UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] 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, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
for the transition period from ________________ to ______________
Commission File Number 000-29171
-----------
MED GEN, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 65-0703559
---------------------- -------------------------------
(State of incorporation) (IRS Employer Identification No.)
7284 W. Palmetto Park Road, Suite 207, Boca Raton, FL 33433
-------------------------------------------------------------
(Address of principal executive offices)
(561) 750-1100
-------------------------
(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 by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12B-2). Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of March 31st, 2006, 41,621,727 shares of common stock,.001 par value
per share, were outstanding.
The Company's stock trades on the OTCBB under the symbol "MGEN".
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, 2006 (Unaudited)
Statements of Operations - Three months ended March
31,2006 and 2005 and Six Months ended
March 31,2006 and 2005 (Unaudited)
Statements of Cash Flows - Six months ended March 31,
2006 and 2005 (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
March 31, 2006
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 766,427
Accounts receivable 92,356
Inventory 125,102
Other current assets 5,700
-----------
Total Current Assets 989,585
-----------
Property and Equipment, net 36,467
-----------
Other Assets
Deferred loan costs 226,420
Deposits and other 121,673
-----------
348,093
-----------
$ 1,374,145
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 2,641,689
-----------
Total Current Liabilities 2,641,689
-----------
Derivative financial instruments 9,858,355
-----------
Convertible debentures 246,887
-----------
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, 495,000,000
shares authorized, 41,621,727 shares
issued and outstanding 41,622
Paid in capital 24,718,044
Accumulated (deficit) (36,132,452)
-----------
(11,372,786)
-----------
$ 1,374,145
===========
See accompanying note to the financial statements.
4
Med Gen, Inc.
Statements of Operations
For the Three Months and Six Months Ended March 31, 2006 and 2005
(Unaudited)
Three Months Six Months
-------------------------- --------------------------
2006 2005 2006 2005
----------- ----------- ----------- ------------
Net sales $ 45,820 $ 201,471 $ 145,968 $ 483,644
Cost of sales 51,679 71,449 79,829 171,089
----------- ----------- ----------- ------------
Gross profit (5,859) 130,022 66,139 312,555
----------- ----------- ----------- ------------
Operating expenses:
Selling, general and administrative expenses -
Non cash stock compensation 169,650 185,640 225,350 305,640
Selling, general and administrative expenses -
Other 353,765 309,479 1,058,987 627,156
----------- ----------- ----------- ------------
523,415 495,119 1,284,337 932,796
----------- ----------- ----------- ------------
(Loss) from operations (529,274) (365,097) (1,218,198) (620,241)
----------- ----------- ----------- ------------
Other (income) expense:
Interest expense 67,274 184,806 207,966 189,060
Derivative instrument expense 8,336,244 9,328,111 8,286,527 9,328,111
----------- ----------- ----------- ------------
8,403,518 9,512,917 8,494,493 9,517,171
----------- ----------- ----------- ------------
(Loss) before income taxes (8,932,792) (9,878,014) (9,712,691) (10,137,412)
Income taxes - - - -
----------- ----------- ----------- ------------
Net (loss) $(8,932,792) $(9,878,014) $(9,712,691) $(10,137,412)
=========== =========== =========== =============
Per share information - basic and fully diluted:
Weighted average shares outstanding 27,103,694 1,474,045 16,809,540 1,409,734
=========== =========== =========== =============
Net (loss) per share $ (0.33) $ (6.70) $ (0.58) $ (7.19)
=========== =========== =========== =============
See accompanying note to the financial statements.
5
Med Gen, Inc.
Statements of Cash Flows
For the Six Months Ended March 31, 2006 and 2005
(Unaudited)
2006 2005
----------- -----------
Cash flows from operating activities:
Net cash (used in) operating activities $(1,120,683) $ (566,030)
----------- -----------
Cash flows from investing activities:
Accquisition of property and equipment (9,174) -
----------- -----------
Net cash (used in) investing activities (9,174) -
----------- -----------
Cash flows from financing activities:
Borrowing on related party notes - 230,000
Proceeds from option exercise 350 101,987
Proceeds from convertible debentures 1,135,000 665,000
----------- -----------
Net cash provided by financing activities 1,135,350 996,987
----------- -----------
Net increase in cash 5,493 430,957
Beginning - cash and cash equivalents 760,934 213,708
----------- -----------
Ending - cash and cash equivalents $ 766,427 $ 644,665
=========== ===========
See accompanying note to the financial statements.
