As filed with the Securities and Exchange Commission on ______ ___, 2006
Reg. No. ______________
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
AMENDMENT NUMBER 1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Med Gen, Inc.
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(Name of Small Business Issuer in its Charter)
Nevada 5122 65-0703559
- ------------------------ ------------------------- -------------------
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Classification Identification No.)
Code Number)
7284 W. Palmetto Park Road, Suite 207
Boca Raton, Florida 33433
(561) 750-1100
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(Address and telephone number of principal executive offices
and principal place of business)
Paul Mitchell
President
Med Gen, Inc.
7284 W. Palmetto Park Road, Suite 207
Boca Raton, Florida 33433
(561)750-1100
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(Name, address and telephone number of agent for service)
Copy to:
Stewart A. Merkin, Esq.
Law Office of Stewart A. Merkin, P.A.
444 Brickell Avenue, Suite 300
Miami, Florida 33131
(305) 357-5556
Approximate date of proposed sale to the public: From time to time after the
date this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of each class Proposed Proposed
of securities to be Shares to be maximum maximum aggregate Amount of
registered registered offering price offering price(1)(2) registration fee
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Common Stock Selling
Shareholders (3) 15,000,000 Shares $0.01 $ 150,000 $ 16.05
Common Stock(4) 135,000,000 Shares $0.01 $1,350,000 $144.45
(1) Estimated in accordance with Rule 457(c) under the Securities Act of
1933, as amended, solely for the purpose of calculating the registration fee
and represents the market price of the common stock of our Company on August
7th, 2006.
(2) Includes shares of our common stock,$0.001 par value per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of callable secured convertible notes and the exercise of
warrants held by the selling stockholders. In addition to the shares set
forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon conversion of the secured convertible notes
and exercise of the warrants, as such number may be adjusted as a result of
stock splits, stock dividends and similar transactions in accordance with
Rule 416. The number of shares of common stock registered hereunder
represents a good faith estimate by us of the number of shares of common
stock issuable upon conversion of the secured convertible notes and upon
exercise of the warrants. For purposes of estimating the number of shares of
common stock to be included in this registration statement, we calculated a
good faith estimate of the number of shares of our common stock that we
believe will be issuable upon conversion of the secured convertible notes and
upon exercise of the warrants to account for market fluctuations, and anti-
dilution and price protection adjustments, respectively. Should the
conversion ratio result in our having insufficient shares, we will not rely
upon Rule 416, but will file a new registration statement to cover the resale
of such additional shares should that become necessary. In addition, should a
decrease in the exercise price as a result of an issuance or sale of shares
below the then current market price, result in our having insufficient
shares, we will not rely upon Rule 416, but will file a new registration
statement to cover the resale of such additional shares should that become
necessary.
(3) 15,000,000 shares are being offered for resale by selling stockholders.
Such number of shares may be adjusted as a result of stock splits, stock
dividends and similar transactions in accordance with Rule 416.
(4) Includes a good faith estimate of shares underlying secured
convertible notes to account for market fluctuations.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We
shall not sell these securities until the registration statement filed with
the Securities and Exchange Commission (the "SEC") is effective. This
prospectus is not an offer to sell these securities and it is not soliciting
an offer to buy these securities in any state where the offer or sale is not
permitted.
PROSPECTUS
MED GEN, INC.
150,000,000 Shares of Common Stock
This prospectus relates to the resale by the selling stockholders of up to
150,000,000 shares of our common stock, including up to 135,000,000 shares of
common stock underlying callable secured convertible notes in a principal
amount of $1,350,000. The callable secured convertible notes are convertible
into our common stock at 40% of the lessor of $.04 and the average of the
lowest intra day trading prices during the 20 trading days immediately prior
to conversion.
The selling stockholders may sell common stock from time to time in the
principal market on which the stock is traded at the prevailing market price
or in negotiated transactions. The selling stockholders may be deemed
underwriters of the shares of common stock which they are offering. We will
pay the expenses of registering these shares.
As of August 7th, 2006, our common stock was being traded on the NASDAQ
Bulletin Board under the symbol "MGEN"; the closing bid and asked price
respectively of our common stock as reported on the Bulletin Board was $0.011
and $0.012. These stock prices may not reflect actual transactions.
You should understand the risks associated with investing in our common
stock. Before making an investment, read the "Risk Factors" which is on page
2.
Neither the SEC nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of
the prospectus. Any representation to the contrary is a criminal offense.
Subject to completion, dated ___________, 2006
Med Gen, Inc.
7284 W. Palmetto Park Road, Suite 207 Boca Raton, FL 33433
(561) 750-1100
TABLE OF CONTENTS
Page
Risk Factors..................................................... 2
Use of Proceeds.................................................. 10
Market Price of Common Stock and Other Shareholder Matters....... 10
Management's Discussion and Analysis or Plan of Operation........ 15
Business of our Company.......................................... 19
Management and Executive Compensation............................ 26
Terms of Secured Convertible Notes and Warrants ................. 30
Security Ownership of Certain Beneficial Owners and
Management..................................................... 32
Selling Stockholders............................................. 33
Plan of Distribution............................................. 35
Description of Securities........................................ 37
Disclosure of SEC Position on Indemnification for
Liabilities under the Securities Act of 1933................... 38
Interests of Named Experts and Counsel........................... 39
Legal Matters.................................................... 39
Where You Can Find More Information.............................. 39
Financial Statements.............................................F-1 - F-32
Exhibits......................................................... 40
1
RISK FACTORS
In addition to the other information included in this prospectus, you should
be aware of the following risk factors in connection with our business and
ownership of our shares. Any investment in the shares offered hereby will
involve a high degree of risk and may result in loss of the entire amount
invested. Prospective investors should carefully consider the risks of an
investment in any speculative business and the risks and the speculative
factors inherent to and affecting our business described below and throughout
this prospectus.
Risk Related to the Securities Markets and Ownership of our Stock
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There is a limited trading market for our stock, which may cause our reported
stock prices to be volatile and limit your ability to sell your shares.
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Our shares may trade at a limited volume, reported only on the OTC Bulletin
Board, indefinitely. As a result, relatively small trades in our stock could
have a disproportionate effect on our reported stock prices.
The OTC Bulletin Board is a regulated quotation service that displays real-
time quotes, last-sale prices and volume information for shares of stock that
are not designated for quotation on The NASDAQ National Stock Market or a
national securities exchange. Trades in OTC Bulletin Board-listed shares will
be displayed only if the trade is processed by an institution acting as a
market maker for those shares. Although there are currently 17 institutions
acting as market makers for our stock, these institutions are not obligated
to continue making a market for any specific period of time. If there is no
market maker for our stock and no trades in those shares are reported, it may
be difficult for you to dispose of your shares or even to obtain accurate
quotations as to the market price of your shares and the price of your shares
may drop. Moreover, because the order handling rules adopted by the SEC that
apply to NASDAQ-listed shares do not apply to OTC Bulletin Board-listed
shares, no market maker is required to maintain an orderly market in our
shares.
