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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q/A

 (Mark One)

 

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

 

For the quarterly period ended March 31, 2009

 

o    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from _______ to _________

 

Commission File Number: 333-118155

 

MDWERKS, INC.

(Exact name of registrant as specified in charter)

 

Delaware	33-1095411
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

Windolph Center, Suite I

1020 N.W. 6th Street

Deerfield Beach, FL 33442

(Address of principal executive offices)(Zip Code)

 

(954) 389-8300

(Registrant's telephone number, including area code)

 

N/A

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

 

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                             Yes o   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer  o	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 17,990,208 shares at May 14, 2009

 

Explanatory Note -Other than the addition of the line item to the Consolidated Statement of Operations and the resulting changes to Net loss attributable to common shareholders and Net loss per common share, our Consolidated Statements of Operations has not been impacted by this modification.  This modification has not had any impact on our Consolidated Balance Sheets or Consolidated Statements of Cash Flows. The Quarterly Report on Form 10-Q/A has not been updated to reflect other events occurring after the filing date of the original Quarterly Report on Form 10-Q or to modify or update those disclosures affected by subsequent events.  Except for the foregoing amended information, this Quarterly Report on Form 10-Q/A continues to describe conditions as of the date of the filing of the original Quarterly Report on Form 10-Q and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

 

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For comparability, certain March 31, 2008 amounts have been reclassified, where applicable, to conform to the financial statement presentation used at March 31, 2009.

 

 

11

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

 

NOTE 2 — ACCOUNTS AND NOTES RECEIVABLE

 

Accounts receivable are recorded when revenue has been recognized but not yet collected. The Company had net $197,816 of accounts receivable as of March 31, 2009 and $188,048 as of December 31, 2008 from claims purchased.

 

At March 31, 2009, the Company had advanced funding to two healthcare providers under lines of credit and note agreements aggregating $1,418,717. Advances under the lines of credit are due to be repaid as the provider collects their receivables.  The Company charges the healthcare providers interest and other charges as defined in the agreements.   At December 31, 2008, the Company had $1,277,722 of notes receivable.

Accounts and notes receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers’ ability to pay and current economic trends. The Company writes off receivables against the allowance when a balance is determined to be uncollectible.  At March 31, 2009, certain amounts were in excess of 90 days, therefore, the Company maintained a $200,000 allowance for doubtful accounts that was recorded at December 31, 2008 for receivables due from one customer.

NOTE 3 — AVAILABLE-FOR-SALE SECURITIES

On June 16, 2008, the Company restructured one healthcare provider’s notes receivable which were due and payable to the Company on June 15, 2008.  Notes receivable of $175,000 were paid off and the remaining balance was consolidated into a new promissory note totaling $395,835 with a new maturity date of June 15, 2009.  As consideration for the changes to the terms of these notes, among other fees, the Company was given 920,000 shares of the healthcare provider’s common stock when the stock was valued at $0.69 per share, 1,000,000 shares when the stock was valued at $0.31 per share and 550,000 shares when the stock was valued at $0.20 per share as quoted on the OTC Bulletin Board.  These stock receipts were recorded as interest income of $1,054,800 at December 31, 2008.  At March 31, 2009, the stock price decreased to $0.01 per share resulting in a $37,050 decrease in the value of the Available-for-sale securities.  The Company will revalue these securities on a quarterly basis.  These revaluations will correspondingly adjust the Accumulated other comprehensive income/loss reported in the Equity section of the Balance Sheet.  The Company does not plan to sell these securities within the next twelve months and has recorded this as a long-term asset.

 

NOTE 4 — PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

	Estimated Life		March 31, 2009				December 31, 2008
Office furniture and equipment	5-7 Years		$	30,174			$	30,174
Computer equipment and software	3-5 Years			181,190				197,157
Total				211,364				227,331
Less: accumulated depreciation				(174,775	)			(179,211	)
Property and equipment, net			$	36,589			$	48,120

 

Depreciation expense for the three months ending March 31, 2009 and 2008 was $11,531 and $9,796, respectively.   The Company lowered the estimated life for computer equipment to three years in December 2008.

