UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
Amendment No. 2
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, 2004
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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 207, 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
26,936,447 Shares outstanding as of December 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 - December 31, 2004 (Unaudited)
Statements of Operations - Three months ended December 31, 2004
and 2003 (Unaudited).
Statements of Cash Flows - Three months ended December 31, 2004
and 2003 (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 Security holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
MED GEN, INC.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
Med Gen, Inc.
Balance Sheet
December 31, 2004
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 20,194
Accounts receivable, net of reserve of $10,000 339,451
Inventory 125,359
Other current assets 5,700
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Total Current Assets 490,704
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Property and Equipment, net 49,876
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Other Assets
Deposits and other 33,563
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$ 574,143
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 31,520
Accrued expenses 150,000
Notes payable - related parties 331,000
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Total Current Liabilities 512,520
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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, no shares issued and outstanding -
Undesignated, 3,500,000 shares authorized -
Common stock, $.001 par value, 50,000,000
shares authorized, 26,936,447 shares
issued and outstanding 26,936
Paid in capital 14,702,348
Accumulated (deficit) (14,464,261)
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265,023
Receivable for common stock (203,400)
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61,623
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$ 574,143
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See accompanying notes to the financial statements.
4
Med Gen, Inc.
Statements of Operations
For the Three Months Ended December 31, 2004 and 2003
(Unaudited)
2004 2003
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Net Sales $ 282,173 $ 267,264
Cost of Sales 99,640 104,106
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Gross profit 182,533 163,158
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Operating expenses:
Non-cash stock compensation 120,000 87,000
Selling, general and administrative expenses 317,677 485,077
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437,677 572,077
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(Loss) from operations (255,144) (408,919)
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Other expenses:
Interest expense 4,254 48,740
Other expenses - 6,250
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4,254 54,990
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(Loss) before income taxes (259,398) (463,909)
Income taxes - -
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Net (loss) $ (259,398) $ (463,909)
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Per share information - basic and fully diluted:
Weighted average shares outstanding 26,936,447 3,983,655
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Net income (loss) per share $ (0.01) $ (0.12)
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See accompanying notes to the financial statements.
5
Med Gen, Inc.
Statements of Cash Flows
For the Three Months Ended December 31, 2004 and 2003
(Unaudited)
2004 2003
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Cash flows from operating activities:
Net cash (used in) operating activities $ (400,741) $ (225,079)
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Cash flows from investing activities:
Net cash (used in) investing activities - -
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Cash flows from financing activities:
Borrowing (repayment) of related party
notes, net 156,000 (200,000)
Proceeds from option exercise 51,227 369,603
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Net cash provided by financing activities 207,227 169,603
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Net (decrease) in cash (193,514) (55,476)
Beginning - cash and cash equivalents 213,708 90,791
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Ending - cash and cash equivalents $ 20,194 $ 35,315
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6
MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
December 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, 2004 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) Accounts Receivable and Revenue Recognition
Revenue Recognition
In general, the Company records revenue when persuasive
evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price
to the customer is fixed or determinable, and collectability
is reasonably assured. The following policies reflect
specific criteria for the various revenues streams of the
Company:
Revenue is recognized at the time the product is delivered.
Provision for sales returns will be estimated based on the
Company's historical return experience. Revenue is presented
net of returns.
Accounts Receivable
Accounts receivable are stated at estimated net realizable
value. Accounts receivable are comprised of balances due
from customers net of estimated allowances for uncollectible
accounts. In determining collectability, historical trends
are evaluated and specific customer issues are reviewed to
arrive at appropriate allowances. Accounts receivable are
stated net of an allowance of $10,000 which the Company
deemed to be sufficient based on the composition of its
accounts receivable.
The Company's standard credit terms are net 30 days. In
certain limited instances and in conjunction with initial
orders by large established retailers the Company will
extend credit terms to 90 to 120 days. The Company
recognizes revenue on these sales in accordance with the
revenue recognition policies described above. During the
period ended December 31, 2004, the Company was on payment
hold with a significant retailer due to a merger completed
by the retailer for an amount of approximately $87,000,
which was remitted to the Company during January 2005 and
made sales to certain retailers with extended Credit
terms as described above.
(4) 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.
(5) Notes Payable - Related Parties
During the period ended December 31, 2004, the Company
repaid $21,000 in notes due to related parties and borrowed
an additional $177,000 from related parties with interest at
8% per annum. The balance due this lender was $331,000 at
December 31, 2004 (see Note 9).
(6) 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.
7
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. The principal difference between the accumulated
deficit for income tax purposes and for financial reporting
purposes results from non-cash stock compensation being
charged to operations for financial reporting purposes.
