UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission file number 000-29171
MED GEN, INC.
[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 207, Boca Raton, FL 33433
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(Address of principal executive offices)
(561) 750-1100 (Issuer's
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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
11,087,187 Shares outstanding as of March 31, 2004. The Company's stock trades
on the OTCBB under the symbol "MDGN".
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - March 31, 2004 (Unaudited)
Statements of Operations - Six months and three months ended March 31,
2004 and 2003 (Unaudited).
Statements of Cash Flows - Six months ended March 31, 2004 and 2003
(Unaudited).
Notes to Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Change in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-31.1
EX-31.2
EX-32.1
EX-32.2
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MED GEN, INC.
This Form 10-QSB is for the period ended March 31, 2004.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Med Gen, Inc.
Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 299,291
Accounts receivable 365,013
Inventory 153,947
Other current assets 5,700
-----------
Total Current Assets 823,951
-----------
Property and Equipment, net 72,531
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Other Assets
Deposits 62,421
Assets held for sale 37,500
Other 10,836
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$ 1,007,239
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 248,707
Notes payable - related parties 979,450
Convertible debentures 380,000
-----------
Total Current Liabilities 1,608,157
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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, $.001 par value, 20,000,000
shares authorized, 7,506,051 shares
issued and outstanding 7,506
Paid in capital 9,121,003
Accumulated (deficit) (5,800,184)
-----------
3,328,325
Receivable for common stock (3,929,243)
-----------
(600,918)
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$ 1,007,239
===========
See accompanying notes to the financial statements.
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Med Gen, Inc.
Statements of Operations
For the Three Months and Six Months Ended March 31, 2004 and 2003
(Unaudited)
Three Months Six Months
------------------------ -------------------------
2004 2003 2004 2003
----------- --------- ----------- ----------
Net Sales $ 244,937 $ 586,140 $ 512,201 $1,140,818
Cost of Sales 144,083 233,328 248,189 340,147
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100,854 352,812 264,012 800,671
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Operating expenses:
Non cash stock compensation 48,750 -- 135,750 --
Selling, general and administrative expenses 325,994 340,236 811,071 696,168
----------- --------- ----------- ----------
374,744 340,236 946,821 696,168
----------- --------- ----------- ----------
(Loss) from operations (273,890) 12,576 (682,809) 104,503
----------- --------- ----------- ----------
Other (income) expense:
Interest expense 22,595 15,604 71,335 49,773
Other expenses 6,250 -- 12,500 --
----------- --------- ----------- ----------
28,845 15,604 83,835 49,773
----------- --------- ----------- ----------
Income (loss) before income taxes (302,735) (3,028) (766,644) 54,730
Income taxes -- -- -- --
----------- --------- ----------- ----------
Net income (loss) $ (302,735) $ (3,028) $ (766,644) $ 54,730
=========== ========= =========== ==========
Per share information - basic and fully diluted:
Weighted average shares outstanding 5,821,914 694,028 4,496,172 659,204
=========== ========= =========== ==========
Net income (loss) per share $ (0.05) $ (0.00) $ (0.17) $ (0.08)
=========== ========= =========== ==========
See accompanying notes to the financial statements.
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Med Gen, Inc.
Statements of Cash Flows
For the Six Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
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Cash flows from operating activities:
Net cash (used in) operating activities $(467,932) $(200,840)
--------- ---------
Cash flows from investing activities:
Net cash (used in) investing activities -- (10,382)
--------- ---------
Cash flows from financing activities:
Borrowing (repayment) of related party notes (184,800) 193,500
Proceeds from option exercise 461,232 --
Proceeds from issuance of common stock 400,000 --
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Net cash provided by financing activities 676,432 193,500
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Net increase (decrease) in cash 208,500 (17,722)
Beginning - cash and cash equivalents 90,791 49,563
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Ending - cash and cash equivalents $ 299,291 $ 31,841
========= =========
See accompanying notes to the financial statements.
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MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004
(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, 2003 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 - Related Parties
During March 2002 the Company repaid $200,000 in notes payable to related
parties and borrowed an additional $15,200 from related parties with interest at
10% per annum.
(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 $1,600,000 resulting from net
operating loss carryforwards aggregating approximately $5,000,000 is fully
offset by a valuation allowance. The Company has recorded a valuation 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.
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(6) Convertible Debentures
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 $2.00 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
$2.00 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.
During December 2003 a holder of the convertible debentures converted a $50,000
debenture into 27,205 shares of common stock.
