for
distribution, after payment of or provision for all liabilities and the
liquidation preference of any outstanding Preferred Stock. The holders of common
stock have no preemptive, subscription, redemption or conversion rights. All
issued and outstanding shares of common stock are, and the common stock reserved
for issuance upon conversion of the Preferred Stock and exercise of the Warrants
will be, when issued, fully-paid and non-assessable.
Miscellaneous
Warrants
General. Each
Miscellaneous Warrant entitles the holder thereof to purchase shares of common
stock at an exercise price ranging from $1.25 to $4.00 per share and
will expire between three and five years after the date of
issuance.
Redemption. The
Miscellaneous Warrants may not be redeemed by the Company at any
time.
Transfer,
Exchange and Exercise. The
Miscellaneous Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (as explained below) at the offices
of the Company with the form of ‘‘Subscription Form’’ on the reverse side of the
warrant certificate filled out and executed as indicated, accompanied by payment
(in the form of certified or cashier’s check payable to the order of the
Company) of the full exercise price for the number of Miscellaneous Warrants
being exercised.
Adjustments. The
Miscellaneous Warrants contain provisions that protect the holders thereof
against dilution by adjustment of the purchase price in certain events, such
as
stock dividends, stock splits, and other similar events. The holder of a
Miscellaneous Warrant will not possess any rights as a stockholder of the
Company unless and until he exercises the Miscellaneous Warrant.
The
Miscellaneous Warrants do not confer upon holders any voting or any other rights
as a stockholder of the Company.
Series
A Warrants
General. Each
Series A Warrant entitles the holder thereof to purchase 20,000 shares of common
stock at the exercise price of $3.00 per share and will expire three years
after
the date of issuance.
Redemption. The
Series A Warrants may not be redeemed by the Company at any time.
Transfer,
Exchange and Exercise. The
Series A Warrants may be exercised upon surrender of the certificate therefore
on or prior to the expiration date (as explained below) at the offices of the
Company with the form of “Subscription Form” on the reverse side of the warrant
certificate filled out and executed as indicated, accompanied by payment (in
the
form of certified or cashier’s check payable to the order of the Company) of the
full exercise price for the number of Series A Warrants being
exercised.
74
Adjustments. The
Series A Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the purchase price in certain events, such as stock
dividends, stock splits, and other similar events. The holder of a Series A
Warrant will not possess any rights as a stockholder of the Company unless
and
until he exercises the Series A Warrant.
The
Series A Warrants do not confer upon holders any voting or any other rights
as a
stockholder of the Company.
Class
C Warrant
General. The
Class
C Warrant entitles the holder thereof to purchase 111,111 shares of common
stock
at the exercise price of $2.25 per share and expires three years after the
date
of issuance.
Redemption. The
Class
C Warrant may not be redeemed by the Company at any time.
Transfer,
Exchange and Exercise. The
Class
C Warrant may be exercised upon surrender of the certificate therefore on or
prior to the expiration date (as explained below) at the offices of the Company
with the form of “Subscription Form” on the reverse side of the warrant
certificate filled out and executed as indicated, accompanied by payment (in
the
form of certified or cashier’s check payable to the order of the Company) of the
full exercise price for the number of shares of common stock underlying the
Class C Warrant being exercised.
Adjustments. The
Class
C Warrant contains provisions that protect the holder thereof against dilution
by adjustment of the purchase price in certain events, such as stock dividends,
stock splits, and other similar events. The holder of the Class C Warrant will
not possess any rights as a stockholder of the Company unless and until he
exercises the Class C Warrant.
The
Class
C Warrant does not confer upon holder any voting or any other rights as a
stockholder of the Company.
Senior
Notes
The
Senior Notes bear interest at the rate of 8% per year, payable monthly in
arrears. Subject to certain mandatory prepayment provisions, and events of
default, unpaid principal and interest due under the Senior Notes, as amended,
will become due and payable on January 1, 2011. The Senior Notes are
convertible, at the option of the holder, into shares of our common stock at
a
price of $2.25 per share (the “Conversion Price”), subject to adjustment for
stock splits, stock dividends, or similar transactions, sales of our common
stock at a price per share below the Conversion Price or the issuance of
convertible securities or options or warrants to purchase shares of our common
stock at an exercise price or conversion price that is less than the Conversion
Price.
The
Senior Notes provide for optional redemption by us at a redemption price equal
to 110% of the face amount redeemed plus accrued interest.
Events
of
default will result in a default rate of interest of 15% per year and the holder
may require that the Senior Notes be redeemed at the Event of Default Redemption
Price (as defined in the Senior Notes). The Event of Default Redemption Price
includes various premiums depending on the nature of the event of
default.
The
Senior Notes also provide that in the event of a Change of Control (as defined
in the Senior Notes), the holder may require that such holder’s Senior Note be
redeemed at the Change of Control Redemption Price (as defined in the Senior
Notes). The Change of Control Redemption Price includes certain premiums in
the
event a Senior Note is redeemed in the event of a Change of
Control.
75
Series
D Warrants
The
Series D Warrants are exercisable at a price of $2.25 per share for a period
of
five years from the date of issuance. The Series D Warrants may be exercised
on
a cashless basis to the extent the resale of the shares of Common Stock
underlying the Series D Warrants is not subject to an effective registration
statement. 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 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 D Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series D Warrants. As of May 22, 2008, the Series D Warrants were exercisable
for an aggregate of 875,000 shares of Common Stock.
Series
E Warrants
The
Series E Warrants, as amended, are exercisable at a price of $2.25 per share
for
a period of five years from the date of issuance. The Series E Warrants may
be
exercised on a cashless basis to the extent the resale of the shares of Common
Stock underlying the Series E Warrants is not subject to an effective
registration statement. 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 E 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 E Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series E Warrants. As of May 22, 2008, the Series E Warrants were exercisable
for an aggregate of 541,666 shares of Common Stock.
Series
H Warrant
The
Series H Warrant is exercisable at a price of $0.75 per share for a period
of
ten years from the date of issuance. The Series H Warrant may be exercised
on a
cashless basis to the extent that the resale of the shares of common stock
underlying the Series H Warrant is not subject to an effective registration
statement. 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 H 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 H Warrant, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series H Warrant. As of May
22,
2008, the Series H Warrant was exercisable for an aggregate of 53,333,334 shares
of common stock.
Series
I Warrant
The
Series I Warrant is exercisable at a price of $0.75 per share for a period
of
five years from the date of issuance. The Series I Warrant may be exercised
on a
cashless basis to the extent that the resale of the shares of common stock
underlying the Series I Warrant is not subject to an effective registration
statement. 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 I 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 I Warrant, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series I Warrant. As of May
22,
2008, the Series I Warrant was exercisable for an aggregate of 1,000,000 shares
of common stock.
76
We
have
agreed to file this “resale” registration statement with the SEC (the date of
such filing, the “SEC Filing Date”) covering all shares of common stock into
which the 750 shares of Series B Preferred Stock sold to Vicis pursuant to
the
March Securities Purchase Agreement are convertible and all shares of common
stock underlying the Series H Warrants, on or before the date that is 60 days
after the final closing date of the March Securities Purchase Agreement. We
will
maintain the effectiveness of the “resale” registration statement unless all
securities have been sold or are otherwise able to be sold without volume
limitation pursuant to Rule 144, at which time exempt sales may be permitted
for
purchasers of the units. We have agreed to use our best efforts to
have this “resale” registration statement declared effective by the SEC as
soon as possible and, in any event, within 150 days after the final closing
date
of the March Securities Purchase Agreement.
Trading
Information
The
Company’s common stock is traded in the over-the-counter market and is quoted on
the OTC Bulletin Board under the symbol ‘‘MDWK.OB.’’ The trading market for the
common stock has been extremely limited and sporadic.
The
Company anticipates that it will apply to list the common stock on the American
Stock Exchange or the NASDAQ SmallCap Market. No assurance can be given that
the
Company will satisfy the initial listing requirements, or that its shares of
common stock will ever be listed on those trading markets.
Transfer
Agent
The
Transfer Agent for shares of the Company’s securities is Corporate Stock
Transfer, 200 Cherry Creek Drive, Suite 430, Denver, Colorado 80209. The Company
will serve as warrant agent for the warrants, unless Company determines to
appoint a commercial transfer agent for such securities.
Anti-Takeover
Effect of Delaware Law, Certain By-Law Provisions
Certain
provisions of our by-laws are intended to strengthen our Board’s position in the
event of a hostile takeover attempt. These by-law provisions have the following
effects:
| • |
they
provide that only business brought before an annual meeting by our
Board
or by a stockholder who complies with the procedures set forth in
the
by-laws may be transacted at an annual meeting of stockholders;
and
|
| • |
they
provide for advance notice or certain stockholder actions, such as
the
nomination of directors and stockholder
proposals.
|
We
are
subject to the provisions of Section 203 of the DGCL, an anti-takeover law.
In
general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a ‘‘business combination’’ with an ‘‘interested stockholder’’ for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in
a prescribed manner. For purposes of Section 203, a ‘‘business combination’’
includes a merger, asset sale or other transaction resulting in a financial
benefit to the interested stockholder, and an ‘‘interested stockholder’’ is a
person who, together with affiliates and associates, owns, or within three
years
prior, did own, 15% or more of the voting stock..
77
PLAN
OF DISTRIBUTION
We
have registered an aggregate of 3,882,020 shares of common stock covered by
this
prospectus on behalf of the Selling Securityholder. The Selling Securityholder
and any of its donees, pledgees, assignees and successors-in-interest, from
time
to time, may offer and sell any and all of their shares of common stock that
are
covered by this prospectus on any stock exchange, market, or trading facility
on
which such shares are traded. The Selling Securityholder will act independently
of us in making decisions with respect to the timing, manner and size of each
such sale. Sales may be made at fixed or negotiated or market prices. The shares
of common stock may be sold by way of any legally available means, including
in
one or more of the following transactions:
| • |
a
block trade in which a broker-dealer engaged by the Selling Securityholder
attempts to sell the shares as agent but may position and resell
a portion
of the block as principal to facilitate the
transactions;
|
| • |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account pursuant to this
prospectus;
|
| • |
ordinary
brokerage transactions and transactions in which a broker-dealer
solicits
purchasers; and
|
| • |
privately
negotiated transactions.
|
Transactions
under this prospectus may or may not involve brokers or dealers. The Selling
Securityholder may sell shares directly to purchasers or to or through
broker-dealers, who may act as agents or principals. Broker-dealers engaged
by
the Selling Securityholder may arrange for other broker-dealers to participate
in selling shares. Broker-dealers or agents may receive compensation in the
form
of commissions, discounts or concessions from the Selling Securityholder in
amounts to be negotiated in connection with the sale. Broker-dealers or agents
also may receive compensation in the form of discounts, concessions, or
commissions from the purchasers of shares for whom the broker-dealers may act
as
agents or to whom they sell as principal, or both. The Selling Securityholder
does not expect these commissions and discounts to exceed what is customary
in
the types of transactions involved. The Selling Securityholder and any
broker-dealers and any other participating broker-dealers who execute sales
for
the Selling Securityholder may be deemed to be ‘‘underwriters’’ within the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
discounts and commissions under the Securities Act. If the Selling
Securityholder is deemed to be an underwriter, it may be subject to certain
statutory and regulatory liabilities, including liabilities imposed pursuant
to
Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange
Act.
To
the
extent required, the number of shares to be sold, the name of the Selling
Securityholder, the purchase price, the name of any agent or broker and any
applicable commissions, discounts or other compensation to such agents or
brokers and other material facts with respect to a particular offering will
be
set forth in a prospectus supplement as required by the Rules and Regulations
under the Securities Act.
The
Selling Securityholder also may sell shares under Rule 144, if available, rather
than pursuant to this prospectus.
78
In
order
to comply with the securities laws of certain states, if applicable, the shares
will be sold in such jurisdictions, if required, only through registered or
licensed brokers or dealers. In addition, in certain states the shares may
not
be sold unless the shares have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and
complied with. The anti-manipulative provisions of Regulation M promulgated
under the Exchange Act may apply to sales of the shares offered by the Selling
Securityholder.
We
are
required to pay all fees and expenses incident to the registration of the
shares. Otherwise, all discounts, commissions or fees incurred in connection
with the sale of common stock offered hereby will be paid by the Selling
Securityholder. We have agreed to indemnify the Selling Securityholder against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and current reports, and other information with the SEC.
Our
filings are available to the public at the SEC’s website at
http://www.sec.gov. You also may read and copy any document we file at
the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549.
Further information on the Public Reference Room may be obtained by calling
the
SEC at 1-800-SEC-0330. In addition, through our website,
http://www.mdwerks.com, you can access electronic copies of
documents that we file with the SEC, including our annual, quarterly and
current reports, as well as any amendments to those reports. Information on
our
website is not incorporated by reference in this prospectus. Access to those
electronic filings is available as soon as practicable after filing with the
SEC.
We
have
filed a registration statement on Form S-1 with the SEC under the Securities
Act
for the common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement, certain
parts of which have been omitted in accordance with the rules and regulations
of
the SEC. For further information, reference is made to the registration
statement and its exhibits. Whenever we make references in this prospectus
to
any of our contracts, agreements or other documents, the references are not
necessarily complete and you should refer to the exhibits attached to the
registration statement for the copies of the actual contract, agreement or
other
document.
LEGAL
MATTERS
The
validity of the securities being offered by this prospectus has been passed
upon
for us by Peckar & Abramson, P.C., 70 Grand Avenue, River Edge, NJ
07661.
EXPERTS
Our
financial statements for the years ended December 31, 2007, and December 31,
2006, appearing in this prospectus and registration statement in which this
prospectus is included have been audited by Sherb & Co., LLP, as independent
registered public accounting firm, as set forth in their report appearing
elsewhere herein, and are included in reliance upon the report given on the
authority of the firm as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC’s opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable.
79
MDWERKS,
INC.,
AND
SUBSIDIARIES
INDEX
TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007 and March 31, 2008
INDEX
|
Pages
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
||
|
Consolidated
Balance Sheet as of December 31, 2007
|
F-3
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007
and
2006
|
F-4
|
|
|
Consolidated
Statement of Changes in Stockholders’ Equity (Deficiency) for the Years
Ended December 31, 2007 and 2006
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007
and
2006
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
to F-27
|
|
|
Consolidated
Balance Sheet as of March 31, 2008 (Unaudited) and December 31,
2007
|
F-30
|
|
|
Consolidated
Statements of Operations for the Three Months Ended March 31, 2008
and
2007 (Unaudited)
|
F-31
|
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2008
and
2007 (Unaudited)
|
F-32
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
F-33
to F-48
|
F-1
To
the Audit Committee
MDwerks,
Inc.
We
have
audited the accompanying consolidated balance sheet of MDwerks, Inc. and
Subsidiaries as of December 31, 2007 and the related consolidated
statements of operations, changes in stockholders’ equity (deficiency) and cash
flows for the years ended December 31, 2007 and 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of MDwerks, Inc. and
Subsidiaries as of December 31, 2007 and the results of their operations
and their cash flows for the years ended December 31, 2007 and 2006 in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
that raises substantial doubt about its ability to continue as a going concern.