6
MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2006
(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, 2005, 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) Stockholders' (Deficit)
During the period from October 2005 through March 2006 the
Company issued an aggregate of 12,290,000 shares of common
stock for services rendered. The shares were valued at their
fair market value of $225,350 which was charged to
operations during the period.
During the period from October 2005 through March 2006 the
Company issued an aggregate of 26,452,950 shares of common
stock for the conversion $199,390 of the notes described on
Note 6.
During December 2005 the Company cancelled an aggregate of
400,000 shares of common stock which it held for issuance to
settle the litigation described in Note 5.
During the period ended March 31, 2006, the Company adjusted
the receivable related to common shares held by an officer
from $35,000 to $350 and charged $34,650 to operations
related to this repricing. The officer also paid the $350 to
the Company.
Stock-based Compensation
The Company did not issue options during the period ended
March 31, 2006.
7
A summary of stock option activity is as follows:
Weighted Weighted
Number average average
of exercise fair
shares price value
------- ----- -----
Balance at
September 30, 2005 9,197 $24.50 $24.50
Granted -
Exercised/Forfeited -
------
Balance at
March 31, 2006 9,197 $24.50 $24.50
======
The following table summarizes information about fixed-price
stock options at March 31, 2006:
Outstanding Exercisable
----------- -----------
Weighted Weighted Weighted-
Average Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$1.01 1,597 1.0 years $20.20 1,597 $20.20
$1.25 5,000 3.0 years $25.00 100,000 $25.00
$1.31 2,600 3.0 years $26.20 2,600 $26.20
-------- --------
9,197 9,197
======== ========
(5) Commitments, Concentrations and Contingencies
During the period ended March 31, 2006, the Company derived
19%, 12% and 11% of its total sales from three customers. At
March 31, 2006, $18,000 is due from these customers.
Litigation
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 400,000 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, and charged $1,320,000 to operations for the
settlement during the year ended September 30, 2004. The
Company has agreed to file a registration statement covering
an aggregate of 510,000 shares of common stock on or before
January 15, 2005, and should it not due so an additional
25,000 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.
8
A dispute between the parties arose and the settlement
agreement was set aside by the Court and no new settlement
agreement has yet been reached. Through September 30, 2005,
the Company made payments to Global aggregating $75,000. At
September 30, 2005, the Company has recorded an accrual
amounting $2,426,191 (the original judgment of $2,501,191
less the payments made of $75,000) plus post judgment
interest at 7% of $169,800. During the year ended September
30, 2005, the Company charged $1,181,191 to operations for
the difference between the settlement recorded during 2004
and the total judgment awarded. The Company is currently
attempting to negotiate a new settlement agreement with
Global. In addition, the Company issued 400,000 shares of
its common stock which were held by the Company pending
issuance to Global. These shares were cancelled when the
settlement was set aside.
During the period ended March 31, 2006, the Company recorded
an additional $43,770 of post judgment interest.
In December 2005, the Company filed litigation against CVS,
Inc. The Company sold CVS in excess of $140,000 dollars of
goods and received payment of approximately $26,000 during
an 18 month period. CVS terminated the product in late May
2005 and claims the Company owes them $77,000. Management
cannot determine the outcome of this litigation at this
time.
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.
(6) CALLABLE SECURED CONVERTIBLE NOTES AND DERIVATIVE
INSTRUMENT LIABILITIES
Derivative financial instruments
The Company does not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.
The Company reviews the terms of convertible debt and equity
instruments issued to determine whether there are embedded
derivative instruments, including the embedded conversion
option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. In
circumstances where the convertible instrument contains more
than one embedded derivative instrument, including the
conversion option, that is required to be bifurcated, the
bifurcated derivative instruments are accounted for as a
single, compound derivative instrument. Also, in connection
with the sale of convertible debt and equity instruments,
the Company may issue freestanding options or warrants that
may, depending on their terms, be accounted for as
derivative instrument liabilities, rather than as equity.
The Company may also issue options or warrants to non-
employees in connection with consulting or other services
they provide.
