UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2006 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT For the transition period from ________ to ________ Commission File Number: 333-118155 MDWERKS, INC. (Exact name of small business issuer as specified in charter) Delaware 33-1095411 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) WINDOLPH CENTER, SUITE I 1020 N.W. 6TH STREET DEERFIELD BEACH, FL 33442 (Address of principal executive offices)(Zip Code) (954) 389-8300 (Issuer's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[x] No [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes[_] No [x] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 11,760,898 shares at August 9, 2006 Transitional Small Business Disclosure Format (Check one): Yes [_] No [x] MDWERKS, INC. FORM 10-QSB FOR THE SIX MONTHS ENDED JUNE 30, 2006 INDEX Page ----- PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets As of June 30, 2006 (Unaudited) and December 31, 2005............. 3 Condensed Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2006 and 2005......... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, 2006 and 2005................... 5 Notes to Unaudited Condensed Consolidated Financial Statements....... 6-15 Item 2 - Management's Discussion and Analysis and Plan of Operations........................................................ 16-23 Item 3 - Controls and Procedures..................................... 24 PART II - OTHER INFORMATION Item 1 - Legal Proceedings........................................... 25 Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds.......................................................... 25 Item 3 - Defaults Upon Senior Securities............................. 25 Item 4 - Submission of Matters to a Vote of Security Holders......... 25 Item 5 - Other Information........................................... 25 Item 6 - Exhibits.................................................... 25 Signatures........................................................... 26 2 MDWERKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 2006 2005 ------------ ------------ (Unaudited) ASSETS Current assets: Cash $ 453,761 $ 766,464 Notes receivable 442,670 363,845 Accounts receivable 160,185 10,415 Prepaid expenses and other 84,514 68,816 ------------ ------------ Total current assets 1,141,130 1,209,540 Property and equipment, net of accumulated depreciation of $28,633 for June 30, 2006 and $13,428 for December 31, 2005 136,914 80,391 ------------ ------------ Total assets $ 1,278,044 $ 1,289,931 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY. Current liabilities: Notes payable $ 90,000 $ 135,000 Loan payable 86,669 98,700 Accounts payable 315,216 211,517 Accrued expenses 218,105 167,382 Deferred revenues 11,646 5,357 Warrant liability 2,323,923 1,735,237 ------------ ------------ Total current liabilities 3,045,559 2,353,193 Long-term liabilities: Deferred revenues, less current portion 151,481 3,390 ------------ ------------ Total liabilities 3,197,040 2,356,583 ------------ ------------ Stockholders' deficiency: Preferred stock, $.001 par value, 10,000,000 shares authorized; no shares issued and outstanding -- -- Series A preferred stock, $.001 par value, 1,000 shares authorized; 28 shares issued and outstanding -- -- Common stock, $.001 par value, 100,000,000 shares authorized; 11,760,898 shares issued and outstanding at June 30, 2006 and 11,538,730 shares issued and outstanding at December 31, 2005 11,761 11,539 Additional paid-in capital 18,152,159 15,480,037 Accumulated deficit (20,082,916) (16,558,228) ------------ ------------ Total stockholders' deficiency (1,918,996) (1,066,652) ------------ ------------ Total liabilities and stockholders' deficiency $ 1,278,044 $ 1,289,931 ============ ============ The accompanying notes should be read in conjunction with the condensed consolidated financial statements 3 MDWERKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended For the Six Months Ended June 30 June 30 -------------------------- ------------------------- 2006 2005 2006 2005 ------------ ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Service fees $ 61,982 $ 5,500 $ 114,566 $ 5,500 Financing income 9,823 4,476 26,171 4,476 ----------- ---------- ----------- ---------- Total revenue 71,805 9,976 140,737 9,976 ----------- ---------- ----------- ---------- Operating expenses: Compensation 703,788 -- 1,463,735 -- Consulting expense and outside services 211,924 210,637 255,045 288,998 Professional fees 64,153 109,899 124,124 119,712 Selling, general and administrative 388,159 68,571 779,579 94,626 ----------- ---------- ----------- ---------- Total operating expenses 1,368,024 389,107 2,622,483 503,336 ----------- ---------- ----------- ---------- Loss from operations (1,296,219) (379,131) (2,481,746) (493,360) ----------- ---------- ----------- ---------- Other income (expense): Interest income 2,094 -- 4,548 -- Interest expense (3,682) -- (7,748) -- Settlement expense related to debt conversion -- -- (180,827) -- Loss on revaluation of warrant liability (588,686) -- (588,686) -- Other income -- -- 11 -- ----------- ---------- ----------- ---------- Total other income (expense) (590,274) -- (772,702) -- ----------- ---------- ----------- ---------- Net Loss (1,886,493) (379,131) (3,254,448) (493,360) Deemed preferred stock dividend -- -- (24,000) -- Common stock issued in connection with anti-dilutive recalculation -- -- (246,240) -- ----------- ---------- ----------- ---------- Net loss attributable to common shareholders $(1,886,493) $ (379,131) $(3,524,688) $ (493,360) =========== ========== =========== ========== NET LOSS PER COMMON SHARE - basic and diluted $ (0.16) $ (0.04) $ (0.30) $ (0.05) =========== ========== =========== ========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - basic and diluted 11,735,475 9,352,328 11,702,853 9,352,328 =========== ========== =========== ========== The accompanying notes should be read in conjunction with the condensed consolidated financial statements 4 MDWERKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30 ------------------------- 2006 2005 ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities: Net Loss $(3,254,448) $(493,360) ----------- --------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 15,205 8,857 Stock-based compensation 748,636 -- Settlement expense