Accordingly, an order to sell our shares placed with a market maker may not
be processed until a buyer for the shares is readily available, if at all,
which may further limit your ability to sell your shares at prevailing market
prices. Stocks of other companies like ours are often volatile and such
volatility in the price of our shares could affect your ability to trade your
shares.
The stock markets in general, and the markets for the stocks of over-the-
counter "wellness" and pain care companies in particular, have experienced
significant volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may harm
the trading prices of our stock. Any of these factors could adversely affect
the liquidity and trading price of our stock.
Because the price of our stock is less than $5.00 per share and as such, is
classified as a "penny stock" under the federal securities laws, our stock
will be subject to the requirements for penny stocks, which will likely make
it difficult to sell your shares at a price higher than you paid for them.
The Securities Exchange Act of 1934 (the "Exchange Act") defines a penny
stock as any equity security that is not traded on a national securities
exchange or authorized for quotation on The NASDAQ National Market and that
has a market price of less than $5.00 per share, with certain exceptions.
Penny stocks are subject to Rule 15g under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers who sell such
securities. In general, a broker-dealer, prior to a transaction in a penny
stock, must deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The
broker-dealer must provide the customer with current bid and offer quotations
for the penny stock, information about the commission payable to the broker-
dealer and its salesperson in the transaction and monthly statements that
disclose recent price information for each penny stock in the customer's
account. Finally, prior to any transaction in a penny stock, the broker-
dealer must make a special written suitability determination for the
purchaser and receive the purchaser's written consent to the transaction
prior to sale. All of these requirements may restrict your ability to sell
your shares and could limit the trading volume of our stock and adversely
affect the price investors are willing to pay for our stock.
2
Our revenues and quarterly operating results may fluctuate, which may
adversely affect the market price of our stock and could lead to Med Gen
becoming the target of costly securities class action.
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Med Gen expects its revenues and operating results to fluctuate due to a
number of factors, many of which are outside of its control. Therefore, you
should not rely on period-to-period comparisons of results of operations as
an indication of our future performance. Management does believe that the
drop in its revenues in fiscal year 2005 contributed significantly to the
drop in its stock price. It is possible that in some future periods our
operating results may fall below the expectations of investors. In this
event, the market prices of our stock would likely fall. Factors that may
affect our quarterly operating results include:
- - product introductions, new marketing initiatives, or increased sales by
competitors;
- - market conditions affecting the nutritional and pain care industries;
- - the effect of favorable or adverse publicity about the over-the-counter
"wellness" or pain care industries;
- - demand for and consumer acceptance of our product offerings;
- - changes in our pricing policies, or the pricing policies of its
competitors, and general pricing trends in the market for over-the-counter
"wellness" and pain care products;
- - additions or departures of our key personnel;
- - announcements by us or our competitors of the creation or termination of
significant strategic partnerships, joint ventures, or acquisitions; and
- - general economic conditions.
Insiders will have substantial voting control over our Company after the
Offering and could delay or prevent our Company from engaging in a change of
control transaction and you from selling your shares of our common stock at a
premium to the shares' then current market value.
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Our executive officers, directors and five percent or greater stockholders,
excluding those investors purchasing in this Offering, will beneficially own
or control, directly or indirectly, approximately 175,387,365(including
shares that were issued pursuant to the Settlement Agreement for which Mr.
Kravitz retains voting rights) of the approximately 332,838,727 shares of our
common stock that will then be outstanding after the Offering, which will
represent a 52.69% voting interest. As a result, these stockholders will have
the ability to significantly influence the voting results of all matters
submitted to our Company stockholders for approval, including the election and
removal of directors and the approval of any business combinations. You can
read more about the ownership of our Company shares by its executive officers,
directors and principal stockholders in the section entitled "Security
Ownership of Management".
You may suffer dilution of your investment if our Company issues additional
securities in price of your shares may drop significantly; our Company has in
the past and may in the future issue securities to its executive officers and
directors.
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Med Gen's stockholders will be dependent upon the judgment of the board of
directors of our Company in connection with future issuance and sale of
shares of our capital stock. Stockholders' equity interests will be diluted
in the event of further issuances of our capital stock, in direct proportion
to the number of shares subsequently issued in price of your shares may drop
significantly. In fiscal year 2004, we issued 2,200,000 additional shares of
3
stock, representing 8.1% of our outstanding shares, 2,000,000 shares of which
were issued to management. In fiscal 2005 we issued 10,000,000 additional
shares of stock to management. This prospectus includes 150,000,000
additional shares of common stock issued to management. Management does not
know if the issuance of these shares had a direct impact on the price of our
stock, but it is highly likely that it did.
Med Gen does not plan to issue dividends to its stockholders for the
foreseeable future which may adversely affect the price of our stock.
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We have experienced significant losses from operations. For the years ended
September 30, 2004 and 2005, we incurred net losses of $9,171,324 and
$12,214,900 respectively. Our ability to continue as a going concern is
contingent upon our ability to secure additional financing, increase
ownership equity and attain profitable operations, none of which may occur.
Therefore, we have not and may never pay dividends. If we continue to pay no
dividends, the price of our shares may continue to be adversely affected.
Our articles and bylaws and Nevada law contain provisions which could delay
or prevent a change in control and could also limit the market price of your
stock.
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Our articles of incorporation and bylaws contain provisions that could delay
or prevent a change in control. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common
stock. Some of these provisions:
- - our articles authorize the issuance of preferred stock which can be created
and issued by the board of directors without prior stockholder approval,
commonly referred to as "blank check" preferred stock, with rights senior
to those of common stock; and
- - our bylaws establish advance notice requirements for submitting nominations
for election to the board of directors and for proposing matters that can
be acted upon by stockholders at a meeting.
Further, certain provisions of Nevada law make it more difficult for a third
party to acquire our Company. Some of these provisions:
- - establish a majority stockholder voting requirement to approve an
acquisition by a third party of a controlling interest; and
- - impose time restrictions or require additional approvals for an acquisition
of us by an interested stockholder.
While management does not control a majority of our outstanding shares
(35.1%), it does control a significant enough block of shares to veto a
transaction that may be desired by nonaffiliated shareholders, which could
serve to entrench current management in their respective positions with Med
Gen. These provisions could also limit the price that investors might be
willing to pay in the future for shares of our common stock.
Through this offering, we are registering a significant number of shares of
common stock so that they are freely tradable, which, because of the dilutive
effect, may have a depressing effect on the market price of our common stock.
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We are registering 150,000,000 shares of common stock in this offering, which
represents an increase of approximately 64.93% over the number of shares
which we had outstanding prior to this offering. Because of the dilutive
effect on our book value, the registration of these shares of common stock
may have a depressing effect on the market price of our common stock.
4
Risks Relating To Our Current Financing Arrangement
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There are a large number of shares underlying our callable secured
convertible notes and warrants that may be available for future sale and the
sale of these shares may depress the market price of our common stock.