9
Certain instruments, including convertible debt and equity
instruments and the freestanding options and warrants issued
in connection with those convertible instruments, may be
subject to registration rights agreements, which impose
penalties for failure to register the underlying common
stock by a defined date. If the convertible debt or equity
instruments are not considered to be "conventional", then
the existence of the potential cash penalties under the
related registration rights agreement requires that the
embedded conversion option be accounted for as a derivative
instrument liability. Similarly, the potential cash
penalties under the related registration rights agreement
may require us to account for the freestanding options and
warrants as derivative financial instrument liabilities,
rather than as equity. In addition, when the ability to
physical or net-share settle the conversion option or the
exercise of the freestanding options or warrants is deemed
to be not within the control of the company, the embedded
conversion option or freestanding options or warrants may be
required to be accounted for as a derivative financial
instrument liability.
Derivative financial instruments are initially measured at
their fair value. For derivative financial instruments that
are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-
valued at each reporting date, with changes in the fair
value reported as charges or credits to income. For option-
based derivative financial instruments, the Company uses the
Black-Scholes option pricing model to value the derivative
instruments.
If freestanding options or warrants were issued in
connection with the issuance of convertible debt or equity
instruments and will be accounted for as derivative
instrument liabilities (rather than as equity), the total
proceeds received are first allocated to the fair value of
those freestanding instruments. If the freestanding options
or warrants are to be accounted for as equity instruments,
the proceeds are allocated between the convertible
instrument and those derivative equity instruments, based on
their relative fair values. When the convertible debt or
equity instruments contain embedded derivative instruments
that are to be bifurcated and accounted for as liabilities,
the total proceeds allocated to the convertible host
instruments are first allocated to the fair value of all the
bifurcated derivative instruments. The remaining proceeds,
if any, are then allocated to the convertible instruments
themselves, usually resulting in those instruments being
recorded at a discount from their face amount.
To the extent that the fair values of the freestanding
and/or bifurcated derivative instrument liabilities exceed
the total proceeds received, an immediate charge to income
is recognized, in order to initially record the derivative
instrument liabilities at their fair value.
The discount from the face value of the convertible debt,
together with the stated interest on the instrument, is
amortized over the life of the instrument through periodic
charges to income, usually using the effective interest
method. When the instrument is convertible preferred stock,
the dividends payable are recognized as they accrue and,
together with the periodic amortization of the discount, are
charged directly to retained earnings.
The classification of derivative instruments, including
whether such instruments should be recorded as liabilities
or as equity, is re-assessed periodically, including at the
end of each reporting period. If re-classification is
required, the fair value of the derivative instrument, as of
the determination date, is re-classified. Any previous
charges or credits to income for changes in the fair value
of the derivative instrument are not reversed. Derivative
instrument liabilities are classified in the balance sheet
as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required
within twelve months of the balance sheet date.
10
On March 30, 2005, the Company entered into a Securities
Purchase Agreement with four accredited investors ("Note
Holders") for the sale of up to (i) $1,540,000 in Callable
Secured Convertible Notes (the "Convertible Notes") and (ii)
warrants to purchase up to 1,540,000 shares of its common
stock (the "Warrants"). The Convertible Notes bear interest
at 8% and have a maturity date of three years from the date
of issuance. The Company is not required to make any
principal payments during the term of the Convertible Notes.
The Convertible Notes are convertible into shares of the
Company's common stock at the Note Holders' option, at the
lower of (i) $0.09 per share or (ii) 60% of the average of
the three lowest intra-day trading prices for the common
stock as quoted on the Over-the-Counter Bulletin Board for
the 20 trading days preceding the conversion date. The
warrants are exercisable for a period of five years from the
date of issuance and have an exercise price of $0.085 per
share. The full principal amount of the Notes is due upon
the occurrence of an event of default.
The Convertible Notes and the Warrants were issued in three
tranches, on March 30, 2005 ($740,000 of Convertible Notes
and 740,000 Warrants), on May 25, 2005 ($700,000 of
Convertible Notes and 700,000 Warrants), and on August 23,
2005 ($100,000 of Convertible Notes and 100,000 Warrants).