 

 

12

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

NOTE 5 — NOTES PAYABLE

 

 On each of October 19, 2006 and November 9, 2006 we received gross proceeds of $2,500,000 ($2,375,000 net proceeds) for a total of $5,000,000 in the aggregate ($4,750,000 net proceeds  in the aggregate) in connection with a financing provided by Gottbetter Capital Master, Ltd. (in liquidation) “Gottbetter”, an unaffiliated accredited institutional investor.  Pursuant to the terms of a Securities Purchase Agreement, we issued two senior secured convertible promissory notes to Gottbetter, each in the original principal amount of $2,500,000 at an initial conversion price of $2.25 per share (each a ‘‘Senior Note’’ and collectively, the ‘‘Senior Notes’’), five-year Series D Warrants to purchase 375,000 shares of our common stock at a price of $2.25 per share (‘‘Series D Warrants’’) and five-year Series E Warrants, as amended, to purchase 541,666 shares of our common stock at a price of $2.25 per share (‘‘Series E Warrants’’).

 

On November 14, 2008, the Company received $300,000 as part of a potential funding with Debt Opportunity Fund LLLP (“DOF”). This funding was not consummated and a portion of the funds escrowed were used in the April 20, 2009 transaction described below.

 

The Company valued the Notes Payable at their face value and calculated the beneficial conversion feature of the warrants using Black Scholes in deriving a discount that is being amortized over the term of the Notes as interest expense using a straight line method.

The promissory notes are as follows:

 

		March 31, 2009				December 31, 2009
Notes payable		$	5,300,000			$	5,300,000
Less principal repayments			(1,250,000	)			(1,250,000	)
Less issuance of common stock in connection with debt conversion			(433,334	)			(433,334	)
Notes payable outstanding			3,616,666				3,616,666
Less: unamortized discount on notes payable			(2,046,701	)			(2,325,796	)
Notes payable, net			1,569,965				1,290,870
Less current portion			(1,569,965	)			(1,290,870	)
Notes payable, net of discount of $2,046,701 at March 31, 2009 and $2,325,796 at December 31, 2008, less current portion		$	—			$	—

 

On November 6, 2008, the Company temporarily reduced the conversion price set forth in the Senior Note issued to Gottbetter on October 19, 2006 (the “October Note”) from $2.25 per share to $0.303 per share with respect to a one-time conversion of  $433,334 of Conversion Amount (as defined in the October Note).  After the conversion price was reduced, Gottbetter converted $433,334 of Conversion Amount into 1,430,143 shares of Common Stock of the Company.  The Company recorded a debt conversion expense of $371,265 for the difference between the original conversion price of $2.25 per share and the one-time conversion price of $0.303 per share.  In connection with the reduction in the conversion price of the October Note, both Gottbetter and Vicis waived all anti-dilution adjustments to which they would have been entitled under the terms of the securities that they hold as result of the reduction of the conversion price of the October Note.   In connection with the waiver by Vicis of the anti-dilution adjustments to which Vicis was entitled as described above, the Company is obligated to pay Vicis $250,000.  The remaining principal balance of these Notes at March 31, 2009 and December 31, 2008 was $3,316,666 which is convertible to purchase shares of our common stock, at the original conversion price of $2.25 per share.

 

On November 6, 2008, pursuant to a Securities Purchase Agreement by and between Vicis and Gottbetter, Vicis  purchased from Gottbetter, for a purchase price of $2,250,000, all of Gottbetter's rights, title and interest in and to:

 

(i) that certain Securities Purchase Agreement, dated as of October 19, 2006, by and between the Company and Gottbetter pursuant to which the Company issued to Gottbetter: (A) the Senior Notes, (B) Series D Warrants to purchase an aggregate of 375,000 shares of Common Stock; and (C) Series E Warrants to purchase an aggregate of 541,667 shares of Common Stock of the Issuer (the “Series E Warrants”),

 

(ii) the Senior Notes;

 

(iii) Series D Warrants to purchase an aggregate of 875,000 shares of Common Stock;