Management’s plan in regard to these matters is also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
| /s/ SHERB & CO., LLP | |
| Certified Public Accountants |
Boca
Raton, Florida
March
17,
2008
The
accompanying notes should be read in conjunction with the consolidated financial
statements
F-2
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
December
31, 2007
|
ASSETS
|
||||
|
Current
assets:
|
||||
|
Cash
|
$
|
320,903
|
||
|
Notes
receivable
|
1,652,079
|
|||
|
Accounts
receivable
|
66,985
|
|||
|
Prepaid
expenses and other
|
215,073
|
|||
|
Total
current assets
|
2,255,040
|
|||
|
Property
and equipment, net of accumulated depreciation of $92,995
|
115,902
|
|||
|
Debt
issuance and offering costs, net of accumulated amortization of
$273,997
|
400,246
|
|||
|
Total
assets
|
$
|
2,771,188
|
||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
||||
|
Current
liabilities:
|
||||
|
Notes
payable, net of discount of $2,566,395, less long-term
portion
|
$
|
2,942,842
|
||
|
Mandatory
redeemable convertible Series B preferred stock, $.001 par value,
250
shares authorized; 200 shares issued and outstanding
|
1,346,326
|
|||
|
Loans
payable
|
109,559
|
|||
|
Accounts
payable
|
351,482
|
|||
|
Accrued
expenses
|
686,917
|
|||
|
Deferred
revenue
|
11,296
|
|||
|
Total
current liabilities
|
5,448,422
|
|||
|
Long-term
liabilities:
|
||||
|
Notes
payable, net of discount of $2,566,395, less current
portion
|
65,763
|
|||
|
Deferred
revenue, less current portion
|
1,613
|
|||
|
Total
liabilities
|
5,515,798
|
|||
|
Stockholders’
deficiency:
|
||||
|
Preferred
stock, Series A convertible preferred stock, $0.001 par value,
10,000,000
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
|
33,732,690
|
|||
|
Accumulated
deficit
|
(36,490,240
|
)
|
||
|
Total
stockholders’ deficiency
|
(2,744,610
|
)
|
||
|
Total
liabilities and stockholders’ deficiency
|
$
|
2,771,188
|
||
The
accompanying notes should be read in conjunction with the consolidated financial
statements
F-3
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For the Years Ended
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Revenue:
|
|||||||
|
Service
fees
|
$
|
470,149
|
$
|
355,429
|
|||
|
Financing
income
|
107,102
|
72,349
|
|||||
|
Total
revenue
|
577,251
|
427,778
|
|||||
|
Operating
expenses:
|
|||||||
|
Compensation
|
5,286,985
|
5,732,372
|
|||||
|
Consulting
expenses
|
760,284
|
943,500
|
|||||
|
Professional
fees
|
411,917
|
358,969
|
|||||
|
Selling,
general and administrative
|
1,562,845
|
2,001,460
|
|||||
|
Total
operating expenses
|
8,022,031
|
9,036,301
|
|||||
|
Loss
from operations
|
(7,444,780
|
)
|
(8,608,523
|
)
|
|||
|
Other
income (expense):
|
|||||||
|
Interest
income
|
46,978
|
33,701
|
|||||
|
Interest
expense
|
(2,484,835
|
)
|
(905,374
|
)
|
|||
|
Loss
on revaluation of warrant liability
|
—
|
(192,914
|
)
|
||||
|
Other
income, (expense), net
|
307
|
(1,936
|
)
|
||||
|
Total
other income (expense)
|
(2,437,550
|
)
|
(1,066,523
|
)
|
|||
|
Net
loss
|
(9,882,330
|
)
|
(9,675,046
|
)
|
|||
|
Deemed
preferred stock dividend
|
—
|
(913,777
|
)
|
||||
|
Common
stock issued in connection with anti-dilutive
recalculation
|
—
|
(246,240
|
)
|
||||
|
Net
loss attributable to common shareholders
|
$
|
(9,882,330
|
)
|
$
|
(10,835,063
|
)
|
|
|
NET
LOSS PER COMMON SHARE – basic and diluted
|
$
|
(0.77
|
)
|
$
|
(0.91
|
)
|
|
|
WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING – basic and diluted
|
12,780,503
|
11,899,272
|
|||||
The
accompanying notes should be read in conjunction with the consolidated financial
statements
F-4
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
(DEFICIENCY)
For
the
Years Ended December 31, 2007 and 2006
|
Series A
Preferred Stock
$.001 Par Value
|
Common Stock
$.001 Par Value
|
Additional
|
Total
Stockholders’ |
|||||||||||||||||||
|
Number
of Shares
|
Amount
|
Number
of Shares
|
Amount
|
Paid-in
Capital
|
Accumulated
Deficit
|
Equity
(Deficiency)
|
||||||||||||||||
|
Balance,
December 31, 2005
|
—
|
$
|
—
|
11,538,730
|
$
|
11,539
|
$
|
15,480,037
|
$
|
(16,558,228
|
)
|
$
|
(1,066,652
|
)
|
||||||||
|
Common
stock issued in connection with anti-dilutive
recalculation
|
—
|
—
|
76,000
|
76
|
246,164
|
(246,240
|
)
|
—
|
||||||||||||||
|
Deemed
preferred stock dividend
|
—
|
—
|
—
|
—
|
—
|
(913,777
|
)
|
(913,777
|
)
|
|||||||||||||
|
FAS
123R Stock Option Compensation
|
—
|
—
|
—
|
—
|
3,911,640
|
—
|
3,911,640
|
|||||||||||||||
|
Amortization
of deferred compensation — consultants
|
—
|
—
|
—
|
—
|
291,487
|
—
|
291,487
|
|||||||||||||||
|
Cumulative
effect of warrant liability adjustment
|
—
|
—
|
—
|
—
|
1,911,520
|
785,381
|
2,696,901
|
|||||||||||||||
|
Issuance
of warrants in connection with notes payable
|
—
|
—
|
—
|
—
|
460,572
|
—
|
460,572
|
|||||||||||||||
|
Common
stock issued for notes payable
|
—
|
—
|
92,685
|
92
|
226,985
|
—
|
227,077
|
|||||||||||||||
|
Issuance
of warrants in connection with offering
|
—
|
—
|
—
|
—
|
145,026
|
—
|
145,026
|
|||||||||||||||
|
Debt
discounts in connection with notes payable
|
—
|
—
|
—
|
—
|
4,091,402
|
—
|
4,091,402
|
|||||||||||||||
|
Sales
of preferred stock, net of placement fees
|
28
|
—
|
170,000
|
170
|
1,386,077
|
—
|
1,386,247
|
|||||||||||||||
|
Conversion
of Series A convertible preferred stock
|
(23
|
)
|
—
|
466,667
|
467
|
(467
|
)
|
—
|
—
|
|||||||||||||
|
Common
stock issued in connection with notes payable
|
—
|
—
|
110,000
|
110
|
333,690
|
—
|
333,800
|
|||||||||||||||
|
Common
stock issued for services
|
—
|
—
|
125,983
|
126
|
422,375
|
—
|
422,501
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(9,675,046
|
)
|
(9,675,046
|
)
|
|||||||||||||
|
Balance,
December 31, 2006
|
5
|
—
|
12,580,065
|
12,580
|
28,906,508
|
(26,607,910
|
)
|
2,311,178
|
||||||||||||||
|
FAS
123R Stock Option Compensation
|
—
|
—
|
—
|
—
|
3,196,044
|
—
|
3,196,044
|
|||||||||||||||
|
Amortization
of deferred compensation — consultants
|
—
|
—
|
—
|
—
|
266,040
|
—
|
266,040
|
|||||||||||||||
|
Conversion
of Series A convertible preferred stock
|
(3
|
)
|
—
|
60,000
|
60
|
(60
|
)
|
—
|
—
|
|||||||||||||
|
Issuance
of warrants in connection with notes payable
|
—
|
—
|
—
|
—
|
1,214,458
|
—
|
1,214,458
|
|||||||||||||||
|
Common
stock issued for services
|
—
|
—
|
300,000
|
300
|
149,700
|
—
|
150,000
|
|||||||||||||||
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(9,882,330
|
)
|
(9,882,330
|
)
|
|||||||||||||
|
Balance,
December 31, 2007
|
2
|
$
|
—
|
12,940,065
|
$
|
12,940
|
$
|
33,732,690
|
$
|
(36,490,240
|
)
|
($2,744,610
|
)
|
The
accompanying notes should be read in conjunction with the consolidated financial
statements
F-5
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Years Ended
December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(9,882,330
|
)
|
$
|
(9,675,046
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
45,439
|
34,716
|
|||||
|
Amortization
of debt issuance costs
|
10,954
|
12,480
|
|||||
|
Amortization
of debt discount
|
2,021,396
|
354,190
|
|||||
|
Amortization
of deferred offering costs
|
207,202
|
43,361
|
|||||
|
Amortization
of deferred compensation
|
266,040
|
291,487
|
|||||
|
Stock-based
compensation
|
3,196,046
|
3,911,640
|
|||||
|
Settlement
expense related to debt conversion
|
—
|
180,827
|
|||||
|
Loss
on revaluation of warrant liability
|
—
|
192,914
|
|||||
|
Common
stock issued for services
|
150,000
|
422,500
|
|||||
|
Interest
expense in connection with grant of warrants
|
—
|
460,572
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Notes
receivable
|
(1,178,386
|
)
|
(109,848
|
)
|
|||
|
Accounts
receivable
|
(11,394
|
)
|
(45,176
|
)
|
|||
|
Prepaid
expenses and other
|
(141,276
|
)
|
(4,981
|
)
|
|||
|
Accounts
payable
|
83,560
|
56,405
|
|||||
|
Accrued
expenses
|
308,158
|
212,627
|
|||||
|
Deferred
revenue
|
(43,050
|
)
|
47,212
|
||||
|
Total
adjustments
|
4,914,689
|
6,060,926
|
|||||
|
Net
cash used in operating activities
|
(4,967,641
|
)
|
(3,614,120
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of property and equipment
|
(5,209
|
)
|
(110,457
|
)
|
|||
|
Net
cash used in investing activities
|
(5,209
|
)
|
(110,457
|
)
|
|||
|
Cash
flows from financing activities:
|
|||||||
|
Proceeds
from notes payable
|
825,000
|
5,110,000
|
|||||
|
Proceeds
from loan payable
|
250,000
|
—
|
|||||
|
Placement
fees in connection with notes payable
|
—
|
(263,264
|
)
|
||||
|
Repayment
of notes payable
|
(598,362
|
)
|
(101,634
|
)
|
|||
|
Repayment
of loan payable
|
(212,916
|
)
|
(26,225
|
)
|
|||
|
Proceeds
from 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
|
(116,810
|
)
|
(313,923
|
)
|
|||
|
Net
cash provided by financing activities
|
2,146,912
|
6,104,954
|
|||||
|
Net
(decrease) increase in cash
|
(2,825,938
|
)
|
2,380,377
|
||||
|
Cash – beginning
of year
|
3,146,841
|
766,464
|
|||||
|
Cash – end
of year
|
$
|
320,903
|
$
|
3,146,841
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for:
|
|||||||
|
Taxes
|
$
|
—
|
$
|
—
|
|||
|
Interest
|
$
|
351,939
|
$
|
77,355
|
|||
|
Non-cash
investing and financing activities:
|
|||||||
|
Common
stock issued for debt and accrued interest
|
$
|
1,214,458
|
$
|
5,208,358
|
|||
|
Common
stock issued in connection with notes payable
|
$
|
—
|
$
|
333,800
|
|||
The
accompanying notes should be read in conjunction with the consolidated financial
statements
F-6
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 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 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.
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 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 additional institutional financing similar to financing described
in
Note 4, provide the opportunity for the Company to continue as a going concern.
As
reflected in the accompanying consolidated financial statements, the Company
has
a stockholders’ deficiency of $2,744,610 and a working capital deficiency of
$3,193,382 at December 31, 2007.
Basis
of presentation
The
consolidated statements include the accounts of the Company and its wholly
owned
subsidiaries, Xeni Medical, Xeni Financial, Xeni Billing and PPS. All
significant intercompany balances and transactions have been eliminated.
Certain
amounts previously reported for in 2006 have been reclassified to conform to
the
classifications used in 2007. Such reclassifications have no effect on the
reported net loss.
F-7
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 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 payable and accrued expenses, notes payable, 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
December 31, 2007, the Company was $3,000 in excess of the $100,000 limit on
one
account. 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 $28,000 and $103,000 for the years ended December
31, 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
revenues 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.
F-8
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
1 — ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
recognition
(continued)
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 loss
by
the weighted average number of shares of common stock, potential common stock
and potentially dilutive securities outstanding during each period. For the
years ended December 31, 2007 and 2006, the Company had outstanding options
to
purchase an aggregate of 3,514,250 and 2,876,250 shares of common stock,
respectively, warrants to purchase an aggregate of 5,733,012 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 and 888,888
and 0 shares of common stock, respectively, issuable upon conversion of Series
B
preferred stock which could potentially dilute future earnings per share.
Diluted loss per common share has not been presented for the years ended
December 31, 2007 and 2006 since the impact of the stock options and warrants
would be antidilutive.
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.
F-9
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
1 —
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 is currently evaluating the impact of adopting SFAS
159.
In
December 2007, the FASB issued two new pronouncements, SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements- an amendment
of
ARB N0. 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.
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
receivable are recorded when revenue has been recognized but not yet collected.
The Company has $66,985 of accounts receivable from implementation, processing,
collection, other fees, and disbursements not yet collected as of December
31,
2007.
At
December 31, 2007, the Company advanced five healthcare providers under lines
of
credit and note agreements, respectively, aggregating $1,652,079. 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
health care providers interest and other charges as defined in the agreements.
At December 31, 2007, no amounts were past due.
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
December 31, 2007 the Company has no allowance for doubtful
accounts.
NOTE
3 —
PROPERTY
AND EQUIPMENT
At
December 31, 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
|
(92,995
|
)
|
|||||
|
Property
and equipment, net
|
$
|
115,902
|
|||||
F-10
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 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.
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, 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 bore interest at 10% per year, and both interest and
principal were paid in full 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 in the aggregate) in connection with a financing provided by
Gottbetter Capital Master, Ltd., an unaffiliated accredited institutional
investor (“Gottbetter’’). 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 (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 to purchase 375,000 shares of our
common stock at a price of $3.25 per share (‘‘Series E Warrants’’).
The
Senior Notes bear interest at the rate of 8% per year, payable monthly in
arrears, commencing December 1, 2006. Subject to certain mandatory prepayment
provisions, and events of default, unpaid principal and interest due under
the
Senior Notes, as amended, will become due and payable on January 1, 2011.
The
Senior Notes require monthly principal payments until the January 1, 2011
maturity date. The Senior Notes are convertible, at the option of the holder,
into shares of our common stock at a price of $2.25 per share (the ‘‘Conversion
Price’’), subject to adjustment for stock splits, stock dividends, or similar
transactions, sales of our common stock at a price per share below the
Conversion Price or the issuance of convertible securities or options or
warrants to purchase shares of our common stock at an exercise price or
conversion price that is less than the Conversion Price.
The
Senior Notes provide for optional redemption by us at a redemption price
equal
to 110% of the face amount redeemed plus accrued interest.
Events
of
default will result in a default rate of interest of 15% per year and the
holder
may require that the Senior Note be redeemed at the Event of Default Redemption
Price (as defined in the Senior Notes). The Event of Default Redemption Price
includes various premiums depending on the nature of the event of default.
Events of default include, but are not limited to,: (i) the failure to keep
the
registration statement covering shares underlying the Senior Notes, the Series
D
Warrants and the Series E Warrants effective, as required by the Registration
Rights Agreement that we entered into with Gottbetter; (ii) suspension from
trading on the OTC Bulletin Board; (iii) failure to timely deliver shares
in the
event the Senior Notes are converted; (iv) failure to reserve adequate shares
for conversion of the Senior Notes; (v) failure to pay principal, interest
or
late charges when due; (vi) any default in the payment of other indebtedness
in
excess of $250,000; (vii) bankruptcy events; and (viii) judgments against
us in
excess of $250,000.
The
Senior Notes also provide that in the event of a Change of Control (as defined
in the Senior Notes), the holder may require that such holder’s Senior Note be
redeemed at the Change of Control Redemption Price (as defined in the Senior
Notes). The Change of Control Redemption Price includes certain premiums
in the
event a Senior Note is redeemed in the event of a Change of
Control.
F-11
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
4 —
NOTES
PAYABLE (continued)
The
Series D Warrants are exercisable at a price of $2.25 per share for a period
of
five years from the date of issuance. The Series D 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 D 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 D Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series D Warrants.
The
Series E Warrants are exercisable at a price of $2.25 per share for a period
of
five years from the date of issuance, with the same provisions as the Series
D
Warrants.
We
entered into a Security Agreement with Gottbetter. The Security Agreement,
as
amended, provides for a lien in favor of Gottbetter on all of our assets
except
for certain assets of our subsidiary, Xeni Financial.
Our
subsidiaries entered into a Guaranty Agreement with Gottbetter, pursuant
to
which they have agreed to unconditionally guaranty our obligations under
the
Senior Notes and the documents entered into by us in connection the sale
of the
Senior Notes.
We
also
entered into a Registration Rights Agreement and amendments thereto with
Gottbetter. Pursuant to the amended Registration Rights Agreement, we included
in our registration statement that was declared effective on December 7,
2006,
2,777,778 shares underlying the Senior Notes. 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.
On
August
31, 2007 we received proceeds of $250,000 in connection with a financing
provided by Vicis Capital Master Fund (“Vicis”), 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 (the “Vicis Convertible
Note”).
On
September 28, 2007 we received net proceeds of $1,633,190 in connection
with a financing provided by Vicis. The total deferred offering costs incurred
with this financing were $116,810 and are being amortized over twelve months.
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.
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.
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.
F-12
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
4 —
NOTES
PAYABLE (continued)
In
connection with the Sale of the Series B Preferred Stock the Company entered
into an Amendment, Consent and Waiver agreement with Gottbetter (the “Consent
and Waiver Agreement”).
Securities
Purchase Agreement
The
Securities Purchase Agreement provided 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 $2,000,000. Payment was made by
$1,691,445 in cash, the conversion of $251,555 in principal and interest
of the
Vicis Convertible Note and deduction of certain closing expenses.
The
Convertible Series B Preferred Stock is as follows at December 31,
2007:
|
Mandatory
Redeemable Convertible Series B Preferred Stock
|
$
|
2,000,000
|
||
|
Less:
unamortized discount on Preferred Stock
|
(653,674
|
)
|
||
|
Series
B Preferred Stock, net of discount of $653,674
|
$
|
1,346,326
|
The
Securities Purchase Agreement provides to Vicis, 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 pari
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 Vicis; (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.
F-13
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
4 —
NOTES
PAYABLE (continued)
The
Securities Purchase Agreement also contains customary representations,
warranties, covenants and indemnification provisions for transactions of
the
type entered into between the Company and Vicis.
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.
Holders
of Series B Preferred Stock have 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).
Holders
of Series B Preferred Stock are entitled to 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.
F-14
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
4 —
NOTES
PAYABLE (continued)
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, with the same provisions as the Series
F
warrants.
Security
Agreement
We,
along
with our subsidiaries, MDwerks, Xeni Medical, Xeni Financial, Xeni Billing,
and
PPS entered into Security Agreements with Vicis. The Security Agreements
provide
for liens in favor of Vicis 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.
Guaranty
Agreement
Our
subsidiaries, MDwerks, Xeni Medical, Xeni Financial, Xeni Billing, and
PPS entered into Guaranty Agreements with Vicis, 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 Vicis. 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. If
we
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 (the “Consent and Waiver Agreement”) with 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.
F-15
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
4 —
NOTES
PAYABLE (continued)
Also
in
connection with the transactions described above, the conversion price of
the
Gottbetter Series E Warrants were reduced to $2.25 per share subject to further
adjustment, and the number of Warrant Shares for which such warrants may
be
exercised were increased to 541,666 and 2/3 shares subject to further
adjustment. The additional warrants were recorded as $84,117 of debt discount
and are being amortized over four months through January 2008.
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 at a price of $2.25 per share.
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.
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 will
become due and payable on December 2, 2008.
The
promissory notes are as follows at December 31, 2007:
|
Notes
payable
|
$
|
5,575,000
|
||
|
Less:
unamortized discount on notes payable
|
(2,566,395
|
)
|
||
|
Notes
payable, net
|
3,008,605
|
|||
|
Less
current portion
|
(2,942,842
|
)
|
||
|
Notes
payable, net of discount of $2,566,395, less current
portion
|
$
|
65,763
|
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 provided this non-interest bearing loan to assist
with
interim financing and to fund equipment purchases incurred on behalf of the
customer. A repayment of $210,000 was made to the customer in October of
2007
and the net balance due at December 31, 2007 is $40,000.
F-16
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY)
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.
On
February 1, 2006, the Board of Directors of the Company authorized the creation
of 1,000 shares of $.001 par value Series A Convertible Preferred Stock with
a
liquidation value of $60,000 per share (subject to adjustment in the event
of
stock splits, combinations or similar events). The Series A Convertible
Preferred Stock shall not be entitled to receive dividends or other
distributions from the Company. Each holder of record of shares of the Series
A
Convertible Preferred Stock shall have the right at such holder’s option, at any
time and from time to time, to convert any of such shares of Series A
convertible preferred stock into fully paid shares of common stock. Each
share
of Series A Convertible Preferred Stock shall initially be convertible into
20,000 shares of common stock (the ‘‘Conversion Rate’’), subject to adjustment
due to consolidation, merger or sale or common stock dividends. The holders
of
shares of Series A Convertible Preferred Stock shall be entitled to vote
on all
matters submitted to a vote of the stockholders of the Company and shall
have
such number of votes equal to the number of shares of the Company’s common stock
into which such holders’ shares of Series A Convertible Preferred Stock are
convertible.
Between
February 1, 2006 and June 30, 2006, the Company conducted a series of closings
under private placement offering of Units consisting of one share of Series
A
Convertible Preferred Stock and a three-year warrant to purchase up to 20,000
shares of the Company’s Common Stock at a purchase price of $3.00 per share. The
Company sold an aggregate of 28.3 Units to accredited investors pursuant
to the
terms of a confidential private placement memorandum, dated February 1, 2006,
used in connection with this offering. The Company realized net proceeds
from
this private placement of $1,386,077 after payment of commissions and expenses.
Between August 11, 2006 and December 31, 2006, 23.3 shares of Series A
Convertible Preferred Stock were converted into 466,667 shares of common
stock.
In 2007, 3 shares of Series A Convertible Preferred Stock were converted
into
60,000 shares of common stock leaving 2 Series A Convertible Preferred Shares
outstanding as of December 31, 2007.
In
accordance with Emerging Issues Task Force (‘‘EITF’’) 98-5 and EITF 00-27, the
Series A Convertible Preferred Stock was considered to have an embedded
beneficial conversion feature (ECF) because the conversion price was less
than
the fair value of the Company’s common stock. This Series A Convertible
Preferred Stock was fully convertible at the issuance date, therefore a portion
of proceeds allocated to the Series A Convertible Preferred Stock was determined
to be the value of the beneficial conversion feature and was recorded as
a
deemed dividend.
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 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 year ended December 31, 2006,
the
Company revalued these warrants resulting in a loss on valuation of warrant
liability of $192,914.
F-17
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Preferred
stock (continued)
The
assumptions used valuing the warrants include:
|
Risk
free interest rate (annual)
|
4.70%
and 4.75%
|
|
Expected
volatility
|
147%
and
154%
|
|
Expected
life
|
5
Years
|
|
Assumed
dividends
|
none
|
Brookshire
Securities Corporation (‘‘Brookshire’’) served as the lead placement agent in
connection with the private placement. Brookshire received a cash fee in
the
aggregate of $170,000, 170,000 shares of the Company’s common stock, and
five-year warrants to purchase 56,667 shares of the Company’s common stock at an
exercise price of $1.50 per share on terms which are identical to those warrants
included in the units except that they contain a cashless exercise provision.