related to debt conversion 180,827 -- Loss on revaluation of warrant liability 588,686 -- Changes in assets and liabilities: Notes receivable (78,825) (121,648) Accounts receivable (149,770) -- Prepaid expenses and other (15,698) (18,999) Accounts payable 103,699 159,092 Accrued expenses 51,973 (917) Deferred revenues 154,380 -- ----------- --------- Total adjustments 1,599,113 26,385 ----------- --------- Net cash used in operating activities (1,655,335) (466,975) ----------- --------- Cash flows from investing activities: Purchase of property and equipment (71,728) (72,172) ----------- --------- Net cash used in investing activities (71,728) (72,172) ----------- --------- Cash flows from financing activities: Capital contributions -- 550,886 Proceeds from loans payable -- 13,500 Repayment of loan payable (12,031) -- Proceeds from sale of Series A preferred stock 1,700,000 -- Placement fees and other expenses paid (273,609) -- ----------- --------- Net cash provided by financing activities 1,414,360 564,386 ----------- --------- Net increase (decrease) in cash (312,703) 25,239 Cash - beginning of year 766,464 267,388 ----------- --------- Cash - end of period $ 453,761 $ 292,627 =========== ========= Supplemental disclosure of cash flow information: Cash paid for: Interest $ 5,112 $ -- =========== ========= Noncash investing and financing activities: Common stock issued for debt and accrued interest $ 46,250 $ -- =========== ========= The accompanying notes should be read in conjunction with the condensed consolidated financial statements 5 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2005 and notes thereto and other pertinent information contained in the Form 10-KSB of MDwerks, Inc. (the "Company") as filed with the Securities and Exchange Commission (the "Commission"). The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results for the full fiscal year ending December 31, 2006. 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 9,352,328 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 acquisition was accounted for as a reverse merger because, on a post-merger basis, the MDwerks stockholders hold a majority of the outstanding common stock of the Company on a voting and fully diluted basis. As a result, MDwerks was deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statements presented, beginning with the period ending December 31, 2005, are those of the Company for all periods prior to the acquisition, and the financial statements of the consolidated companies from the acquisition date forward. The historical stockholders' deficit of the Company prior to the acquisition has been retroactively restated (a recapitalization) for the equivalent number of shares received in the acquisition after giving effect to any differences in the par value of the Company and MDwerks common stock, with an offset to additional paid-in capital. The restated consolidated accumulated deficit of the accounting acquirer MDwerks carried forward after the acquisition. On June 7, 2005, MDwerks entered into and consummated Share Exchange Agreements with all of the shareholders of each of the Xeni Companies: Xeni Medical Systems, Inc. ("XMS"); Xeni Financial Services, Corp. ("XFS"); and Xeni Medical Billing, Corp. ("XMB"). Pursuant to each of the Share Exchange Agreements, MDwerks acquired 100% of the issued and outstanding shares of each of the Xeni Companies' common stock. The acquisition of the Xeni Companies by MDwerks was accounted for as a reverse merger because, on a post-merger basis, the former Xeni shareholders held a majority of the outstanding common stock of MDwerks on a voting and fully diluted basis. As a result, Xeni was deemed to be the acquirer for accounting purposes. Accordingly, the financial statements of MDwerks are those of Xeni for all periods presented. XMS was incorporated under the laws of the state of Delaware on July 21, 2004. XMS provides a Web-based package of electronic claims solutions to the healthcare provider industry through Internet access to its MDwerks' suite of proprietary products and services so that healthcare providers can significantly improve daily insurance claims transaction processing, administration and management. 6 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Organization (continued) XFS was incorporated under the laws of the state of Florida on February 3, 2005. XFS offers financing and advances to health care providers secured by claims processed through the MDwerks system. XMB was incorporated under the laws of the state of Florida on March 2, 2005. XMB offers health care providers billing services facilitated through the MDwerks system. Going concern The accompanying 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 provide the opportunity for the Company to continue as a going concern. Basis of presentation The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated statements include the accounts of the Company and its wholly-owned subsidiaries, XMS, XFS and XMB. All significant intercompany balances and transactions have been eliminated. All material intercompany balances and transactions have been eliminated. 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. Cash and cash equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments purchased with a maturity of three months or less and money market accounts to be cash equivalents. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts. Accounts and notes receivable Notes receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts. The Company estimates doubtful accounts based on historical bad debts, factors related to specific customers' ability to pay and current economic trends. The Company writes off receivables against the allowance when a balance is determined to be uncollectible. At June 30, 2006 the Company has no allowance for doubtful accounts. 7 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 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. As of June 30, 2006, the Company had outstanding options to purchase an aggregate of 1,741,250 shares of common stock, warrants to purchase an aggregate of 1,327,974 shares of common stock, and 566,667 shares of common stock issuable upon conversion of preferred stock which could potentially dilute future earnings per share. Diluted loss per common share has not been presented for the period ended June 30, 2006 and March 31, 2006 since the impact of the stock options and warrants would be antidilutive. At March 31, 2005 and June 30, 2005, respectively the Company did not have any potential common stock. 