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As of August 7th, 2006, we had 167,838,727 shares of common stock issued and
outstanding and callable secured convertible notes outstanding that may be
converted into an estimated 67,678,239 shares of common stock at current
market prices, and outstanding warrants to purchase 33,240,000 shares of our
common stock. Additionally, we have an obligation to sell callable secured
convertible notes that may be converted into an estimated 135,000,000 shares
of common stock at current market prices. In addition, the number of shares
of common stock issuable upon conversion of the outstanding callable secured
convertible notes may increase if the market price of our stock declines. All
of the shares, including all of the shares issuable upon conversion of the
notes and upon exercise of our warrants, may be sold without restriction. The
sale of these shares may adversely affect the market price of our common
stock.
The continuously adjustable conversion price feature of our callable secured
convertible notes could require us to issue a substantially greater number of
shares, which will cause dilution to our existing stockholders, because our
obligation to issue shares upon conversion of our callable secured
convertible notes is essentially limitless.
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The continuously adjustable conversion price feature of our secured
convertible notes may encourage investors to make short sales in our common
stock, which could have a depressive effect on the price of our common stock.
The secured convertible notes are convertible into shares of our common stock
at a 40% discount to the trading price of the common stock prior to the
conversion. The significant downward pressure on the price of the common
stock as the selling stockholders convert and sell material amounts of common
stock could encourage short sales by investors. This could place further
downward pressure on the price of the common stock. The selling stockholders
could sell common stock into the market in anticipation of covering the short
sale by converting their securities, which could cause the further downward
pressure on the stock price. In addition, not only the sale of shares issued
upon conversion or exercise of notes, warrants and options, but also the mere
perception that these sales could occur, may adversely affect the market
price of the common stock.
The issuance of shares upon conversion of the callable secured convertible
notes and exercise of outstanding warrants may cause immediate and
substantial dilution to our existing stockholders.
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The issuance of shares upon conversion of the callable secured convertible
notes and exercise of warrants may result in substantial dilution to the
interests of other stockholders since the selling stockholders may ultimately
convert and sell the full amount issuable on conversion. Although the selling
stockholders may not convert their callable secured convertible notes and/or
exercise their warrants if such conversion or exercise would cause them to
own more than 4.9% of our outstanding common stock, this restriction does not
prevent the selling stockholders from converting and/or exercising some of
their holdings and then converting the rest of their holdings. In this way,
the selling stockholders could sell more than this limit while never holding
more than this limit. There is no upper limit on the number of shares that
may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common
stock, including investors in this offering.
In the event that our stock price declines, the shares of common stock
allocated for conversion of the callable secured convertible notes and
registered under this prospectus may not be adequate and we may be required
to file a subsequent registration statement covering additional shares. if
the shares we have allocated are not adequate and we are required to file an
additional registration statement, we may incur substantial costs in
connection therewith.
5
Based on our current market price and the potential decrease in our market
price as a result of the issuance of shares upon conversion of the callable
secured convertible notes, we have made a good faith estimate as to the
amount of shares of common stock that we are required to register and
allocate for conversion of the callable secured convertible notes.
Accordingly, we have allocated and registered 135,000,000 shares to cover the
conversion of the callable secured convertible notes. In the event that our
per share stock price decreases below $0.04, the shares of common stock we
have allocated for conversion of the callable secured convertible notes and
are registering hereunder may not be adequate. If the shares we have
allocated to the registration statement are not adequate and we are required
to file an additional registration statement, we may incur substantial costs
in connection with the preparation and filing of such registration statement.
If we are required for any reason to repay our outstanding callable secured
convertible notes, we would be required to deplete our working capital, if
available, or raise additional funds. our failure to repay the callable
secured convertible notes, if required, could result in legal action against
us, which could require the sale of substantial assets.
In March 2005, we entered into a Securities Purchase Agreement for the sale
of an aggregate of $1,540,000 principal amount of callable secured
convertible notes. The callable secured convertible notes are due and
payable, with 8% interest, two years from the date of issuance, unless sooner
converted into shares of our common stock. Any event of default such as our
failure to repay the principal or interest when due, our failure to issue
shares of common stock upon conversion by the holder, our failure to timely
file a registration statement or have such registration statement declared
effective, breach of any covenant, representation or warranty in the
Securities Purchase Agreement or related convertible notes, the assignment or
appointment of a receiver to control a substantial part of our property or
business, the filing of a money judgment, writ or similar process against our
company in excess of $50,000, the commencement of a bankruptcy, insolvency,
reorganization or liquidation proceeding against our company and the
delisting of our common stock could require the early repayment of the
callable secured convertible notes, including a default interest rate of 15%
on the outstanding principal balance of the notes if the default is not cured
within the specified grace period. We anticipate that the full amount of the
callable secured convertible notes will be converted into shares of our
common stock, in accordance with the terms of the callable secured
convertible notes. If we are required to repay the callable secured
convertible notes, we would be required to use our limited working capital
and raise additional funds. If we were unable to repay the notes when
required, the note holders could commence legal action against us and
foreclose on all of our assets to recover the amounts due. Any such action
would require us to curtail or cease operations.
Risks Related to our Company's Business
---------------------------------------
We face significant competition, and many of our competitors are larger and
have more resources than we have, which may have an adverse effect on the
price of our shares.
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The markets for over-the-counter anti-snoring, "wellness" and pain care
products are highly competitive, with many companies, including well-
established manufacturers and distributors, with greater financial resources
and longer operating histories than we have.
Our primary competitors are CNS, Inc., Snore Stop, Inc. Green Company, Inc
and Ayrs, Inc. The products produced by these companies are Breathe Right
Spray[R], SnoreStop[R] and Ayrs Snore Spray. Our market share of Snorenz[R]
is less than 1%, while Breathe Right[R] is 33%, SnoreStop[R] is 19% and Ayrs
is 17%. While Snorenz[R] competes with them, it is now sold only by 2 of
the major 100 national chains.
We began losing market share when in February, 2003, Breathe Right[R] was
launched with a major advertising campaign on both national television and
radio. In 2006, the Company stopped almost all marketing directly to
domestic retail chains in favor of boosting its marketing efforts thru DRTV
(Direct Response Television) and DTC (direct to consumer) programs and has
undertaken a program of direct to consumer marketing via the internet. While
the Company is allocating substantial marketing capital to building these
programs, there can be no assurance that these efforts will be successful and
if they are not, that the Company will be able to continue operations.
6
The FTC consent degree described below, which was mainly a re-labeling issue,
has not affected distribution of Snorenz[R]. We were permitted to continue to
sell out our inventory while producing new inventory with new and FTC
approved language on our packaging.
In order to compete effectively, the Company is seeking to raise $1.5
million. Until we are able to raise significant capital for advertising and
other consumer awareness programs, we may continue to lose further market
share.
Our success is dependent upon its ability to manage anticipated growth. If we
do not do this successfully, the value of your shares may be adversely
affected.
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With our recent financing (see "Terms of Secured Convertible Notes and
Warrants" on page 18), which has provided us with $3,990,000 over a period of
13 months, we intend to pursue rapid growth by launching our new product -
"The Un-Diet Program". Most of the funding will be utilized to advertise and
cover cash shortages until our products are sold nationwide. Our ability to
achieve this planned growth depends upon a number of factors, including our
ability to hire and train management and other employees, our ability to
identify new markets in which to successfully compete and our ability to
adapt our purchasing and other systems to accommodate our expanded
operations.
