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 June 30, 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
18,199,320 Shares outstanding as of June 30, 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 - June 30, 2004 (Unaudited)
Statements of Operations - Nine months and three months ended June 30,
2004 and 2003 (Unaudited).
Statements of Cash Flows - Nine months ended June 30, 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Med Gen, Inc.
Balance Sheet
June 30, 2004
(Unaudited)
ASSETS
Cash and cash equivalents $ 610,459
Accounts receivable 225,855
Inventory 136,931
Other current assets 11,962
---------
Total Current Assets 985,207
---------
Property and Equipment, net 64,979
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Other Assets
Other assets 10,630
Deposits 62,421
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$1,123,237
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 128,543
Notes payable - related parties 153,185
Convertible debentures 30,000
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Total Current Liabilities 311,728
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Stockholders' Equity
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, 50,000,000
shares authorized, 18,199,320 shares
issued and outstanding 18,194
Paid in capital 12,530,306
Accumulated (deficit) (7,085,689)
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5,462,811
Receivable for common stock (4,651,302)
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811,509
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$1,123,237
=========
See accompanying notes to the financial statements.
Med Gen, Inc.
Statements of Operations
For the Three Months and Nine Months Ended June 30, 2004 and 2003
(Unaudited)
Three Months Nine Months
------------------------- -------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Sales $ 232,087 $ 402,505 $ 744,288 $ 1,543,323
Cost of Sales 98,460 190,926 346,649 531,073
---------- ---------- ---------- ----------
Gross profit 133,627 211,579 397,639 1,012,250
---------- ---------- ---------- ----------
Operating expenses:
Non cash stock compensation 279,350 - 415,100 -
Selling, general and administrative expenses 1,062,432 351,090 1,873,503 1,047,258
---------- ---------- ---------- ----------
1,341,782 351,090 2,288,603 1,047,258
---------- ---------- ---------- ----------
(Loss) from operations (1,208,155) (139,511) (1,890,964) (35,008)
---------- ---------- ---------- ----------
Other (income) expense:
Interest expense 39,850 35,719 111,185 85,492
Other expenses 37,500 - 50,000 -
---------- ---------- ---------- ----------
77,350 35,719 161,185 85,492
---------- ---------- ---------- ----------
(Loss) before income taxes (1,285,505) (175,230) (2,052,149) (120,500)
========== ========== ========== ==========
Income taxes - - - -
---------- ---------- ---------- ----------
Net (loss) $(1,285,505) $ (175,230) $(2,052,149) $ (120,500)
========== ========== ========== ==========
Per share information - basic and fully diluted:
Weighted average shares outstanding 15,328,609 958,472 8,098,809 803,896
========== ========== ========== ==========
Net (loss) per share $ (0.08) $ (0.18) $ (0.25) $ (0.15)
========== ========== ========== ==========
See accompanying notes to the financial statements.
Med Gen, Inc.
Statements of Cash Flows
For the Nine Months Ended June 30, 2004 and 2003
(Unaudited)
2004 2003
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Cash flows from operating activities:
Net cash (used in) operating activities $(1,460,329) $ (307,276)
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Cash flows from investing activities:
Net cash (used in) investing activities - (22,461)
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Cash flows from financing activities:
Borrowing (repayment) of related party notes (994,315) 317,500
Proceeds from option exercise 1,059,173 -
Proceeds from issuance of common stock 1,915,139 -
------------ ------------
Net cash provided by financing activities 1,979,997 317,500
------------ ------------
Net increase (decrease) in cash 519,668 (12,237)
Beginning - cash and cash equivalents 90,791 49,563
------------ ------------
Ending - cash and cash equivalents $ 610,459 $ 37,326
============ ============
See accompanying notes to the financial statements.
MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 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 2004 the Company repaid $200,000 in notes due to related
parties and borrowed an additional $15,200 from related parties with
interest at 10% per annum. During the period from April through June
2004 the Company repaid an aggregate of $809,515 in notes due to related
parties.
(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 $2,000,000 resulting
from net operating loss carryforwards aggregating approximately
$6,000,000 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.
(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 $.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.
During December 2003 a holder of the convertible debentures converted a
$50,000 debenture into 27,205 shares of common stock and during April
and May 2004 holders of an aggregate of $350,000 in convertible
debentures converted these debentures into 274,808 shares of common
stock.
(7) Stockholders' Equity
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 June 30, 2004, officers exercised 5,940,000
options and received 5,940,000 common shares in the cashless exercise.
The aggregate value for the shares of $4,958,250 is due from these
officers at such time as they sell the shares and has been recorded as
a receivable for common stock.
From October 1, 2003 to June 30, 2004, $1,059,173 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 2003 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 fair value of
these options. During June 2004 the Company issued 31,850 options to
purchase common stock at an exercise price of $1.01 per share to a
consultant and 1,000,000 options, which vest beginning in June 2005 to
purchase common stock at an exercise price of $.95 to a consultant. The
Company charged $25,500 to operations related to the fair value 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 $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 the period from February through June 2004, the Company issued an
aggregate of 10,412,167 shares of common stock pursuant to Regulation S
offerings. The Company realized net proceeds of $1,915,139 from these
sales.