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 provides advance funding services to unaffiliated healthcare providers (the Company's "Customers"). The Customers advances are typically collateralized by Security Agreements granting first position liens on the medical claims submitted by its Customers to third party payors (the "Payors"). The advances are repaid through the remittance of payments of Customers medical claims, by Payors, directly to the Company. The Company withholds from these advances interest, accrued on a daily basis, and 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. 8 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Stock-based compensation Effective January 1, 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 recognized the cost resulting from all stock-based payment transactions including shares issued under its stock option plans in the financial statements. Prior to January 1, 2006, the Company accounted for stock-based employee compensation plans (including shares issued under its stock option plans) in accordance with APB Opinion No. 25 and followed the pro forma net income, pro forma income per share, and stock-based compensation plan disclosure requirements set forth in the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). 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. The Company has net operating loss carryforwards for tax purposes totaling approximately $5,516,000 at June 30, 2006 expiring at various times through the year 2026 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 Company recorded a deferred tax asset of approximately $2,096,000 offset by a full valuation of $2,096,250 since it is more likely than not that the deferred tax asset will not be realized. Recent accounting pronouncements In February 2006, the Financial Accounting Standards Board issued Statement No. 155 ("SFAS No 155"), "Accounting for Certain Hybrid Instruments: An Amendment of FASB Statements No. 133 and 140". Management does not believe that this statement will have a significant impact as the Company does not use such instruments. In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109"("FIN 48"), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company does not expect FIN 48 will have a material effect on its consolidated financial condition or results of operations. Reclassifications For comparability, certain December 31, 2005 amounts have been reclassified, where appropriate, to conform to the financial statement presentation used at June 30, 2006. 9 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 2 -- NOTES RECEIVABLE At June 30, 2006, the Company advanced three healthcare providers under lines of credit and note agreements, respectively, aggregating $442,670. Advances under the line of credit are due to be repaid out of providers' claims collections, as defined in the agreement. The note receivable under a note agreement is payable as the provider collects certain receivables. The Company charged the health care providers interest and other charges as defined in the agreements. At June 30, 2006, no amounts were past due. NOTE 3 -- PROPERTY AND EQUIPMENT At June 30, 2006, property and equipment consisted of the following: Estimated Life -------------- Office furniture and equipment 5-7 Years $ 15,027 Computer equipment and software 3-5 Years 150,520 -------- 165,547 Less: accumulated depreciation (28,633) -------- $136,914 ======== NOTE 4 -- NOTES PAYABLE At June 30, 2006, the Company has notes payable of $90,000 to unrelated parties that bear interest at 8%. The outstanding principal and all accrued and unpaid interest is due and payable at various dates through August 2006. At the Company's option, all or any part of the outstanding principal balance and accrued interest may be prepaid. In the event the Company raises $2.5 million or more in a financing transaction involving the sale of equity securities, the notes shall become due and payable at the closing of such transaction. Additionally, in such event, the Company shall grant to the note holders four-year warrants to purchase an aggregate of 90,000 shares of the Company's common stock or the Company's successor parent company at $1.25 per share. In February, 2006, $45,000 of these notes payable plus accrued interest of $1,342 were converted into 92,685 shares of the Company's common stock in full satisfaction of a portion the notes payable (see note 6). NOTE 5 -- LOAN PAYABLE The Company has a loan payable to an unrelated individual in the amount of $86,669. The loan bears interest at 8% per annum and is payable on a monthly basis, less fees. The loan shall be repaid proportionally upon repayment of certain of the Company's notes receivable. NOTE 6 - STOCKHOLDERS' 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. 10 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 6 - STOCKHOLDERS' DEFICIENCY (continued) Preferred Stock (continued) 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 our Common Stock at a purchase price of $3.00 per share. The Company sold an aggregate of 28.33 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 $1,426,391 after 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 of 1933. The shares of Series A Preferred Stock and warrants to purchase shares of Common Stock were not registered under the Securities Act of 1933, 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 of 1933 and corresponding provisions of state securities laws. 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 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 with a corresponding credit to additional paid-in capital in the amount of $24,000 after taking into account the value of the warrants issued.. The assumptions used valuing the warrants include: Risk free interest rate (annual) ............................. 4.74% and 4.83% Expected volatility .......................................... 105% and 142% Expected life ................................................ 3 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, and will receive 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. 