In
addition, the warrants have registration rights that are the same as those
afforded to investors in the private placement.
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 December 31, 2007, there are 200 Series
B
Convertible Preferred Stock shares issued and outstanding.
Common
stock
On
January 1, 2006, the Company issued 76,000 shares of the Company’s common stock
to certain stockholders pursuant to agreements to offset the effect of dilutive
financing of the Xeni Companies. The shares issued were valued at the fair
value
at the date of issuance of $246,240 and were charged to expense.
On
February 13, 2006, $45,000 of notes payable plus accrued interest of $1,342
was
converted into 92,685 shares of the Company’s common stock in full satisfaction
of the notes payable. The common shares were valued at a fair market value
of
$2.45 per share for an aggregate fair market value of $227,077 based on recent
trading price of the stock. Accordingly, in connection with the issuance
of
these shares, the Company reduced notes payable by $45,000, reduced interest
payable by $1,342, and recorded settlement expenses related to the debt
conversion of $180,827.
On
February 28, 2006, the Company issued 25,000 shares of the common stock to
the
Chief Financial Officer of the Company in consideration for services rendered.
The shares were issued at the fair value at the date of the issuance of $81,000
or $3.24 per share. For the year ended December 31 2006, in connection with
these shares, the Company recorded stock-based compensation of
$81,000.
On
June
19, 2006, the Company authorized the issuance of 75,000 shares of common
stock
to a Director of the Company in consideration for services
rendered. On June 22, 2006, the Company issued 25,000 of these
authorized shares of common stock at the fair value at the date of the issuance
of $87,500 or $3.50 per share. For the year ended December 31, 2006, in
connection with these shares, the Company recorded stock-based compensation
of
$87,500 for the Director.
F-18
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock (continued)
On
June
29, 2006, the Company issued 3,483 shares of the common stock to consultants
in
consideration for services rendered. The shares were issued at the fair value
at
the date of the issuance of $14,000 or $4.02 per share. For the year ended
December 31 2006, in connection with these shares, the Company recorded
stock-based consulting fees of $14,000.
On
August
9, 2006, the Company issued 22,500 shares of the common stock to consultants
in
consideration for services rendered. The shares were issued at the fair value
at
the date of the issuance of $90,000 or $4.00 per share. For the year ended
December 31 2006, in connection with these shares, the Company recorded
stock-based consulting fees of $90,000.
On
August
24, 2006, the Company issued 10,000 shares of common stock in connection
with a
notes payable financing. The shares were valued at fair market value at date
of
issuance of $39,800 or $3.98 per share and recorded as a discount on notes
payable to be amortized over the term of the note (see note 4).
On
October 18, 2006 the Company issued 170,000 shares in connection with the
private placement.
On
October 18, 2006, the Company issued 50,000 shares of common stock to
consultants for services rendered. The shares were issued at the fair value
at
the date of the issuance of $150,000 or $3.00 per share. For the year ended
December 31 2006, in connection with these shares, the Company recorded
stock-based consulting fees of $150,000.
On
October 20, 2006, and November 9, 2006, the Company issued a total of 100,000
shares of common stock for consulting services rendered in connection with
the
financing provided by the unaffiliated accredited institutional investor.
The
shares were issued at the fair value at the date of issuance of $240,000,
or
$3.00 per share for 80,000 shares issued on October 20, 2006 and $49,000,
or
$2.45 per share for 20,000 shares issued on November 9, 2006. For the year
ended
December 31, 2006, in connection with these shares, the Company recorded
deferred offering costs of $289,000.
Between
August 11, 2006 and December 31, 2006, 23.3 shares of Series A Convertible
Preferred Stock were converted into 466,667 shares of common stock.
On
May
29, 2007, the Company issued 150,000 shares of common stock to consultants
for
services rendered. The shares were issued at the fair value at the date of
the
issuance of $75,000 or $0.50 per share. For the year ended December 31, 2007,
in
connection with these shares, the Company recorded stock-based consulting
expense of $75,000.
On
May
29, 2007, the Company issued 50,000 shares of common stock to a Director
of the
Company in consideration for services rendered. The shares were issued at
the
fair value at the date of the issuance of $25,000 or $0.50 per share. For
the
year ended December 31, 2007, in connection with these shares, the Company
recorded stock-based consulting expense of $25,000.
On
May
29, 2007, the Company issued 100,000 shares of common stock to consultants
for
services rendered. The shares were issued at the fair value at the date of
the
issuance of $50,000 or $0.50 per share. For the year ended December 31, 2007,
in
connection with these shares, the Company recorded investor relation expenses
of
$50,000.
In
2007,
3 shares of Series A Convertible Preferred Stock were converted into 60,000
shares of common stock.
F-19
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock options
In
November 2005, the Company and its stockholders approved the MDwerks, Inc.
2005
Incentive Compensation Plan (the ‘‘Incentive Plan’’). The Incentive Plan covers
grants of stock options, grants of equity securities, dividend equivalents
and
other customary items covered by such plans. Persons eligible to receive
awards
under the Incentive Plan are the officers, directors, employees, consultants
and
other persons who provide services to the Company or any related entity (as
defined in the Incentive Plan). The Incentive Plan will be administered by
the
Company’s Compensation Committee; however, the Board of Directors can exercise
any power or authority granted to the Compensation Committee under the Incentive
Plan, unless expressly provided otherwise in the Incentive Plan. The Company
reserved 10,000,000 shares of its authorized common stock for issuance pursuant
to grants under the Incentive Plan.
On
December 29, 2005, the Company granted options to purchase 200,000 shares
of
common stock to employees of the Company under the Incentive Plan. The options
are exercisable at $3.25 per share. The options vest over a three-year term
and
expire on December 29, 2015. The fair value of these options was approximately
$598,000 using the Black-Scholes pricing model. The assumptions used were:
interest free rate of 3.75%, 105% volatility, 10-year term and no expected
dividends.
On
January 3, 2006, the Company granted options to purchase 860,000 shares of
common stock to employees of the Company under the Incentive Plan. The options
are exercisable at $3.40 per share. The options vest as to 33.33% of such
shares
on each of the first and second anniversaries of the date of grant and as
to
33.34% of such shares on the third anniversary of the date of grant, and
expire
on January 3, 2016 or earlier due to employment termination. As of January
1,
2006, the Company accounts for stock options issued to employees in accordance
with the provisions of SFAS 123(R) and related interpretations. The fair
value of this option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 105%; risk-free
interest rate of 3.75%; and, a term of 8 years. In connection with these
options, the Company valued these options at a fair market value of
approximately $2,578,445 and will record stock-based compensation expense
over
the vesting period.
On
June
19, 2006, the Company granted options to purchase 606,250 shares of common
stock
to employees and a Director of the Company under the Incentive Plan. The
options
are exercisable at $4.00 per share. The options vest over a three-year term
and
expire on June 19, 2016. The fair value of these options was approximately
$2,324,363 using the Black-Scholes pricing model. The assumptions used were:
interest free rate of 4.83%, 142% volatility, 10-year term and no expected
dividends.
On
October 11, 2006, the Company granted options to purchase 1,025,000 shares
of
common stock to employees and Directors of the Company under the Incentive
Plan.
The options are exercisable at $2.25 per share. The options vest 1/3 immediately
and 1/3 each year over the next two years and expire on October 11, 2016.
The
fair value of these options was approximately $2,265,250 using the Black-Scholes
pricing model. The assumptions used were: interest free rate of 4.75%, 147%
volatility, 10-year term and no expected dividends.
On
December 27, 2006, the Company granted options to purchase 125,000 shares
of
common stock to employees of the Company under the Incentive Plan. The options
are exercisable at $1.39 per share. The options either vest immediately or
vest
1/3 immediately and 1/3 each year over the next two years and expire on December
29, 2016. The fair value of these options was approximately $171,250 using
the
Black-Scholes pricing model. The assumptions used were: interest free rate
of
4.70%, 154% volatility, 10-year term and no expected dividends.
F-20
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock options (continued)
On
September 27, 2007, the Company granted options to purchase 175,000 shares
of
common stock of the Company under the Incentive Plan. The options are
exercisable at $0.67 per share. The options either vest 1/3 immediately and
1/3
each year over the next two years or vest over the next three years and expire
on September 27, 2017. The fair value of these options was approximately
$119,000 using the Black-Scholes pricing model. The assumptions used were:
interest free rate of 4.23%, 116% volatility, 10-year term and no expected
dividends.
On
December 31, 2007, the Company granted options to purchase 483,000 shares
of
common stock to Directors of the Company under the Incentive Plan. The options
are exercisable at $0.38 per share. The options vest immediately and expire
on
December 31, 2017. The fair value of these options was approximately $173,880
using the Black-Scholes pricing model. The assumptions used were: interest
free
rate of 3.52%, 114% volatility, 10-year term and no expected
dividends.
A
summary
of the status of the Company’s outstanding stock options as of December 31, 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, 2005
|
200,000
|
$
|
3.25
|
|||||||
|
Granted
|
2,691,250
|
$
|
3.03
|
|||||||
|
Exercised
|
—
|
$
|
—
|
|||||||
|
Forfeited
|
(15,000
|
)
|
$
|
3.50
|
||||||
|
Outstanding
at December 31, 2006
|
2,876,250
|
$
|
3.04
|
|||||||
|
Granted
|
658,000
|
$
|
0.46
|
|||||||
|
Exercised
|
—
|
$
|
—
|
|||||||
|
Forfeited
|
(20,000
|
)
|
$
|
1.39
|
||||||
|
Outstanding
at December 31, 2007
|
3,514,250
|
$
|
2.57
|
$
|
0
|
|||||
|
Options
exercisable at end of period
|
1,933,417
|
$
|
2.71
|
|||||||
|
Weighted-average
fair value of options granted during the period
|
$
|
0.46
|
||||||||
F-21
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock options (continued)
The
following information applies to options outstanding at December 31,
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
|
|||||||||||
|
$0.38
|
483,000
|
10.00
|
$
|
0.38
|
483,000
|
$
|
0.38
|
|||||||||
|
$0.67
|
175,000
|
9.75
|
$
|
0.67
|
33,333
|
$
|
0.67
|
|||||||||
|
$1.39
|
105,000
|
9.00
|
$
|
1.39
|
95,000
|
$
|
1.39
|
|||||||||
|
$2.25
|
1,025,000
|
8.75
|
$
|
2.25
|
683,333
|
$
|
2.25
|
|||||||||
|
$3.25
|
190,000
|
8.00
|
$
|
3.25
|
126,667
|
$
|
3.25
|
|||||||||
|
$3.40
|
860,000
|
8.00
|
$
|
3.40
|
286,667
|
$
|
3.40
|
|||||||||
|
$4.00 –
$4.25
|
676,250
|
8.50
|
$
|
4.03
|
225,417
|
$
|
4.03
|
|||||||||
|
3,514,250
|
$
|
2.57
|
1,933,417
|
$
|
2.71
|
|||||||||||
In
connection with granted stock options, the Company recognized stock-based
compensation expense of $3,196,046 for the year ended December 31, 2007 and
$3,911,640 for the year ended December 31, 2006. The stock based compensation
for 2007 includes $173,880 for new options granted and $3,022,166 related
to
2005 and 2006 options. As of December 31, 2007, the total future compensation
expense related to non-vested options not yet recognized in the consolidated
statement of operations is approximately $1,311,181, which will be recognized
through September 2010.
Common
stock warrants
Between
February 1, 2006 and June 30, 2006, the Company conducted 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. Each unit consists of
one
share of the Company’s Series A Convertible Preferred Stock, par value $.001 per
share, and a detachable, transferable warrant to purchase 20,000 shares of
the
Company’s common stock, at a purchase price of $3.00 per share. Pursuant to the
Private Placement, the Company sold an aggregate of 28.33 units and issued
to
investors three-year warrants to purchase an aggregate of 566,667 shares
of its
common stock at an exercise price of $3.00 per share, which expire from March
22, 2009 to June 29, 2009. Brookshire Securities Corporation (‘‘Brookshire’’)
served as the lead placement agent in connection with the private placement.
Brookshire received five-year warrants to purchase 56,667 shares of the
Company’s common stock at an exercise price of $1.50 per share on terms which
are identical to those warrants included in the units except that they contain
a
cashless exercise provision. In addition, the warrants have registration
rights
that are the same as those afforded to investors in the private
placement.
F-22
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock warrants (continued)
In
connection with a 7% secured promissory note, the Company granted warrants
to
purchase 111,111 shares of its common stock at an exercise price of $2.25
per
share which warrants expire on August 24, 2009. These warrants were treated
as a
discount on the secured promissory note and were valued at $250,000 to be
amortized over the 12-month note terms. The fair market value of each stock
warrants were 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 4.80%; volatility of 142% and an expected term of 3 years (see note
4).
On
July
5, 2006, in connection with terms of certain notes payable (see note 4),
the
Company granted to note holders four-year warrants to purchase an aggregate
of
90,000 shares of the Company’s common stock at $1.25 per share. The fair market
value of these stock warrants were 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 4.83%; volatility of 142% and an expected term of 4 years.
In
connection with these warrants, the Company recorded interest expense of
$335,273.
In
connection with Gottbetter notes payable (see note 4), the Company granted
to
note holders Series D Warrants which are exercisable at a price of $2.25
per
share for a period of five years from the date of issuance. The Series D
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
the Company’s 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 Warrants, issuances of any rights, warrants or options
to
purchase shares of the Company’s common stock with an exercise price below the
exercise price of the Series D Warrants, issuances of convertible securities
with a conversion price below the exercise price of the Series D
Warrants.
Also
in
connection with the issuance of the Senior Notes (see note 4), the Company
granted to note holders of the Senior Notes Series E Warrants which are
exercisable at a price of $3.25 per share for a period of five years from
the
date of issuance. The Series E 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 the Company’s 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 E Warrants, issuances of any
rights, warrants or options to purchase shares of the Company’s common stock
with an exercise price below the exercise price of the Series E Warrants,
issuances of convertible securities with a conversion price below the exercise
price of the Series E Warrants.
On
October 18, 2006, the Company granted 225,000 Warrants to consultants which
are
exercisable at a price of $3.76 per share for a period of three years. On
October 18, 2006, the Company granted 62,500 Warrants to brokers which are
exercisable at prices between $1.25 and $4.00 per share for a period of three
years.
F-23
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
Common
stock warrants (continued)
On
September 28, 2007 we received net proceeds of $1,633,190 in connection
with a financing provided by Vicis. 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. These warrants were treated
as a discount on the preferred stock and were valued at $877,980 to be amortized
over the 12-month term. 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 7 years.
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. 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 note extension term. 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
connection with the September 28, 2007 transactions described in Note 4,
the
conversion price of the Gottbetter Series E Warrants were reduced to $2.25
per
share subject to further adjustment, and the number of Warrant Shares for
which
such warrants may be exercised were increased to 541,666 and 2/3 shares subject
to further adjustment. The additional warrants were treated as a discount
on the
secured promissory note and were valued at $84,117 to be amortized over the
4-month note extension term. 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.
A
summary
of the status of the Company’s outstanding stock warrants granted as of December
31, 2007 and changes during the period is as follows:
|
Shares
|
Weighted-Average
Exercise Price
|
||||||
|
Outstanding at
December 31, 2005
|
704,400
|
$
|
2.39
|
||||
|
Granted
|
1,861,945
|
$
|
2.78
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Forfeited
|
—
|
—
|
|||||
|
Outstanding
at December 31, 2006
|
2,566,345
|
$
|
2.67
|
||||
|
Granted
|
3,166,667
|
$
|
2.21
|
||||
|
Exercised
|
—
|
—
|
|||||
|
Forfeited
|
—
|
—
|
|||||
|
Outstanding
at December 31, 2007
|
5,733,012
|
$
|
2.42
|
||||
|
Common
stock issuable upon exercise of warrants
|
5,733,012
|
$
|
2.42
|
||||
F-24
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
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
December 31,
2007
|
Weighted Average
Remaining
Contractual
Life (Years)
|
Weighted
Average
Exercise Price
|
Number
Exercisable
at
December
31,
2007
|
Weighted
Average
Exercise Price
|
|||||||||||
|
$1.25
|
199,000
|
2.50
|
$
|
1.25
|
199,000
|
$
|
1.25
|
|||||||||
|
$1.50
|
56,667
|
3.50
|
$
|
1.50
|
56,667
|
$
|
1.50
|
|||||||||
|
$2.25
|
3,027,778
|
5.50
|
$
|
2.25
|
3,027,778
|
$
|
2.25
|
|||||||||
|
$2.50
|
1,640,400
|
4.50
|
$
|
2.50
|
1,640,400
|
$
|
2.50
|
|||||||||
|
$3.00
|
579,167
|
1.40
|
$
|
3.00
|
579,167
|
$
|
3.00
|
|||||||||
|
$3.76
|
225,000
|
1.80
|
$
|
3.76
|
225,000
|
$
|
3.76
|
|||||||||
|
$4.00
|
5,000
|
1.80
|
$
|
4.00
|
5,000
|
$
|
4.00
|
|||||||||
|
5,733,012
|
$
|
2.42
|
5,733,012
|
$
|
2.42
|
|||||||||||
Registration
rights
The
Company has 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 June 13, 2005 Private Placement.
The Company has 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 will 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 are received, but in any event
not
later than 30 business days from the date such comments are received. The
‘‘resale’’ registration statement became effective on December 7,
2006.
In
the
event the ‘‘resale’’ registration statement had not been not 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 fails to respond to SEC comments to the Registration
Statement within 30 business days, each investor in the Private Placement
will
receive 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.
F-25
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
6 —
STOCKHOLDERS’
EQUITY (DEFICIENCY) (continued)
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 Rule144(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.
NOTE
7 —
INCOME
TAXES
The
Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis
of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires
the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets. Realization of deferred tax assets, including those
related to net operating loss carryforwards, are dependent upon future earnings,
if any, of which the timing and amount are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation
allowance.
The
Company has net operating loss carryforwards for tax purposes totaling
approximately $9,457,000 at December 31, 2007, expiring through the year
2027
subject to the Internal Revenue Code Section 382, which places a limitation
on
the amount of net operating losses that can offset by taxable income after
a
change in control (generally greater than a 50% change in
ownership).
The
table
below summarizes the differences between the Company’s effective tax rate and
the statutory federal rate as follows for fiscal 2007 and 2006:
|
2007
|
2006
|
||||||
|
Computed
“expected” tax benefit
|
(34.0
|
)%
|
(34.0
|
)%
|
|||
|
State
income taxes
|
(4.0
|
)%
|
(4.0
|
)%
|
|||
|
Other
permanent differences
|
21.7
|
%
|
9.5
|
%
|
|||
|
Change
in valuation allowance
|
16.3
|
%
|
28.5
|
%
|
|||
|
Effective
tax rate
|
0.0
|
%
|
0.0
|
%
|
|||
F-26
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
7 —
INCOME
TAXES (continued)
Deferred
tax assets and liabilities are provided for significant income and expense
items
recognized in different years for tax and financial reporting purposes.
Temporary differences, which give rise to a net deferred tax asset is as
follows:
|
2007
|
||||
|
Tax
benefit of net operating loss carryforward
|
$
|
3,594,000
|
||
|
Non-qualified
stock options
|
934,000
|
|||
|
4,528,000
|
||||
|
Valuation
allowance
|
(4,528,000
|
)
|
||
|
Net
deferred tax asset
|
$
|
—
|
||
After
consideration of all the evidence, both positive and negative, management
has
recorded a valuation allowance at December 31, 2007, due to the uncertainty
of
realizing the deferred income tax assets. The valuation allowance was increased
by $878,000 from the prior year.