On August 31, 2005, the Company sold an additional $500,000
of Convertible Notes and 500,000 Warrants to the same four
investors. The terms of these Convertible Notes and Warrants
are the same as those previously issued, except that the
exercise price of the Warrants is $0.09 per share.
On October 31, 2005, the Company sold an additional $600,000
of Convertible Notes and 600,000 Warrants to the same four
investors. The terms of these Convertible Notes and Warrants
are the same as those previously issued, except that the
conversion price is $0.04 and the exercise price of the
Warrants is $0.10 per share.
On February 23, 2006, the Company sold an additional
$600,000 of Convertible Notes and 600,000 Warrants to the
same four investors. The terms of these Convertible Notes
and Warrants are the same as those previously issued, except
that the conversion price is $0.04 and the exercise price of
the Warrants is $0.05 per share.
The conversion price of the Convertible Notes and the
exercise price of the warrants will be adjusted in the event
that the Company issues common stock at a price below the
initial fixed conversion or exercise price, with the
exception of any shares of common stock issued in connection
with the Convertible Notes. The conversion price of the
Convertible Notes and the exercise price of the warrants may
also be adjusted in certain circumstances such as if the
Company pays a stock dividend, subdivides or combines
outstanding shares of common stock into a greater or lesser
number of shares, or takes such other actions as would
otherwise result in dilution of the Note Holders' position.
The Note Holders have contractually agreed to restrict their
ability to convert their Convertible Notes or exercise their
warrants and receive shares of the Company's common stock
such that the number of shares of common stock held by the
Note Holders and their affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. In addition, the Company
has granted the Note Holders registration rights and a
security interest in substantially all of the Company's
assets. The Company has the right to prepay the Convertible
Notes under certain circumstances at a premium ranging from
25% to 50% of the principal amount, depending on the timing
of such prepayment.
Pursuant to the terms of a Registration Rights Agreement
entered into with the Note Holders, the Company is obligated
to register for resale, within a defined time period, the
shares underlying the Warrants and the shares issuable on
conversion of the Convertible Notes. The terms of the
Registration Rights Agreement provide that, in the event
that the registration statement does not become effective
within 105 days of the issuance of the Warrants or
Convertible Notes, the Company is required to pay to the
Note Holders as liquidated damages, an amount equal to 2%
per month of the principal amount of the Convertible Notes.
11
This amount may be paid in cash or, at the Holder's option,
in shares of common stock priced at the conversion price
then in effect on the date of the payment.
Because the Warrants are subject to a Registration Rights
Agreement with the Note Holders, they have been accounted
for as derivative instrument liabilities (see below) in
accordance with EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled
In, a Company's Own Common Stock" (EITF 00-19). Accordingly
the initial fair value of the warrants, amounting to an
aggregate of $1,550,481 was recorded as a derivative
instrument liability. The fair value of the warrants was
determined using the Black-Scholes valuation model, based on
the market price of the common stock on the dates the
Warrants were issued, an expected dividend yield of 0%, a
risk-free interest rate based on constant maturity rates
published by the U.S. Federal Reserve, applicable to the
life of the Warrants, expected volatility of 50% and the
five year life of the Warrants.
The Company is required to re-measure the fair value of the
warrants at each reporting period. Accordingly, the Company
re-measured the fair value of the Warrants at December 31,
2005 using the Black-Scholes valuation model based on the
market price of the common stock on that date, an expected
dividend yield of 0%, a risk-free interest rate based on
constant maturity rates published by the U.S. Federal
Reserve, applicable to the remaining term of the Warrants,
expected volatility of 50% and an expected life equal to the
remaining term of the Warrants. This resulted in a fair
market value for the warrants of $17,599 at March 31, 2006.
Upon the Company meeting its obligation to register the
securities, the fair value of the Warrants on that date will
be reclassified to equity.
Because the conversion price of the Convertible Notes is not
fixed, the Convertible Notes are not "conventional
convertible debt" as that term is used in EITF 00-19.
Accordingly, because the shares underlying the conversion of
the Convertible Notes are subject to the Registration Rights
Agreement with the Holders, the Company is required to
bifurcate and account separately for the embedded conversion
options, together with any other derivative instruments
embedded in the Convertible Notes.