(7) Stockholders' Equity
During October 2004 the Company issued 2,000,000 shares of
common stock to an officer pursuant to the exercise of
options granted in October 2004 at $.10 per share. The fair
value of the shares issued was $.16 per share. The
difference between the fair value and the exercise price of
$120,000 has been charged to operations during the period
ended December 31, 2004. In addition, the Company recorded a
receivable for common stock of $200,000 for the amount due
for the shares.
Stock-based Compensation
During the period ended December 31, 2004, the Company
issued options to purchase shares of common stock to certain
officers. Compensation costs charged to operations
aggregated $120,000 for these options.
SFAS 123 requires the Company to provide proforma
information regarding net income and earnings per share as
if compensation cost for the Company's stock option plans
had been determined in accordance with the fair value based
method prescribed in SFAS 123. The fair value of the option
grants is estimated on the date of grant utilizing the Black-
Scholes option pricing model with the following weighted
average assumptions for grants during the period ended
December 31, 2004: expected life of options of 5 years,
expected volatility of 121%, risk-free interest rate of 3%
and no dividend yield. The weighted average fair value at
the date of grant for options granted during the period
ended December 31, 2004, approximated $.14 per option. These
results may not be representative of those to be expected in
future years.
Under the provisions of SFAS 123, the Company's net income
(loss) and earnings (loss) per share would have been reduced
(increased) to the proforma amounts indicated below:
Net (loss)
As reported $(259,398)
Proforma $(419,398)
Basic and diluted (loss) per share
As reported $(.01)
Proforma $(.02)
8
A summary of stock option activity is as follows:
Weighted Weighted
Number average average
of exercise fair
shares price value
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Balance at
September 30, 2004 934,112
Granted 2,000,000 $1.23 $1.23
Exercised/Forfeited (2,750,260) $1.23 $1.23
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Balance at
December 31, 2004 183,852
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The following table summarizes information about fixed-price
stock options at December 31, 2004:
Outstanding Exercisable
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Weighted Weighted Weighted-
Average Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------- ----------- ----------- --------- ----------- --------
$1.01 31,852 2.0 years $1.01 31,852 $1.01
$1.25 100,000 5.0 years $1.25 100,000 $1.25
$1.31 52,000 5.0 years $1.31 52,000 $1.31
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183,852 183,852
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(8) Commitments, Concentrations and Contingencies
During the period ended December 31, 2004 the Company
derived 43%, 14%, 13% and 10% of its total sales from four
customers. At December 31, 2004, $147,344 is due from these
customers.
During May 2003 Global Healthcare Laboratories, Inc.
(Global) made a claim against the Company for breach of
contract under a master license agreement. Management
contended that Global committed fraud and multiple breaches
of the master license agreement and that the claim was
without merit. 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 31,
2004, a verdict was rendered in favor of the plaintiffs and
they were awarded a judgment in the sum of $2,501,191. The
Company initially intended to appeal the verdict, however on
December 3, 2004 the Company and Global settled the matter
as follows:
The Company would make cash payments to Global aggregating
$200,000 through March 1, 2005 and would issue to Global an
aggregate of 8,000,000 shares of common stock. The shares to
be issued were valued at their fair market value of
$1,120,000. The Company has recorded an accrual of $200,000
for the cash payments due and a stock subscription of
$1,120,000 for the common shares issuable at September 30,
2004. The Company has agreed to file a registration
statement covering an aggregate of 10,200,000 shares of
common stock on or before January 15, 2005, and should it
not due so an additional 500,000 shares of common stock
would be due to Global. Global will be required to execute
proxies giving the voting rights of the shares issuable to
an officer of the Company. Through December 31, 2004, the
Company made payments aggregating $50,000 to Global.
9
During the periods covered by these financial statements the
Company issued shares of common stock and subordinated
debentures without registration under the Securities Act of
1933. Although the Company believes that the sales did not
involve a public offering of its securities and that the
Company did comply with the "safe harbor" exemptions from
registration, if such exemptions were found not to apply,
this could have a material impact on the Company's financial
position and results of operations. In addition, the Company
issued shares of common stock pursuant to Form S-8
registration statements and pursuant to Regulation S. The
Company believes that it complied with the requirements of
Form S-8 and Regulation S in regard to these issuances,
however if it were determined that the Company did not
comply with these provisions this could have a material
impact on the Company's financial position and results of
operations.
(9) Basis of Reporting
The Company's financial statements are presented on a going
concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of
business. The Company has experienced a significant loss
from operations including the settlement of certain
litigation. For the period ended December 31, 2004, the
Company incurred a net loss of $259,398 and has an
accumulated deficit of $14,464,261 at December 31, 2004.
The Company's ability to continue as a going concern is
contingent upon its ability to secure additional financing,
increase ownership equity and attain profitable operations.
In addition, the Company's ability to continue as a going
concern must be considered in light of the problems,
expenses and complications frequently encountered in
established markets and the competitive environment in which
the Company operates.