NOTE
8 —
COMMITMENTS
Lease
agreements
The
Company sub-leased its facility, on a month-to-month basis, under a master
lease
expiring July 2008. Rent expense for the year ended December 31, 2007 was
$83,772. On February 1, 2008, the Company was assigned the master lease and
a
5-year lease option was exercised which extends the master lease until June
2013.
Employment
agreements
Effective
January 1, 2006, each of Howard B. Katz, Solon L. Kandel, Vincent Colangelo,
and
Stephen W. Weiss entered into an employment agreement with us. The employment
agreement with Mr. Katz was extended on December 31, 2007 to a term expiring
on
December 31, 2010. The employment agreement with Mr. Colangelo extends for
a
term expiring on December 31, 2009. The employment agreements with Messrs.
Kandel and Weiss expired on December 31, 2007 and are being extended on a
month-to-month basis. Pursuant to these employment agreements, Mr. Katz has
agreed to devote substantially all of his time, attention and ability, and
Messrs. Kandel, Colangelo and Weiss have each agreed to devote all of their
time, attention and ability, to our business as our Chief Executive Officer,
President, Chief Financial Officer, Chief Operating Officer, respectively.
The
employment agreements provide that Messrs. Katz, Kandel, Colangelo, and Weiss
will receive a base salary during calendar year 2007 at an annual rate of
$225,000, $200,000, $175,000, and $165,000 for services rendered in such
positions. Mr. Kandel agreed to defer payment on his entire 2007 annual base
salary increase of $25,000 and Mr. Colangelo agreed to defer payment of $15,000
of his 2007 annual base salary increase of $25,000. During calendar years
2008
and 2009 under the employment agreements for Messrs. Katz and Colangelo,
their
annual base salaries will be increased to $300,000 and $330,000, respectively,
for Mr. Katz, and $200,000 and $220,000, respectively, for Mr. Colangelo.
During
calendar years 2010, under the employment agreement for Mr. Katz, the annual
base salary will be increased to $363,000. In addition, each executive may
be
entitled to receive, at the sole discretion of our board of directors, cash
bonuses based on the executive meeting and exceeding performance goals. The
cash
bonuses range from up to 25% of the executive’s annual base salary for Mr.
Weiss, up to 100% of the executive’s annual base salary for Messrs. Kandel and
Colangelo, and up to 150% of the executive’s annual base salary for Mr. Katz.
The cash bonuses for Messrs. Katz, Kandel and Colangelo include a minimum
bonus
due of 40%, 25% and 25% respectively. Messrs. Katz, Kandel, and Colangelo
have
agreed to defer payment on their 2007 bonuses, to which they were entitled.
Each
of our executive officers is entitled to participate in our 2005 Incentive
Compensation Plan. We have also agreed to pay or reimburse each executive
officer up to a specified monthly amount for the business use of his or her
personal car and cell phone. The employment agreements provide for termination
by us upon death or disability (defined as 90 aggregate days of incapacity
during any 365-consecutive day period) of the executive or upon conviction
of a
felony or any crime involving moral turpitude, or willful and material
malfeasance, dishonesty or habitual drug or alcohol abuse by the executive,
related to or affecting the performance of his duties. In the event any of
the
employment agreements are terminated by us without cause, such executive
will be
entitled to compensation for the balance of the term of his employment agreement
or, if longer, for three years in the case of Mr. Katz and two years in the
case
of Mr. Colangelo. Messrs. Katz, Kandel and Colangelo also have the right,
if
terminated without cause, to accelerate the vesting of any stock options
or
other awards granted under our 2005 Incentive Compensation Plan. We intend
to
obtain commitments for key-man life insurance policies for our benefit on
the
lives of Messrs. Katz, Kandel and Colangelo equal to three times their
respective annual base salary. In addition to the key-man life insurance
policies, we have agreed to maintain throughout the term of each employment
agreement 15-year term life insurance policies on the lives of Messrs. Katz,
Kandel and Colangelo, with benefits payable to their designated beneficiaries,
and to pay all premiums in connection with those policies.
F-27
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
In
the
event of a change of control of our company, Messrs. Katz and Colangelo may
terminate their employment with us within six months after such event and
will
be entitled to continue to be paid pursuant to the terms of their respective
employment agreements.
The
employment agreements also contain covenants (a) restricting the executive
from
engaging in any activities competitive with our business during the terms
of
such employment agreements and one year thereafter, (b) prohibiting the
executive from disclosure of confidential information regarding us at any
time
and (c) confirming that all intellectual property developed by the executive
and
relating to our business constitutes our sole and exclusive
property.
F-28
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2007
NOTE
9 —
SUBSEQUENT
EVENTS
On
January 17, 2008 we filed an amended and restated Certificate of Designations
(as amended and restated, the “Certificate of Designations”) with the Secretary
of State of the State of Delaware, to, among other things, increase the number
of authorized shares of Series B Preferred Stock from 250 shares to 325
shares.
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.
The
Securities Purchase Agreement, dated January 18, 2008, by and between Vicis
and
us (the “January Securities Purchase Agreement”) provides that our obligations
to Vicis under the Series B Preferred Stock, the January Securities Purchase
Agreement and the various transaction documents entered into in connection
with
the January Securities Purchase Agreement (the “January Transaction Documents”)
are secured by a lien on all of our assets pursuant to the Security Agreement,
dated September 28, 2007, between us and Vicis
The
January Securities Purchase Agreement further provides that our obligations
under the Series B Preferred Stock, the January Securities Purchase Agreement
and the January Transaction Documents are guaranteed by each of our subsidiaries
pursuant to the terms of the Guaranty Agreements, dated September 28, 2007,
between Vicis and each of our subsidiaries in September 2007.
The
January Securities Purchase Agreement also provides that the guaranty
obligations of our subsidiaries in connection with the January Securities
Purchase Agreement and the January Transaction Documents are secured by the
liens on all of the assets of each our subsidiaries, except for the accounts
receivable and certain contract rights of Xeni Financial Services, Corp.,
created pursuant to the Security Agreements, previously entered into by and
between our subsidiaries and Vicis in September 2007.
In
connection with the sale of the Series B Preferred Stock, we amended the
Registration Rights Agreement, previously entered into, by and between Vicis
and
us in September 2007 pursuant to which we agreed, in addition to registering
the
securities previously covered by such Registration Rights Agreement, to register
for resale, the shares of our common stock into which the Series B Preferred
Stock sold pursuant to the January Securities Purchase Agreement is convertible
and the shares of our common stock for which the Series F Warrants and the
Series G Warrants sold pursuant to the January Securities Purchase Agreement
are
exercisable.
On
March
1, 2008, the Company and Gottbetter amended the Senior Notes to extend the
maturity date of the Senior Notes to January 1, 2011 and to delay principal
payments until March 1, 2008, if the Company is able to secure additional
financing by March 31, 2008. If the Company is unable to secure additional
financing by March 31, 2008, the amendment to the Senior Notes will be void
and
of no force and effect. In consideration of the amendment to the Senior Notes,
if the Company is able to obtain at least $5,000,000 in additional financing,
MDwerks, Inc. will issue to Gottbetter 2,000,000 warrants at an exercise
price
to be determined at the time of the financing. We are in discussions with
Vicis
regarding the provision of additional financing.
F-29
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
March 31,
2008
(Unaudited)
|
December
31,
2007
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
|
$
|
6,928,582
|
$
|
320,903
|
|||
|
Notes
receivable, net of allowance of $125,000 for March 31, 2008 and
$0 for
December 31, 2007
|
1,511,091
|
1,652,079
|
|||||
|
Accounts
receivable
|
79,424
|
66,985
|
|||||
|
Prepaid
expenses and other
|
203,544
|
215,073
|
|||||
|
Total
current assets
|
8,722,641
|
2,255,040
|
|||||
|
Long-term
assets:
|
|||||||
|
Property
and equipment, net of accumulated depreciation of $102,791 for
March 31,
2008 and $92,995 for December 31, 2007
|
106,106
|
115,902
|
|||||
|
Debt
issuance and offering costs, net of accumulated amortization of
$324,265
for March 31, 2008 and $273,997 for December 31, 2007
|
520,259
|
400,246
|
|||||
|
Total
assets
|
$
|
9,349,006
|
$
|
2,771,188
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Notes
payable, less long-term portion
|
$
|
1,944,444
|
$
|
2,942,842
|
|||
|
Mandatory
Redeemable Convertible Series B Preferred Stock, $.001 par value,
1,250
shares authorized;1,000 shares issued and outstanding at March
31, 2008
and 250 shares authorized; 200 shares issued and outstanding at
December
31, 2007
|
—
|
1,346,326
|
|||||
|
Loans
payable
|
69,559
|
109,559
|
|||||
|
Accounts
payable
|
456,906
|
351,482
|
|||||
|
Accrued
expenses
|
748,391
|
686,917
|
|||||
|
Deferred
revenue
|
11,107
|
11,296
|
|||||
|
Total
current liabilities
|
3,230,407
|
5,448,422
|
|||||
|
Long-term
liabilities:
|
|||||||
|
Notes
payable, net of discount of $2,900,548 at March 31, 2008 and $2,566,395
at
December 31, 2007, less current portion
|
155,008
|
65,763
|
|||||
|
Deferred
revenues, less current portion
|
3,701
|
1,613
|
|||||
|
Total
liabilities
|
3,389,116
|
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 March 31, 2008 and December 31,
2007
|
—
|
—
|
|||||
|
Common
stock, $.001 par value, 100,000,000 shares authorized; 12,940,065
shares issued and outstanding at March 31, 2008 and December 31,
2007
|
12,940
|
12,940
|
|||||
|
Additional
paid-in capital
|
45,081,578
|
33,732,690
|
|||||
|
Accumulated
deficit
|
(39,134,628
|
)
|
(36,490,240
|
)
|
|||
|
Total
stockholders' equity (deficiency)
|
5,959,890
|
(2,744,610
|
)
|
||||
|
Total
liabilities and stockholders' equity (deficiency)
|
$
|
9,349,006
|
$
|
2,771,188
|
|||
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
F-30
MDWERKS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Three Months
Ended March 31,
|
||||||
|
|
2008
|
2007
|
|||||
|
|
(Unaudited)
|
(Unaudited)
|
|||||
|
Revenue:
|
|
|
|||||
|
Service
fees
|
$
|
162,242
|
$
|
119,908
|
|||
|
Financing
income
|
41,219
|
13,977
|
|||||
|
Total
revenue
|
203,461
|
133,885
|
|||||
|
Operating
expenses:
|
|||||||
|
Compensation
|
902,102
|
1,417,321
|
|||||
|
Consulting
expenses
|
65,481
|
162,697
|
|||||
|
Professional
fees
|
164,688
|
125,547
|
|||||
|
Selling,
general and administrative
|
290,890
|
409,019
|
|||||
|
Total
operating expenses
|
1,423,161
|
2,114,584
|
|||||
|
Loss
from operations
|
(1,219,700
|
)
|
(1,980,699
|
)
|
|||
|
Other
income (expense):
|
|||||||
|
Interest
income
|
1,924
|
28,239
|
|||||
|
Interest
expense
|
(766,639
|
)
|
(517,498
|
)
|
|||
|
Loss
on extinguishment of debt
|
(660,122
|
)
|
—
|
||||
|
Other
income (expense)
|
149
|
—
|
|||||
|
Total
other income (expense)
|
(1,424,688
|
)
|
(489,259
|
)
|
|||
|
Net
loss
|
$
|
(2,644,388
|
)
|
$
|
(2,469,958
|
)
|
|
|
NET
LOSS PER COMMON SHARE - basic and diluted
|
$
|
(0.20
|
)
|
$
|
(0.20
|
)
|
|
|
WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING - basic and diluted
|
12,940,065
|
12,580,065
|
|||||
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
F-31
MDWERKS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Three Months
Ended March 31,
|
||||||
|
|
2008
|
2007
|
|||||
|
|
(Unaudited)
|
(Unaudited)
|
|||||
|
Cash
flows from operating activities:
|
|
|
|||||
|
Net
loss
|
$
|
(2,644,388
|
)
|
$
|
(2,469,958
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
9,796
|
10,700
|
|||||
|
Amortization
of debt issuance cost
|
—
|
5,360
|
|||||
|
Amortization
of debt discount
|
1,264,742
|
411,409
|
|||||
|
Amortization
of deferred offering costs
|
73,698
|
44,499
|
|||||
|
Amortization
of deferred compensation
|
22,168
|
66,510
|
|||||
|
Bad
debt
|
125,000
|
—
|
|||||
|
Stock-based
compensation
|
381,505
|
910,653
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Notes
receivable
|
15,988
|
(129,165
|
)
|
||||
|
Accounts
receivable
|
(12,439
|
)
|
12,509
|
||||
|
Prepaid
expenses and other
|
11,529
|
(9,595
|
)
|
||||
|
Accounts
payable
|
105,424
|
(95,209
|
)
|
||||
|
Accrued
expenses
|
61,474
|
(36,267
|
)
|
||||
|
Deferred
revenues
|
1,898
|
(8,836
|
)
|
||||
|
Total
adjustments
|
2,060,783
|
1,183,568
|
|||||
|
Net
cash used in operating activities
|
(583,605
|
)
|
(1,286,390
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of property and equipment
|
—
|
(1,716
|
)
|
||||
|
Net
cash used in investing activities
|
—
|
(1,716
|
)
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Repayment
of notes payable
|
(575,000
|
)
|
(124,629
|
)
|
|||
|
Repayment
of loan payable
|
(40,000
|
)
|
(2,916
|
)
|
|||
|
Proceeds
from sale of Mandatory Redeemable Series B preferred stock
|
8,000,000
|
—
|
|||||
|
Placement
fees and other expenses paid
|
(193,716
|
)
|
—
|
||||
|
Net
cash provided (used in) by financing activities
|
7,191,284
|
(127,545
|
)
|
||||
|
Net
increase (decrease) in cash
|
6,607,679
|
(1,415,651
|
)
|
||||
|
Cash
- beginning of period
|
320,903
|
3,146,841
|
|||||
|
Cash
- end of period
|
$
|
6,928,582
|
$
|
1,731,190
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Cash
paid for:
|
|||||||
|
Interest
|
$
|
66,666
|
$
|
108,254
|
|||
The
accompanying notes should be read in conjunction with the unaudited consolidated
financial statements
F-32
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 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 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
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 funds in the first quarter of 2008 through the sale of
preferred stock. As reflected in the accompanying consolidated financial
statements, the Company has stockholders’ equity of $5,959,890 and working
capital of $5,492,234 at March 31, 2008.
F-33
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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-KSB of the Company as filed with the Securities and
Exchange Commission (the ‘‘Commission’’). The results of operations for the
three months ended March 31, 2008 are not necessarily indicative of what the
results will be for the full fiscal year ending December 31,
2008.
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 March 31, 2008, the Company was approximately
$6,700,000 in excess of the $100,000 limit. The Company has not experienced
any
losses on these accounts.
F-34
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Advertising
The
Company expenses advertising costs as incurred. Advertising costs charged to
operations were approximately $2,001 and $34,293 for the three months ended
March 31, 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.
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.
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 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.
F-35
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 March 31, 2008 and 2007, the Company had outstanding
options to purchase an aggregate of 3,514,250 and 2,876,250 shares of common
stock, respectively and warrants to purchase an aggregate of 57,566,346 and
2,733,012 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 2,222,222 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 three months ended March 31, 2008 and
2007
since the impact of the stock options and warrants would be antidilutive.
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.
F-36
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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 is currently evaluating the impact of adopting SFAS
159.
In
December 2007, the FASB issued two new pronouncements, SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements- an amendment
of
ARB N0. 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.
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
receivable are recorded when revenue has been recognized but not yet collected.
The Company had $79,424 of accounts receivable as of March 31, 2008 and 66,985
as of December 31, 2007 from implementation, processing, collection, and other
fees, and disbursements not yet collected.
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
March
31, 2008, the Company advanced six healthcare providers under lines of credit
and note agreements, respectively, aggregating $1,636,091. 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 March 31, 2008, no amounts were past due, but an allowance for
doubtful accounts of $125,000 was recorded for one note receivable due to the
company’s estimate of the note holder’s ability to pay. At December 31, 2007,
the Company had $1,652,079 of notes receivable.
F-37
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE 3 — PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
Estimated Life
|
March 31,
2008
|
December 31,
2007
|
||||||||
|
Office
furniture and equipment
|
5-7
Years
|
$
|
27,077
|
$
|
27,077
|
|||||
|
Computer
equipment and software
|
3-5
Years
|
181,820
|
181,820
|
|||||||
|
Total
|
208,897
|
208,897
|
||||||||
|
Less:
accumulated depreciation
|
(102,791
|
)
|
(92,995
|
)
|
||||||
|
Property
and equipment, net
|
|
$
|
106,106
|
$
|
115,902
|
|||||
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.
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.
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 in the aggregate) in connection with a financing provided by
Gottbetter Capital Master, Ltd. (in liquidation, an unaffiliated accredited
institutional investor (”Gottbetter’’). 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 (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 to purchase 375,000
shares of our common stock at a price of $3.25 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 an
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.
F-38
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE 4 — NOTES PAYABLE (continued)
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
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.
As
consideration for Gottbetter entering into the Gottbetter Consent Agreement,
we
issued to Gottbetter a Series I warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $0.75 per share. The Series I Warrant
is
exercisable for a period of five years from the date of issuance. The Series
I
Warrant may be exercised on a cashless basis to the extent that the resale
of
shares of common stock underlying the Series I Warrant is not covered by an
effective registration statement. 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 I
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
I
Warrant and issuances of convertible securities with a conversion price below
the exercise price of the Series I Warrant. 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 2.46%; volatility of 117% and an expected term of 5 years.
For
the
three months ended March 31, 2008, amortization of the debt discount on notes
payable amounted to $418,760.
F-39
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
4 — NOTES PAYABLE (continued)
The
promissory notes are as follows:
|
March
31,
2008
|
December
31,
2007
|
||||||
|
Notes
payable
|
$
|
5,000,000
|
$
|
5,575,000
|
|||
|
Less:
unamortized discount on notes payable
|
(2,900,548
|
)
|
(2,566,395
|
)
|
|||
|
Notes
payable, net
|
$
|
2,099,452
|
$
|
3,008,605
|
|||
|
Less
current portion
|
(1,944,444
|
)
|
(2,942,842
|
)
|
|||
|
Notes
payable, net of discount of $2,900,548, less current
portion
|
$
|
155,008
|
$
|
65,763
|
|||
On
August
31, 2007 we received gross proceeds of $250,000 in connection with a financing
provided by Vicis. 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. 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 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, to the
Investor. 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 7 years.
On
January 17, 2008 we filed an amended and restated Certificate of Designations
(as amended and restated, the “Certificate of Designations”) with the Secretary
of State of the State of Delaware, to, among other things, increase the number
of authorized shares of Series B Preferred Stock from 250 shares to 325
shares.
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. 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 4.75%; volatility of 118% and an expected term
of
7 years.
F-40
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE 4 — NOTES PAYABLE (continued)
The
Securities Purchase Agreement, dated January 18, 2008, by and between Vicis
and
us (the “January Securities Purchase Agreement”) provides that our obligations
to Vicis under the Series B Preferred Stock, the January Securities Purchase
Agreement and the various transaction documents entered into in connection
with
the January Securities Purchase Agreement (the “January Transaction Documents”)
are secured by a lien on all of our assets pursuant to the Security Agreement,
dated September 28, 2007, between us and Vicis.
