UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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Commission file number 000-29171
MED GEN, INC.
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[Exact name of small business issuer as specified in its charter]
Nevada 65-0703559
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(State of incorporation) (IRS Employer Identification No.)
7284 W. Palmetto Park Road, Suite 106, Boca Raton, FL 33433
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(Address of principal executive offices)
(561) 750-1100
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(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, Par Value $.001 per share
156,465 Shares outstanding as of December 31, 2002. The Nasdaq has
assigned a new cusip number and symbol for the Company. It will trade
under the new symbol "MDGN" on or about February 3, 2003.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
1
This amendment to the Company's Form 10-QSB for the period ended
December 31, 2002 is filed for the purpose of providing additional
disclosure regarding the Company's internal controls and procedures
(See Part I, Item 3. Controls and Procedures) and for the purpose of
adding additional compliance lanugage to the Certifications pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - December 31, 2002 (Unaudited)
Statements of Operations - Three months ended December 31, 2002
and 2001 (Unaudited).
Statements of Cash Flows - Three months ended December 31, 2002
and 2001 (Unaudited).
Notes to Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3. Controls and Procedures.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
2
MED GEN, INC.
This Form 10-QSB for the period ended December 31, 2002 reflects an
80:1 reverse split of the Company's Common Stock which was approved by the
Board of Directors on January 20, 2003. The Nasdaq has assigned a new cusip
number and symbol for the Company. It will trade under the new symbol
"MDGN" on or about February 3, 2003.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
4
Med Gen, Inc.
Balance Sheet
December 31, 2002
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 13,734
Accounts receivable 512,610
Inventory 283,255
Officer advances 7,981
Other current assets 69,537
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Total Current Assets 887,117
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Property and Equipment, net 88,849
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Other Assets
Deposits 90,705
Assets held for sale 77,922
Other 11,325
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179,952
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$ 1,155,918
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 332,307
Notes payable - officers 100,000
Notes payable 600,000
Convertible debentures 30,000
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Total Current Liabilities 1,062,307
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Convertible debentures 400,000
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Stockholders' (Deficit)
Preferred stock, $.001 par value, 5,000,000 shares
authorized
Series A 8% cumulative, convertible, 1,500,000 shares
authorized -
Undesignated, 3,500,000 shares authorized -
Common stock, $.001 par value, 20,000,000
shares authorized, 156,465 shares
issued and outstanding 156
Paid in capital 4,161,853
Accumulated (deficit) (4,382,938)
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(220,929)
Receivable for common stock (85,460)
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(306,389)
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$ 1,155,918
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See accompanying notes to financial statements.
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Med Gen, Inc.
Statements of Operations
For the Three Months Ended December 31, 2002 and 2001
(Unaudited)
2002 2001
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Net Sales $ 554,678 $ 952,879
Cost of Sales 106,819 271,032
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Gross profit 447,859 681,847
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Operating expenses:
Selling, general and administrative expenses 355,932 684,211
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Income (loss) from operations 91,927 (2,364)
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Other (income) expense:
Other (income) expenses - (23,065)
Interest expense 34,169 17,443
Non cash interest expense - 210,000
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34,169 204,378
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Income (loss) before income taxes 57,758 (206,742)
Income taxes - -
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Net income (loss) $ 57,758 $ (206,742)
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Per share information - basic and fully diluted:
Weighted average shares outstanding 156,465 128,861
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Net income (loss) per share $ 0.37 $ (1.60)
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See accompanying notes to financial statements.
6
Med Gen, Inc.
Statements of Cash Flows
For the Three Months Ended December 31, 2002 and 2001
(Unaudited)
2002 2001
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Cash flows from operating activities:
Net cash (used in) operating activities $ (133,021) $ (174,219)
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Cash flows from investing activities:
Net cash (used in) investing activities (2,808) (12,625)
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Cash flows from financing activities:
Net cash provided by financing activities 100,000 255,800
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Net increase (decrease) in cash (35,829) 68,956
Beginning - cash and cash equivalents 49,563 7,987
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Ending - cash and cash equivalents $ 13,734 $ 76,943
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See accompanying notes to financial statements.