(7) Stockholders' (Deficit)
During November 2003 the Company affected a four to one forward stock split. All
share and per share amounts have been restated to give effect to this split.
From October 1, 2003 to December 31, 2003 officers exercised 735,000 of the
options discussed in Note 6 and the received 2,940,000 common shares in the
cashless exercise. The aggregate value for the shares of $3,638,250 is due from
these officers at such time as they sells the shares and has been recorded as a
receivable for common stock.
From October 1, 2003 to March 31, 2004 $461,232 had been paid related to the
option exercises
During January 2004 the Company repriced options held by officers from $1.24 to
$.44 which was the fair market value of the common shares underlying the option
on the repricing date.
During November 2004 the Company issued 186,915 options to purchase common stock
at an exercise price of $1.34 per share to a consultant. The Company charged
$87,000 to operations related to the issuance of these options.
During November 2003 the Company entered into a term sheet with an investment
banker for a proposed offering of a minimum of $600,000 and a maximum of
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$800,000 in 5% convertible preferred securities pursuant to Regulation D. The
preferred shares are convertible into common shares at $1.00 per share. In
addition, each ten shares of preferred stock entitles the purchaser to receive 2
three year warrants to purchase common shares of the Company at 110% of the
conversion price at the time of closing. The Company has agreed to pay a fee to
the investment banker of 10% of the cash raised and warrants to purchase shares
of common stock equal to 20% of the common shares which may be issued in the
proposed offering at an exercise price of 110% of the conversion price at the
time of closing. All shares and warrants carry certain registration rights. This
offering was subsequently cancelled.
During February and March 2004 the Company issued an aggregate of 3,238,706
shares of common stock pursuant to Regulation S offerings. The Company realized
net proceeds of $400,000 from these sales.
During February 2004 the Company issued 75,000 shares of common stock for
consulting services. The fair value of these shares of $48,750 has been charged
to operations during the period.
(8) Concentrations
During the period ended March 31, 2004 the Company derived 46%, 20%, 14% and 13%
of its total sales from four customers. At March 31, 2004 $257,570 is due from
these customers.
(9) Subsequent Events
During April 2004 the Company issued an aggregate of 3,273,240 shares of common
stock pursuant to Regulation S offerings. The Company realized net proceeds of
$439,650 from these sales.
During April 2004 the Company issued 75,000 shares of common stock for
consulting services. The fair value of these shares of $75,000 has been charged
to operations during the period.
During April 2004 the Company issued 232,896 shares to satisfy obligations for
$350,000 in convertible debentures and accured interest.
During April 2004 the Company repaid an aggregate of $425,000 of notes due to
related parties.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Six months and Three months ended March 31, 2004 Compared with six months and
three months ended March 31, 2003
GENERAL
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The Company is now headquartered at 7284 W. Palmetto Park Rd., Suite 207, Boca
Raton, Florida 33433 since January 1,2004. The Company has downsized its
headquarters from 4500 sq, ft. to 2200 sq. ft. in an effort to decrease
operating expenses. It does not foresee any need to further expand its 2200
sq.ft. Corporate facility. The Company has elected to outsource the
manufacturing of all its products at this time.
RESULTS OF OPERATIONS
- ---------------------
FOR THE SIX MONTHS ENDED MARCH 31, 2004 NET SALES DECREASED 55.11% TO $512,201
FROM $1,140,818 IN THE PRIOR YEAR. THE DECREASE IN SALES WAS PRIMARILY DUE TO A
LACK OF ADVERTISING BUDGET TO COMPETE WITH OTHER PRODUCTS IN THE SAME
MARKETPLACE. BY COMPARISON OUR LARGEST COMPETITOR SPENT MILLIONS OF DOLLARS
ADVERTISING THEIR NATIONAL BRAND WHILE THE COMPANY CONTINUED TO ADVERTISE
THROUGH CO-OPERATIVE ADS WITH THE CHAIN DISTRIBUTOR. GROSS PROFIT FOR THE SIX
MONTHS ENDED MARCH 31, 2004 WAS $264,012 VERSUS $800,671 FOR THE SAME PERIOD
YEAR AGO, A DECREASE OF 67. 03% . GROSS PROFIT MARGINS FOR THE SIX MONTHS ENDED
MARCH 31, 2004 DECREASED TO 51.54% FROM 70.2% IN THE PREVIOUS SIX MONTHS, A YEAR
AGO. THE DECREASE CAN BE ATTRIBUTED TO LOWER SALES WHICH IN TURN COST THE
COMPANY MORE TO MANUFACTURE THE PRODUCT AND LOWER MARGINS.
