MDWerks, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with our audited financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.” In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors. Overview MDwerks, Inc. (the “Company”), a Delaware corporation, was focused on effecting a “reverse merger,” capital exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more unrelated businesses (a “Business Combination”) that would benefit from the Company’s public reporting status. During the fiscal year ended December 31, 2023, the Company completed two acquisitions as discussed in detail below. We are a technology company pioneering the development of innovate energy wave solutions for industrial and other commercial enterprises. Our expertise in radio wave technologies and microwave technologies has led to multiple breakthroughs with applications both industrial and commercial. Our patented energy wave technology introduces a revolutionary approach to industrial processes by specific molecular targeting, which can be applied at precise and multiple locations in a system in ways that conventional single point heat sources cannot, resulting in improved efficiency, higher quality, and reduced processing time. 18 Our wholly-owned subsidiary, Two Trees Beverage Company, utilizes our Spirits Rapid Aging System, validating the use of our patented energy wave technology within the premium craft spirits industry. Our proprietary and patented molecular targeting system swiftly and sustainably transforms distillate to maturity, delivering traditional flavors in a fraction of the time with greatly reduced environmental impact and cost. Precision engineered to match traditional aging flavors and aromas, it has been used to produce over 50 SKUs and many award-winning products. Recent Developments RF Specialties, Inc. Acquisition On January 19, 2023, we entered into an Exchange Agreement (the “Exchange Agreement”) by and between the Company, RF Specialties, LLC (“RFS”) and Keith A. Mort as the sole member of RFS. Pursuant to the terms of the Exchange Agreement, the Company agreed to acquire from Mr. Mort, and Mr. Mort agreed to sell to the Company, 100% of the equity interests and membership interests of RFS, in exchange for the issuance by the Company to Mr. Mort of 7,500,000 shares of the Company’s common stock (the “Exchange”). Immediately following the Exchange, RFS became a wholly owned subsidiary of the Company. RFS is an innovative company pushing the boundaries of sustainable Radio Frequency applications. For over 13 years RFS has addressed companies’ most pressing challenges by implementing automated Radio Frequency Technology in a sustainable way reducing energy costs and increasing speed to market when compared to traditional methods. By bringing Radio Frequency applications to market RFS has successfully elevated a wide range of industries including structural engineering, food & beverage, and manufacturing. Two Trees Acquisition On February 13, 2023, we entered into a Merger Agreement (the “Merger Agreement”), by and between the Company, MD-TT Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”) and Two Trees Beverage Co. (“Two Trees”). Two Trees produces a variety of aged alcoholic beverages using an innovative rapid-aging system. This scalable technology results in all-natural, high-quality products, efficiently produced, with a reduced environmental impact. Our products are nearly indistinguishable from those that are traditionally aged. Two Trees created a proprietary process that mirrors and accelerates the natural aging process that occurs when alcohol is aged in wooden barrels over time. The true art of our craft spirits lives within the balance between the grain selection, local water, and the full-bodied flavors from our toasted wood chip varieties. Our wood chips are selected to pair with specific grains and toasted to just the right char, bringing rich flavor profiles to life with a hint of smoke. In consideration of the Merger Agreement, at the effective time of the Merger, each of the holders of Two Trees stock, subject to certain exceptions set forth in the Merger Agreement, shall have the right to convert all of the shares of Two Trees stock into a total of 60,000,000 shares of Company common stock, which shall be apportioned between the Two Trees stockholders, pro rata, based on the number of shares of Two Trees stock held by each of the Two Trees stockholders as of the closing of the Merger (the “Merger Consideration”). Immediately following the Exchange, Two Trees became a wholly owned subsidiary of the Company. Sale of Assets On August 25, 2023, we entered an asset purchase agreement with an unrelated company, Dream Workz Automotive LLC, a Colorado limited liability company (“Dream Workz”). Pursuant to this agreement, we sold certain tangible manufacturing assets of ours to Dream Workz for a purchase price of $195,000 (the “Purchase Price”). The Purchase Price was paid in a combination of cash in the amount of $100,000 and a promissory note in the amount of $95,000 (the “Note”). The Note is unsecured and bears interest at the rate of 8% per annum commencing as of August 25, 2023, and matures on August 25, 2029. The Company recognized a gain of $168,855 on the disposition of assets. During the year ended December 31, 2024, the Company recognized a loss on impairment of the Note of $97,533. In May 2024, the Company entered into two bill of sale agreements to sell two vehicles to Keith Mort, the former owner of RFS. Mr. Mort assumed the loans associated with the two vehicles with a net book value of $130,492 and an aggregate principal balance of $72,592 at the time of sale, and the Company recognized a loss on disposal of $57,900 during the year ended December 31, 2024. 