During the period from February 2004 through June 2004, the Company
issued 320,000 shares of common stock for consulting services. The fair
value of these shares of $302,600 has been charged to operations during
the period.
(8) Concentrations
During the period ended June 30, 2004 the Company derived 24%, 20%, 19%
and 12% of its total sales from four customers. At June 30, 2004,
$169,575 is due from these customers.
(9) Subsequent Events
During July 2004 the Company issued an aggregate of 772,900 shares of
common stock pursuant to Regulation S offerings. The Company realized
net proceeds of $169,953 from these sales.
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. On August 6, 2004 a verdict was rendered in
favor of the plaintiff's and they were awarded a judgement in the sum
of: $2,211,000. The Company intends to appeal the verdict and take all
necessary steps to protect the assets of the Corporation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nine months and Three months ended June 30, 2004
Compared with nine months and three months ended June 30, 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
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
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For the nine months ended March 31, 2004 net sales decreased 51.78% to
$744,288 from $1,543,323 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. The Company launched several television commercials
prior to the end of the quarter and anticipates an increase in sales
in the next quarter.Gross profit for the nine months ended June 30,
2004 was $397,639 versus $1,012,250 for the same period year ago, a
decrease of 60.72% . Gross profit margins for the nine months ended
June 30, 2004 decreased to 53.42 % from 65.58% in the previous nine
months, a year ago. The decrease can be attributed to lower sales
which in turn cost the Company more to manufacture the product and
resulted in lower gross profit margins.
For the three month period ended June 30, 2004, Sales decreased 42.34%
to $232,087 from $402,505 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 June
30,2004 was $133,627 versus $211,579 for the prior year, a decrease of
36.85%. The decrease was due to a continuing decline in sales because
of increased competition and a lack of advertising budget. Gross
profit margins for the three months ended June 30, 2004 increased to
57.58 % from 52.56% in the previous three months, a year ago. The
increase was due to better inventory controls and better control of
purchases.
For the nine month period ended June 30, 2004 operating expenses
increased from $1,047,258 to $2,288,603 . The increase is attributable
to a $415,100 non cash expense related to consultants fees whereby the
Company paid the consultants in restricted common stock and conserved
cash and additional costs of shooting and running a commercial
advertisement for the product at the end of the quarter. Management
anticipates that it will further cut costs in the fourth fiscal
quarter.
Operating loss was , $<1,890,964> in the period ending June 30, 2004
as compared to an operating loss of $<35,008> for the nine month
period , a year ago. The loss for the nine month period is related to
declining sales, increased cost of sales, increased selling general
and administrative expenses, non-cash stock compensation and the cost
of free product which was required as part of a contractual obligation
to garner shelf space at a major retailer.
For the three month period ending June 30, 2004 Operating expenses
increased to $1,062,432 from $351,090. The increase is due to a non-
cash stock compensation expense of $279,350,and the costs of shooting
and launching an advertisement at the end of the quarter.
Operating loss was < $1,208,155> as opposed to an operating loss of
<$139,511> 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 nine month periods interest expense was $111,185 as compared
to $85,492. 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, May and June
2004 and Management expects to have lower interest expenses in the
fourth fiscal quarter of 2004.
For the three month period interest expense increased from $35,719 in
the year ago quarter to $39,850. This increase is due to the increase
in borrowings for the period. The Company has paid down a significant
portion of the outstanding debt over the past three months.
For the nine months ended June 30, 2004 the Company reported a loss of
< $0.25> as compared to a loss of <$0.15 > for the same period a year
ago.
For the three month period ended June 30, 2004 the Company reported a
loss of ($.08) per share versus ($0.18) per share for the same period a
year ago .
Liquidity and Capital Resources
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Cash on hand at June 30, 2004 was $610,459, and the Company had
working capital of $679,479 at June 30, 2004.
Net cash used in operating activities was $1,460,329 during the nine
month period ended June 30, 2004 which consisted principally of the
net loss adjusted for a decrease in accounts receivable of $170,418
and non-cash stock compensation of $415,100 .
Net cash used in investing activities was $-0- during the the nine
month period ended June30, 2004.
Net cash provided by financing activities was $1,979,997 during the
nine month period ended June 30, 2004, which consisted of proceeds
from the management options exercises of $1,059,173, proceeds from
stock issuances of $1,915,139 and repayments of related party loans
of $994,315.
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. On August 6th, 2004 after a six day
jury trial a verdict was rendered in favor of the plaintiff's and they
were awarded a judgement in the sum of: $2,211,000. The Company
intends to appeal the verdict and take all necessary steps to protect
the assets of the Corporation.
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.
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: August 12, 2004
By:/s/Paul B. Kravitz
------------------------
Paul B. Kravitz
Chief Executive Officer