The
January Securities Purchase Agreement further provides that our obligations
under the Series B Preferred Stock, the January Securities Purchase Agreement
and the January Transaction Documents are guaranteed by each of our subsidiaries
pursuant to the terms of the Guaranty Agreements, dated September 28, 2007,
between Vicis and each of our subsidiaries in September 2007.
The
January Securities Purchase Agreement also provides that the guaranty
obligations of our subsidiaries in connection with the January Securities
Purchase Agreement and the January Transaction Documents are secured by the
liens on all of the assets of each our subsidiaries, except for the accounts
receivable and certain contract rights of Xeni Financial Services, Corp.,
created pursuant to the Security Agreements, previously entered into by and
between our subsidiaries and Vicis in September 2007.
We
amended the Registration Rights Agreement, previously entered into, by and
between Vicis and us in September 2007. We agreed, in addition to registering
the securities previously covered by such Registration Rights Agreement, to
register for resale, the common stock relating to convertible shares of our
preferred stock and the Series F Warrants and the Series G Warrants that are
exercisable pursuant to the January Securities Purchase Agreement.
On
March
1, 2008, the Company and Gottbetter amended the Senior Notes to extend the
maturity date of the Senior Notes to January 1, 2011 and to delay principal
payments until March 1, 2008, since the Company was able to secure additional
financing by March 31, 2008. If the Company was unable to secure additional
financing by March 31, 2008, the amendment to the Senior Notes would have been
void and of no force and effect. In consideration of the amendment to the Senior
Notes, the Company issued to Gottbetter 1,000,000 Series I warrants. The Series
I Warrants are exercisable at a price of $0.75 per share for a period of five
years from the date of issuance.
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. 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 2.46%; volatility of
117%
and an expected term of 7 years.
For
the
three months ended March 31, 2008, amortization of the debt discount on
mandatory redeemable convertible Series B preferred stock amounted to $845,982.
F-41
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE 4 — NOTES PAYABLE (continued)
The
mandatory redeemable convertible Series B preferred stock is as
follows:
|
March 31,
2008
|
December 31,
2007
|
||||||
|
Mandatory
redeemable convertible Series B preferred stock
|
$
|
10,000,000
|
$
|
2,000,000
|
|||
|
Less:
unamortized discount on preferred stock
|
(10,000,000
|
)
|
(653,674
|
)
|
|||
|
Mandatory
redeemable convertible Series B preferred stock, net
|
$
|
—
|
$
|
1,346,326
|
|||
In
connection with the sale of the Series B Preferred Stock, we amended and
restated the Registration Rights Agreement, dated September 28, 2007, by and
between Vicis and us (as amended and restated, the “Amended and Restated
Registration Rights Agreement”), pursuant to which, among other things, we
agreed, to register for resale all of the shares of our common stock into which
the outstanding Series B Preferred Stock is convertible and all of the shares
of
our common stock for which the Series H is exercisable.
In
connection with obtaining the consent and waiver of Gottbetter to the financing
provided by Vicis, we entered into an Amendment, Consent and Waiver Agreement
(the “Gottbetter Consent Agreement”), pursuant to which (i) we issued to
Gottbetter a five year Series I warrant to purchase one million shares of our
common stock at an exercise price of $0.75 per share; (ii) 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 (iii)
Gottbetter consented to the financing provided by Vicis.
March
Securities Purchase Agreement
The
March
Securities Purchase Agreement provided for the sale by us to Vicis of (i) 750
shares of Series B Preferred Stock (ii) and a Series H Warrant to purchase
an
aggregate of 53,333,334 shares of our common stock at a price of $0.75 per
share. Pursuant to the March Securities Purchase Agreement, the aggregate gross
purchase price for the Series B Preferred Stock and the Series H Warrant was
$7,500,000, which was paid by wire transfer of immediately available funds
and
the surrender for cancellation of a promissory note that we issued to Vicis
in
the principal amount of $575,000. Principal and accrued interest under the
promissory note and $100,000 of Vicis’ expenses were applied against the
purchase price.
The
March
Securities Purchase Agreement provides to Vicis, 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 right of first
refusal is on a pro rata basis (based upon the amount invested) with
Gottbetter.
The
March
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 pari 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
January Securities Purchase Agreement); (vii) amend our charter documents in
a
way that adversely affects the rights of Vicis; (viii) except through Xeni
Financial Services, Corp., make loans to, or advances or guarantee the
obligations of, third parties; (ix) make intercompany transfers; (x) engage
in
transactions with officers, directors, employees or affiliates; (xi) divert
business to other business entities; (xii) make investments in securities or
evidences of indebtedness (excluding loans made by Xeni Financial Services,
Corp.) in excess of $250,000 in a calendar year; and (xiii) file registration
statements.
F-42
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
4 — NOTES PAYABLE (continued)
Events
of
default under the March 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)
suspension from listing on the OTC Bulletin Board or other exchange for
10
consecutive trading days; (iv) the failure to timely deliver shares of
common
stock upon conversion of the Series B Preferred Stock or exercise of the
Series
H Warrant ; (v) default in the payment of indebtedness in excess of $250,000;
(vi) a judgment entered against us in excess of $250,000; and (vii) insolvency,
bankruptcy and similar circumstances.
The
March
Securities Purchase Agreement further provides that our obligations to
Vicis
under the Series B Preferred Stock, the March Securities Purchase Agreement
and
the various transaction documents entered into in connection with the March
Securities Purchase Agreement (the “March Transaction Documents”) are secured by
a lien on all of our assets pursuant to the Security Agreement, dated September
28, 2007, between us and Vicis (the “Company Security Agreement”).
Series
B
Preferred Stock
On
March
31, 2008 we filed an amended and restated Certificate of Designations (as
amended and restated, the “Certificate of Designations”) with the Secretary of
State of the State of Delaware to, among other things, increase the number
of
authorized shares of Series B Preferred Stock from 325 shares to 1,250
shares.
The
Certificate of Designations, which designates the rights, preferences,
privileges and terms of the Series B Preferred Stock, 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 12% 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 $0.75 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.
F-43
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
4 — NOTES PAYABLE (continued)
To
the
extent that any shares of Series B Preferred Stock remain outstanding
on March
31, 2010, 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.
Holders
of Series B Preferred Stock have 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).
Holders
of Series B Preferred Stock are entitled to 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.
As
of the
March 31, 2008, there are 1,000 shares of Series B Preferred Stock
issued and
outstanding.
Series
H
Warrant
The
Series H Warrant is exercisable at a price of $0.75 per share for a
period of
ten years from the date of issuance. The Series H Warrant may be exercised
on a
cashless basis to the extent that the resale of shares of common stock
underlying the Series H Warrant is not covered by an effective registration
statement. 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 H 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 H Warrant, issuances
of
convertible securities with a conversion price below the exercise price
of the
Series H Warrant.
As
of
March 31, 2008, the outstanding Series H Warrant is exercisable for
an aggregate
of 53,333,334 shares or our common stock.
Company
Security Agreement
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed
that the lien
granted pursuant to the Company Security Agreement would, in addition
to
securing the obligations previously secured thereby, secure our obligations
in
connection with the March Securities Purchase Agreement, the March
Transaction
Documents and the Series B Preferred Stock issued in connection with
the March
Securities Purchase Agreement. The Company Security Agreement provides
for a
lien on all of our assets in favor of Vicis.
F-44
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
4 — NOTES PAYABLE (continued)
Guaranty
Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
Guaranty Agreements would, in addition to applying to the obligations previously
guaranteed thereby, apply to our obligations in connection with the March
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to the January Securities Purchase Agreement.
The Guaranty Agreements provide for unconditional guaranties of the obligations
guaranteed thereunder.
Guarantor
Security Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
security interests granted by our subsidiaries pursuant to the Guarantor
Security Agreements would, in addition to securing the obligations previously
secured thereunder, secure the obligations of our subsidiaries under the
Guaranty Agreements insofar as those obligations related to the January
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to March Securities Purchase Agreement. The
Guarantor Security Agreements provide for liens in favor of Vicis on all of
the
assets of each of our subsidiaries, except for the accounts receivable and
certain contract rights of Xeni Financial Services, Corp.
Amended
and Restated Registration Rights Agreement
Pursuant
to the Amended and Restated Registration Rights Agreement, 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
H
Warrant is exercisable.
The
Registration Rights Agreement requires us to file a registration statement
covering the resale of the shares underlying the Series B Preferred Stock and
the Series H warrant within 60 days after the closing date. We are only required
to register up to thirty percent of the number of outstanding shares of common
stock in such registration statement and then file subsequent registration
statements after the later of (i) sixty days following the sale of the
securities covered by the initial registration statement or any subsequent
registration statement and (ii) six months following the effective date of
the
initial registration statement or any subsequent registration statement. We
are
required to cause the initial registration statement to become effective on
or
before the date which is 150 calendar days after the closing date if the
Securities and Exchange Commission (the “SEC”) does not review the registration
statement or 180 calendar days after the closing if the registration statement
receives a full review by the SEC. If we fail to file a registration statement
in the time frame required, fail to file a request for acceleration in the
time
frame required, or fail to maintain the effectiveness of a registration
statement as required by the Registration Rights Agreement, we will be required
to pay a cash penalty in the amount of 1.5% of the aggregate stated value of
the
Series B Preferred Stock for each month, or part thereof, that such registration
statement is not filed or effective, as the case may be. The cash penalty is
limited to 9% of the aggregate stated value of the Series B Preferred
Stock. The cash penalty will not apply to the registration of shares of common
stock underlying the Series H Warrant. The Registration Rights Agreement also
provides for piggyback registration rights.
F-45
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
5 — LOAN PAYABLE
The
Company has a loan payable to an unrelated individual in the amount of $69,559
at March 31, 2008 and December 31, 2007. 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 had a net loan payable at December 31, 2007 to a customer of the
Company in the amount of $40,000. During March 2008, the remaining $40,000
of
this loan payable was paid in full to the customer.
NOTE
6 — STOCKHOLDERS’ EQUITY
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 March 31, 2008, there are
12,940,065 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.
The
Company issued 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 June 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 March 31, 2008, 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 March 31, 2008.
The
Company is authorized to issue 1,250 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 convertible preferred stock were issued in connection
with the September Securities Purchase Agreement. On January 18, 2008, 50 shares
of Series B convertible preferred stock were issued in connection with the
January Securities Purchase Agreement. On March 31, 2008, 750 shares of Series
B
convertible preferred stock shares were issued in connection with the March
Securities Purchase Agreement. As of March 31, 2008, there are 1,000 issued
and
outstanding shares of Series B convertible preferred stock.
F-46
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
6 — STOCKHOLDERS’ EQUITY
Common
stock options
A
summary
of the status of the Company's outstanding stock options as of March 31, 2008
and changes during the period ending on that date is as follows:
|
|
Shares
|
Weighted
Average Exercise Price |
Aggregate
Intrinsic Value
|
|||||||
|
Outstanding
at December 31, 2007
|
3,514,250
|
$
|
2.57
|
$
|
0
|
|||||
|
Granted
|
—
|
—
|
—
|
|||||||
|
Exercised
|
—
|
—
|
—
|
|||||||
|
Forfeited
|
—
|
—
|
—
|
|||||||
|
Outstanding
at March 31, 2008
|
3,514,250
|
$
|
2.57
|
$
|
291,410
|
|||||
|
Options
exercisable at end of period
|
2,220,083
|
$
|
2.80
|
$
|
258,827
|
|||||
|
Weighted-average
fair value of options granted during the period
|
—
|
|||||||||
The
following information applies to options outstanding at March 31,
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
|
9.75
|
$
|
0.38
|
483,000
|
$
|
0.38
|
|||||||||
|
$0.67
|
175,000
|
9.50
|
$
|
0.67
|
33,333
|
$
|
0.67
|
|||||||||
|
$1.39
|
105,000
|
9.00
|
$
|
1.39
|
95,000
|
$
|
1.39
|
|||||||||
|
$2.25
|
1,025,000
|
8.75
|
$
|
2.25
|
683,333
|
$
|
2.25
|
|||||||||
|
$3.25
|
190,000
|
7.75
|
$
|
3.25
|
126,667
|
$
|
3.25
|
|||||||||
|
$3.40
|
860,000
|
7.75
|
$
|
3.40
|
573,333
|
$
|
3.40
|
|||||||||
|
$4.00
- 4.25
|
676,250
|
8.25
|
$
|
4.03
|
225,417
|
$
|
4.03
|
|||||||||
|
|
3,514,250
|
$
|
2.57
|
2,220,083
|
$
|
2.80
|
||||||||||
In
connection with previously granted stock options, the Company recognized
stock-based compensation expense of $381,504 for the three months ended March
31, 2008 and $910,653 for the three months ended March 31, 2007.
As
of
March 31, 2008, the total future compensation expense related to non-vested
options not yet recognized in the consolidated statement of operations is
approximately $945,000, which will be recognized through September
2010.
F-47
MDWERKS,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2008
NOTE
6 — STOCKHOLDERS’ EQUITY
Common
stock warrants
A
summary
of the status of the Company's outstanding stock warrants granted as of March
31, 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 March 31, 2008
|
57,566,346
|
$
|
0.85
|
||||
|
Common
stock issuable upon exercise of warrants
|
57,566,346
|
$
|
0.85
|
||||
|
Common
Stock issuable upon
exercise
of warrants outstanding
|
Common
Stock issuable
upon
Warrants
Exercisable
|
|||||||||||||||
|
Range
of Exercise
Price
|
Number
Outstanding
at March 31,
2008
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted
Average Exercise
Price
|
Number
Exercisable
at March 31,
2008
|
Weighted
Average Exercise
Price
|
|||||||||||
|
$0.75
|
54,333,334
|
9.91
|
$
|
0.75
|
54,333,334
|
$
|
0.75
|
|||||||||
|
$1.25
|
199,000
|
2.22
|
$
|
1.25
|
199,000
|
$
|
1.25
|
|||||||||
|
$1.50
|
56,667
|
3.24
|
$
|
1.50
|
56,667
|
$
|
1.50
|
|||||||||
|
$2.25
|
1,527,778
|
3.89
|
$
|
2.25
|
1,527,778
|
$
|
2.25
|
|||||||||
|
$2.50
|
640,400
|
0.63
|
$
|
2.50
|
640,400
|
$
|
2.50
|
|||||||||
|
$3.00
|
579,167
|
1.12
|
$
|
3.00
|
579,167
|
$
|
3.00
|
|||||||||
|
$3.76
|
225,000
|
1.55
|
$
|
3.76
|
225,000
|
$
|
3.76
|
|||||||||
|
$4.00
|
5,000
|
1.55
|
$
|
4.00
|
5,000
|
$
|
4.00
|
|||||||||
|
|
57,566,346
|
$
|
0.85
|
57,566,346
|
$
|
0.85
|
||||||||||
NOTE
7 — COMMITMENTS
Lease
agreements
The
Company sub-leased its facility, on a month-to-month basis, under a master
lease
expiring July 2008. Rent expense for the three months ended March 31, 2008
was
$21,936. On February 1, 2008, the Company was assigned the master lease and
a
5-year lease option was exercised which extends the master lease until June
2013.
F-48
[BACK
COVER OF PROSPECTUS]
Until
_____________, all dealers that effect transactions in these securities, whether
or not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers’ obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
Item
13.
|
Other
Expenses of Issuance and
Distribution
|
We
will
pay all expenses in connection with the registration and sale of our common
stock. All amounts shown are estimates.
|
EXPENSE
|
AMOUNT
|
|||
|
Registration
Fee
|
$
|
100
|
||
|
Transfer
Agent Fees
|
500
|
|||
|
Costs
of Printing and Engraving
|
10,000
|
|||
|
Legal
Fees
|
50,000
|
|||
|
Accounting
Fees
|
2,000
|
|||
|
Miscellaneous
|
7,400
|
|||
|
TOTAL
|
$
|
70,000
|
||
|
Item
14.
|
Indemnification
of Directors and Officers.
|
Section
145 of the DGCL provides, in general, that a corporation incorporated under
the
laws of the State of Delaware, such as us, may indemnify any person who was
or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than a derivative action by or
in
the right of the corporation) by reason of the fact that such person is or
was a
director, officer, employee or agent of the corporation, or is or was serving
at
the request of the corporation as a director, officer, employee or agent of
another enterprise, against expenses (including attorneys’ fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person’s
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys’ fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and
in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification will be made in
respect of any claim, issue or matter as to which such person will have been
adjudged to be liable to the corporation unless and only to the extent that
the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled
to
indemnity for such expenses.
Our
Certificate of Incorporation and Bylaws provide that we will indemnify our
directors, officers, employees and agents to the extent and in the manner
permitted by the provisions of the DGCL, as amended from time to time, subject
to any permissible expansion or limitation of such indemnification, as may
be
set forth in any shareholders’ or directors’ resolution or by contract. We also
have director and officer indemnification agreements with each of our executive
officers and directors which provide, among other things, for the
indemnification to the fullest extent permitted or required by Delaware law,
provided that such indemnitee shall not be entitled to indemnification in
connection with any ‘‘claim’’ (as such term is defined in the agreement)
initiated by the indemnitee against us or our directors or officers unless
we
join or consent to the initiation of such claim, or the purchase and sale of
securities by the indemnitee in violation of Section 16(b) of the Exchange
Act.
Any
repeal or modification of these provisions by our stockholders will be
prospective only and will not adversely affect any limitation on the liability
of any of our directors or officers arising as of the time of such repeal or
modification.
II-1
|
Item
15.
|
Recent
Sales of Unregistered
Securities
|
In
June
through September, 2005, we issued an aggregate of $135,000 of 8% Promissory
Notes in exchange for loans made to it in the amount of $135,000. Such notes
were issued in reliance on an exemption from registration under Section 4(2)
of
the Securities Act (“Section 4(2)”). The following sets forth the identity of
the class of persons to whom we sold these notes and the principal amount of
the
notes for each noteholder:
|
Brookshire
Holdings, Inc.
|
$
|
25,000
|
||
|
Arrowhead
Consultants, Inc.
|
$
|
24,000
|
||
|
Timothy
B. Ruggiero Profit Sharing Plan
|
$
|
16,000
|
||
|
Todd
Adler
|
$
|
30,000
|
||
|
John
Garrell
|
$
|
15,000
|
||
|
Daniel
Nolan
|
$
|
25,000
|
These
notes qualified for exemption under Section 4(2) because the issuance of shares
by us did not involve a public offering. The offering was not a ‘‘public
offering’’ as defined in Section 4(2) due to the insubstantial number of persons
involved in the deal, size of the offering, manner of the offering and number
of
shares offered. We did not undertake an offering in which we sold a high number
of notes a high number of investors. We sold notes to a total of 6 investors,
each of whom is an ‘‘accredited investor’’. Furthermore, we sold only $135,000
of notes in the offering. This offering was done with no general solicitation
or
advertising by the Company. Based on an analysis of the above factors, we have
met the requirements to qualify for exemption under Section 4(2) for this
transaction.
The
securities issued by the Company upon the consummation of the merger discussed
in the ‘‘PROSPECTUS SUMMARY’’ at page 1 of the Prospectus were not registered
under the Securities Act. At the effective time of the merger, each outstanding
share of common stock of MDwerks Global Holdings, Inc., was converted into
the
right to receive 0.158074 shares of the Company’s common stock. At the effective
time of the merger, approximately 59,162,000 shares of MDwerks Global Holdings,
Inc., shares of common stock were outstanding and no options or warrants to
purchase shares of MDwerks Global Holdings, Inc., common stock were outstanding.