 

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

NOTE 5 — NOTES PAYABLE (continued)

 

(iv) Series E Warrants to purchase an aggregate of 541,667 shares of Common Stock;

 

(v) the Security Agreement, dated as of October 19, 2006, by and between the Company and Gottbetter;

 

(vi) the Guaranty Agreement, dated as of October 19, 2006, by and among the Company, Mdwerks Global Holdings, Inc., Xeni Medical Systems, Inc., Xeni Financial Services, Corp., Xeni Medical Billing Corp. and Gottbetter; and

 

(vi) the Registration Rights Agreement, dated as of October 19, 2006, by and between the Company and Gottbetter.

 

On April 20, 2009, we, along with our subsidiary Xeni Financial Services, Corp. (“XFS”), entered into a Loan and Securities Purchase Agreement (the “Loan Agreement”) with Vicis Capital Master Fund (“Vicis”), dated April 15, 2009 pursuant to which Vicis loaned the Company $3,200,000, subject to a deduction for an original issue discount of 2%. The proceeds from the loan from Vicis will be used for our corporate operations (See Note 10).

Pursuant to the Loan Agreement, we issued a Senior Secured Promissory Note, dated April 15, 2009, to Vicis in the original principal amount of $3,851,374 (the “Vicis Note”) comprised of the current loan of $3,200,000, and prior advances including the $300,000 loaned to us by DOF on November 14, 2008, accrued interest, and professional and other fees of $651,375 relative to prior loans and commitments. The Vicis Note bears interest at the rate of 13% per annum and is payable monthly, in arrears on the first day of each month, commencing on October 15, 2009. Principal payments in the monthly amount of $40,000 commence on October 15, 2009 and, subject to events of default specified in the Loan Agreement, the entire amount of principal and accrued but unpaid interest due under the note becomes due and payable on October 15, 2011.

In connection with the Loan Agreement and the financing provided under the Loan Agreement, we, XFS and each of our other subsidiaries, and Vicis entered into security agreements, dated April 15, 2009, pursuant to which we, XFS and our other subsidiaries granted a security interest to Vicis in substantially all of our assets. Each of our subsidiaries (other than XFS) also entered into a guaranty agreement to guaranty all obligations under the Loan Agreement and documents entered into in connection with the Loan Agreement.

As partial consideration for the loan provided by Vicis on April 20, 2009, the Company adjusted the Series J Warrant held by Vicis to reflect a decrease in the exercise price to $0.35 per share and a reduction in the number of shares underlying the Series J Warrant to 493,142 (the “Series J Warrant”) and issued a ten-year Series K Warrant to purchase 2,550,000 shares of our common stock at a price of $.35 per share (the “Series K Warrant”).

In connection with the issuance of the Series K Warrant, we and Vicis entered into a registration rights agreement, dated April 15, 2009, pursuant to which, among other things, we granted “piggyback” registration rights to Vicis for the Series K Warrant.

In addition, we also entered into an agreement with Vicis pursuant to which Vicis agreed to defer the principal and interest installment amounts with respect to the loans in the original aggregate principal amount of $5,000,000 issued by us in favor of Vicis as assignee of Gottbetter Capital Master Fund Ltd. Vicis agreed to defer the payment of each installment amount commencing with the installment due April 1, 2009 and ending with the installment amount due January 1, 2010.  On January 1, 2010, in addition to the regular installment amount due on January 1, 2010, we shall pay all deferred amounts in full, in one lump sum.

 

 

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

 

 

NOTE 6 — TEMPORARY EQUITY

On September 28, 2007 we received gross proceeds of $2,000,000 (net proceeds of $1,691,445 after repayment of a $250,000 31-day August 31, 2007 Convertible Note, interest and closing expenses) from 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 December 3, 2007 we received gross proceeds of $575,000 from Vicis and in connection with the financing.  We issued a Convertible Note to Vicis which bore interest at the rate of 8% per year.  Subject to certain prepayment provisions, unpaid principal and interest due under the Convertible 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.

On January 18, 2008, we received net proceeds of $500,000 from 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 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.