Our ability to continue as a going concern is contingent upon our ability to
secure additional financing, increase ownership equity and attain profitable
operations. If we do not accomplish this, we may not be able to continue as a
going concern.
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Our 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. We have experienced a significant loss from
operations including the legal expenses incurred and settlement of the Global
Healthcare Lawsuit for cash of $426,664 and the issuance of 15,000,000 shares
to the plaintiffs. Additionally, being undercapitalized, we have struggled to
find funds to be able to advertise against our major competitors. For the
years ended September 30, 2004 and 2005, our Company incurred net losses of
$9,171,324 and $12,214,900 respectively. Our accumulated deficit totals
$26,419,763. Our ability to continue as a going concern is contingent upon
our ability to secure additional financing, increase ownership equity and
attain profitable operations. In addition, our 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 we operate, we secured additional financing
in the amount of $3,990,000, we are able to spend only $10,000 on advertising
every two weeks, which is inadequate; even though we have raised additional
capital, we must raise an additional $1,200,000 to pay for additional
marketing and advertising for our products, to expand distribution and reduce
the deficit. Because this amount may not be sufficient, we are continuing to
pursue additional financing for our operations and we are seeking new
investors. In addition, we are seeking to expand our revenue base by adding
new customers and increasing its advertising. Failure to secure such
financing or to raise additional equity capital and to expand our revenue
base may result in our depleting our available funds and not being able pay
our 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 us to continue as a going concern.
If we lose key management personnel, we may not be able to successfully
operate our business.
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Our future performance depends substantially upon the continued services of
our senior management, Paul B. Kravitz and Paul S. Mitchell and other key
personnel. Because we have a relatively small number of managerial employees,
our dependence on retaining our managerial employees is particularly
significant. Our success will depend, in part, on its ability to attract and
retain qualified management and professional personnel. Competition for such
personnel in the industries in which we compete is intense. In addition, our
employees may not continue to work for us. We do not maintain "key man"
insurance on any of our officers or employees. The loss of the services of
Mssrs. Kravitz and Mitchell could have the effect of lowering our sales,
which would adversely affect our operating results and financial condition.
On February 16, 2005, we entered into employment agreements with Messrs.
Kravitz and Mitchell.
7
There are a limited amount of clinical studies and scientific review of our
key products, and our business could suffer from adverse publicity concerning
our products or similar products.
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While we conduct quality control testing on its products, we conduct limited
clinical studies on its products. Our SNORenz and Snor Away products consist
of ingredients that we regard as safe when taken as suggested by us. To date,
neither Snorenz[R] nor Good Night's Sleep[R] have received any adverse
publicity nor, to our knowledge, have they or similar products caused harm,
or been proven to cause harm to the public or have they had any adverse
publicity since we began selling them. However, because we are highly
dependent upon consumers' perception of the safety and quality of our
products as well as similar products distributed by other companies (which
may not adhere to the same quality standards as ours), we could be adversely
affected in the event any of our products, or any similar products
distributed by other companies, should prove or be asserted to be harmful to
consumers. In addition, because of our dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from consumers' failure to consume our products as suggested by us or other
misuse or abuse of our products or any similar products distributed by other
companies could have a material adverse effect on our results of operations
and financial conditions.
We may face product liability claims from users of our products which could
have a serious impact on our operating results.
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While we have never had a liability claim, Med Gen, like other manufacturers,
wholesalers, distributors and retailers of products that are similar to those
produced and sold by us, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury. We have product liability insurance in the amount of $5,000,000,
which is the amount required by the accounts to whom we sell. Because the
cost of insurance may increase, such insurance may not continue to be
available at a reasonable cost, and if available, it may not be adequate to
cover all liabilities.
We depend on our trade secrets, patent and other intellectual property for
SNORenz[R]/Snor Away[R], Good Nights Sleep[R], UN-DIET[TM] and Painenz[R] for
protection. There are no guarantees that these assets could be used by others
without our consent. requiring protracted costly litigation.
- -----------------------------------------------------------------------------
Med Gen's success and ability to compete in the marketplace in connection
with its SNORenz[R]/SnorAway[TM] products depend to a significant degree on
its intellectual property. We have been issued U.S. patent no. 6,187,318 in
connection with our SNORenz[R]/Snor Away[R] products. In addition, we rely on
copyrights, trademark and trade secret laws to protect our intellectual
property. We may not be able to or may not possess the resources necessary to
defend our patent or the other intellectual property in an economically
viable fashion. In addition, effective protection may not be available for
any trade or service marks we may employ. Our competitors in this marketplace
or others may adopt similar product or service names, thereby impeding its
ability to build brand identity and possibly leading to client confusion. Our
inability to adequately protect our name would seriously harm our business.
Policing unauthorized use of our intellectual property is made especially
difficult by the global nature of the Internet and difficulty in controlling
the ultimate destination or security of software or other data transmitted on
it. The laws of other countries may afford little or no effective protection
for our intellectual property. Litigation may be necessary in the future to:
- - enforce our intellectual property rights;
- - determine the validity and scope of the proprietary rights of others; or
8
- - defend against claims of infringement or invalidity.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversions of resources, either of which could
seriously harm our business.
Med Gen and its products are subject to regulation by a variety of
governmental agencies.
- ------------------------------------------------------------------
The manufacturing, processing, formulation, packaging, labeling and
advertising of our products may be subject to regulation by one or more
federal agencies, including the Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service,
the United States Environmental Protection Agency and the Occupational Safety
and Health Administration. Our products may also be regulated by various
agencies of the states and localities in which its products will be sold. In
particular, the FDA regulates the safety, labeling and distribution of
dietary supplements, including vitamins, minerals, herbs, food, over-the-
counter and prescription drugs and cosmetics. The regulations that are
promulgated by the FDA relating to the manufacturing process are known as
Current Good Manufacturing Practices ("CGMPs"), and are different for drug
and food products.
In addition, the FTC has overlapping jurisdiction with the FDA to regulate
the labeling, promotion and advertising of vitamins, over-the-counter drugs,
cosmetics and foods. The FDA is generally prohibited from regulating the
active ingredients in dietary supplements as drugs unless product claims that
a product may heal, mitigate, cure or prevent an illness, disease or malady,
trigger drug status. Governmental regulations in foreign countries where our
Company may sell our products may prevent or delay entry into a market or
prevent or delay the introduction, or require the reformulation, of certain
of our Company's products. New domestic or foreign legislation regulating our
activities may be enacted in the future. Such new legislation could have a
material adverse effect on us.
In 2002, we signed a consent decree settling an FTC investigation of claims
made by us on its packaging and labels.
- ---------------------------------------------------------------------------
In the summer of 2001, the FTC opened an investigation into certain claims
made by us on our packaging and labels for the SNORenz[R]product. In May
2002, Med Gen and its Chairman/CEO entered into a consent decree with the FTC
whereby, without denying or admitting any guilt, they agreed to make certain
changes to its product label and to more accurately report its claims in
advertising. Med Gen and its Chairman believe it has complied with the FTC
consent to date.