11 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 6 - STOCKHOLDERS' DEFICIENCY (continued) 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 treated as an additional charge to the loss available to common stockholders. 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 will account 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 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 six months ended June 30 2006, in connection with these shares, the Company recorded stock-based compensation of $81,000. On June 29, 2006, the Company issued 28,483 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 $114,000 or $4.00 per share. For the six months ended June 30 2006, in connection with these shares, the Company recorded stock-based consulting fees of $114,000. In June, 2006, the Company granted options to purchase 681,250 shares of common stock to employees of the Company under the Incentive Plan. The options are exercisable at $4.00 to $4.25 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. 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, an estimated holding period of 8 years. In connection with these options, the Company valued these options at a fair market value of approximately $2,629,973 and will record stock-based compensation expense over the vesting period. In connection with granted stock options, the Company recognized compensation expense of $553,635 for the six months ended June 30, 2006. There was no stock-based compensation expense for the six months ended June 30, 2005. As of June 30, 2006, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of operations is approximately $4,754,300, which will be recognized through June 2009. 12 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 6 - STOCKHOLDERS' DEFICIENCY (continued) Common Stock (continued) A summary of the status of the Company's outstanding stock options as of June 30, 2006 and changes during the period ending on that date is as follows: Aggregate Weighted Average Intrinsic Shares Exercise Price Value ---------- ---------------- --------- Outstanding at December 31, 2005 200,000 $3.25 Granted 1,541,250 3.68 Exercised -- -- Forfeited -- -- ---------- ----- Outstanding at June 30, 2006 1,741,250 $3.63 $0 ========== ===== === Options exercisable at end of period -- -- ========== ===== Weighted-average fair value of options granted during the period $ 3.68 ========== The following information applies to options outstanding at June 30, 2006: Options Outstanding Options Exercisable --------------------------------- ----------------------- Weighted Average Weighted Remaining Average Weighted Contractual Exercise Average Range of Exercise Prices Shares Life (Years) Price Shares Exercise Price ------------------------ ------- ------------ -------- ------ -------------- $3.25 200,000 9.50 $3.25 -- -- $3.40 860,000 9.50 $3.40 -- -- $4.00- 4.25 681,250 9.98 $4.03 -- -- ------- ---- ----- 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 our Series A Convertible Preferred Stock, par value $.001 per share, and a detachable, transferable warrant to purchase 20,000 shares of our common stock, at a purchase price of $3.00 per share. Pursuant to the Private Placement we 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, or Brookshire, served as the lead placement agent in connection with the private placement. Brookshire will receive five-year warrants to purchase 56,667 shares of our 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. 13 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 6 - STOCKHOLDERS' DEFICIENCY (continued) Common Stock Warrants (continued) A summary of the status of the Company's outstanding stock warrants granted as of June 30, 2006 and changes during the period is as follows: Weighted-Average Shares Exercise Price ---------- ---------------- Outstanding at December 31, 2005 704,640 $2.25 Granted 623,334 2.57 Exercised -- -- Forfeited -- -- ---------- ----- Outstanding at June 30, 2006 1,327,974 $2.61 ========== ===== Common stock issuable upon exercise of warrants 1,327,974 $2.61 ========== ===== Weighted-average fair value of common stock issuable $ 2.61 ========== Common Stock issuable Common Stock issuable upon exercise of warrants outstanding upon Warrants Exercisable ---------------------------------------------------------------------- ------------------------- Weighted Average Weighted Remaining Weighted Number Average Range of Exercise Number Outstanding Contractual Average Exercisable at Exercise Price at June 30, 2006 Life (Years) Exercise Price June 30, 2006 Price ----------------- ------------------ ------------ -------------- -------------- -------- $1.25 64,040 4.40 $1.25 64,040 $1.25 $1.50 56,667 4.90 $1.50 56,667 $1.50 $2.50 640,600 2.45 $2.50 640,600 $2.50 $3.00 566,667 2.90 $3.00 566,667 $3.00 --------- ----- --------- ----- 1,327,974 $2.61 1,327,974 $2.61 ========= ===== ========= ===== Registration rights The Company has agreed to use its best efforts to file 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 Company has agreed to use its best efforts to have such "resale" registration statement declared effective by the SEC as soon as possible after the initial filing date. 14 MDWERKS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2006 NOTE 6 - STOCKHOLDERS' DEFICIENCY (continued) Registration rights In the event the "resale" registration statement is 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 will receive 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 is not so filed, provided that the aggregate increase in such shares of common stock as a result of the delinquent filing will 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. In accordance with Emerging Issues Task Force Issue 00-19 ("EITF 00-19"), "Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled in, a Company's Own Stock", the Company has initially accounted for the fair value of the warrants as a liability since the Company will incur penalties if the Company cannot comply with the warrant holders' registration rights. As of the closing date of the private placement the fair value of the warrants was $1,142,770 calculated utilizing the Black-Scholes option pricing model. In addition, changes in the market value of the Company's common stock from the closing date through the date of filing of the registration statement will result in non-cash charges or credits to operations to reflect the change in fair value of the warrants during this period. The Company recorded a charge to operations of $592,467 during the year ended December 31, 2005 to reflect the change in market value of the warrants. For the six months ended June 30, 2006, the Company recorded an increase in fair value of warrants of $588,686 which was recognized as a charge to operations. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS Overview On November 16, 2005, we acquired all of the outstanding capital stock of MDwerks Global Holdings, Inc. in connection with the merger of a wholly owned subsidiary of the Company with and into MDwerks Global Holdings, Inc. (the "Merger"), with the former stockholders of MDwerks being issued approximately 9,352,000 shares of common stock of the Company in exchange for all their shares of common stock of MDwerks Global Holdings, Inc. In connection with the Merger, we changed our name to MDwerks, Inc. Simultaneously with the closing of the Merger, we completed the closing of a private placement of units, with each unit consisting of 10,000 shares of our common stock and a warrant to purchase 10,000 shares of our common stock at an exercise price of $2.50 per share, with gross proceeds of $1,600,000 and net proceeds to us, after deduction of offering expenses and commissions paid at the closing, of $1,310,000 (the "Private Placement"). As we have ceased our prior mining operations we will operate the business of MDwerks Global Holdings, Inc. and the Xeni Companies as our sole line of business, therefore the following discussion and analysis is of the financial condition and results of operations for the year ended December 31, 2005 and 2004 of MDwerks Global Holdings, Inc. and the Xeni Companies. The following discussion and analysis should be read in conjunction with the financial statements, including footnotes, and other information presented in this prospectus. For purposes of the following discussion and analysis, references to "we", "our", "us" or the "Company" refers to MDwerks, Inc. and includes MDwerks Global Holdings, Inc. as its wholly-owned subsidiary and the Xeni Companies as indirect wholly-owned subsidiaries. MDwerks Global Holdings, Inc. was incorporated under the laws of the state of Florida on October 23, 2003. It was originally formed to provide international telecommunications products and services. In April 2004, MDwerks Global Holdings, Inc. decided not to pursue the telecommunications business. In December 2004, it decided to focus on a new line of business involving healthcare provider claims processing, funding and related services. On May 25, 2005, MDwerks Global Holdings, Inc. changed its name from Global IP Communications, Inc, to MDwerks Global Holdings, Inc. On June 7, 2005, MDwerks Global Holdings, Inc. entered into and consummated Share Exchange Agreements with all of the stockholders of each of the Xeni Companies (Xeni Medical, Xeni Financial and Xeni Billing). Pursuant to each of the Share Exchange Agreements, MDwerks Global Holdings, Inc. acquired 100% of the issued and outstanding shares of common stock of each of the Xeni Companies, in exchange for approximately 52,623,000 shares of common stock of MDwerks Global Holdings, Inc. (which shares, together with the shares of the holders of common stock of MDwerks Global Holdings, Inc. prior to the share exchanges were exchanged for approximately 9,352,000 shares of our common stock in connection with the Merger). As a result of the share exchanges, each of the Xeni Companies became a wholly-owned subsidiary of MDwerks Global Holdings, Inc. The acquisition of the Xeni Companies was accounted for as a reverse merger, because, after giving effect to the share exchanges, the former stockholders of the Xeni Companies held a majority of the outstanding common stock of MDwerks Global Holdings, Inc. on a voting and fully diluted basis. As a result of the share exchanges, Xeni Medical was deemed to be the acquirer for accounting purposes. Accordingly, the financial statements presented are those of Xeni Medical for all periods prior to the acquisition of the Xeni Companies on June 7, 2005, and the financial statements of the consolidated companies from the acquisition date forward. The historical stockholders' deficiency of the Xeni Companies prior to their acquisition has been retroactively restated for the equivalent number of shares received in the acquisition. The restated consolidated stockholders' deficiency of the accounting acquirer is carried forward after the acquisition. Xeni Medical provides a web-based package of electronic claims solutions to the healthcare provider industry. Through internet access to our "MDwerks" suite of proprietary products and services, healthcare providers can significantly improve daily insurance claims transaction processing, administration, funding and management. Xeni Financial offers advance funding to healthcare providers secured by claims processed through the MDwerks system. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) Xeni Billing offers healthcare providers billing services facilitated through the MDwerks suite of products and services. We plan, initially, to sell to physician and clinical service group practices, hospitals, rehabilitation centers, nursing homes and certain related practice vendors, including diagnostic testing companies, 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 such as California, Florida and New York, 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 business, including, among other things, efficiently deploying our capital, developing our product and services offerings, developing and implementing our marketing campaigns and strategies and developing awareness and acceptance of our products. Our ability to generate future revenues will be dependent on a number of factors, many of which are beyond our control, including the pricing of other services, overall demand for our products, market competition and government regulation. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We apply the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. We have identified the policy below as critical to our business operations and understanding of our financial results: Revenue derived from fees related to claims and contract management services are generally recognized when services are provided to the customer. We provide advance funding services to unaffiliated healthcare providers (our "Customer"). The Customer advances are typically collateralized by Security Agreements granting first position liens on the medical claims submitted by our Customers to third party payors (the "Payors"). The advances are repaid through the remittance of payments of Customer medical claims, by Payors, directly to us. We withhold from these advances interest, accrued on a daily basis, and 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 we have 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. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) Because we have had a limited operating history, it is difficult to accurately forecast our revenues and expenses. Additionally, our operations will continue to be subject to risks inherent in the establishment of a new business, including, among other things, efficiently deploying our capital, developing our product and services offerings, developing and implementing our marketing campaigns and strategies and developing awareness and acceptance of our products. Our ability to generate future revenues will be dependent on a number of factors, many of which are beyond our control, including the pricing of other services, overall demand for our products, market competition and government regulation. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 VERSUS SIX MONTHS ENDED JUNE 30, 2005 Revenue In July 2005, we began processing claims on our MDwerks suite of products for our first client and recorded total revenue of $140,737 during the six months ended June 30, 2006 as compared to $9,976 for the six months ended June 30, 2005, an increase of $130,761. For the six months ended June 30, 2006, we recorded service fee revenue of $114,566, or 81.4% and financing income of $26,171, or 18.6%. For the six months ended June 30, 2005, we recorded service fee revenue of $5,500, or 55.1% and financing income of $4,476, or 44.9%. Operating Expenses Our operating expenses significantly increased for the six months ended June 30, 2006 from the six months ended June 30, 2005 as a result of increased operations as we began to implement our business plan. For the six months ended June 30, 2006, total operating expenses were $2,622,483 as compared to $503,336 for the six months ended June 30, 2005, an increase of $2,119,147. Included in this increase for the six months ended June 30, 2006 is the following: 1. We recorded compensation expense of $1,463,735 for the six months ended June 30, 2006 as compared to $0 for the six months ended June 30, 2005. This increase was attributable to the hiring of permanent sales, operations and executive staff, which began on September 26, 2005. We expect compensation expense to increase as we hire additional administrative, sales and technical personnel. In addition, for the six months ended June 30, 2006, we recorded $81,000 of compensation expense related to the issuance of 25,000 shares to our chief financial officer and $553,635 of compensation expense related to issuance of stock options to employees; 2. Consulting expense and outside services amounted to $255,045 for the six months ended June 30, 2006 as compared to $288,998 for the six months ended June 30, 2005, a decrease of $33,953. During the six months ended June 30, 2006, we issued 28,483 shares of our common stock to consultants and recorded consulting expense of $114,000. For the six months ended June 30, 2005, we paid consultants for substantially all of our sales, operations and executive functions prior to the hiring of permanent staff on September 26, 2005. 3. Professional fees amounted to $124,124 for the six months ended June 30, 2006 as compared to $119,712 for the six months ended June 30 2005, an increase of $4,412 of 3.7%. This increase was attributable to accounting fees for the audit of our financial statements and SEC filings and legal fees related to other corporate matters. 4. Selling, general and administrative expenses were $779,579 for the six months ended June 30, 2006 as compared to $94,626 for the six months ended June 30, 2005, an increase of $684,953 or 724%. This increase was attributable to an increase in all of our general and administrative expenses as we implement our business plan. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) For the six months ended June 30, 2006, selling, general and administrative expenses consisted of the following: Sales commissions $105,429 Advertising and promotion 80,033 Employee benefits and payroll taxes 178,967 Other selling, general and administrative 415,150 -------- $779,579 ======== Other Income (Expenses) For the six months ended June 30, 2006, interest income was $4,548 as compared to $0 for the six months ended June 30, 2005, an increase of $4,548. This increase was due to an increase in interest-bearing cash deposits. For the six months ended June 30, 2006, interest expense was $7,748 as compared to $0 for the six months ended June 30, 2005, an increase of $7,748. This increase was due to an increase in borrowings. For the six months ended June 30, 2006, we recorded a loss on settlement of notes payable related to the issuance of common shares for debt conversion of $180,827 compared to $0 for the six months ended June 30, 2005. For the six months ended June 30, 2006, we recorded a loss on the revaluation of a warrants liability of $588,686 as compared to $0 for the six months ended June 30, 2005. We are required to revalue our warrant liability to fair value at the end of each reporting period until our registration statement is declared effective. Net Loss As a result of these factors, we reported a net loss of $3,254,448 for the six months ended June 30, 2006 as compared to a net loss of $493,360 for the six months ended June 30, 2005. Deemed Dividend arising from beneficial conversion on Preferred Stock and Other Charges During the six months ended June 30, 2006, we recorded a deemed dividend arising from a beneficial conversion feature of preferred stock of $24,000 which relates to our Series A Convertible Preferred Stock. This non-cash expense related to the beneficial conversion features of those securities and is recorded with a corresponding credit to paid-in capital. In addition, for the six months ended June 30, 2006, we issued 76,000 shares of the Company's common stock to certain shareholders pursuant to agreements to offset the effect of dilutive financing 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. Net Loss Attributable to Common Shareholders We reported a net loss attributable to common shareholders of $3,524,688 for the six months ended June 30, 2006 as compared to net loss attributable to common shareholders of $493,360 for the six months ended June 30, 2005. This translates to an overall per share loss available to shareholders of ($.30) for the six months ended June 30, 2006 as compared to a per share loss of $(.05) for the six months ended June 30, 2005. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) FOR THE THREE MONTHS ENDED JUNE 30, 2006 VERSUS THREE MONTHS ENDED JUNE 30, 2005 Revenue In July 2005, we began processing claims on our MDwerks suite of products for our first client and recorded total revenue of $71,805 during the three months ended June 30, 2006 as compared to $9,976 for the three months ended June 30, 2005, an increase of $61,829. For the three months ended June 30, 2006, we recorded service fee revenue of $61,982, or 86.3% and financing income of $9,823, or 13.7%. For the three months ended June 30, 2005, we recorded service fee revenue of $5,500, or 55.1% and financing income of $4,476, or 44.9%. Operating Expenses Our operating expenses significantly increased for the three months ended June 30, 2006 from the three months ended June 30, 2005 as a result of increased operations as we began to implement our business plan. For the three months ended June 30, 2006, total operating expenses were $1,368,024 as compared to $389,107 for the three months ended June 30, 2005, an increase of $978,917. Included in this increase for the three months ended June 30, 2006 is the following: 1. We recorded compensation expense of $703,788 for the three months ended June 30, 2006 as compared to $0 for the three months ended June 30, 2005. This increase was attributable to the hiring of permanent sales, operations and executive staff, which began on September 26, 2005. We expect compensation expense to increase as we hire additional administrative, sales and technical personnel. In addition, for the three months ended June 30, 2006, we recorded $289,209 of compensation expense related to issuance of stock options to employees; 2. Consulting expense and outside services amounted to $211,924 for the three months ended June 30, 2006 as compared to $210,637 for the three months ended June 30, 2005, an increase of $1,287. During the three months ended June 30, 2006, we issued 28,483 shares of our common stock to consultants and recorded consulting expense of $114,000. For the three months ended June 30, 2005, we paid consultants for substantially all of our sales, operations and executive functions prior to the hiring of permanent staff on September 26, 2005. 3. Professional fees amounted to $64,153 for the three months ended June 30, 2006 as compared to $109,899 for the three months ended June 30 2005, a decrease of $45,746 of 41.6%. This decrease was attributable to accounting fees for the audit of our financial statements and SEC filings and legal fees related to other corporate matters. 4. Selling, general and administrative expenses were $388,159 for the three months ended June 30, 2006 as compared to $68,571 for the three months ended June 30, 2005, an increase of $319,588 or 466%. This increase was attributable to an increase in all of our general and administrative expenses as we implement our business plan. For the three months ended June 30, 2006, selling, general and administrative expenses consisted of the following: Sales commissions $ 42,871 Advertising and promotion 32,960 Employee benefits and payroll taxes 87,811 Other selling, general and administrative 224,517 -------- $388,159 ======== 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) Other Income (Expenses) For the three months ended June 30, 2006, interest income was $2,094 as compared to $0 for the three months ended June 30, 2005, an increase of $2,094. This increase was due to an increase in interest-bearing cash deposits. For the three months ended June 30, 2006, interest expense was $3,682 as compared to $0 for the three months ended June 30, 2005, an increase of $3,682. This increase was due to an increase in borrowings. For the three months ended June 30, 2006, we recorded a loss on the revaluation of a warrants liability of $588,686 as compared to $0 for the three months ended June 30, 2005. We are required to revalue our warrant liability until our registration statement is declared effective. Net Loss and Net Loss Attributable to Common Shareholders As a result of these factors, we reported a net loss of $1,886,493 for the three months ended June 30, 2006 as compared to a net loss of $379,131 for the three months ended June 30, 2005. This translates to an overall per share loss available to shareholders of ($.16) for the three months ended June 30, 2006 as compared to a per share loss of $(.04) for the three months ended June 30, 2005. Liquidity and Capital Resources We used the proceeds from the sales of common stock through December 31, 2005 and proceeds from notes and loans payable for working capital purposes and to fund our notes receivable of which we have $442,670 owed to us at June 30, 2006. We will continue to advance funds under note agreements to providers that subscribe to our MDwerks financial services solution. During 2006, we sold 28.33 units in a private placement to accredited investors pursuant to the terms of a Confidential Private Placement Memorandum, dated February 1, 2006, and private placement subscription agreements executed and delivered by each investor on or before the closing of the private placement. Each unit consists of one share of our Series A Convertible Preferred Stock, par value $.001 per share, and a detachable, transferable warrant to purchase 20,000 shares of our common stock, at a purchase price of $3.00 per share. In connection with the sale of the 28.33 units, we received net proceeds of $1,426,391. While we have sufficient funds to conduct our business and operations as they are currently undertaken for the near term, our ability to continue to implement our revenue and profit growth strategy could be adversely affected if we are unable to consummate additional private placement transactions or debt financing, which we are currently pursuing. We currently have no material commitments for capital expenditures. 