19 Results of Operations Fiscal Year Ended December 31, 2024 compared to Year Ended December 31, 2023 The Company’s results of operations for the year ended December 31, 2024 include the results of Two Trees since the acquisition date of December 8, 2023, and include the results of RFS from the acquisition date of December 27, 2023. For the Years ended December 31, 2024 2023 Revenue Two Trees Distilling $ 1,324,823 $ 104,066 RF Specialties 1,039,270 - Total $ 2,364,093 $ 104,066 Cost of Revenue Two Trees Distilling $ 917,458 $ 80,133 RF Specialties 572,606 1,523 Total $ 1,490,064 $ 81,656 Gross profit (loss) Two Trees Distilling $ 407,365 $ 23,933 RF Specialties 466,664 (1,523 ) Total $ 874,029 $ 22,410 Revenue. Revenue for the year ended December 31, 2024 was $2,364,093 compared to $104,066 for the year ended December 31, 2023. Revenue of $1,324,823 in 2024 is attributable to liquor sales from the acquisition of Two Trees, compared to $104,066 in 2023, and $1,039,270 of revenue in 2024 attributable to product and service income from the acquisition of RF Specialties, compared to $0 in 2023. The RF Specialties business benefited in 2023 from contracts related to the design of industrial drying modules using the Company’s patented radio frequency technology for use in lumber mills. In February 2025, the Company executed contracts with two customers related to the lease of an aggregate of three Spirits Rapid Aging System that are expected to begin producing revenue to the Company in the second half of 2025. The Company expects to drive significant growth in revenue and gross profit in its Two Trees Distilling business from this new revenue stream going forward. Cost of Sales. Cost of sales for the year ended December 31, 2024 was $1,490,064 compared to $81,656 for the year ended December 31, 2023. Cost of sales for the Company’s Two Trees Distilling operations was $917,458 in 2024 compared to $80,133 in 2023. The increase is due to a full year of operations in 2024 compared to the acquisition in December 2023. The Company’s RF Specialties business incurred costs of sales of $572,606 in 2024, including labor costs of $470,045 related to the product and service income from the acquisition of RF Specialties, compared to $1,523 in 2023. Operating Expenses . The Company reported operating expenses of $2,376,693 consisting primarily of legal, accounting, payroll, and general business related expenses for the year ended December 31, 2024 compared to $475,009 for the year ended December 31, 2023. The $1,843,784 increase in operating expenses was primarily attributable to a full year of operations with both businesses. Selling, general and administrative expenses was $1,853,335, and included legal, accounting and audit fees related to our public company reporting obligations and increased activity from two operating business lines, including stock-based compensation of $71,938. Operating expenses included salary and wages expense of $175,827 and $0 for the years ended December 31, 2024 and 2023, respectively. Operating expenses included depreciation and amortization expense of $289,631 and $15,126 for the years ended December 31, 2024 and 2023, and a loss of $57,900 on disposal of assets to a related party. 20 Total Other Income/Expense . Total other expense was $118,453 for the year ended December 31, 2024 compared to the total other income of $160,927 for the year ended December 31, 2023. The $221,480 change was primarily attributable to a loss of $97,533 loss on impairment of note receivable compare to $0 in 2023, and a gain of $168,855 on the sale of assets in 2023. Liquidity and Capital Resources We believe that if we do not raise additional capital over the next 12 months following the filing of this annual report, we may be required to suspend or cease the implementation of our business plans. As of December 31, 2024 and 2023, our cash balance was $11,159 and $115,111, respectively. We anticipate that our current cash and cash generated from financing activities will be insufficient to satisfy our liquidity requirements for the next 12 months. To date, the Company has incurred operating losses since inception of $2,360,505. At December 31, 2024, the Company had a working capital deficit of $1,244,697. The Company requires additional funding to meet its ongoing obligations and to fund anticipated operating losses. Management has expressed substantial doubt about our ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on raising capital to fund its initial business plan and ultimately to attain profitable operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. We expect to incur marketing, professional, and administrative expenses as well as expenses associated with maintaining our filings with the Commission. We will require additional funds during this time and will seek to raise the necessary additional capital. If we are unable to obtain additional financing, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results. Additional funding may not be available on favorable terms, if at all. The Company intends to continue to fund its business by way of equity or debt financing and advances from related parties. Any inability to raise capital as needed would have a material adverse effect on our business, financial condition, and results of operations. Cash Flows Cash Used in Operating Activities. Net cash used in operating activities for the years ended December 31, 2024 and 2023, was $781,970 and $519,790. The increase was attributable to an increase in net loss from the increase in operations in 2024. Cash Used in Investing Activities. Net cash used in investing activities for the years ended December 31, 2024 and net cash provided by investing activities for the year ended December 31, 2023, was $6,990 and $39,041, respectively. The decrease was attributable to a decrease in purchase of intangible assets of $19,500 and