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MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for interim
financial information and Item 310(b) of Regulation S-B. They do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair presentation
have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements of the Company as of September
30, 2002 and for the two years then ended, including notes thereto included
in the Company's Form 10-KSB.
(2) Earnings Per Share
The Company calculates net income (loss) per share as required by Statement
of Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share is calculated by dividing net income (loss) by the
weighted average number of common shares and dilutive common stock equivalents
outstanding. During periods when anti-dilutive commons stock equivalents are
not considered in the computation.
(3) Inventory
Inventory is stated at the lower of cost, determined on a first in, first out
basis, or market value. Inventory consists principally of finished goods and
packaging materials.
(4) Notes Payable
During March 2002 the Company refinanced certain obligations to a lender into
a $500,000 note payable. This note bears interest at 8% per annum, requires
interest payments of $3,333 per month and is due on March 23, 2003. During
the quarter ended December 31, 2002 the Company borrowed an additional
$100,000 from this lender.
(5) Income Taxes
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes", which requires use of the liability method. SFAS 109 provides that
deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes, referred to as temporary differences.
Deferred tax assets and liabilities at the end of each period are determined
using the currently enacted tax rates applied to taxable income in the
periods in which the deferred tax assets and liabilities are expected to be
settled, or realized.
The Company's deferred tax asset of approximately $1,300,000 resulting from
net operating loss carryforwards aggregating approximately $3,800,000 is
fully offset by a valuation allowance. The Company has recorded a valuation
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allowance to state its deferred tax assets at estimated net realizable value
due to the uncertainty related to realization of these assets through future
taxable income.
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34% to income before income taxes due to the effect of
the net operating loss.
(6) Convertible Debentures - long-term
During February through April 2002 the Company issued $400,000 of 8%
cumulative convertible debentures due in May 2004 for cash aggregating
$400,000. The debentures are convertible into common shares of the Company as
follows:
At any time after the Company's common stock price exceeds $3 per share for
a period of ten consecutive trading days the holder may convert 50% of the
value of the debenture into common stock at the rate of $.10 per common share
(election to convert).
The remaining 50% of the debenture may be redeemed by the Company for cash or
may be converted into the number of common shares of the Company determined
by dividing the balance of the value of the debenture by the common stock
price at the time of the election to convert.
Notwithstanding the above, on the 25th monthly anniversary of the date of the
investments the debentures automatically convert into common stock as follows:
50% of the value of the debentures converts into common stock at the rate of
$.10 per common share and the remaining 50% of the value of the debentures
converts into the number of common shares determined by dividing the balance
of the value of the debentures by the common stock price at the 25th monthly
anniversary.
The shares of common stock to be issued upon conversion are subject to
certain registration rights.
Any difference between the fair market value of the common shares and the
conversion price shall be recorded as additional interest on the debentures
at the time of the conversion.
(7) Stockholders' (Deficit)
During February 2003 the Company affected a one for eighty reverse stock
split. All share and per share amounts have been restated to give effect to
this split.
During January 2003 the Company commenced a private placement of its common
stock. The Company is offering a minimum of 1,250,000 and a maximum of
1,785,714 units at $2.80 per unit. Each unit consists of 1 share of common
stock and 1 warrant to purchase 1 common share for a period of four years
from the date of issuance. The warrants carry two separate reset provisions
which are not contingent on each other. The first reset provision occurs if
the Company fails to file a registration statement within 60 days of the
closing of the offering. In the event the company does not file within the
60 day period, the warrants will be adjusted to an exercise price of $1.40.
The second reset provision occurs in the event that after twelve months from
the beginning of the first quarter following the date of the closing of this
offering, the Company does not have net profits after taxes of at least
$800,000; in such case, each warrant will be adjusted by 50% of the original
$2.80 offering price or the previously adjusted price of $1.40. Based upon
this second reset provision the warrants could carry an exercise price as low
as $.70. The warrants are callable, at the discretion of the Company, if the
average closing bid price for the underlying shares is $4.50 or more for any
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20 consecutive calendar days during the term of the warrant. If the Company
elects to call the warrants, the warrant holder must exercise his warrants
within 15 calendar days from the date of the call notification. In the event
the Company calls the warrants any warrants not converted into common stock
by the warrant holder within the 15 day conversion time of the call, will
expire and the holder will lose its right to convert the warrants in the
future.