21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) Cash flows At June 30, 2006, we had cash of $453,761. Net cash used in operating activities was $1,655,335 for the six months ended June 30, 2006 as compared to $466,975 for the six months ended June 30, 2005, an increase of $1,188,360. This increase is primarily attributable to an increase in our net loss and: 1. An increase in notes receivable, accounts receivable and prepaid expenses aggregating $244,293 related to the increase in revenue and the funding of notes receivable to providers that subscribe to our MDwerks financial services solution; 2. An increase in accounts payable, accrued expenses and deferred revenues related to an increase in operations aggregating $310,052. Net cash used in investing activities was $71,728 for the six months ended June 30, 2006 as compared to $72,172 for the six months ended June 30, 2005, and is related to the acquisition of computer and office equipment and furniture. Net cash provided by financing activities was $1,414,360 for the six months ended June 30, 2006 as compared to $564,386 for the six months ended June 30, 2005. For the six months ended June 30, 2006, we received proceeds from the sale of Series A preferred stock of $1,700,000 offset by placement fees and other expenses paid of $273,609 related to the preferred stock offering and repayment of loans payable of $12,031. During the six months ended June 30, 2005, we received capital contributions from the former stockholders of the Xeni Companies of $550,886 and proceeds from loans payable of $13,500. OFF BALANCE SHEET ARRANGEMENTS We had no off balance sheet arrangements as of June 30, 2006. 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS (CONTINUED) CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties, many of which are beyond our control. Our actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this report. Important factors that may cause actual results to differ from projections include, but are not limited to, for example: o adverse economic conditions; o inability to raise sufficient additional capital to implement our business plan; o intense competition, including entry of newly-developed alternative drug technologies; o unexpected costs and operating deficits, and lower than expected sales and revenue; o adverse results of any legal proceedings; o inability to satisfy government and commercial customers using our technology; o the volatility of our operating results and financial condition; o inability to attract or retain qualified senior management personnel, including sales and marketing, and technology personnel; and o other specific risks that may be alluded to in this report. All statements, other than statements of historical facts, included in this report regarding our strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans and objectives of management are forward-looking statements. When used in this report, the words "will," "may," "believe," "anticipate," "intend," "estimate," "expect," "project," "plan" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, no one can assure investors that these plans, intentions or expectations will be achieved. Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of securities offerings or economic analysis. We have not reviewed or included data from all sources, and we cannot assure investors of the accuracy or completeness of the data included in this report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We have no obligation to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. 23 ITEM 3. CONTROLS AND PROCEDURES We maintain "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the "Evaluation"), under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls") as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were effective as of the end of the period covered by this report. We have also evaluated our internal controls for financial reporting, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. CEO and CFO Certifications appearing immediately following the signatures section of this report are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. 24 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the six month ended June 30, 2006, we sold 28.33 units in a private placement to accredited investors pursuant to the terms of a Confidential Private Placement Memorandum, dated February 1, 2006, and private placement subscription agreements executed and delivered by each investor on or before the closing of the private placement. Each unit consists of one share of our Series A Convertible Preferred Stock, par value $.001 per share convertible into 20,000 shares of common stock, and a detachable, transferable warrant to purchase 20,000 shares of our common stock, at a purchase price of $3.00 per share. In connection with the sale of the 28.33 units, we received net proceeds of $1,426,391. The private placement was made solely to "accredited investors," as defined in Regulation D under the Securities Act of 1933, as amended, or the Securities Act. None of the units, warrants or the Common Stock, or shares of our common stock underlying the warrants sold in the offering 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. In June 2006, we issued 28,483 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 $114,000 or $4.00 per share The shares described above were exempt from the registration requirements of the Securities Act by reason of Section 4(2) of the Securities Act and the rules and regulations, including Regulation D there under, as a transaction by an issuer not involving a public offering. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS 31.1 Section 302 Certification of Principal Executive Officer 31.2 Section 302 Certification of Principal Financial Officer 32.1 Section 906 Certification of Principal Executive Officer 32.2 Section 906 Certification of Principal Financial Officer 25 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MDWERKS, INC. August 10, 2006 /s/ Howard B. Katz ---------------------------------------- Howard B. Katz Chief Executive Officer August 10, 2006 /s/ Vincent Colangelo ---------------------------------------- Vincent Colangelo Chief Financial Officer 26