On March 31, 2008, we received net proceeds of $6,809,794 from Vicis.  In connection with this $7,500,000 Note Payable to Vicis, 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.

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.  Dividends of $1,248,222 and $948,222 have been accrued as of March 31, 2009 and December 31, 2008, respectively, but are not payable until there are profits, surplus or other funds available for the payment of such dividends.

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.

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

 

NOTE 6 — TEMPORARY EQUITY (continued)

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.

Since the redeemable preferred stock contains substantive conversion rights that remain with the holder until maturity, this preferred stock is required to be recorded as “temporary equity” according to ASR 268 and Topic No. D-98.

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.  Since the redemption is contingent upon the holder’s not exercising their option to convert into a fixed number of shares, the Series B Preferred Stock is classified as temporary equity.

As of March 31, 2009 and December 31, 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 March 31, 2009, the outstanding Series H Warrant is exercisable for an aggregate of 53,333,334 shares or our common stock.

 

For the three months ended March 31, 2009 and March 31, 2008, amortization of the debt discount amounted to $279,096 and $418,760, respectively.

The mandatorily redeemable convertible Series B preferred stock has been recorded as follows:

		March 31, 2009				December 31, 2008
Mandatorily redeemable convertible Series B preferred stock		$	10,000,000			$	10,000,000
Less: unamortized discount on preferred stock			(4,758,333	)			(5,947,917	)
Mandatorily redeemable convertible Series B preferred stock, net		$	5,241,667			$	4,052,083

 

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 MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

NOTE 7 — STOCKHOLDERS’ EQUITY

 

Common stock  

 

The Company is authorized to issue 200,000,000 shares of Common stock, $.001 par value, with such designations, rights and preferences as may be determined from time to time by the Board of Directors. As of March 31, 2009, there are 14,390,208 shares issued and outstanding.   

 

Preferred stock

 

The Company is authorized to issue 10,000,000 shares of preferred stock, $.001 par value, with such designations, rights and preferences as may be determined from time to time by the Board of Directors, of which 1,000 shares are designated Series A Convertible Preferred stock and 1,500 shares are designated Series B Convertible Preferred stock.

 

The Company is authorized to issue 1,000 shares of Series A Convertible Preferred stock, $0.001 par value with such designations, rights and preferences are set forth in the Certificate of Designations Designating Series A Convertible Preferred stock. Between February 1, 2006 and September 30, 2006, the Company sold 28.3 Units to accredited investors. Each unit consists of one share of our Series A Convertible Preferred Stock, par value $.001 per share, and a detachable, transferable Series A Warrant to purchase 20,000 shares of our common stock, at a purchase price of $3.00 per share. Between August 11, 2006 and March 31, 2009, 27.3 shares of Series A Convertible Preferred Stock were converted into 546,667 shares of common stock leaving one (1) Series A Convertible Preferred Stock outstanding as of March 31, 2009.

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

 

Common stock options

 

A summary of the status of the Company's outstanding stock options as of March 31, 2009 and changes during the period ending on that date is as follows:

 

		Shares				Weighted Average Exercise Price				Aggregate Intrinsic Value
Outstanding at December 31, 2008			5,405,080			$	1.82			$	—
Granted			—				—				—
Exercised			—				—				—
Forfeited			(418,330	)			3.12				—
Outstanding at March 31, 2009			4,986,750			$	1.71			$	—
Options exercisable at end of period			4,593,833			$	1.71			$	—
Weighted-average fair value of options granted during the period			—

 

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

 

NOTE 7 — STOCKHOLDERS’ EQUITY

Common stock options (continued)

 

The following information applies to options outstanding at March 31, 2009:

 

		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			8.75		$	0.38			483,000		$	0.38
$0.60			185,000			9.00		$	0.60			61,667		$	0.60
$0.67			175,000			8.50		$	0.67			91,666		$	0.67
$0.75			1,925,000			9.00		$	0.75			1,925,000		$	0.75
$1.39			95,000			7.75		$	1.39			95,000		$	1.39
$2.25			900,000			7.50		$	2.25			900,000		$	2.25
$3.25			110,000			6.75		$	3.25			110,000		$	3.25
$3.40			555,000			6.75		$	3.40			555,000		$	3.40
$4.00 - 4.25			558,750			7.25		$	4.03			372,500		$	4.03
			4,986,750					$	1.59			4,593,833		$	1.66

 

In connection with previously granted stock options, the Company recognized stock-based compensation expense of $77,477 for the three months ended March 31, 2009 and $381,505 for the three months ended March 31, 2008.