property and equipment of $88,000 in 2023 to purchases of property and equipment of $6,990 in 2024. The Company had cash proceeds from the sale of certain equipment of $100,000 and $46,541 net assets acquired from acquisitions in 2023. Cash Provided by Financing Activities. Net cash provided by financing activities for the years ended December 31, 2024 and 2023, was $685,008 and $572,145. Net cash provided by financing activities for the year ended December 31, 2024 consisted of $745,000 in proceeds from the sale of common stock, $155,500 in proceeds from related party notes payable, offset by repayments of notes payable to related parties and third parties of $32,500 and $182,982, respectively, and redemption of preferred stock of $10. Net cash provided by financing activities for the year ended December 31, 2023 consisted of $676,349 in proceeds from the sale of common stock, offset by $104,204 repayments of advances payable. 21 Off Balance Sheet Arrangements There are no off-balance sheet arrangements currently contemplated by management or in place that are reasonably likely to have a current or future effect on the business, financial condition, changes in financial condition, revenue or expenses, result of operations, liquidity, capital expenditures and/or capital resources. Recent Accounting Standards In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures , which amends the existing segment reporting guidance (ASC Topic 280) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss, an amount for other segment items by reportable segment and a description of its composition, the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The amendments in this update were effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The Company adopted this standard on a retrospective basis within our annual report for the year ended December 31, 2024, which resulted in additional disclosures in our segment financial information footnote, primarily related to significant segment expenses that are regularly provided to the CODM and included within our reported measure of segment profit or loss. Refer to note 14 for these additional disclosures. In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses (DISE) , requiring additional disclosure of the nature of expenses included in the income statement. The new standard requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. The amendments in this update are effective for annual periods beginning after December 15, 2026 and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The Company is currently evaluating the impact of our pending adoption of this standard on its consolidated financial statements. The Company has implemented all new accounting standards that are in effect and that may impact its financial statements and does not believe that there are any other new accounting standards that have been issued that might have a material impact on its financial position or results of operations. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions. We evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments. Revenue Recognition - Net sales from Two Trees include liquor and related products, less excise taxes and customer programs and incentives. Sales from RF Specialties, LLC will include product and services related to sustainable Radio Frequency applications to a wide range of industries including structural engineering, food & beverage, and manufacturing. The Company recognizes revenue by applying the following steps in accordance with Accounting Standards Codification (“ASC”) Topic 606 – Revenue from Contracts with Customers: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. The Company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers (except in the case of a consignment sale). For consignment sales, the Company recognizes sales upon the consignee’s shipment to the customer. Postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise. Shipping terms are generally FOB shipping point, and title passes to the customer at the time and place of shipment or purchase by customers at a retail location. For consignment sales, title passes to the consignee concurrent with the consignee’s shipment to the customer. The customer has no cancellation privileges after shipment or upon purchase at retail locations, other than customary rights of return. For service revenue within the Company’s radio frequency applications, the Company recognizes revenue as the services are provided to the customer. The Company’s contracts typically have a single performance obligation, and do not contain a significant financing component. The Company recognizes deferred revenue for performance obligations not yet satisfied, primarily related to liquor sales not yet shipped. As of December 31, 2024, the Company had $226,066 in unsatisfied performance obligations that it expects to satisfy over the next 12 months, of which $25,366 related to shipment of liquor products and $200,700 related to the Company’s RF Specialties business Goodwill - Goodwill represents the excess of acquisition cost over the fair value of the net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it can conclude the assessment. If the Company concludes otherwise, the Company is required to perform a quantitative analysis to determine the amount of impairment. A quantitative analysis is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value to determine the amount of impairment, if any. The Company has determined that it has two reporting units. During the years ended December 31, 2024, and 2023, no impairment expense was recognized. Impairment of Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. During the years ended December 31, 2024, and 2023, no impairment expense was recognized. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act. 22