As a result of the Merger, the approximately 59,162,000 shares of MDwerks Global
Holdings, Inc., that were outstanding were exchanged for approximately 9,352,000
shares of common stock of the Company. Set forth below is a list of shareholders
who received shares of common stock in connection with such merger and the
number of shares they received:
|
Name
|
Number
of
Shares Received
|
|||
|
Peter
Dunne
|
39,519
|
|||
|
Rosemarie
Manchio
|
19,715
|
|||
|
Steven
Brandenburg IRA
|
11,903
|
|||
|
Thomas
Stephens
|
35,077
|
|||
|
Ronald
& Lydia Hankins JTWROS
|
13,478
|
|||
|
Bernard
O’Neil
|
8,319
|
|||
|
Robert
Bouvier
|
1,628
|
|||
|
Arthur
J. Ballinger
|
11,959
|
|||
|
Roger
Hermes
|
36,452
|
|||
|
F.
Bradford Wilson
|
19,805
|
|||
|
John
& Jeanie Garell JTWROS
|
62,236
|
|||
|
Jai
Gaur
|
988
|
|||
II-2
|
Name
|
Number
of
Shares Received
|
|||
|
Phil
Dean
|
39,233
|
|||
|
Joseph
Morgillo
|
21,435
|
|||
|
Solon
Kandel & Vivian Kandel TEN ENT
|
1,018,310
|
|||
|
73142
Corp.
|
113,813
|
|||
|
Arrowhead
Consultants, Inc.
|
294,308
|
|||
|
Glenwood
Capital, Inc.
|
294,308
|
|||
|
Steven
Brandenburg
|
9,726
|
|||
|
Kay
Garell Trust
|
28,041
|
|||
|
Wesley
Neal
|
20,856
|
|||
|
Sol
Bandiero
|
83,679
|
|||
|
Stephen
Katz
|
176,152
|
|||
|
Gerald
Maresca
|
71,713
|
|||
|
Tonia
Pfannenstiel
|
23,350
|
|||
|
Steven
Weiss
|
65,809
|
|||
|
Phil
Margetts
|
33,483
|
|||
|
Ronald
Hankins
|
13,609
|
|||
|
John
Garell
|
16,666
|
|||
|
Todd
Adler
|
131,751
|
|||
|
Leanne
Kennedy
|
56,501
|
|||
|
Jon
Zimmerman
|
54,251
|
|||
|
Howard
Katz and Denise Katz TEN ENT
|
1,084,001
|
|||
|
Harley
Kane
|
102,334
|
|||
|
Lauren
Kluger
|
24,542
|
|||
|
MedWerks,
LLC
|
5,115,912
|
|||
|
Larry
Biggs
|
59,968
|
|||
|
Peter
Chung
|
38,750
|
|||
|
Sparta
Road, Ltd.
|
38,750
|
|||
|
Todd
Snyder
|
20,000
|
|||
|
Frank
Essner Trust
|
20,000
|
|||
|
Jason
Clark
|
20,000
|
These
shares of our common stock issued in connection with the merger qualified for
exemption under Section 4(2) because the issuance shares by us did not involve
a
public offering. The offering was not a ‘‘public offering’’ as defined in
Section 4(2) due to the insubstantial number of persons involved in the deal,
size of the offering, manner of the offering and number of shares offered.
We
did not undertake an offering in which we sold a high number of shares to a
high
number of investors. In addition, the shareholders listed above had the
necessary investment intent as required by Section 4(2) since they agreed to
and
received a share certificate bearing a legend stating that such shares are
restricted pursuant to Rule 144. This restriction ensures that these shares
would not be immediately redistributed into the market and therefore not be
part
of a ‘‘public offering.’’ Based on an analysis of the above factors, we have met
the requirements to qualify for exemption under Section 4(2) for this
transaction. Furthermore, each of the shareholders listed above is an
‘‘accredited investor’’ as defined in Regulation D of the Securities
Act.
II-3
In
connection with the Merger, we completed the closing of a private offering
of
our securities in which, through December 31, 2005, we sold an aggregate of
approximately 64 Units to accredited investors, pursuant to the terms of a
Confidential Private Placement Memorandum dated June 13, 2005, as supplemented.
Each Unit consists of 10,000 shares of common stock and a warrant to purchase
10,000 shares of common stock. Each warrant entitles the holder to purchase
10,000 shares of common stock for $2.50 per share. The Units were offered by
Brookshire Securities Corporation, as placement agent, pursuant to a placement
agent agreement under which the placement agent, in addition to a percentage
of
gross proceeds of the Private Placement, received 96,000 shares of common stock
and a warrant to purchase up to an aggregate of 64,000 shares of common stock.
We realized gross proceeds from the Private Placement of $1,600,000, before
payment of commissions and expenses. The private placement was made solely
to
‘‘accredited investors,’’ as that term is defined in Regulation D under the
Securities Act. The shares of common stock and warrants to purchase common
stock
were not registered under the Securities Act or the securities laws of any
state
and were offered and sold in reliance on the exemption from registration
afforded by Section 4(2) and Regulation D (Rule 506) under the Securities Act
and corresponding provisions of state securities laws. Set forth below is a
list
of the purchasers in the Private Placement and the number of Units
purchased:
|
Name
|
Amount Paid
for Units
|
Number of Units
Purchased
|
|||||
|
Arrowhead
Consultants, Inc.
|
$
|
149,500
|
5.98
|
||||
|
Constantine
G. Barbounis
|
$
|
50,000
|
2
|
||||
|
Brookshire
Securities Corp.
|
$
|
17,000
|
0.68
|
||||
|
Daniel
R. Brown
|
$
|
25,000
|
1
|
||||
|
Jason
Clarke / Tanya Clarke (T/E)
|
$
|
25,000
|
1
|
||||
|
Donia
Hachem Revocable Trust
|
$
|
50,000
|
2
|
||||
|
Ronald
Hankins
|
$
|
22,000
|
0.88
|
||||
|
Philip
J. Hempleman
|
$
|
100,000
|
4
|
||||
|
Roger
Hermes
|
$
|
25,000
|
1
|
||||
|
Domenico
Iannucci
|
$
|
250,000
|
10
|
||||
|
Carlos
A. Jimenez
|
$
|
25,000
|
1
|
||||
|
Carlos
A. Jimenez and Jason M. Beccaris
|
$
|
25,000
|
1
|
||||
|
JTP
Holdings, LLC
|
$
|
25,000
|
1
|
||||
|
Dr.
Irving Karten
|
$
|
25,000
|
1
|
||||
|
Rosemarie
Manchio
|
$
|
25,000
|
1
|
||||
|
Daniel
J. O’Sullivan
|
$
|
100,000
|
4
|
||||
|
Eric
W. Penttinen
|
$
|
25,000
|
1
|
||||
|
Jonathan
J. Rotella
|
$
|
25,000
|
1
|
||||
|
SCG
Capital LLC
|
$
|
300,000
|
12
|
||||
|
Todd
Snyder
|
$
|
50,000
|
2
|
||||
|
Thomas
S. Stephens
|
$
|
12,500
|
0.5
|
||||
|
Jamie
Toddings
|
$
|
25,000
|
1
|
||||
|
Alphonse
Tribuiani
|
$
|
25,000
|
1
|
||||
|
Roger
Walker
|
$
|
25,000
|
1
|
||||
|
Todd
Wiseberg
|
$
|
50,000
|
2
|
||||
|
Jon
R. Zimmerman
|
$
|
50,000
|
2
|
||||
|
Robert
E. Zimmerman
|
$
|
75,000
|
3
|
||||
II-4
On
June
28, 2006, we completed a private placement offering of Units consisting of
one
share of Series A Preferred Stock and a three-year warrant to purchase up to
20,000 shares of our common stock at a purchase price of $3.00 per share. We
sold an aggregate of 28.3 Units to accredited investors pursuant to the terms
of
a confidential private placement memorandum, dated February 1, 2006, used in
connection with this offering. As of May 22, 2008, 26.3 shares of Series A
Convertible Preferred Stock have been converted into 526,667 shares of common
stock. The Units were offered by Brookshire Securities Corporation as placement
agent. The placement agent received $170,000 in cash and is entitled to 170,000
shares of our common stock and, for nominal consideration, a warrant to purchase
up to an aggregate of 56,667 shares of our common stock at a purchase price
of
$1.50 per share. We realized gross proceeds from this private placement of
$1,700,000 before payment of commissions and expenses. The private placement
was
made solely to “accredited investors,” as that term is defined in Regulation D
under the Securities Act. The shares of Series A Convertible Preferred Stock
and
warrants to purchase shares of common stock were not registered under the
Securities Act, or the securities laws of any state and were offered and sold
in
reliance on the exemption from registration offered by Section 4(2) and
Regulation D (Rule 506) under the Securities Act and corresponding provisions
of
state securities laws. Set forth below is a list of purchasers in this private
placement and the number of Units purchased:
|
Name
|
Amount Paid
for Units
|
Number of Units
Purchased
|
|||||
|
RAJ
Investments Limited Liability Partnership
|
$
|
60,000
|
1
|
||||
|
Daniel
J. O’Sullivan
|
$
|
120,000
|
2
|
||||
|
Kevin
William Walker
|
$
|
60,000
|
1
|
||||
|
Frank
V. Cappo
|
$
|
120,000
|
2
|
||||
|
Rick
A. Bennett
|
$
|
60,000
|
1
|
||||
|
Rion
Needs
|
$
|
60,000
|
1
|
||||
|
J.
Joseph Levine
|
$
|
60,000
|
1
|
||||
|
Terence
Smith
|
$
|
60,000
|
1
|
||||
|
Tim
Johnson
|
$
|
60,000
|
1
|
||||
|
Joe
Sparieino
|
$
|
60,000
|
1
|
||||
|
Scott
McNair
|
$
|
50,000
|
0.8333
|
||||
|
Gerald
F. Huepel, Jr.
|
$
|
50,000
|
0.8333
|
||||
|
Louise
E. Rehling Tr. Dated 3/9/00
|
$
|
25,000
|
0.4167
|
||||
|
PH
D Investments I, LP
|
$
|
150,000
|
2.5
|
||||
|
Kevin
& Brenda Narcomey
|
$
|
50,000
|
0.8333
|
||||
|
Daniel
Craig Sager
|
$
|
25,000
|
0.4167
|
||||
|
GH
Medical PSP
|
$
|
75,000
|
1.25
|
||||
|
Joseph
Lewin
|
$
|
60,000
|
1
|
||||
|
Joe
& Carolyn Hubbard, JTWROS
|
$
|
60,000
|
1
|
||||
|
John
R. Harrison
|
$
|
60,000
|
1
|
||||
|
Melvin
C. Sanders
|
$
|
60,000
|
1
|
||||
|
Randy
Bean Revocable Trust 2/21/05
|
$
|
30,000
|
0.5
|
||||
|
C.
Edward White, Jr./Brenda R. Fortunate, JTWROS
|
$
|
60,000
|
1
|
||||
|
James
W. Lees
|
$
|
75,000
|
1.25
|
||||
|
M.
Michael Anderson
|
$
|
60,000
|
1
|
||||
|
Sharon
Sootin
|
$
|
90,000
|
1.50
|
||||
Institutional
Financings
On
each
of October 20, 2006, and November 9, 2006, we received net proceeds of
$2,375,000 for a total aggregate net proceeds of $4,750,000 in connection with
a
financing provided by Gottbetter Capital Master, Ltd., an unaffiliated
accredited institutional investor (“Gottbetter”). 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 (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 to purchase 375,000 shares
of our common stock at a price of $3.25 per share (“Series E
Warrants”).
II-5
Securities
Purchase Agreement
The
Gottbetter Securities Purchase Agreement provides to Gottbetter, for so long
as
the Senior Notes remain outstanding, a right of first refusal to purchase
securities offered by MDwerks, Inc., except for the issuance of Excluded
Securities (as defined in the Gottbetter Securities Purchase Agreement). The
Gottbetter Securities Purchase Agreement also contains restrictions against
issuing shares of our Common Stock for a price per share that is less than
the
price at which our Common Stock is traded on any national exchange or market.
This restriction also covers the issuance of convertible securities with an
exercise or conversion price that is lower than the price at which our Common
Stock is traded on any national exchange or market.
Senior
Notes
The
Senior Notes bear interest at the rate of 8% per year, payable monthly in
arrears, commencing December 1, 2006. Subject to certain mandatory prepayment
provisions, and events of default, unpaid principal and interest due under
the
Senior Notes, as amended, will become due and payable on January 1, 2011.
The Senior Notes require monthly principal payments until the January 2, 2011
maturity date. The Senior Notes are convertible, at the option of the holder,
into shares of our common stock at a price of $2.25 per share (the “Conversion
Price”), subject to adjustment for stock splits, stock dividends, or similar
transactions, sales of our common stock at a price per share below the
Conversion Price or the issuance of convertible securities or options or
warrants to purchase shares of our common stock at an exercise price or
conversion price that is less than the Conversion Price.
The
Senior Notes provide for optional redemption by us at a redemption price equal
to 110% of the face amount redeemed plus accrued interest.
Events
of
default will result in a default rate of interest of 15% per year and the holder
may require that the Senior Note be redeemed at the Event of Default Redemption
Price (as defined in the Senior Notes). The Event of Default Redemption Price
includes various premiums depending on the nature of the event of default.
Events
of
default include, but are not limited to,: (i) the failure to keep the
registration statement covering shares underlying the Senior Notes, the Series
D
Warrants and the Series E Warrants effective, as required by the Registration
Rights Agreement that we entered into with Gottbetter; (ii) suspension from
trading on the OTC Bulletin Board; (iii) failure to timely deliver shares in
the
event the Senior Notes are converted; (iv) failure to reserve adequate shares
for conversion of the Senior Notes; (v) failure to pay principal, interest
or
late charges when due; (vi) any default in the payment of other indebtedness
in
excess of $250,000; (vii) bankruptcy events; and (viii) judgments against us
in
excess of $250,000.
The
Senior Notes also provide that in the event of a Change of Control (as defined
in the Senior Notes), the holder may require that such holder’s Senior Note be
redeemed at the Change of Control Redemption Price (as defined in the Senior
Notes). The Change of Control Redemption Price includes certain premiums in
the
event a Senior Note is redeemed in the event of a Change of
Control.
Series
D Warrants
The
Series D Warrants are exercisable at a price of $2.25 per share for a period
of
five years from the date of issuance. The Series D 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 D 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 D Warrants, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series D Warrants.
II-6
Series
E Warrants
The
Series E Warrants, as amended, are exercisable at a price of $2.25 per share
for
a period of five years from the date of issuance. The Series E 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 E 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 E Warrants,
issuances of convertible securities with a conversion price below the exercise
price of the Series E Warrants.
Security
Agreement
We
entered into a Security Agreement with Gottbetter on October 19, 2006. The
Security Agreement provided for a lien in favor of Gottbetter on all of our
assets. On September 28, 2007, Gottbetter released from the scope of its
lien
Xeni Financial’s Accounts
(as
defined in the New York Uniform Commercial Code) and documents relating to
Accounts, as well as Xeni Financial’s Payment
Intangibles (as defined New York Uniform Commercial Code), contract rights
and
causes of action.
Guaranty
Agreements
Our
subsidiaries entered into a Guaranty Agreement with Gottbetter, pursuant to
which they have agreed to unconditionally guaranty our obligations under the
Senior Notes and the documents entered into by us in connection the sale of
the
Senior Notes.
Registration
Rights Agreement
We
also
entered into a Registration Rights Agreement and amendments thereto with
Gottbetter. Pursuant to the amended Registration Rights Agreement we were
required 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,
which includes this prospectus, 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.
Gottbetter
is an “accredited investor,” as defined in Regulation D under the Securities
Act. None of the Senior Note, the Series D Warrants, the Series E Warrants
or
the shares of our common stock underlying such securities were registered under
the Securities Act, or the securities laws of any state and were offered and
sold in reliance on the exemption from registration afforded by Section 4(2)
and
Regulation D (Rule 506) under the Securities Act and corresponding provisions
of
state securities laws, which exempts transactions by an issuer not involving
any
public offering. We made this determination based on the representations of
the
Investor, which included, in pertinent part, that Gottbetter is an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act, and that Gottbetter was acquiring the Senior Notes, the Series
D
Warrants and the Series E Warrants for investment purposes for its own account
and not as nominee or agent, and not with a view to the resale or distribution,
and that Gottbetter understood such securities may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
On
August
31, 2007, we received net proceeds of $250,000 in connection with a financing
provided by Vicis Capital Master Fund (“Vicis”), 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 (the “Vicis Convertible
Note”).
II-7
On
September 28, 2007, we received net proceeds of $1,633,190, after repayment
of the Vicis Convertible Note, interest and closing expenses in connection
with
a financing provided by Vicis. In connection with the financing, pursuant to
the
terms of a Securities Purchase Agreement, we issued 200 shares of Series B
Convertible Preferred Stock (“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.
The
following are summary descriptions of the material agreements entered into
in
connection with the September 28, 2007, financing described above and such
descriptions are qualified in its entirety by reference to the full agreements
filed either as exhibits hereto or previous SEC filings.
Securities
Purchase
Agreement
The
Securities Purchase Agreement provided 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
B
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 Vicis Convertible Note and deduction of certain closing
expenses.
The
Securities Purchase Agreement provides to Vicis, 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 pari
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 Vicis; (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 Vicis.
Series
B Preferred Stock
In
connection with the sale of the Series B Preferred Stock, on September 27,
2007,
we filed a
Certificate of Designations, which designate the rights, preferences, privileges
and terms of the Series B Preferred Stock (the “Certificate of Designations”).
The Certificate of Designations was subsequently amended and restated on March
31, 2008, in connection with the March 31, 2008, financing provided by Vicis,
described below (the “March 2008 Vicis Financing”). For a description of the
Certificate of Designations, as amended and restated, please see our disclosure
regarding the March 2008 Vicis Financing below.
II-8
Series
F Warrants
The
Series F Warrants were
exercisable at a price of $2.25 per share for a period of seven years from
the
date of issuance. On March 31, 2008, the Series F Warrants were cancelled in
connection with the March 2008 Vicis Financing.
Series
G Warrants
The
Series G Warrants were
exercisable at a price of $2.50 per share for a period of seven years from
the
date of issuance, with the same provisions as the Series F warrants. On March
31, 2008, the Series G Warrants were cancelled in connection with the March
2008
Vicis Financing.
Security
Agreement
We,
along
with our subsidiaries MDwerks, Xeni Medical, Xeni Financial, Xeni Billing,
and
PPS entered into Security Agreements with Vicis. The Security Agreements provide
for liens in favor of Vicis 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 Vicis, 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 Vicis. The Registration Rights
Agreement was
amended and restated in connection with the March 2008 Vicis Financing and
is
more fully described below.
Amendment,
Consent and
Waiver
In
connection with the transactions described above, we entered into an
Amendment, Consent and Waiver with Gottbetter (the “Consent and Waiver
Agreement”), 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.
Also
in
connection with the transactions described above, the conversion price of the
Gottbetter Series E Warrants was reduced to $2.25 per share subject to further
adjustment, and the number of Warrant Shares for which such warrants may be
exercised was increased to 541,666 and 2/3 shares subject to further adjustment.
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.
II-9
Amended
and
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.
On
December 3, 2007, we received net 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 will
become due and payable on December 2, 2008.
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 at a price of $2.50
per
share.
The
Securities Purchase Agreement, dated January 18, 2008, by and between Vicis
and
us (the “January Securities Purchase Agreement”) provides that our obligations
to Vicis under the Series B Preferred Stock, the January Securities Purchase
Agreement and the various transaction documents entered into in connection
with
the January Securities Purchase Agreement (the “January Transaction Documents”)
are secured by a lien on all of our assets pursuant to the Security Agreement,
dated September 28, 2007, between us and Vicis.
