UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] AMENDED 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, 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 June 30, 2006, 116,697,714 shares of common stock, .001 par
value per share, were outstanding.
The Company's stock trades on the OTCBB under the symbol "MDGN".
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - June 30, 2006 (Unaudited)
Statements of Operations - Three months ended June
30, 2006 and 2005 and Nine Months ended
June 30, 2006 and 2005 (Unaudited)
Statements of Cash Flows - Nine months ended June 30,
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
June 30, 2006
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 644,663
Accounts receivable 10,733
Inventory 102,500
Other current assets 5,700
-----------
Total Current Assets 763,596
-----------
Property and Equipment, net 33,606
-----------
Other Assets
Deferred loan costs 153,472
Prepaid expenses - derivatives 147,856
Deposits 48,544
-----------
349,872
-----------
$ 1,147,074
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,054,266
-----------
Total Current Liabilities 1,054,266
-----------
Derivative instruments 10,524,517
-----------
Convertible debentures 259,198
-----------
Redeemable common shares 200,000
-----------
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, 2,495,000,000
shares authorized, 116,697,714 shares
issued and outstanding 116,698
Paid in capital 26,079,925
Accumulated (deficit) (37,087,530)
-----------
(10,890,907)
-----------
$ 1,147,074
===========
See accompanying notes to financial statements.
4
Med Gen, Inc.
Statements of Operations
For the Three Months and Nine Months Ended June 30, 2006 and 2005
(Unaudited)
Three Months Nine Months
-----------------------------------------------------------
2006 2005 2006 2005
----------- ----------- ------------ --------------
(Restated) (Restated)
Net sales $ 32,729 $ 181,034 $ 178,697 $ 664,678
Cost of sales 141,221 99,658 221,050 270,747
----------- ----------- ------------ --------------
Gross profit (loss) (108,492) 81,376 (42,353) 393,931
----------- ----------- ------------ --------------
Operating expenses:
Non cash stock compensation -
selling, general and administrative 269,070 60,000 494,420 365,640
Selling, general and administrative expenses 503,211 557,582 1,562,198 1,184,738
----------- ----------- ------------ --------------
772,281 617,582 2,056,618 1,550,378
----------- ----------- ------------ --------------
(Loss) from operations (880,773) (536,206) (2,098,971) (1,156,447)
----------- ----------- ------------ --------------
Other (income) expense:
Interest expense 484,224 47,111 692,190 56,171
Gain on litigation settlement (782,848) - (782,848) -
Derivative instruments 372,927 3,294,047 8,659,454 12,622,158
Non cash stock interest expense - - - 180,000
----------- ----------- ------------ --------------
74,303 3,341,158 8,568,796 12,858,329
----------- ----------- ------------ --------------
(Loss) before income taxes (955,076) (3,877,364) (10,667,767) (14,014,776)
Income taxes - - - -
----------- ----------- ------------ --------------
Net (loss) $ (955,076) $(3,877,364) $(10,667,767) $ (14,014,776)
=========== =========== ============ =============
Per share information - basic and fully diluted:
Weighted average shares outstanding 80,687,925 30,806,777 38,102,335 29,065,385
=========== =========== ============ =============
Net (loss) per share $ (0.01) $ (0.13) $ (0.28) $ (0.48)
=========== =========== ============ =============
See accompanying notes to financial statements.
5
Med Gen, Inc.
Statements of Cash Flows
For the Nine Months Ended June 30, 2006 and 2005
(Unaudited)
2006 2005
------------- ------------
Cash flows from operating activities:
Net cash (used in) operating activities $ (1,196,513) $ (963,390)
------------- ------------
Cash flows from investing activities:
Net cash (used in) investing activities (9,174) -
------------- ------------
Cash flows from financing activities:
Borrowing (repayment) of related party notes - (175,000)
Proceeds from option exercise 350 101,987
Proceeds From convertible debentures 1,850,000 1,337,500
------------- ------------
Net cash provided by financing activities 1,850,350 1,264,487
------------- ------------
Net increase in cash 644,663 301,097
Beginning - cash and cash equivalents - 213,708
------------- ------------
Ending - cash and cash equivalents $ 644,663 $ 514,805
============= ============
See accompanying notes to financial statements.
6
MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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 June 2006, the
Company issued an aggregate of 26,380,000 shares of common stock
for services rendered. The shares were valued at their fair
market value of $494,420 which was charged to operations during
the period.
During the period from October 2005 through June 2006 the Company
issued an aggregate of 72,438,750 shares of common stock for the
conversion $597,179 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 . In addition, during
June 2006, the Company issued an aggregate of 15,000,000 shares
of common stock with a fair value of $435,000 as a partial
payment to settle the litigation described in Note 5. The
shareholders have the right in certain circumstances to redeem
the 15,000,000 shares for $200,000; or have the Company issue
sufficient shares, so that together with the 15,000,000 shares
the total value of the shares held by these shareholders has a
value of $200,000. The Company has classified $200,000 as
redeemable shares in the balance sheet at June 30, 2006.