(8) Concentrations
During the period ended December 31, 2002 the Company derived 52% of its
total sales from a single customer and during the period ended December 31,
2001 the Company derived 50% and 23% of its sales from two customers.
(9) Commitments and Contingencies
Litigation
The Company is involved in various legal actions arising in the normal course
of business including a pending case in which the Company is seeking payment
on an open account aggregating approximately $42,000 and in which a counter
suit has been filed in which the plaintiff is seeking damages of approximately
$1,200,000 for breach of contract. In the opinion of management, the
likelihood of success by plaintiffs against the Company is small and such
matters will not have a material effect upon the financial position of the
Company.
Other
During July 2002 the Company entered into an agreement with the manufacturer
of several of its products, whereby the Company would acquire all of the
outstanding common shares of the manufacturer and certain related entities for
$2,000,000 in shares of common stock at the Company's stock value at closing,
$3,000,000 in cash and $2,000,000 evidenced by a note payable over 3 years
with interest at 8% per annum. The note is convertible into common shares of
the Company at the average price of the Company's common stock for the five
business days prior to conversion This acquisition is contingent upon the
Company obtaining the necessary funding to complete the transaction which at
a minimum must aggregate $12,000,000.
Employment Contracts
On September 27, 2002 the Company entered into 5-year employment contracts
with 2 officers in contemplation of the closing of the acquisition described
above and the completion of a private placement. Each contract provides for
annual salary payments aggregating $150,000 plus a bonus equal to 1.66% of
the Company's pre-tax income or net cash-flow whichever is greater. The
contracts will not become effective until the completion of the proposed
private placement described in Note 7.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Three months ended December 31, 2002
Compared with three months ended December 31, 2001
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GENERAL
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The Company has been headquartered at 7284 W. Palmetto Park Rd., Suite
106, Boca Raton, Florida 33433 since December 1999. Although the
Company has expanded through 2002 it does not foresee any need to
further expand its 4500 sq.ft. Corporate facility. The Company has
elected to outsource the manufacturing of all its products at this
time.
Results of Operations
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For the 2003 first fiscal quarter ended December 31, 2002, Sales
decreased 41.79% to $554,678. This decrease was due to K-Mart's
closing of stores and the one time "ramp up" of orders to 1800 Wal-
Mart stores during the December 2002 quarter. Gross profit for the
first quarter was $447,859 versus $681,847 for the year ago quarter, a
decrease of 34.32%. Gross profit margins for the quarter increased to
80.74% of sales up from 71.56% in the previous year ago quarter
reflecting managements continuing emphasis on reducing the cost of
product and the reduction of sales to Wal-Mart which carry lower gross
margins.
Operating expenses (selling, general and administrative expenses)
decreased to $355,932 from $684,211, a decrease of 47.98%. The
decrease is due to several factors, decreased revenue, which resulted
in a decrease in commissions of $114,475, a decrease in legal fees of
$65,690, which was higher in 2002 as a result of litigation and the
elimination of the one-time expenses associated with doing business
with major retailers. These include, computer up-grades,
communications links and data transmission. Operating income was
$91,927 as apposed to a loss of $2,364 in the prior year's quarter.
Interest expense decreased from $227,443 in the year ago quarter to
$34,169. This is due to the $210,000 of non-cash interest recorded in
2002 related to the Company's credit facility.
For the first fiscal quarter the company reported a profit of $.37 per
share versus a loss of $1.60 per share in the year ago quarter.
Liquidity and Capital Resources
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Cash on hand at December 31, 2002 was $13,734 and the Company had a
working capital deficit of $175,190 at December 31, 2002.
Net cash used in operating activities was $133,021 during the quarter
ended December 31, 2002, which consisted principally of net income
offset by increases in prepaid expenses of $47,408, inventory of
$26,242 and deposits of $26,557 and a decrease in accounts payable
and accrued expenses of $78,159.