Note Regarding Forward Looking Statements
-----------------------------------------
This prospectus contains forward-looking statements that involve risks and
uncertainties. The statements contained in this prospectus that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act, as
amended, including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding the future. The words "believes,"
"should be," "anticipates," "plans," "expects," "intends" and "estimates,"
and similar expressions identify these forward-looking statements. All
forward-looking statements included in this document are based on information
available to us on the date hereof and we assume no obligation to update any
such forward-looking statements. Our actual results may differ materially as
a result of certain factors, including those set forth hereafter and
elsewhere in this prospectus. Prospective investors should consider carefully
the following factors, as well as the more detailed information contained
elsewhere in this prospectus, before making a decision to invest in Med Gen.
9
USE OF PROCEEDS
We will not receive any proceeds from the sale of common shares by the
selling stockholders pursuant to this prospectus.
MARKET PRICE OF COMMON STOCK AND OTHER SHAREHOLDER MATTERS
This prospectus relates to the sale of 150,000,000 shares owned by our
shareholders, 15,000,000 shares of which have been issued and the balance
shares of which will be issued as further described in this prospectus. All
references in this prospectus as to ownership of shares, number of shares
outstanding and percentages of shares owned will reflect the issuance of all
150,000,000 shares.
As of effective date of this prospectus, including additional stock
issuances and options exercised, there will be approximately 1911
shareholders of common stock consisting of both registered shareholders
plus those being held by the Depository Trust Company in street name. Of
the 231,849,884 shares outstanding, on the effective date of this
prospectus, 25,889,779 will be restricted and 205,960,105 are non-restricted.
Upon the effective date of this prospectus, 15,000,000 restricted shares of
common stock already issued will become non-restricted.
Our common stock is traded on the NASD OTC Bulletin Board under the symbol
"MGEN". Shares first began trading on the OTC Bulletin Board in May of 2000
(prior to that time, our common stock was traded in the Pink Sheets).
The following table sets forth the high and low bid prices by month for our
common stock for calendar years 2002 through 2006. The following high and low
bid prices reflect inter- dealer prices without retail markup, markdown or
commission, and may not represent actual transactions.
Historical Price Data of our Common Stock
- -----------------------------------------
2002-2004 High Low
- --------- ---- ---
2002
- ----
October 0.09 0.07
November 0.13 0.08
December (end first quarter) 0.10 0.07
2003
- ----
January 0.08 0.03
February* (80:1 reverse) 3.30 2.40
March (end second quarter) 3.10 5.05
April 5.25 4.00
May 4.90 2.75
June (end third quarter) 6.00 3.50
July 5.00 5.25
August 5.50 5.00
September (end fourth quarter 5.50 5.10
October 5.50 4.75
November* (4:1 forward split) 7.75 1.25
December (end first quarter) 1.80 0.90
2004
- ----
January 1.19 0.44
February* 0.90 0.40
March (end second quarter) 1.15 0.75
April 1.312 0.62
May 1.18 0.75
June (end third quarter) 1.43 0.55
July 0.535 0.34
August 0.70 0.012
September (end fourth quarter) 0.224 0.065
October 0.225 0.102
November 0.168 0.115
December (end first quarter) 0.178 0.07
2005
- ----
January 0.85 0.65
February 0.89 0.45
March (end of second quarter) 0.68 0.45
April 0.118 0.50
May 0.70 0.45
June (end third quarter) 0.06 0.032
July 0.044 0.013
August 0.057 0.016
September ** (end third quarter) 0.42 0.061
October 0.061 0.035
November 0.055 0.027
December (end first quarter) 0.036 0.0008
2006
- ----
January 0.030 0.0009
February 0.025 0.0009
March (end of second quarter) 0.057 0.010
April 0.039 0.022
May 0.032 0.012
June (end third quarter) 0.051 0.011
July 0.028 0.010
August 0.013 0.005
* In February, 2003, we completed an 80:1 reverse stock split and in
November, 2003 we issued a stock dividend of 4:1. As a result of those
splits, the symbol was changed to MDGN.
** In September 2005 the Company completed a 20:1 reverse split and
changed its symbol to "MGEN"
10
As of August 7th, 2006, the bid price of our shares was $0.011 and the asked
price was $0.012
The Transfer agent for our common stock is Liberty Transfer Co., 274 New York
Ave, Huntington, NY 11743-2711. The telephone number is (631) 385-1616.
Dividend Policy
We have not paid any dividends on our common stock to date and do not
anticipate that we will be paying dividends in the foreseeable future. Any
payment of cash dividends on our common stock in the future will be dependent
upon the amount of funds legally available; earnings, financial condition,
capital requirements and other factors that the Board of Directors may think
are relevant. We intend for the foreseeable future to continue to follow a
policy of retaining all of our earnings, if any, to finance the development
and expansion of our business and, therefore we do not have any current
intention to pay cash dividends on our common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our financial condition and our subsidiaries and
our results of operations should be read together with the consolidated
financial statements and related notes that are included later in this Annual
Report on Form 10-QSB. This discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under Risk Factors or in
other parts of this prospectus.
General
- -------
Our headquarters has been located at 7284 West Palmetto Park Road, Boca
Raton, Florida 33433, since December 1999. We lease a 2200 square foot
facility. Under certain manufacturing agreements, we have elected to
outsource the manufacturing of all of our products at this time.
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.
- ----------------------------------------------------------------------
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.
11
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.
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.
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.
12
The Company has eliminated one-time burdens of legal, computer and other non-
recurring expenses. The Company has sufficient cash resources, receivables
and cash flow to provide for all general corporate operations in the
foreseable future.
We have continued to cut costs by eliminating one-time legal and computer
and Internet related costs. We have sufficient cash resources, 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.
13
Current Marketing of our Products
- ---------------------------------
Our products are currently sold domestically and internationally. In late
2005, we turned to DRTV(Direct Response Television) and DTC (Direct to
Consumer) marketing programs to eliminate the huge costs we had encountered
while dealing with mass merchandisers, drugstores, supermarkets, and other
stores that sell "health and beauty" aides. The conversion of our marketing
direction to DRTV and DTC required us to produce infomercials and construct
new web sites to attract our consumer. We do still sell to Albertsons, Savon,
Osco Drugs and others, but our major effort henceforth will be DRTV and DTV
marketing programs. Med Gen continues to sell its products using private
label programs to multi-level marketing companies and distributors. Our
products are also sold through distributors in Norway, Denmark, Iceland,
Sweden, Poland, Ireland, Australia and New Zealand.
We are pursuing financing for our operations and seeking additional
investments. In addition, we are seeking to expand our revenue base by adding
new customers and increasing our advertising. Failure to secure such
financing or to raise additional equity capital and to expand our revenue
base may result in Med Gen depleting its available funds and not being able
to 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 our Company to continue as a going concern.
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.
Off-Balance Sheet Arrangements
- ------------------------------
We do not currently have any off-balance sheet arrangements.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
The following discussion of our financial condition and our
subsidiaries and our results of operations should be read
together with the consolidated financial statements and related
notes that are included later in this Annual Report on Form 10-
KSB. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of various factors, including those set
forth under Risk Factors or in other parts of this Annual Report
on Form 10-KSB.