7
During the period ended June 30, 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 June
30, 2006.
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
June 30, 2006 9,197 $24.50 $24.50
=====
The following table summarizes information about fixed-price
stock options at June 30, 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 June 30, 2006, the Company derived 37%,
22% and 20% of its total sales from three 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:
8
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.
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 June 30, 2006, the Company recorded an
additional $43,770 of post judgment interest.
During April 2006 the Company settled the litigation by agreeing
to the following:
A cash payment of $300,000
29 monthly payments of $31,667
The issuance of 15,000,000 common shares subject to registration
rights
The holders of the shares shall have the right beginning on the
effective date of the registration statement for a period of two
years to require the Company at the Company's discretion to sell
the shares back to the Company for $200,000 or require the
Company to issue additional shares so that the value of the
shares held by the holders is $200,000.
As a result of the settlement the Company's obligation related to
the litigation was reduced by $782,848 which has been recorded as
a gain on the settlement date.
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.
9
(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.
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. 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.
10
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.
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.
On April 21, 2006, the Company sold an additional $750,000 of
Convertible Notes and 750,000 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
11
price is $0.04 and the exercise price of the Warrants is $0.05
per share. In addition, the Company issued 30,000,000 Warrants,
exercisable for a period of seven years and with an exercise
price of $0.05 per share, to the same four investors, in lieu of
cash interest payments on all outstanding convertible notes for
the four months ending August 31, 2006.
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. 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 values of the
warrants were recorded as derivative instrument liabilities. The
fair values of the warrants were 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
contractual 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 June 30, 2006 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 $244,582 at
June 30, 2006.
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,
12
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 values. When
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.
A summary of the Callable Secured Convertible Notes and
derivative instrument liabilities at June 30, 2006, is as
follows:
Callable Secured Convertible Notes; 8% per annum;
due March 30, 2008 $740,000
Less: face amount of Notes converted (720,788)
--------
19,212
Less: unamortized discount related to warrants and bifurcated
embedded derivative instruments (19,075)
--------
$ 137
--------
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 (340,939)
--------
$259,061
Callable Secured Convertible Notes; 8% per annum;
due February 23, 2009 $600,000
Less: unamortized discount related to warrants and bifurcated
embedded derivative instruments (600,000)
--------
$ -
--------
13
Callable Secured Convertible Notes; 8% per annum;
due February 23, 2009 $750,000
Less: unamortized discount related to warrants and bifurcated
embedded derivative instruments (750,000)
--------
$ -
--------
Total carrying value at June 30, 2006 $259,198
========
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 June 30, 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.
At June 30, 2006, the following derivative liabilities related to
common stock Warrants and embedded derivative instruments were
outstanding:
Exercise Value-
Price Per Value- June 30
Issue Date Expiry Date Share Issue Date 2006
______________________________________________________________________
03-30-2005 03-30-2010 740,000 warrants $0.085 $673,400$ 1,371
05-25-2005 05-25-2010 700,000 warrants 0.085 693,000 1,410
08-23-2005 08-23-2010 100,000 warrants 0.085 31,000 207
08-26-2005 08-26-2010 500,000 warrants 0.090 145,000 1,048
10-31-2005 10-31-2010 600,000 warrants 0.010 6,000 1,157
02-23-2006 02-23-2011 600,000 warrants 0.050 2,081 3,137
04-21-2006 04-21-2011 750,000 warrants 0.050 6,932 4,069
04-21-2006 04-21-2013 30,000,000 warrrants 0.050 363,005 232,183
-------
Fair value of freestanding derivative instrument
liabilities for warrants $ 244,582
--------
Value- Value-
Issue June 30,
Issue Date Expiry Date Date 2006
__________________________________________________________________________
03-30-2005 03-30-2008 $19,212 convertible notes $9,176,010 $ 62,060
05-25-2005 05-25-2008 $700,000 convertible notes 9,451,556 2,229,836
08-23-2005 08-23-2008 $100,000 convertible notes 413,333 311,292
08-26-2005 08-26-2008 $500,000 convertible notes 1,928,889 1,552,972
10-31-2005 10-31-2008 $500,000 convertible notes 372,000 1,835,979
02-23-2006 02-23-2009 $600,000 convertible notes 1,487,973 1,776,988
04-21-2006 04-21-2009$750,000 convertible notes 1,758,445 2,510,808
---------
Fair value of bifurcated embedded derivative instrument
liabilities associated with the above convertible notes $10,279,935
----------
Total derivative financial instruments $10,524,517
==========
(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 June 30, 2006, the Company incurred a net loss of
$10,667,767 and has a working capital deficit, an accumulated
deficit and a stockholders' deficit of $290,670, $37,087,530 and
$10,890,907 at June 30, 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.
(8) Subsequent Events
Through August 9, 2006, the Company issued 48,300,000 shares of
common stock related to the conversion of the convertible debt of
$321,050 described in Note 6 and 30,000,000 shares of common
stock for services.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended June 30, 2006, Compared with three months ended
June 30, 2005, and Nine Months ended June 30, 2006, compared with Nine
months ended June 30,2005.