Net cash used in investing activities was $2,808 during the quarter
ended December 31, 2002, which consisted of the acquisition of
equipment.
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Net cash provided by financing activities was $100,000 during the
quarter ended December 31, 2002, which consisted of additional
borrowings under the credit facility.
The Company expects to introduce at least one new product into retail
stores and its SnorEnzr Brand continues to grow in popularity,
especially in the international markets. Further, the Company has
affected a 5% price increase effective March 1st 2003. The Company has
also eliminated one-time burdens of legal, computer and other non-
recurring expenses. The Company has sufficient cash resources,
receivables and cash flow to provide for all general corporate
operations in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
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Our discussion of results of operations and financial condition relies
on our consolidated financial statements that are prepared based on
certain critical accounting policies that require management to make
judgments and estimates that are subject to varying degrees of
uncertainty. We believe that investors need to be aware of these
policies and how they impact our financial reporting to gain a more
complete understanding of our financial statements as a whole, as well
as our related discussion and analysis presented herein. While we
believe that these accounting policies are grounded on sound
measurement criteria, actual future events can and often do result in
outcomes that can be materially different from these estimates or
forecasts. The accounting policies and related risks described in the
notes to our financial statements for the quarter ended December 31,
2002 are those that depend most heavily on these judgments and
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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Recently issued accounting pronouncements and their effect on us are
discussed inn the notes to the financial statements in our September
30, 2002 audited financial statements.
FORWARD LOOKING STATEMENTS
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When used throughout in this form 10QSB filing, the words "believe",
"should", "would", and similar expressions that are not historical are
intended to identify forward-looking statements that involve risks and
uncertainties. Such statements include, without limitation,
expectations with respect to the results for the next fiscal year, the
Company's beliefs and its views about the long term future of the
industry and the Company, its suppliers or its strategic business
partners. In addition to factors that may be described in the
Company's other Securities and Exchange Commission ("SEC") filings,
unforeseen circumstances or events could cause the Company's financial
performance to differ materially from that expressed in any forward-
looking statements made by, or on behalf of, the Company. The Company
does not undertake any responsibility to update the forward-looking
statements contained in this Form 10QSB filing.
Item 3. Controls and Procedures.
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The Company's Chief Executive Officer/Chief Financial Officer evaluated
the Company's disclosure controls and procedures within the 90 days
preceding the filing date of this quarterly report. Based upon this
evaluation, the Chief Executive Officer/Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in
ensuring that material information required to be disclosed is included
in the reports that it files with the Securities and Exchange Commission.
There were no significant changes in the Company's internal controls or,
to the knowledge of the management of the Company, in other factors that
could significantly affect these controls subsequent to the evaluation
date.
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PART II
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Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGE IN SECURITIES
Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
Not Applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99.1 - Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
(b) There were no reports filed on Form 8-K for the period covered
by this Report.
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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.
Med Gen, Inc.
(Registrant)
Date: February 5, 2003
By:______/s/Paul B. Kravitz_____
Paul B. Kravitz
Chief Executive Officer
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CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Paul Kravitz, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Med Gen, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quaterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for Med Gen, Inc. and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Med Gen, Inc.,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Med Gen, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to Med Gen,
Inc.'s auditors and the audit committee of Med Gen, Inc.'s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Med Gen, Inc.'s
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in Med Gen,
Inc.'s internal controls; and
6. I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 5, 2003
By:_______/s/Paul B. Kravitz___________
Paul Kravitz
Chief Executive Officer
14
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jack Chien, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Med Gen, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quaterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for Med Gen, Inc. and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to Med Gen, Inc.,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Med Gen, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to Med Gen,
Inc.'s auditors and the audit committee of Med Gen, Inc.'s board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Med Gen, Inc.'s
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in Med Gen,
Inc.'s internal controls; and
6. I have indicated in this quarterly report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 5, 2003
By:__________/s/Jack Chien_____________
Jack Chien
Chief Financial Officer, and
Principal Accounting Officer
15