Twelve months ended September 30, 2005
Compared with twelve months ended September 30, 2004
- ----------------------------------------------------
GENERAL
The Company has been headquartered at 7284 West Palmetto Park
Road, Boca Raton, Florida 33433, since December 1999.
It leases a 2200 square foot facility. The company, under special
protective contracts, has elected to outsource the manufacturing
of all of its products at this time.
Results of Operations
- ---------------------
For the twelve months ended September 30, 2005, net sales decreased
23.11% to $802,127 from $1,043,101 in the prior fiscal year.
The decrease in sales was due primarily to four factors:
(1) A multi-million dollar advertising campaign by our direct
competitor Breath-Rite in all of our retail markets which led
them to dominate the point of purchase sale to the consumer and
(2)The successful launch by several of our retailers of
competitively priced "generic" snoring products which gave the
consumers more products to choose from when making a purchase.
Coupled with these factors were (3) The Company's lack of
substantial advertising budget which did not allow the Company to
affect the consumers purchasing decisions and led to a substantial
loss of revenue until late in the year when the Company began
expending significant amounts on advertising. AN additional factor
was the loss of three major accounts during the last half of the
fiscal year. These accounts Wal-Mart, Walgreens and CVS accounted
for over 60% of the gross revenues in the prior fiscal years.
Gross profit for the twelve months ended September 30, 2005 was
$472,058 versus $606,567 for the same period a year ago, a
decrease of 22.18%. This decrease relates to a substantial
decrease in total sales volume for the fiscal year. Gross profit
margins for the years 2004 were 58.15% and 2005 were 58.85%. The
increase in the gross profit margins was negligible in comparison
to the prior fiscal year. The Company had lower cost of sales
which is directly attributable to the loss in revenue volume over
the last six months of operations in fiscal 2005.
For the twelve-month period ended September 30, 2005 operating
expenses were $9,368,644 as compared to $9,664,294 a decrease of
3.1% from the prior fiscal year. The marginal decrease is due to
the expensing of the costs of the litigation which amounted to
$1,181,191 as compared to $1,320,000 in the prior fiscal year.
This expense resulted from the adverse judicial ruling related to
the settlement of the above referenced litigation, and non-cash
stock compensation of $6,551,800 in 2005 as compared to $5,496,425
in 2004. Management does not believe these types operating expenses
for the next fiscal year will continue.
Excluding these expenses in fiscal 2004 the SG&A was $2,487,869 as
compared to $1,635,653 in fiscal 2005. This represents an actual
reduction of 34.25%. Management has continued to cut expenses in
all areas of operations in an effort to conserve cash until sales
volume substantially increases during fiscal 2006.
15
The operating loss decreased to $(8,896,586) as opposed to a loss
of $(9,057,727) for the same twelve months period, in the prior year.
For the twelve-month periods interest expense increased to
$253,992 from $113,597 primarily as a result of an increase in
borrowings. The Company owes its lender approximately $2,450,000.00
at an 8% coupon rate as of the date of this filing.This figure is based
upon the gross conversions made by the lender through the date of
the filing, (approximately $200,000).
For the twelve months ended September 30, 2005, the Company
reported a loss of $12,214,900 ($7.12 per share) versus a loss of
$9,171,324 ($15.42 per share) for the same fiscal period, a year ago.
Liquidity and Capital Resources
- -------------------------------
Cash on hand at September 30th,2005 was $760,934 and the Company
had a working capital deficeit of $1,787,390 at September 30, 2005.
Net cash used in operating activities was $1,219,999 during the
twelve months ended September 30, 2005 as compared to $2,060,531
in the year earlier. This decrease is attributed principally to
compare 2005 to 2004. The net loss adjusted for non-cash stock
compensation of $6,551,800, and derivative accounting requirements
of $4,298,243.
Net cash used in investing activities was $5,092 during the
twelve months ended September 30, 2005.
Net cash provided by financing activities was $1,772,317 during
the twelve months ended September 30, 2005, which consisted
principally of proceeds from a convertible stock offering pursuant
to an SB-2 Registration Statement $(1,935,000), the payment of
option exercises $(101,987) and the proceeds from related party
loans ($411,000) reduced by the repayment of advances of related
party loans ($586,000) and financing fess of $(89,670).
The Company launched its first advertising campaign in May -June
of 2004 in order to support the sales of its products Good Night's
Sleep[TM] and SNORenz[R] brand. Other advertising campaigns were
launched in fiscal 2005.The Company intends to seek additional
funding in 2006 through the sale of Common stock in order to launch
its new UNDIET[TM] product line The Company has continued to cut costs
by eliminating staff, and eliminating one-time legal and computer and
Internet related costs. Since the loss of the major retail accounts
the Company has revitalized its direct sales programs via its Internet
site to the public consumer. The Company's volume via this medium has
slowly increased and management is exploring various ways to drive
the consumer to the website. The Company plans on shooting some
infomercials and advertise on the web in 2006.
At present the Company does not have sufficient cash resources,
receivables and cash flow to provide for all general corporate
operations in the foreseeable future. The Company will be required to
raise additional capital in order to continue to operate in fiscal 2006.
Going Concern
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 years
ended September 30, 2005 and 2004, the Company incurred net
losses of $12,214,900 and $9,171,324.
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.
16
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 and is attempting to settle certain litigation.
Failure to secure such financing, to raise additional equity
capital, settle the litigation 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.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United
States, and make estimates and assumptions that affect our
reported amounts of assets, liabilities, revenue and expenses,
and the related disclosures of contingent liabilities. We base
our estimates on historical experience and other assumptions that
we believe are reasonable in the circumstances. Actual results
may differ from these estimates.
The following critical accounting policies affect our more
significant estimates and assumptions used in preparing our
consolidated financial statements.
Revenue Recognition
- -------------------
In general, the Company records revenue when persuasive evidence
of an arrangement exists, services have been rendered or product
delivery has occurred; the sales price to the customer is fixed
or determinable, and collect ability is reasonably assured. The
following policies reflect specific criteria for the various
revenues streams of the Company:
Revenue is recognized at the time the product is delivered.
Provision for sales returns will be estimated based on the
Company's historical return experience. Revenue is presented net
of returns.
Stock-Based Compensation
- ------------------------
The Company accounts for equity instruments issued to employees
for services based on the fair value of the equity instruments
issued and accounts for equity instruments issued to other than
employees based on the fair value of the consideration received
or the fair value of the equity instruments, whichever is more
reliably measurable.
The Company accounts for stock based compensation in accordance
with SFAS 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow
the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to
apply APB 25 in accounting for its stock option incentive plans.
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.
17
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.
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.
18
BUSINESS OF OUR COMPANY
Company Background
- ------------------
We were established under the laws of the State of Nevada in October 1996.
Executive offices are located at 7284 W. Palmetto Park Road, Suite 207, Boca
Raton, Florida 33433. Our telephone number is (561) 750-1100. We currently
operate five (5) Websites: www.medgen.com, www.undietsystem.com,
------------------------------------
www.painenz.com, www.4goodnightsleep.com and www.snorenz.com. Our common
- --------------- ------------------------ ---------------
stock trades on the OTC Bulletin Board under the symbol "MGEN".