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 quarter ended June 30, 2006, Sales decreased 81.93% to
$32,729 from $181,034. This decrease was primarily caused by the
Company's total shift in its business model from sales to the consumer
through retail chains and distributors to direct to consumer marketing
via the Internet and company maintained websites. The company no
longer distributes its products in retail stores except for
Albertson's and some small retailers. The Company has spent the last
quarter revamping its corporate and product websites and plans on
adding up to 11 additional products in order to effectively compete in
the marketplace. Finally the "Un-Diet System" launch was delayed
until August 15th, 2006, and this product had no impact on quarterly
sales. Management believes that the fourth quarter's revenues will
increase with the launch of this product line as well as increasing
daily sales of its existing products. The Company has spent a large
portion of its budget in the third quarter to redesign its websites
and online branding and search engine marketing initiatives, including
both Paid-For and Natural Search activity.
For the Nine months ended June 30, 2006 sales decreased 73.12% to
$178,697 from $664,678, for the nine months ending June 30, 2005. The
decrease is attributable to a decline in overall customer demand and
the loss of most of the retail chain accounts as described above.
Gross profit for the third quarter was $(108,492) versus $81,376 for
the year ago quarter, a decrease in excess of 100%. The decrease was
due to lower sales as the Company transitioned from one business model
to another. Their was no gross profit margin during the quarter ended
June 30, 2006, as compared to 45.0% during the quarter ended June 30,
2005. This decrease resulted from lower sales and during this quarter
our inventory that was on hand and that was returned from those
retailers who no longer carried the products expired. The Company had
to destroy that product.
For the nine months ended June 30, 2006, Gross profit was $(42,353)
versus $393,931 for the nine months ending June 30, 2005, a decrease
in excess of 100% Their was no gross profit margin for the nine
months quarter ended June 30, 2006, as compared to 59.3% during the
nine month's quarter ended June 30, 2005. . The decrease resulted from
lower sales over the last nine months and inventory that expired and
was required to be destroyed.
15
Operating expenses (selling, general and administrative expenses)for
the 2006 quarter increased to $772,281 from $617,582, an increase of
20.04%. The small increase is due to several factors including,
increased legal fees, and consultants fees.
Operating expenses for the nine months increased from $1,550,378 to
$2,056,618, an increase of 24.62%. The increase for the nine months is
attributable to the Company's increased non cash compensation of
consultant's, expenses related to hiring an independent web-design
solutions Company and legal expenses related to the re-settlement of
the litigation. Management believes that several of these expenses
will be non-recurring in the next fiscal quarter.
Interest expense increased from $47,111 in the year ago quarter to
$484,224 for this quarter. Interest expense for the nine month period
increased from $56,171 to $692,190. The increase is directly
attributable to the borrowings by the Company from the four funds.
At present the Company has borrowed a gross amount of $3,990,000
through June 30, 2006, and the fund has sold 79,958,750 common shares
and reduced the total outstanding debt by $719,503 through June 30,
2006.
Net loss for the 2006 period was $955,076 as opposed to a loss of
$3,877,364 in the prior year's quarter. The loss was substantially
lower because of lower charges related to derivative instruments, and
a one time gain on the litigation settlement.
Net loss for the Nine months was $10,667,767 as compared to
$14,014,776 for the nine months a year ago. The loss was substantially
lower because of lower charges related to derivative instruments, and
a one time gain on the litigation settlement.
For the third fiscal quarter the company reported a loss of $0.01 per
share versus a loss of $0.13 per share in the year ago quarter.
For the third quarter nine month comparison the Company lost $0.28
cents as compared to a loss of $0.48 in the year ago quarter.
Liquidity and Capital Resources
- -------------------------------
Cash on hand at June 30, 2005 was $644,663 and the Company had working
capital of $296,676at June 30, 2006.
Net cash used in operating activities was $1,196,513 during the nine
months ended June 30, 2006.
Net cash used in investing activities was $(9,174 ) during the nine
months ended June 30, 2006.
16
Net cash provided by financing activities was $1,850,350 during the
nine months ended June 30, 2006, which consisted of $350 from the
proceeds from an options exercise and $1,850,000 from the convertible
debentures.
The Company has affected a 5% price increase for all of its products.
The Company has sufficient cash resources, receivables and cash flow
to provide for all general corporate operations in the foreseeable
future.
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 June 30, 2006,
the Company incurred a net loss of $10,667,767 and has an accumulated
deficit of $37,087,530 at June 30, 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.
17
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.
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.
18
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 on From 8-K
as filed on December 12, 2004.
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.
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 19th, 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 were that the amendment passed by a
majority vote of the shareholders . The Board of Directors was also
elected to serve for an additional five year period.
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
19
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 14, 2006 By: /s/Paul B. Kravitz
------------------------
Paul B. Kravitz
Chief Executive Officer
20