The conversion option related to each Convertible Note,
together with the embedded call options represented by the
Note Holders' right to receive interest payments and any
registration rights penalties in common stock, were treated,
for each Convertible Note, as a single compound derivative
instrument, and were bifurcated from the Convertible Note
and accounted for separately as a derivative instrument
liability (see below). The bifurcated embedded derivative
instruments, including the embedded conversion options which
were valued using the Black-Scholes valuation model, were
recorded at their initial fair value of an aggregate of
$22,829,761. Because the initial fair values of these
embedded derivative instruments, together with the fair
values of the Warrants that were also accounted for as
derivative instrument liabilities and recorded at their fair
values, exceeded the proceeds received (the face amount of
the Convertible Notes), the difference was recorded as an
immediate charge to income.
The discount from the face amount of the Convertible Notes
represented by the value assigned to the Warrants and
bifurcated derivative instruments is being amortized over
the period to the due date of each Convertible Note, using
the effective interest method.
12
A summary of the Callable Secured Convertible Notes and
derivative instrument liabilities at March 31, 2006, is as
follows:
Callable Secured Convertible Notes; 8% per annum;
due March 30, 2008 $740,000
Less: face amount of Notes converted (321,714)
----------
418,286
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (416,810)
----------
$ 1,476
----------
Callable Secured Convertible Notes; 8% per annum;
due May 25, 2008 $700,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (700,000)
----------
$ -
----------
Callable Secured Convertible Notes; 8% per annum;
due August 23, 2008 $100,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (100,000)
----------
$ -
----------
Callable Secured Convertible Notes; 8% per annum;
due August 31, 2008 $500,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (500,000)
----------
$ -
----------
Callable Secured Convertible Notes; 8% per annum;
due October 31, 2008 $600,000
Less: unamortized discount related to warrants and ----------
bifurcated embedded derivative instruments (356,782)
----------
$243,218
----------
Callable Secured Convertible Notes; 8% per annum;
due February 23, 2009 $600,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (597,807)
----------
$ 2,193
==========
Total carrying value at March 31, 2006 $246,887
==========
Derivative financial instrument liabilities
We use the Black-Scholes valuation model to value the
Warrants and the embedded conversion option components of
any bifurcated embedded derivative instruments that are
recorded as derivative liabilities.
In valuing the Warrants and the embedded conversion option
components of the bifurcated embedded derivative
instruments, at the time they were issued and at March 31,
2006, we used the market price of our common stock on the
date of valuation, an expected dividend yield of 0% and the
remaining period to the expiration date of the warrants or
repayment date of the Convertible Notes. All warrants and
conversion options can be exercised by the holder at any
time.
Because of the limited historical trading period of our
common stock, the expected volatility of our common stock
over the remaining life of the conversion options and
Warrants has been estimated at 50%. The risk-free rates of
return used were based on constant maturity rates published
by the U.S. Federal Reserve, applicable to the remaining
life of the conversion options or Warrants.
13
At March 31, 2006, the following derivative liabilities
related to common stock Warrants and embedded derivative
instruments were outstanding:
Exercise Value-
Price Per Value-Issue March 31,
Issue Date Expiry Date Share Date 2006
- ---------------------------------------------------------------------------
03-30-2005 03-30-2010 740,000 warrants $0.085 $673,400$ 3,210
05-25-2005 05-25-2010 700,000 warrants 0.085 693,000 3,211
08-23-2005 08-23-2010 100,000 warrants 0.085 31,000 464
08-26-2005 08-26-2010 500,000 warrants 0.090 145,000 2,339
10-31-2005 10-31-2010 600,000 warrants 0.010 6,000 2,582
02-23-2006 02-23-2009 600,000 warrants 0.050 2,081 5,729
--------
Fair value of freestanding derivative instrument liabilities
for warrants $ 17,599
--------
Value-
Value-Issue March 31,
Issue Date Expiry Date Date 2006
- ---------------------------------------------------------------------------
03-30-2005 03-30-2008 $617,676 convertible notes $9,176,010 $1,433,863
5-25-2005 05-25-2008 $700,000 convertible notes 9,451,556 2,363,512
08-23-2005 08-23-2008 $100,000 convertible notes 413,333 329,356
08-26-2005 08-26-2008 $500,000 convertible notes 1,928,889 1,642,809
10-31-2005 10-31-2008 $500,000 convertible notes 372,000 1,939,909
02-23-2006 02-23-2009$600,000 convertible notes 1,487,973 2,148,906
----------
Fair value of bifurcated embedded derivative instrument
liabilities associated with the above convertible notes $9,858,355
----------
Total derivative financial instruments $9,875,954
==========
(7) 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 March 31, 2006, the Company
incurred a net loss of $9,712,691 and has a working capital
deficit, an accumulated deficit and a stockholders' deficit
of $1,652,104, $36,132,452 and $11,372,786 at March 31,
2006.