For the three month period ended March 31, 2004, Sales decreased 58.22% to
$244,937 from $586,140 in the prior year. This decrease was due to a lack of
advertising budget to compete with other products in the same marketplace Gross
profit for the three month period ending March 31, 2004 was $100,854 versus
$352,812 for the prior year , a decrease of 71.42%. The decrease was due to a
continuing decline in sales because of increased competition and a lack of
advertising budget..
For the six month period ended March 31, 2004 selling, general and
administrative expenses increased from $696,168 to $946,821. The increase is
attributable to a $135,750 non cash expense related to consultants fees whereby
the Company paid the consultant in restricted common stock and conserved cash
and an additional costs related to moving the Company to a smaller and more
efficient workplace at the beginning of 2004. Management anticipates that it
will further cut costs in the third fiscal quarter. Operating loss was ,
$(682,809) in the period ending March 31, 2004 as compared to an operating
profit of $104,503 for the six month period , a year ago. The loss for the six
month period is related to declining sales, increased cost of sales and the cost
of free product which was required as part of a contractual obligation to garner
shelf space at a major retailor.
For the three month period ending march 31, 2004 Operating expenses (selling,
general and administrative expenses) increased to $374,744 from $340,236, . The
increase is due to a non-cash stock compensation expense of $48,750 , otherwise
operating expenses would have been lower on a comparative quarterly basis.
Operating loss was ($302,735) as opposed to an operating loss of ($3,028) in
the prior year's quarter. The loss for the quarter is directly related to lower
sales caused by the lack of an advertising budget.
For the six month periods interest expense was $71,335 as compared to $9,773 The
increase was due to increased borrowings in order to supplement cash flow from
declining sales. The Company has paid down a significant portion of the
outstanding debt in April 2004 and management expects to have lower interest
expenses in the third and fourth fiscal quarters of 2004.
For the three month period interest expense increased from $15,604 in the year
ago quarter to $22,595. This due to the increase in borrowings for the period.
The Company has paid down a significant portion of the outstanding debt in April
2004.
For the six months ended March 31, 2004 the Company reported a loss of $0.17 as
compared to a profit of $0.8 for the same period a year ago.
For the three month period ended March 31, 2004 the company reported a loss of
$.05 per share versus $.00 per share for the same period a year ago .
LIQUIDITY AND CAPITAL RESOURCES
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Cash on hand at March 31, 2004 was $299, , and the Company had a working capital
deficit of $784,206 at March 31, 2004.
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Net cash used in operating activities was $467,932 during the six month period
ended March 31, 2004 which consisted principally of the net loss adjusted for a
decrease in accounts receivable of $136,419 and non-cash stock compensation of
$135,750.
Net cash used in investing activities was $-0- during the the six month period
ended March 31, 2004.
Net cash provided by financing activities was $676,432 during the six month
period ended March 31, 2004, which consisted of proceeds from the management
options exercises of $461,232, proceeds from stock issuances net of $400,000 and
repayments of related party loans of $184,800.
The Company has begun an advertising campaign which was launched on April 19th,
2004 The plan is to run advertisements in specific areas of the country in an
effort to re-establish its brand recognition among consumers and effectively
compete against its competitors. The Company has also eliminated one-time
burdens of legal, computer and other non-recurring expenses, in an effort to
further reduce costs while the sales remain below managements expectations. The
Company has sufficient cash resources, receivables and cash flow to provide for
all general corporate operations in the foreseeable future.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
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 year ended
September 30, 2003 are those that depend most heavily on these judgments and
estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- -----------------------------------------
Recently issued accounting pronouncements and their effect on us are discussed
inn the notes to the financial statements in our September 30, 2003 audited
financial statements.
FORWARD LOOKING STATEMENTS
- --------------------------
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
t update the forward-looking statements contained in this Form 10QSB filing.
ITEM 3. CONTROLS & PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Acts
reports is recorded, processed and summarized and is reported within the time
periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the
disclosure control procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
PART II
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ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant in the case: Global Healthcare Inc.. adv. Med Gen
Inc., et. al. The matter was re-filed for the third time by the plaintiffs after
two prior dismissals by the Federal courts for failure to state a cause of
action. Management will vigorously defend this action and believes there is no
merit to the plaintiff's claims.
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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
The Company held its annual meeting on April 16th, 2004 and had no matters to
vote by security holders.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, promulgated under the
Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, promulgated under the
Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 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: May 5, 2004
By: /s/Paul B. Kravitz
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Paul B. Kravitz
Chief Executive Officer
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