The
January Securities Purchase Agreement further provides that our obligations
under the Series B Preferred Stock, the January Securities Purchase Agreement
and the January Transaction Documents are guaranteed by each of our subsidiaries
pursuant to the terms of the Guaranty Agreements previously entered into between
Vicis and each of our subsidiaries in September, 2007.
The
January Securities Purchase Agreement also provides that the guaranty
obligations of our subsidiaries in connection with the January Securities
Purchase Agreement and the January Transaction Documents are secured by the
liens on all of the assets of each our subsidiaries, except for the accounts
receivable and certain contract rights of Xeni Financial Services, Corp.,
created pursuant to the Security Agreements, previously entered into by and
between our subsidiaries and Vicis in September, 2007.
On
March
1, 2008, the Company and Gottbetter amended the Senior Notes to extend the
maturity date of the Senior Notes to January 1, 2011 and to delay principal
payments under the Senior Notes until March 1, 2008.
On
March
31, 2008, we received net proceeds of $6,809,794 in connection with the March
2008 Vicis Financing. In connection with the March 2008 Vicis 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.
In
connection with the sale of the March 2008 Vicis Financing, we amended and
restated the Registration Rights Agreement, dated September 28, 2007, by and
between Vicis and us (as amended and restated, the “Amended and Restated
Registration Rights Agreement”), pursuant to which, among other things, we
agreed, to register for resale all of the shares of our common stock into which
the outstanding Series B Preferred Stock is convertible and all of the shares
of
our common stock for which the Series H Warrant is exercisable.
II-10
In
connection with obtaining the consent and waiver of Gottbetter to the
March
2008 Vicis Financing, we entered into an Amendment, Consent and Waiver (the
“Gottbetter Consent Agreement”), pursuant to which (i) we issued to Gottbetter a
five year Series I warrant to purchase one million shares of our common stock
at
an exercise price of $0.75 per share; (ii) 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 (iii) Gottbetter
consented to the March 2008 Vicis Financing.
The
following summary description of the material agreements entered into in
connection with the March 2008 Vicis Financing described above and the terms
of
the Series B Preferred Stock is qualified in its entirety by reference to the
copies of such material agreements and the Amended and Restated Certificate
of
Designations for the Series B Preferred Stock filed as exhibits to our Current
Report on Form 8-K filed with the SEC on April 2, 2008.
March
Securities Purchase Agreement
The
March
Securities Purchase Agreement provided for the sale by us to Vicis of (i) 750
shares of Series B Preferred Stock (ii) and the Series H Warrant to
purchase an aggregate of 53,333,334 shares of common stock. Pursuant to the
March Securities Purchase Agreement, the aggregate gross purchase price for
the
Series B Preferred Stock and the Series H Warrant was $7,500,000, which was
paid
by wire transfer of immediately available funds and the surrender for
cancellation of a promissory note that we issued to Vicis in the principal
amount of $575,000. Principal and accrued interest under the promissory note,
and $100,000 of Vicis’
expenses were applied against the purchase price.
The
March
Securities Purchase Agreement provides to Vicis, 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 right of first
refusal is on a pro rata basis (based upon the amount invested) with
Gottbetter.
The
March
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 pari 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
March Securities Purchase Agreement); (vii) amend our charter documents in
a way
that adversely affects the rights of Vicis; (viii) except through Xeni Financial
Services, Corp., make loans to, or advances or guarantee the obligations of,
third parties; (ix) make intercompany transfers; (x) engage in transactions
with
officers, directors, employees or affiliates; (xi) divert business to other
business entities; (xii) make investments in securities or evidences of
indebtedness (excluding of loans made by Xeni Financial Services, Corp.) in
excess of $250,000 in a calendar year; and (xii) file registration
statements.
Events
of
default under the March 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)
suspension from listing on the OTC Bulletin Board or other exchange for 10
consecutive trading days; (iv) the failure to timely deliver shares of common
stock upon conversion of the Series B Preferred Stock or exercise of the Series
H Warrant ; (v) default in the payment of indebtedness in excess of $250,000;
(vi) a judgment entered against us in excess of $250,000; and (vii) insolvency,
bankruptcy and similar circumstances.
II-11
The
March
Securities Purchase Agreement further provides that our obligations to Vicis
under the Series B Preferred Stock, the March Securities Purchase Agreement
and
the various transaction documents entered into in connection with the March
Securities Purchase Agreement (the “March Transaction Documents”) are secured by
a lien on all of our assets pursuant to the Security Agreement, dated September
28, 2007, between us and Vicis (the “Company Security Agreement”). The Company
Security Agreement is more fully described below and is attached as an exhibit
to our Current Report on Form 8-K, which was filed with the SEC on October
2,
2007.
The
March
Securities Purchase Agreement further provides that our obligations under the
Series B Preferred Stock, the March Securities Purchase Agreement and the March
Transaction Documents are guaranteed by each of our subsidiaries pursuant to
the
terms of the guaranty agreements, dated September 28, 2007, between Vicis and
each of our subsidiaries (the “Guaranty Agreements”). The Guaranty Agreements
are more fully described below and are attached as exhibits to our Current
Report on Form 8-K, which was filed with the SEC on October 2, 2007.
The
March
Securities Purchase Agreement also provides that the guaranty obligations of
our
subsidiaries in connection with the March Securities Purchase Agreement and
the
March Transaction Documents are secured by the liens on all of the assets of
each of our subsidiaries, except for the accounts receivable and certain
contract rights of Xeni Financial Services, Corp., created pursuant to the
security agreements entered into by and between our subsidiaries and Vicis
on
September 28, 2007 (the “Guarantor Security Agreements”). The Guarantor Security
Agreements are more fully described below and are attached as exhibits to our
Current Report on Form 8-K, which was filed with the SEC on October 2, 2007.
The
March
Securities Purchase Agreement also contains customary representations,
warranties, covenants and indemnification provisions for transactions of the
type entered into between the Company and Vicis.
Series
B Preferred Stock
On
March
31, 2008,
we
filed an amended and restated Certificate of Designations (as amended and
restated, the “Certificate of Designations”) with the Secretary of State of the
State of Delaware.
The
Certificate of Designations, which designates the rights, preferences,
privileges and terms of the Series B Preferred Stock, 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 12% 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 $0.75 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 March
31, 2010, 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.
Holders
of Series B Preferred Stock have 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).
II-12
Holders
of Series B Preferred Stock are entitled to 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.
As
of May
22, 2008, there were 1,000 shares of Series B Preferred Stock issued and
outstanding.
Series
H Warrant
The
Series H Warrant is exercisable at a price of $0.75 per share for a period
of
ten years from the date of issuance. The Series H Warrant may be exercised
on a
cashless basis to the extent that the resale of shares of common stock
underlying the Series H Warrant is not covered by an effective registration
statement. 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 H 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 H Warrant, issuances
of
convertible securities with a conversion price below the exercise price of
the
Series H Warrant.
As
of May
22, 2008, the outstanding Series H Warrant was exercisable for an aggregate
of
53,333,334 shares or our common stock.
Company
Security Agreement
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
lien
granted pursuant to the Company Security Agreement would, in addition to
securing the obligations previously secured thereby, secure our obligations
in
connection with the March Securities Purchase Agreement, the March Transaction
Documents and the Series B Preferred Stock issued in connection with the March
Securities Purchase Agreement. The Company Security Agreement provides for
a
lien on all of our assets in favor of Vicis.
Guaranty
Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
Guaranty Agreements would, in addition to applying to the obligations previously
guaranteed thereby, apply to our obligations in connection with the March
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to the January Securities Purchase Agreement.
The Guaranty Agreements provide for unconditional guaranties of the obligations
guaranteed thereunder.
Guarantor
Security Agreements
Pursuant
to the terms of the March Securities Purchase Agreement, we agreed that the
security interests granted by our subsidiaries pursuant to the Guarantor
Security Agreements would, in addition to securing the obligations previously
secured thereunder, secure the obligations of our subsidiaries under the
Guaranty Agreements insofar as those obligations related to the January
Securities Purchase Agreement, the March Transaction Documents and the Series
B
Preferred Stock issued pursuant to March Securities Purchase Agreement. The
Guarantor Security Agreements provide for liens in favor of Vicis on all of
the
assets of each of our subsidiaries, except for the accounts receivable and
certain contract rights of Xeni Financial Services, Corp.
Amended
and Restated Registration Rights Agreement
Pursuant
to the Amended and Restated Registration Rights Agreement, 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
H
Warrant is exercisable.
II-13
The
Amended and Restated Registration Rights Agreement requires us to file a
registration statement covering the resale of the shares underlying the Series
B
Preferred Stock and the Series H Warrant within 60 days after the closing date.
We are only required to register up to thirty percent of the number of
outstanding shares of common stock in such registration statement and then
file
subsequent registration statements after the later of (i) sixty days following
the sale of the securities covered by the initial registration statement or
any
subsequent registration statement and (ii) six months following the effective
date of the initial registration statement or any subsequent registration
statement. We are required to cause the initial registration statement to become
effective on or before the date which is 150 calendar days after the closing
date if the SEC does not review the registration statement or 180 calendar
days
after the closing if the registration statement receives a full review by the
SEC. If we fail to file a registration statement in the time frame required,
fail to file a request for acceleration in the time frame required, or fail
to
maintain the effectiveness of a registration statement as required by the
Registration Rights Agreement, we will be required to pay a cash penalty in
the
amount of 1.5% of the aggregate stated value of the Series B Preferred Stock
for
each month, or part thereof, that such registration statement is not filed
or
effective, as the case may be. The cash penalty is limited to 9% of the
aggregate stated value of the Series B Preferred Stock. The cash penalty
will not apply to the registration of shares of common stock underlying the
Series H Warrant. The Registration Rights Agreement also provides for piggyback
registration rights.
Gottbetter
Consent Agreement
In
connection with obtaining the consent and waiver of Gottbetter to the financing
provided by Vicis, 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.
Series
I Warrant
As
consideration for Gottbetter entering into the Gottbetter Consent Agreement,
we
issued to Gottbetter a Series I Warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $0.75 per share. The Series I Warrant
is
exercisable for a period of five years from the date of issuance. The Series
I
Warrant may be exercised on a cashless basis to the extent that the resale
of
shares of common stock underlying the Series I Warrant is not covered by an
effective registration statement. 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 I
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
I
Warrant and issuances of convertible securities with a conversion price below
the exercise price of the Series I Warrant.
As
of May
22, 2008, the outstanding Series I Warrant was exercisable for an aggregate
of
1,000,000 shares or our common stock.
Vicis
is
an ‘‘accredited investor,’’ as defined in Regulation D under the Securities Act.
None of the Vicis Convertible Note, the Series B Preferred Stock, the Series
D
Warrants, the Series E Warrants, the Series H Warrant or the shares of our
common stock underlying such securities were registered under the Securities
Act, or the securities laws of any state and were offered and sold in reliance
on the exemption from registration afforded by Section 4(2) and Regulation
D
(Rule 506) under the Securities Act and corresponding provisions of state
securities laws, which exempts transactions by an issuer not involving any
public offering. We made this determination based on the representations of
Vicis, which included, in pertinent part, that Vicis is an ‘‘accredited
investor’’ within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act, and that Vicis was acquiring the Vicis Convertible Note, the
Series B Preferred Stock, the Series D Warrants and the Series E Warrants,
the
Series H Warrant for investment purposes for its own account and not as nominee
or agent, and not with a view to the resale or distribution, and that Investor
understood such securities may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption there
from.
II-14
Loans
from Unaffiliated Third Parties
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 Mr. David Goldner,
an
unaffiliated accredited investor (the “Goldner Financing”). In connection with
the financing, we issued a secured promissory note to Mr. Goldner in the
original principal amount of $250,000 (the “Goldner Note”) and a three year
warrant to purchase 111,111 shares of our common stock at a price of $2.25
per
share (the “Class C Warrant”). On October 1, 2007, principal and accrued
interest on the Goldner Note was repaid in full. In connection with the
financing described above, we issued the Goldner Note and the Class C Warrant
to
Mr. Goldner pursuant to the term of a Subscription Agreement. In the
Subscription Agreement we granted Mr. Goldner “piggyback” registration rights.
The securities subject to Mr. Gilder’s registration rights have been included in
this registration statement. Mr. Goldner is an “accredited investor,” as defined
in Regulation D under the Securities Act.
On
August
24, 2006, our subsidiary Xeni Financial Services, Corp. (Xeni Financial)
received gross proceeds of $110,000 (net proceeds of $100,000, after expenses)
in connection with a financing provided equally by Mr. Frank Grenier and Mr.
Eugene Grenier, both unaffiliated accredited investors (the “Greniers”). In
connection with the financing, Xeni Financial issued two Promissory Notes to
the
Greniers each in the original amount of $55,000 (the “Grenier Notes”) and 5,000
shares of common stock to each of Mr. Frank Grenier and Mr. Eugene Grenier.
Principal and accrued interest under the Grenier Notes was repaid on January
21,
2007. In connection with the financing described above, we issued the Grenier
Notes to the Greniers pursuant to the term of a Subscription Agreement. In
the
Subscription Agreement we granted the Greniers “piggyback” registration rights.
The securities subject to the Greniers’ registration rights have been included
in this registration statement. The Greniers are “accredited investors,” as
defined in Regulation D under the Securities Act.
II-15
Item
16. Exhibits
|
Exhibit No.
|
Exhibits
|
|
|
3.1
|
Company
Certificate of Incorporation1
|
|
|
3.2
|
Amendment
to Company’s Certificate of Incorporation changing name to MDwerks, Inc.
and amending terms of Blank Check Preferred
Stock2
|
|
|
3.3
|
Certificate
of Designations Designating Series A Convertible Preferred
Stock.3
|
|
|
3.4
|
Amended
and Restated Certificate of Designations Designating Series B Convertible
Preferred Stock4
|
|
|
3.5
|
Bylaws
of the Company.5
|
|
|
4.1
|
MDwerks,
Inc. 2005 Incentive Compensation Plan.6
|
|
|
4.2
|
Form
of Warrants to purchase shares of Common Stock at a price of $2.50
per
share.7
|
|
|
4.3
|
Form
of Warrants issued to Placement Agent (and sub-agents) to purchase
shares
of Common Stock at a price of $1.25 per
share.8
|
|
|
4.4
|
Form
of Series A Warrants to purchase shares of Common Stock at a price
of
$3.00 per share.9
|
|
|
4.5
|
Form
of Series A Warrants issued to Placement Agent and sub-agents to
purchase
shares of Common Stock at a price of $1.50 per
share.10
|
|
|
4.6
|
Promissory
Note issued to David Goldner11
|
|
|
4.7
|
Class
C Warrant to purchase shares of Common Stock at a price of $2.25
per
share12
|
|
|
4.8
|
Promissory
Note issued to Frank Grenier13
|
|
|
4.9
|
Promissory
Note issued to Eugene Grenier14
|
|
|
4.10
|
Securities
Purchase Agreement by and between Gottbetter and MDwerks,
Inc.15
|
|
|
4.11
|
Form
of Series D Warrant to purchase shares of Common Stock at a price
of $2.25
per share16
|
|
|
4.12
|
Form
of Series E Warrant to purchase shares of Common Stock at a price
of $3.25
per share17
|
|
|
4.13
|
Form
of Amended and Restated Senior Secured Convertible Notes Issued to
Gottbetter18
|
|
|
4.14
|
Amendment
No. 1, dated March 1, 2008, to Amended and Restated Senior Secured
Convertible Notes19
|
|
|
4.15
|
Registration
Rights Agreement between MDwerks, Inc. and
Gottbetter20
|
|
|
4.16
|
Securities
Purchase Agreement, dated September 28, 2007, by and between MDwerks,
Inc.
and Vicis21
|
|
|
4.17
|
Securities
Purchase Agreement, dated January 18, 2008, by and between MDwerks,
Inc.
and Vicis22
|
|
|
4.18
|
Securities
Purchase Agreement, dated March 31, 2007, by and between MDwerks,
Inc. and
Vicis23
|
|
|
4.19
|
Form
of Series F Warrant to purchase shares of Common Stock at a price
of $2.25
per share 24
|
|
|
4.20
|
Form
of Series G Warrant to purchase shares of Common Stock at a price
of $2.50
per share 25
|
|
|
4.21
|
Form
of Series H Warrant to purchase shares of Common Stock at a price
of $0.75
per share 26
|
|
|
4.22
|
Form
of Series I Warrant to purchase shares of Common Stock at a price
of $0.75
per share 27
|
|
|
4.23
|
Amended
and Restated Registration Rights Agreement between MDwerks, Inc.
and
Vicis28
|
|
|
5.1
|
Legal
Opinion of Peckar & Abramson, P.C.29
|
|
|
10.1
|
Agreement
of Merger and Plan of Reorganization among Western Exploration, Inc.,
MDwerks Acquisition Corp. and MDwerks Global Holdings,
Inc.30
|
|
|
10.2
|
Placement
Agent Agreement by and among the Company, MDwerks and Brookshire
Securities Corporation31
|
|
|
10.3
|
Form
of Lock Up Agreement between the Company and executive officers and
certain stockholders.32
|
|
|
10.4
|
Form
of Private Placement Subscription
Agreement33
|
|
|
10.5
|
Form
of Senior Executive Level Employment Agreement between MDwerks, Inc.
and
each of Howard B. Katz, Solon L. Kandel and Vincent
Colangelo34
|
|
|
10.6
|
Form
of Executive Level Employment Agreement between MDwerks, Inc. and
each of
Stephen Weiss and Gerard J. Maresca35
|
|
|
10.8
|
Guaranty
issued to David Goldner by Xeni Financial Services,
Corp.36
|
II-16
|
Exhibit No.
|
Exhibits
|
|
|
10.9
|
Security
Agreement between Xeni Financial Services, Corp. and David
Goldner37
|
|
|
10.10
|
Subscription
Agreement between MDwerks, Inc. and David
Goldner38
|
|
|
10.11
|
Form
of Subscription Agreement between MDwerks, Inc., and Frank Grenier
and
Eugene Grenier39
|
|
|
10.12
|
Guaranty
issued to Gottbetter by Xeni Financial Services, Corp., Xeni Medical
Billing, Corp., MDwerks Global Holdings, Inc. and Xeni Medical Systems,
Inc.40
|
|
|
10.13
|
Security
Agreement by and among Gottbetter, MDwerks, Inc., Xeni Financial
Services,
Corp., Xeni Medical Corp., Xeni Medical Billing, Corp., MDwerks Global
Holdings, Inc. and Xeni Medical Systems,
Inc.41
|
|
|
10.14
|
Closing
Agreement by and between Investor and MDwerks, Inc. Modifying and
Waiving
Registration Rights Provisions42
|
|
|
10.15
|
Guaranty
issued to Vicis by Xeni Financial Services, Corp.
43
|
|
|
10.16
|
Guaranty
issued to Vicis by Xeni Medical Billing,
Corp.44
|
|
|
10.17
|
Guaranty
issued to Vicis by MDwerks Global Holdings, Inc.
45
|
|
|
10.18
|
Guaranty
issued to Vicis by Xeni Medical Systems, Inc.
46
|
|
|
10.19
|
Guaranty
issued to Vicis by Patient Payment Solutions, Inc.
47
|
|
|
10.20
|
Security
Agreement entered into by and between Vicis and MDwerks, Inc.