 

As of March 31, 2009, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of operations is approximately $366,000, which will be recognized through September 2010.

 

Common stock warrants

 

A summary of the status of the Company's outstanding stock warrants granted as of March 31, 2009 and changes during the period is as follows:

 

		Shares				Weighted Average Exercise Price
Outstanding at December 31, 2008			57,925,946			$	0.80
Granted			—				—
Exercised			—				—
Forfeited			(100,000	)			3.40
Outstanding at March 31, 2009			57,825,946			$	0.79
Common stock issuable upon exercise of warrants			57,825,946			$	0.79

 

 

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MDWERKS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009

NOTE 7 — STOCKHOLDERS’ EQUITY

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 March 31, 2009			Weighted Average Remaining Contractual Life (Years)			Weighted Average Exercise Price			Number Exercisable at March 31, 2009			Weighted Average Exercise Price
$0.75			56,750,001			8.72		$	0.75			56,750,001		$	0.75
$1.25			199,000			1.22		$	1.25			199,000		$	1.25
$1.50			56,667			2.24		$	1.50			56,667		$	1.50
$2.25			111,111			0.40		$	2.25			111,111		$	2.25
$3.00			479,167			0.12		$	3.00			479,167		$	3.00
$3.76			225,000			0.55		$	3.76			225,000		$	3.76
$4.00			5,000			0.55		$	4.00			5,000		$	4.00
			57,825,946					$	0.79			57,825,946		$	0.79

 

Subsequent to quarter end, and as partial consideration for the loan provided by Vicis on April 20, 2009, the Company adjusted the Series J Warrant held by Vicis to reflect a decrease in the exercise price to $0.35 per share and a reduction in the number of shares underlying the Series J Warrant to 493,142 (the “Series J Warrant”) and issued a ten-year Series K Warrant to purchase 2,550,000 shares of our common stock at a price of $0.35 per share (the “Series K Warrant”).

 

NOTE 8 - RESTATEMENT

The Company has effected a restatement of its financial results for the period ended March 31, 2008 (the “Restatement”).  After reviewing certain accounting principles the Company had applied in previously issued financial statements, management determined that the Company’s accounting for Mandatorily Redeemable Convertible Series B Preferred Stock should have been recorded as Temporary Equity and not Debt and that previously issued Mandatorily Redeemable Convertible Series B Preferred Stock should not have been recorded as an extinguishment of debt when new Mandatorily Redeemable Convertible Series B Preferred Stock was issued on March 31, 2008. Consequently, management is restating its quarterly financial statements as of March 31, 2008. These changes decreased net loss by $894,204 due to a decrease in interest expense of $234,082 and the elimination of the loss on extinguishment of debt of $660,122.  These changes also decreased accrued expenses $48,222, increased dividends payable $307,247, increased temporary equity $483,332 and decreased stockholder’s deficiency $742,357.  These changes in presentation of the Company’s Mandatorily Redeemable Convertible Series B Preferred Stock did not impact the cash balance at the end of the period.

 

NOTE 9 — COMMITMENTS

 

Lease agreements

 

On February 1, 2009, the Company was assigned a master lease on its facility and a 5-year lease option was exercised which extends the master lease until July 2013.  Rent expense for the three months ended March 31, 2009 and March 31, 2008 was $20,105 and $21,936, respectively.

Future minimum operating lease commitments as of March 31, 2009 are as follows:

Year Ending December 31		Amount
2009			36,166
2010			50,291
2011			52,805
2012			55,446
2013			33,267
		$	227,975

 

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