Overview of our Business
- ------------------------
We were established to manufacture, sell and license healthcare products,
specifically to the market for alternative therapies (health self-care). One
out of two households practice some form of alternative therapies. Our
specialty is producing "spray" formulations that help relieve common, mass
market, health problems. The "Sprays the Way" technology that we have
developed and became known for, is a fast and effective unique delivery
system that can be developed for most OTC formulations. The Company uses this
STW system for its weight loss system, snoring relief and sleep-aid systems.
Our flagship product has been SNORenz[R], a patented throat spray which
reduces or eliminates the sounds ordinarily associated with snoring.
SNORenz[R] is free of artificial colors, flavors or preservatives. Its
patented ingredients, technology and Liposome[R] manufacturing process,
deliver consistent and measured droplet spray mists directly to the back of
the throat, lubricating the uvula and soft palate that vibrate with each
breath. Each application lasts about six to eight hours. Moreover, the all-
natural peppermint taste further provides the satisfaction of waking up
without a morning breath.
SNORenz[R] is currently sold through a number of retailers and direct to
consumers utilizing our web sites, TV, Radio and Print advertisements. We
have accelerated our timetable to introduce additional products that either
deploy its proprietary technology or otherwise address the $29 billion
Alternative Therapy Market. In late 2003, we introduced Good Nights Sleep[R],
is a liquid throat spray formulation for sleep aide. Using Diphenhydromine as
an active ingredient, Good Nights Sleep[R] is the first spray liquid in this
category to enter the US market. SNORenz[R] is also marketed under several
private labels for other distributors. SnorAway[R] is the label that is
reserved predominately for the European market.
We have completed R%D and have started marketing our newest weight loss
products. The UN-DIET[TM] System consists of three products, Appease[TM],
Weight Shield[TM] and Simply Trim[TM]. The products are designed to reduce
appetite and cravings for sweets, promote thermogenesis and eliminate "bounce
back" or weight gain. The products are all natural, easy to take and fast
acting. The actual formulations and combinations are proprietary to the
Company.
DESCRIPTION OF PRODUCTS
SNORenz[R]
- ----------
SNORenz[R] is an original and innovative entry into the anti-snoring
industry. During the years 1996 through 2002, Med Gen enjoyed a unique
position in the marketplace because we were without competition. Snorenz[R],
an all natural innovative liquid throat spray to prevent or quiet the noise
of snoring. Maintained a leadership position until larger and better
capitalized companies began to introduce spray products to compete with
Snorenz[R]. Because of our Patent protection, we have been able to maintain
our exclusivity as an "all natural" spray snoring relief product. The Patent
on the ingredients and formula was awarded on February 13, 2001.
19
The medical and psychological communities have studied the causes and
symptoms of sleep deprivation for many years. Sleep clinics can be found
internationally at the largest hospitals and universities, and there is a
large body of published work on the subject of snoring. It has been
documented in clinical tests that much of sleep deprivation is caused by
snoring. Not only is the snorer disturbed, but those within close proximity
of the noise are disturbed as well. As the muscles relax during sleep, air
flows in and out of the mouth causing the vibration of the tongue, soft
palate and uvula which produces the sound commonly referred to as snoring.
In 2002, we completed a double blind study at Northwestern Hospital's Sleep
Center in Atlanta, GA, under the direction of Dr. Samuel Mickelson of the
Advanced Ear Nose and Throat P.C. The results of that study concluded that
SNORenz[R] is an effective product to reduce the noise associated with
snoring.
Traditional snoring remedies include surgical procedures, mechanical devices
and dental appliances. During surgery, portions of the vibrating tissue are
cut away by scalpel or laser in an attempt to remove the noise-making
tissues. This type of procedure is painful, takes months to heal, and may not
offer a long-term solution. Mechanical devices primarily attempt to increase
the volume of air or create positive air pressure using some type of
breathing apparatus connected to an air pump. This is not only uncomfortable,
but also limits one's sleeping positions. Dental appliances also attempt to
increase the volume of air by expanding the opening of the mouth or by
repositioning the lower jaw and/or the tongue to decrease the vibration
effect. Again, wearing one of these is not the most comfortable way to sleep.
The costs of these methods can be considerable and may not be covered by
basic medical insurance programs.
Snoring is a problem that affects over 60% of males and 40% of females. In
the United States alone, it is documented that there are over 94 million
people who suffer with and from the effects of snoring. Snoring causes a poor
quality of sleep. The medical implications of snoring usually are not life
threatening, except for a malady called Sleep Apnea, which is not as yet
curable. Therapy has been increasing in response to demand to solve the side
effects of snoring noise.
Experiments with weight loss, the avoidance of alcoholic beverages and the
changing of sleep positions have largely proven ineffective. Sufferers who
demand some relief are now seeking more aggressive methods. Invasive surgery,
continuous positive airway pressures (PAP),or appliances are now being used.
These methods have had variable success in improving the quality of sleep and
reducing snoring. Due to the discomfort and cost of these methods, less
invasive methods are now being evaluated.
The Biotechnology underlying Our Products
- -----------------------------------------
One of the most promising of all these new methods is the use of a natural
blend of oils and vitamins specially formulated to be used as a spray. After
years of research, such a product was developed by a medical specialist in
Brazil with encouraging initial results. We acquired this initial technology,
the trade secrets and initial proprietary formula for worldwide commercial
marketing which over the years has been perfected, retested and re-
formulated leading to the issuance of a patent that has been assigned to us.
We have spent considerable capital and other resources to further improve the
delivery of this spray by using, as its manufacturing technology, the
patented technology called Liposome[R], which enables the blend of oils to
remain equally disbursed and suspended in a vesicle in solution. This, the
patented formula and other trade secrets comprise the underlying
biotechnology of SNORenz[R].
Because of this specialized manufacturing process, there is never a need to
shake the bottle, as the solution is permanently blended. We intend to market
other over-the-counter products for alternative therapies. By way of
explanation, Lipoceuticals are liposomes that have a variety of active
ingredients that contain an active ingredient in each phase. The ability to
20
encapsulate a variety of lipophilic (a substance having the ability to
dissolve in fats) and hydrophilic (a substance having the ability to dissolve
in water) ingredients, peptides and proteins is the obvious advantages needed
to enhance delivery, improve quality and sustain product performance of
SNORenz[R]. This technology is far superior and much more expensive than
other emulsion type delivery systems and insures the highest possible quality
available in the market today.
The advantages and benefits of this technology and delivery system are that
the SNORenz[R] LipoSpray is absorbed transmucosally (absorbed through the
mucous membrane) to provide systemic distribution; has a higher concentration
of active ingredient in the mucosal tissue; has longer residence time of
active ingredient in the mucosal tissue; and, has a high encapsulation rate
(the time required to enclose an active ingredient within a membrane) for
improved performance of the active ingredient. It also has greater
bioavailability, which means that it has faster onset of effect, greater
overall absorption, sustained administration, improved convenience and no
pills, water or swallowing problems.