48
|
|
|
10.21
|
Security
Agreement entered into by and between Vicis and Xeni Medical Billing,
Corp. 49
|
|
|
10.22
|
Security
Agreement entered into by and between Vicis and MDwerks Global Holdings,
Inc. 50
|
|
|
10.23
|
Security
Agreement entered into by and between Vicis and Xeni Medical Systems,
Inc.
51
|
|
|
10.24
|
Security
Agreement entered into by and between Vicis and Xeni Financial Services,
Corp. 52
|
|
|
10.25
|
Security
Agreement entered into by and between Vicis and Patient Payment Solutions,
Inc. 53
|
|
|
10.26
|
Amendment,
Consent and Waiver, dated September 28, 2007, by and between MDwerks,
Inc., and Gottbetter54
|
|
|
10.27
|
Amendment,
Consent and Waiver, dated March 31, 2008, by and between MDwerks,
Inc.,
and Gottbetter55
|
|
|
14.1
|
Code
of Ethics56
|
|
|
22.1
|
Subsidiaries57
|
|
|
23.1
|
Consent
of Sherb & Co. LLP58
|
|
|
99.1
|
Audit
Committee Charter59
|
|
|
99.2
|
Compensation
Committee Charter60
|
|
1
|
Incorporated
by reference to Exhibit 3.I included with our Registration Statement
on
Form SB-2 filed with the SEC on August 12,
2004.
|
|
2
|
Incorporated
by reference to Exhibit 3.1 included with our Current Report on Form
8-K
filed with the SEC on November 18,
2005.
|
|
3
|
Previously
filed.
|
|
4
|
Incorporated
by reference to Exhibit 3.1 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
5
|
Incorporated
by reference to our Registration Statement on Form SB-2, filed with
the
SEC on August 12, 2004.
|
|
6
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
|
7
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
|
8
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
II-17
|
9
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on March 24,
2008.
|
|
10
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on March 24,
2008.
|
|
11
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on August 29,
2006.
|
|
12
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on August 29,
2006.
|
|
13
|
Previously
filed.
|
|
14
|
Previously
filed.
|
|
15
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K
filed with the SEC on October 23,
2006.
|
|
16
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K
filed with the SEC on October 23,
2006.
|
|
17
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K
filed with the SE on October 23,
2006.
|
|
18
|
Incorporated
by reference to Exhibits 10.13 and 10.14 included with our Current
Report
on Form 8-K filed with the SEC on October 2,
2007.
|
|
19
|
Incorporated
by reference to Exhibits 4.11 and 4.12 included with our Annual Report
on
Form 10-KSB, filed with the SEC on March 27,
2008.
|
|
20
|
Incorporated
by reference to Exhibit 4.5 included with our Current Report on Form
8-K
filed with the SEC on October 23, 2006.
|
|
21
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
22
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on January 23,
2008.
|
|
23
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
24
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
25
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
26
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
27
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
28
|
Incorporated
by reference to Exhibit 4.4 included with our Current Report on From
8-K,
filed with the SEC on April 2,
2008.
|
|
29
|
Filed
herewith.
|
|
30
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on October 13,
2005.
|
|
31
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
32
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
33
|
Incorporated
by reference to Exhibit 10.4 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
34
|
Previously
filed.
|
|
35
|
Previously
filed.
|
|
36
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
II-18
|
37
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
|
38
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
|
39
|
Previously
filed.
|
|
40
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K
filed with the SEC on October 23,
2006.
|
|
41
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K
filed with the SEC on October 23,
2006.
|
|
42
|
Previously
filed.
|
|
43
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
44
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
45
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
46
|
Incorporated
by reference to Exhibit 10.4 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
47
|
Incorporated
by reference to Exhibit 10.5 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
48
|
Incorporated
by reference to Exhibit 10.6 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
49
|
Incorporated
by reference to Exhibit 10.7 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
50
|
Incorporated
by reference to Exhibit 10.8 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
51
|
Incorporated
by reference to Exhibit 10.9 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
52
|
Incorporated
by reference to Exhibit 10.10 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
53
|
Incorporated
by reference to Exhibit 10.11 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
54
|
Incorporated
by reference to Exhibit 10.12 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
55
|
Incorporated
by reference to Exhibit 10.12 included with our Current Report on
Form
8-K, filed with the SEC on April 2,
2008.
|
|
56
|
Incorporated
by reference to Exhibit 14.1 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2007.
|
|
57
|
Previously
filed.
|
|
58
|
Filed
herewith.
|
|
59
|
Incorporated
by reference to Exhibit 99.2 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2005.
|
|
60
|
Incorporated
by reference to Exhibit 99.3 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2005.
|
II-19
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
|
1.
|
To
file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement
to:
|
(i) Include
any prospectus required by section 10(a)(3) of the Securities Act;
(ii) Reflect
in the prospectus any facts or events which, individually or together, represent
a fundamental change in the information in the registration statement; and
notwithstanding the forgoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of a prospectus
filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in
the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration Fee”
table in the effective registration statement;
(iii) Include
any material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this registration statement.
|
2.
|
For
determining liability under the Securities Act, treat each post-effective
amendment as a new registration statement of the securities offered,
and
the offering of the securities at that time to be the initial bona
fide
offering thereof.
|
|
3.
|
To
file a post-effective amendment to remove from registration any of
the
securities that remain unsold at the end of the
offering.
|
|
4.
|
For
determining liability of the undersigned issuer under the Securities
Act
to any purchaser in the initial distribution of the securities, the
undersigned issuer undertakes that in a primary offering of securities
of
the undersigned issuer pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to any such purchaser by means
of
any of the following communications, the undersigned small business
issuer
will be a seller to the purchaser and will be considered to offer
or sell
such securities to such purchaser:
|
(i) Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424 of the
Securities Act;
(ii) Any
free
writing prospectus relating to the offering prepared by or on behalf of the
undersigned issuer or used or referred to by the undersigned
issuer;
(iii) The
portion of any other free writing prospectus relating to the offering contained
material information about the undersigned issuer or its securities provided
by
or on behalf of the undersigned issuer; and
(iv) Any
other
communication that is an offer in the offering made by the undersigned issuer
to
the purchaser.
|
5.
|
That,
for the purpose of determining liability under the Securities Act
to any
purchaser, each prospectus filed pursuant to Rule 424(b) as part
of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A, shall be deemed to be part of and included
in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made
in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale
prior to
such first use, supersede or modify any statement that was made in
the
registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such
date of
first use.
|
II-20
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
II-21
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, as amended,
the
registrant certifies that it has reasonable grounds to believe that it meets
all
of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Deerfield Beach,
State of Florida on May 23, 2008.
|
MDwerks,
INC.
|
||
|
By:
|
/s/
Howard B. Katz
|
|
|
Name:
Howard B. Katz
|
||
|
Title:
Chief Executive Officer and
Director
|
||
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Howard B. Katz, his attorneys-in-fact, each with the
power of substitution, for him and in his name, place and stead, in any and
all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and sign any registration statement for the
same
offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933,
and
all post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agents, and each
of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorney-in-fact and agents or any of them, or his
or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In
accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons
in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Howard B. Katz
|
Chief
Executive Officer and Director
|
May
23, 2008
|
||
|
Howard
B. Katz
|
(Principal
Executive Officer)
|
|||
|
/s/
Vincent Colangelo
|
Chief
Financial Officer and Secretary
|
May
23, 2008
|
||
|
Vincent
Colangelo
|
(Principal
Financial Officer)
|
|||
|
/s/
Solon Kandel
|
President
and Director
|
May
23, 2008
|
||
|
Solon
Kandel
|
||||
|
/s/
David M. Barnes
|
Director
|
May
23, 2008
|
||
|
David
M. Barnes
|
||||
|
/s/
Peter Dunne
|
Director
|
May
23, 2008
|
||
|
Peter
Dunne
|
||||
|
/s/
Paul Kushner
|
Director
|
May
23, 2008
|
||
|
Paul
Kushner
|
||||
|
/s/
Shad Stastney
|
Director
|
May
23, 2008
|
||
| Shad Stastney |
II-22
EXHIBIT
INDEX
|
Exhibit
No.
|
Exhibits
|
|
|
3.1
|
Company
Certificate of Incorporation1
|
|
|
3.2
|
Amendment
to Company’s Certificate of Incorporation changing name to MDwerks, Inc.
and amending terms of Blank Check Preferred
Stock2
|
|
|
3.3
|
Certificate
of Designations Designating Series A Convertible Preferred
Stock.3
|
|
|
3.4
|
Amended
and Restated Certificate of Designations Designating Series B Convertible
Preferred Stock4
|
|
|
3.5
|
Bylaws
of the Company.5
|
|
|
4.1
|
MDwerks,
Inc. 2005 Incentive Compensation Plan.6
|
|
|
4.2
|
Form
of Warrants to purchase shares of Common Stock at a price of $2.50
per
share.7
|
|
|
4.3
|
Form
of Warrants issued to Placement Agent (and sub-agents) to purchase
shares
of Common Stock at a price of $1.25 per
share.8
|
|
|
4.4
|
Form
of Series A Warrants to purchase shares of Common Stock at a price
of
$3.00 per share.9
|
|
|
4.5
|
Form
of Series A Warrants issued to Placement Agent and sub-agents to
purchase
shares of Common Stock at a price of $1.50 per
share.10
|
|
|
4.6
|
Promissory
Note issued to David Goldner11
|
|
|
4.7
|
Class
C Warrant to purchase shares of Common Stock at a price of $2.25
per
share12
|
|
|
4.8
|
Securities
Purchase Agreement by and between Gottbetter and MDwerks, Inc.
13
|
|
|
4.9
|
Form
of Series D Warrant to purchase shares of Common Stock at a price
of $2.25
per share.14
|
|
|
4.10
|
Form
of Series E Warrant to purchase shares of Common Stock at a price
of $3.25
per share.15
|
|
|
4.11
|
Form
of Amended and Restated Senior Secured Convertible Notes Issued to
Gottbetter16
|
|
|
4.12
|
Amendment
No. 1, dated March 1, 2008, to Amended and Restated Senior Secured
Convertible Notes17
|
|
|
4.13
|
Registration
Rights Agreement between MDwerks, Inc. and
Gottbetter18
|
|
|
4.14
|
Securities
Purchase Agreement, dated September 28, 2007, by and between MDwerks,
Inc.
and Vicis19
|
|
|
4.15
|
Securities
Purchase Agreement, dated January 18, 2008, by and between MDwerks,
Inc.
and Vicis20
|
|
|
4.16
|
Securities
Purchase Agreement, dated March 31, 2007, by and between MDwerks,
Inc. and
Vicis21
|
|
|
4.17
|
Form
of Series F Warrant to purchase shares of Common Stock at a price
of $2.25
per share 22
|
|
|
4.18
|
Form
of Series G Warrant to purchase shares of Common Stock at a price
of $2.50
per share 23
|
|
|
4.19
|
Form
of Series H Warrant to purchase shares of Common Stock at a price
of $0.75
per share 24
|
|
|
4.20
|
Form
of Series I Warrant to purchase shares of Common Stock at a price
of $0.75
per share 25
|
|
|
4.21
|
Amended
and Restated Registration Rights Agreement between MDwerks, Inc.
and
Vicis26
|
|
|
5.1
|
Legal
Opinion of Peckar & Abramson, P.C.27
|
|
|
10.1
|
Agreement
of Merger and Plan of Reorganization among Western Exploration, Inc.,
MDwerks Acquisition Corp. and MDwerks Global Holdings,
Inc.28
|
|
|
10.2
|
Placement
Agent Agreement by and among the Company, MDwerks and Brookshire
Securities Corporation29
|
|
|
10.3
|
Form
of Lock Up Agreement between the Company and executive officers and
certain stockholders.30
|
|
|
10.4
|
Form
of Private Placement Subscription
Agreement31
|
|
|
10.5
|
Form
of Senior Executive Level Employment Agreement between MDwerks, Inc.
and
each of Howard B. Katz, Solon L. Kandel and Vincent
Colangelo32
|
|
|
10.6
|
Form
of Executive Level Employment Agreement between MDwerks, Inc. and
each of
Stephen Weiss and Gerard J.
Maresca33
|
II-23
|
Exhibit
No.
|
Exhibits
|
|
|
10.7
|
Form
of Executive Level Employment Agreement between MDwerks, Inc. and
Stephen
Weiss34
|
|
|
10.8
|
Guaranty
issued to David Goldner by Xeni Financial Services,
Corp.35
|
|
|
10.9
|
Security
Agreement between Xeni Financial Services, Corp. and David
Goldner36
|
|
|
10.10
|
Subscription
Agreement between MDwerks, Inc. and David
Goldner37
|
|
|
10.11
|
Guaranty
issued to Gottbetter by Xeni Financial Services, Corp., Xeni Medical
Billing, Corp., MDwerks Global Holdings, Inc. and Xeni Medical Systems,
Inc.38
|
|
|
10.12
|
Security
Agreement by and among Gottbetter, MDwerks, Inc., Xeni Financial
Services,
Corp., Xeni Medical Corp., Xeni Medical Billing, Corp., MDwerks Global
Holdings, Inc. and Xeni Medical Systems,
Inc.39
|
|
|
10.13
|
Closing
Agreement by and between Investor and MDwerks, Inc. Modifying and
Waiving
Registration Rights Provisions40
|
|
|
10.14
|
Guaranty
issued to Vicis by Xeni Financial Services, Corp.
41
|
|
|
10.15
|
Guaranty
issued to Vicis by Xeni Medical Billing,
Corp.42
|
|
|
10.16
|
Guaranty
issued to Vicis by MDwerks Global Holdings, Inc.
43
|
|
|
10.17
|
Guaranty
issued to Vicis by Xeni Medical Systems, Inc.
44
|
|
|
10.18
|
Guaranty
issued to Vicis by Patient Payment Solutions, Inc.
45
|
|
|
10.19
|
Security
Agreement entered into by and between Vicis and MDwerks, Inc.
46
|
|
|
10.20
|
Security
Agreement entered into by and between Vicis and Xeni Medical Billing,
Corp. 47
|
|
|
10.21
|
Security
Agreement entered into by and between Vicis and MDwerks Global Holdings,
Inc. 48
|
|
|
10.22
|
Security
Agreement entered into by and between Vicis and Xeni Medical Systems,
Inc.
49
|
|
|
10.23
|
Security
Agreement entered into by and between Vicis and Xeni Financial Services,
Corp. 50
|
|
|
10.24
|
Security
Agreement entered into by and between Vicis and Patient Payment Solutions,
Inc. 51
|
|
|
10.25
|
Amendment,
Consent and Waiver, dated September 28, 2007, by and between MDwerks,
Inc., and Gottbetter52
|
|
|
10.26
|
Amendment,
Consent and Waiver, dated March 31, 2008, by and between MDwerks,
Inc.,
and Gottbetter53
|
|
|
14.1
|
Code
of Ethics54
|
|
|
22.1
|
Subsidiaries55
|
|
|
23.1
|
Consent
of Sherb & Co. LLP56
|
|
|
99.1
|
Audit
Committee Charter57
|
|
|
99.2
|
Compensation
Committee Charter58
|
|
1
|
Incorporated
by reference to our Registration Statement on Form SB-2 filed with
the SEC
on August 12, 2004.
|
|
2
|
Incorporated
by reference to Exhibit 3.1 included with our Current Report on Form
8-K
filed with the SEC on November 18,
2005.
|
|
3
|
Incorporated
by reference to Exhibit 3.3 to our Registration Statement on Form
SB-2
(Registration Number 333-132296) originally filed with the SEC on
March 9,
2006.
|
|
4
|
Incorporated
by reference to Exhibit 3.1 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
5
|
Incorporated
by reference to our Registration Statement on Form SB-2, filed with
the
SEC on August 12, 2004.
|
|
6
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
II-24
|
7
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
|
8
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on November 18,
2005.
|
|
9
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on March 24,
2006.
|
|
10
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on March 24,
2006.
|
|
11
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on August 29,
2006.
|
|
12
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on August 29,
2006.
|
|
13
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K
filed with the SEC on October 23,
2006.
|
|
14
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K
filed with the SEC on October 23,
2006.
|
|
15
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K
filed with the SE on October 23,
2006.
|
|
16
|
Incorporated
by reference to Exhibits 10.13 and 10.14 included with our Current
Report
on Form 8-K filed with the SEC on October 2,
2007.
|
|
17
|
Incorporated
by reference to Exhibits 4.11 and 4.12 included with our Annual Report
on
Form 10-KSB, filed with the SEC on March 27,
2008.
|
|
18
|
Incorporated
by reference to Exhibit 4.5 included with our Current Report on Form
8-K
filed with the SEC on October 23, 2006.
|
|
19
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
20
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on January 23,
2008.
|
|
21
|
Incorporated
by reference to Exhibit 4.1 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
22
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
23
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on October 2,
2007.
|
|
24
|
Incorporated
by reference to Exhibit 4.2 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
25
|
Incorporated
by reference to Exhibit 4.3 included with our Current Report on Form
8-K,
filed with the SEC on April 2,
2008.
|
|
26
|
Incorporated
by reference to Exhibit 4.4 included with our Current Report on From
8-K,
filed with the SEC on April 2,
2008.
|
|
27
|
Filed
herewith.
|
|
28
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on October 13,
2005.
|
|
29
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
30
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
31
|
Incorporated
by reference to Exhibit 10.4 included with our Current Report on
Form 8-K,
filed with the SEC on November 18,
2005.
|
|
32
|
Incorporated
by reference to Exhibit 10.5 to our Registration Statement on Form
SB-2
(Registration Number 333-132296), originally filed with the SEC on
March
9, 2006.
|
|
33
|
Incorporated
by reference to Exhibit 10.6 to our Registration Statement on Form
SB-2
(Registration Number 333-132296), originally filed with the SEC on
March
9, 2006.
|
II-25
|
34
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on April 29,
2008.
|
|
35
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
|
36
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
|
37
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on August 29,
2006.
|
|
38
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K
filed with the SEC on October 23,
2006.
|
|
39
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K
filed with the SEC on October 23,
2006.
|
|
40
|
Previously
filed.
|
|
41
|
Incorporated
by reference to Exhibit 10.1 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
42
|
Incorporated
by reference to Exhibit 10.2 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
43
|
Incorporated
by reference to Exhibit 10.3 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
44
|
Incorporated
by reference to Exhibit 10.4 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
45
|
Incorporated
by reference to Exhibit 10.5 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
46
|
Incorporated
by reference to Exhibit 10.6 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
47
|
Incorporated
by reference to Exhibit 10.7 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
48
|
Incorporated
by reference to Exhibit 10.8 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
49
|
Incorporated
by reference to Exhibit 10.9 included with our Current Report on
Form 8-K,
filed with the SEC on October 2,
2007.
|
|
50
|
Incorporated
by reference to Exhibit 10.10 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
51
|
Incorporated
by reference to Exhibit 10.11 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
52
|
Incorporated
by reference to Exhibit 10.12 included with our Current Report on
Form
8-K, filed with the SEC on October 2,
2007.
|
|
53
|
Incorporated
by reference to Exhibit 10.12 included with our Current Report on
Form
8-K, filed with the SEC on April 2,
2008.
|
|
54
|
Incorporated
by reference to Exhibit 14.1 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2007.
|
|
55
|
Incorporated
by reference to Exhibit 22.1 to our Registration Statement on Form
SB-2
(Registration Number 333-132296), originally filed with the SEC on
March
9, 2006.
|
|
56
|
Filed
herewith.
|
|
57
|
Incorporated
by reference to Exhibit 99.2 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2005.
|
|
58
|
Incorporated
by reference to Exhibit 99.3 included with our Current Report on
Form 8-K,
filed with the SEC on November 18
2005.
|
II-26