The Company is pursuing financing for its operations and
seeking additional investments. In addition, the Company is
seeking to expand its revenue base by adding new customers
and increasing its advertising. Failure to secure such
financing or to raise additional equity capital and to
expand its revenue base may result in the Company depleting
its available funds and not being able pay its obligations.
The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability
and classification of assets or the amounts and
classification of liabilities that may result from the
possible inability of the Company to continue as a going
concern.
(10) Subsequent Events
During January 2005 the Company agreed to issue 2,000,000
shares of common stock to the related party lender described
in Note 4, for future loans to be made to the Company
pursuant to a line of credit. The fair value of these shares
will be charged to operations as additional interest over
the term of the line of credit. In addition, the Company
agreed to issue 200,000 shares of common stock to a
consultant. The fair value of these shares will be charged
to operations.
During January 2005 the Company repaid $35,000 pursuant to a
note to the related party described in Note 4.
During January 2005 the Company filed a Form SB-2
registration statement covering the 8,000,000 common shares
described in Note 7 and the 2,200,000 common shares
described above.
During January 2005 the Company entered into a professional
services agreement with an entity acting as an independent
contractor to distribute its products in the United States.
As compensation the Company agreed to pay a commission of
10
the greater of 5% of invoiced shipments or $105,000 for the
year ended December 31, 2005 and $144,000 for each of the
years ended December 31, 2006 and 2007. The agreement may be
terminated by either party for any reason within 6 months of
the date of the agreement. Thereafter the Company may
terminate the agreement with 6 months notice.
During January 2005 the Company entered into a one year
consulting agreement with an entity to assist the Company
with its business plan and introduce the Company to
potential investors. Should the Company decide to enter into
a funding transaction as a result of an introduction by the
consultant the consultant shall designate a registered
broker Dealer to complete the transaction. The consultant
shall receive a cash fee of 10% of the funds procured and
warrants to purchase common stock equal to 10% of the toal
shares issued for a period of 5 years at 105% of the price
at which the shares are sold. The shares underlying the
warrants are subject to certain registration rights.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Three months ended December 31, 2004
Compared with three months ended December 31, 2003
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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. 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 2004 first fiscal quarter ended December 31, 2004, Sales
increased 5.58% to $282,173 from $267,264.This increase was due to an
advertising campaign to compete with other products in the same marketplace.
Gross profit for the first quarter was $182,533 versus $163,158 for the
year ago quarter, an increase of 11.87%. The increase was due to an increase
in the wholesale price of the products.
Gross profit margins for the quarter increased to 64.68% of sales up
from 61.04% in the previous year ago quarter. The increase was due to lowered
manufacturing costs associated with the Company's products
Operating expenses (selling, general and administrative expenses) decreased
to $317,677 from $485,077,a decrease of 34.51%. The decrease is due to
several factors including, decreased legal fees and consultants fees and
overall operating costs.
Operating loss was $255,144 as opposed to a loss of $408,919 in the prior
year's quarter.
Interest expense decreased from $48,740 in the year ago quarter to $4,254 for
this quarter. This was due to reducing most of the secured lender's
outstanding debt.
For the first fiscal quarter the company reported a loss of $0.01 per
share versus a loss of $0.12 per share in the year ago quarter.
Liquidity and Capital Resources
- -------------------------------
Cash on hand at December 31, 2004 was $20,194 and the Company had a working
capital deficit of $21,816 at December 31, 2004.
Net cash used in operating activities was $400,741 during the quarter ended
December 31, 2004.
Net cash used in investing activities was $-0- during the quarter ended
December 31, 2004.
12
Net cash provided by financing activities was $207,227 during the quarter
ended December 31, 2004, which consisted of $51,227 from the proceeds from
the sale of management options and $156,000 of net draw downs on the credit
facility.
The Company expects to introduce at least one new product into retail
stores in the upcoming quarter. Further, the Company has affected a 5% price
increase for all of its products. 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
- ----------------------------
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, 2004
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 in the notes to the financial statements in our September 30,
2004 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 & Procedures
As required by Rule 13a-15 under the Exchange Act, as of the date of the
filing of this report , the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the
supervision and with the participation of the Company's management,
including the Company's President, Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, the Company's President,
Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures are effective. There have
been no significant changes in the Company's internal controls or in other
factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures
that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
the Securities and Exchange Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
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.
13
PART II
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Item 1. LEGAL PROCEEDINGS
All legal proceedings disclosed in the prior filings have
been settled by the Company. The terms of the settlement
were disclosed on From 8-K as filed on December 12, 2004.
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) 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
32.2 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) On 12-13-2004 a Form 8-K was filed.
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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: March 22, 2005
By: /s/Paul B. Kravitz
--------------------------------
Paul B. Kravitz
Chief Executive Officer
14