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.
14
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.
(8) Subsequent Events
On April 21, 2006, the Company sold an additional $750,000
of Convertible Notes and 30,000,000 Warrants to the same
four investors. The terms of these Convertible Notes and
Warrants are the same as those previously issued, except
that the conversion price is $0.04 and the exercise price of
the Warrants is $0.05 per share.
Through May 12, 2006, the Company issued 51,912,950 shares
of common stock related to the conversion of an aggregate of
$503,191 of the convertible debt described in Note 6.
During April 2006 the Company settled the the litigation
with Global for an aggregate of $1,250,000 payable $300,000
upon the signing of the agreement and 30 payments of $31,667
due monthly commencing wit the signing of the agreement.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Three months ended March 31, 2006 Compared with Three months
ended March 31, 2004 and Six Months ended March 31, 2006
Compared with Six months ended March 31, 2005
- ---------------------------------------------
GENERAL
- -------
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
- ---------------------
For the 2005 second fiscal quarter ended March 31, 2006, Sales
decreased 67.26% to $45,820 from $201,471. This decrease was
attributable to three distinct factors:
A. The Company has significantly reduced its retail
distribution and has introduced an entirely new marketing
program based on Direct To Consumer ("DTC")technologies
which include newly completed websites, a Direct Mail
Program and TV infomercial broadcasts.
Currently the Company's largest retail customers are
Albertson's and Rite Aid's stores.
In general, the product's retail distribution has dropped
from a peak of 30,000 retail chain locations to approximately
7000 retail chain locations. The Company anticipates that within
one or two more quarters there will be a further reduction in its
retail distribution of the products, while at the same time the
DTC program is taking effect.
B. The ongoing litigation settlement negotiation's
severely hampered the Company's sales efforts.
During this quarter management spent all of its efforts
in working out a structured settlement
with the judgment creditor. The Company did not advertise
or promote the products in any manner.
All of the Company's vendor's were reluctant to proceed
with any advertising campaigns and selling efforts
until the threat of bankruptcy was removed. Sales
plummeted because of this factor. Internet vendors did not
want to be exposed to potential preference challenges in
Federal Bankruptcy Court and declined management's assurances
that the Company would eventually re-settle the litigation.
C. The Company was unable to find competent outsourcing
for its internet-direct to consumer marketing programs.
For the Six months ended March 31, 2006 sales decreased 69.82% to
$145,968 from $483,644,for the six months ending March 31, 2005.
The decrease in sales is attributable to the factors
outlined in paragraphs A,B,and C above
Gross profit for the second quarter was <$5,859> versus $130,022
for the year ago quarter, a decrease of 105.85%. The decrease was
due the large decline in sales for the quarter and the return of
expired merchandise from many retail vendors who dropped the product's.
For the six months ended March 31, 2006 Gross profit was $66,139
versus $312,555 for the six months ending March 31, 2005, a decrease
of 78.84%. This decrease was due the large decline in sales for the
quarter and the return of expired merchandise from many retail vendors.
Gross profit margins for the quarter were non existent and down
from 64.62% in the previous year ago quarter. The decrease was
due to the destruction of expired product and increased costs of
manufacturing.
Gross profit margins for the Six Months ending March 31,2006
decreased to 54.69% of sales down from 64.62% for the six months
ending March 31, 2005. The decrease was due to increased costs of
manufacturing and a decline in sales.
Operating expenses (selling, general and administrative expenses)
increased to $353,765 from $309,479, an increase of 12.52%. The
small increase is due to increased legal fees incurred in the
settlement negotiations. Management does not believe these costs
will be recurring in future quarters.
Operating expenses for the six months increased from $627,156 to
$1,058,987, an increase of 41.78%. The increase for the six months
is attributable to the following; $78,000 for legal fees while
negotiating the settlement agreement,$180,000 was spent in
advertising,$52,000 for internet websites, $40,000 for consulting
and $75,000 commissions and fees related to the new loans during
this period.
16
Operating loss was $529,274 as opposed to a loss of $365,097 in
the prior year's quarter. The loss was higher because of greatly
reduced sales in the quarter as compared to a year ago. Overall
operating expenses on a comparative basis were about the same.
Operating loss for the Six months was $1,218,198 as compared to
$620,241 for the six months a year ago. The loss was greater
As sales drastically declined and costs increased.
Interest expense decreased from $184,806 in the year ago quarter
to $67,274 for this quarter. The Company did not have as much
interest due this quarter as a year ago and the decline also
relates to factors in derivative accounting more fully explained
in the "notes to financials".
Interest expense increased for the six month period from $189,060
to $207,966.The increase is directly attributable to more borrowings
from the secured lender
For the second fiscal quarter the company reported a loss of $0.33 per
share versus a loss of $6.70 per share in the year ago quarter.
For the six month period comparison the Company lost $0.58 during
2006 as compared to a loss of $7.19 during 2005.
Liquidity and Capital Resources
- -------------------------------
Cash on hand at March 31, 2006, was $766,427 and the Company had
A working capital deficit of $1,652,104 Net cash used in operating
activities was $1,120,683 during the Six months ended March 31, 2006.
Net cash used in investing activities was $9174 during the six
months ended March 31, 2006.
17
Net cash provided by financing activities was $1,135,350 during
the Six months ended March 31, 2006, which consisted of $350.00
from the proceeds from the sale of management options and
$1,135,000 of net draw downs on the credit facility.
The Company has affected a 10% price increase for all of its
products. The Company believes it has sufficient cash resources,
and cash flow to provide for all general corporate operations in
the foreseeable future, but there can be no assurance of this.
The Company intends to drawdown an additional 750,000 dollars in
August 2006 as part of its credit facility.
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
March 31, 2006, the Company incurred a net loss of $9,712,691
and has an accumulated deficit of $36,132,452 at March 31, 2006.
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.
Derivative instruments
In connection with the sale of debt or equity instruments, we may
sell options or warrants to purchase our common stock. In certain
circumstances, these options or warrants may be classified as
derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative
instruments, such as conversion options, which in certain
circumstances may be required to be bifurcated from the
associated host instrument and accounted for separately as a
derivative instrument liability.
The identification of, and accounting for, derivative instruments
is complex. Our derivative instrument liabilities are re-valued at
the end of each reporting period, with changes in the fair value of
the derivative liability recorded as charges or credits to income,
in the period in which the changes occur. For options, warrants and
bifurcated conversion options that are accounted for as derivative
instruments liabilities, we determine the fair value of these
instruments using the Black-Scholes option pricing model.
That model requires assumptions related to the remaining term of
the instruments and risk-free rates of return, our current common
stock price and expected dividend yield, and the expected volatility
of our common stock price over the life of the option. We have
estimated the future volatility of our common stock price based the
history of our stock price. The identification of, and accounting for,
derivative instruments and the assumptions used to value them can
significantly affect our financial statements.
18
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, 2005
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, 2005 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 to update the forward-looking
statements contained in this Form 10QSB filing.
19
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.
20
PART II
-------
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 in the Company's most recent proxy filing and
attached as an Exhibit for shareholder perusal.
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
On April 17th, 2006 the Company filed its Definitive
Proxy Statement requesting an increase of the authorized
shares from 500,000,000 to 2,500,000,000. The results of the
proxy vote which are scheduled for May 29th, 2006 may be
extended, if necessary to comply with any additional SEC
requirements. The results of the proxy vote will be disclosed
on an 8-K filing.
Item 5. OTHER INFORMATION
During the last six months the secured lender has converted
$199,390 dollars of outstanding convertible debentures into
a total of 26,462,950 common shares.
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
21
- -------------------------------------------------------------------
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 15, 2006 By: /s/Paul B. Kravitz
--------------------------------
Paul B. Kravitz
Chief Executive Officer
22