SNORenz[R] attempts to reduce or eliminate the sounds associated with snoring
by simply lubricating the vibrating tissues in the throat with a combination
of five natural oils, vitamins, and trade secret trace ingredients. The
product is formulated to adhere to the soft tissues in the back of the throat
for an extended period of time, and may be reapplied as needed. Clinical
studies, "Double Blind" studies and scores of testimonials and repeat sales
indicate a high level of success for SNORenz[R] users. SNORenz[R] is not
effective where users have consumed a large amount of alcoholic beverages
shortly before application, as the alcohol tends to break down the chemical
bonds of the natural oils. It should also be noted that SNORenz[R]is not a
cure for sleep apnea, a condition for which there is no known cure.
SNORenz[R] carries a 30-day money back guarantee. Our Company has experienced
negligible product return rates over the past two fiscal years.
GOOD Nights Sleep[TM]
- ---------------------
Good Nights Sleep[TM] ("GNS") is a night time sleep aid and the first such
product formulated as a throat spray. Positioned to compete with Sominex r,
Simply Sleep r and Excedrin PM, which are all solids; GNS enters the market
catering to people who have difficulty taking pills and who want "fast
action" results which only a liquid can give.
Truly innovative in its formulation, GNS uses Diphenhydramine HCLin
quantities of 8.3mg in each measured spray. Absorption into the mucous
membranes of the throat and cheeks is immediate and the resultant sleep
inducement is almost immediate.
GNS is alcohol free and contains inactive ingredients, citric acid, flavor,
glycerin,poloxamer 407, potassium sorbate, purified water, sodium benzoate,
sodium citrate and sorbitol.
The product comes in a "protected sealed" bottle with a screw on spray
applicator. Heavy emphasis in advertising is on a "spray alternative to
pills". Since the product does not contain any natural sugar, it could be
approved for diabetics' use.
Painenz[R]
- ----------
Painenz[R], a recently commercialized product in our family of products, is a
topical analgesic sold over-the-counter. It significantly reduces the pain
common to arthritis sufferers, normal aches and pains due to exercise and
other muscle stress, simple backache pain and muscle sprains. The product
comes in a roll-on applicator. The market for over-the-counter pain relief
products is estimated to exceed $2.5 billion per year.
The active ingredients in Painenz[R] are, Glucosamine, Chondroitin, Cetyl
Myrist Oleate(CMO) and Capsaicin (kap SAY ih sihn), a derivative of the hot
pepper plant. When applied as an external analgesic, Capsaicin depletes and
prevents reaccumulation of substance P in peripheral sensory neurons.
Substance P is found in slow-conducting neurons in the outer and Inner skin
layers and joint tissues, and is thought to be the primary chemical mediator
of pain impulses from the periphery to the central nervous system. By
depleting substance P, Capsaicin renders skin and joints insensitive to pain
since impulses cannot be transmitted to the brain.
21
Capsaicin has been approved by the United States Food and Drug Administration
("FDA") for use without a prescription in topical preparations marketed for
the temporary relief of pain from arthritis, or for the relief of minor aches
and pains of muscles and joints. Information on both Capsaicin and Liposome
is available on the Internet (www.capsaicin.com and www.liposomes.com).
UN-DIET[TM] System
- ------------------
The UN-DIET[TM] System, based on a philosophy of Lifestyle Enhancement and
weight control promotes an all encompassing approach to four of the main
weight stability challenges, that when unattended result in over weight,
obesity and its related health deteriorating effects.
UN-DIET[TM] Utilizes state of the art Spray's the Way technology and
clinically proven safe ingredients that are formulated in synergy. These
ingredients deal with the essential aspects of metabolic improvement,
stabilization and maintenance of a healthy weight level and body mass index.
While the Company has elected not to disclose any of its manufacturing trade
secrets at this time, the main elements of the system consists of three
products:
1. Appease[TM], an appetite suppressant containing high quality
liquefied extract of Hoodia Gordonii.
2. Weight Shield[TM], containing Advantra-Z[R], triggers hormones and
cell receptors that regulate the bodies ability to burn fat. This
process is better referred to as lipolysis and essentially increases
the resting metabolic rate.
3. Simply Trim[TM], a maintenance formula and the most important
product within the system in that it is designed to insure weight
stability "for a lifetime". By controlling the metabolic process,
appetite and the neutralization of starches and carbohydrates, while
at the same time providing a feeling of energy and vitality, Simply
Trim[TM] will insure weight stability, eliminating almost entirely
the desire to splurge. Simply Trim[TM] is also designed as a stand
alone product and will be marketed separately to those who have
reached their desired weight and wish to maintain this weight with a
simple spray, at anytime during the day that the urge for sweets or
increased energy is felt.
Marketing
- ---------
Med Gen products are currently sold through radio and television
infomercials, thru its web sites and over the counter at retail stores
nationwide. The Company also sells to distributors overseas. We have spent
considerable capital resources on our five web sites and producing
infomercials on Snorenz[R], Good Nights Sleep[R] and UN-DIET[TM] System.
Manufacturing and Distribution Agreements
- -----------------------------------------
We have all of our products manufactured by contract manufacturers.
Not including international sales generated from its Internet site, our
Company has distributors to sell our snoring spray under other brand names in
Canada, the United Kingdom, Germany, France, Switzerland, Portugal, Turkey,
Australia, New Zealand, Japan, China and Korea. We expect to market ours
other products through these distribution networks in the future.
Competition, Market Share and Industry Environment
- --------------------------------------------------
In the snoring relief category, as defined by the Information Research
Institute (IRI), a consumer products research organization, our only major
competitor is CNS Inc.dba Breathe Right and its product Breathe Right Spray.
Although this product was introduced into the market in the past year, CNS
has spent a considerable amount of money on promotion and advertising,
replacing SNORenz[R] as the leading seller in the snoring category. Our
Company has not been able to compete because of lack of advertising dollars
and has recently been exploring possibilities to obtain funding for this
purpose.
Good Nights Sleep[TM], although new, enjoys an enviable position in that it
still remains the only brand available as a liquid throat spray for sleep
aid. Although we have significant competition from well known brands, all of
the existing products are in "hard" form delivery systems.
22
We feel that our UN-DIET[TM] System is very unique in its approach to its
delivery system, utilizing Med Gen's Spray's the Way[TM] technology and to
the users psychology because it is so easy to use on a consistent basis, not
having to count calories or carbs.
In July, 2006, the Company entered into a cross promotion agreement with Dr.
Bronwyn Schweigerdt, author of "The UNDIET Program", a book about nutrition
which is based on the author's experiences and testimonials regarding weight
loss, nutrient intake and human habits. The Company will offer the book
free with the purchase of each UN-Diet[TM] System and in exchange, Dr.
Schweigerdt will promote the Company's UN-Diet[TM] System at her health and
wellness seminars. The Company has made an initial purchase of 25,000 books,
13% of the purchase price of which will be donated to Compassion
International, an international charity for needy children.
We feel that our UN-DIET[TM] System is very unique in its approach to its
delivery system, utilizing Med Gen's Spray's the Way[TM] technology and to
the users psychology because it is so easy to use on a consistent basis, not
having to count calories or carbs.
In July, 2006, the Company entered into an agreement with Bronwyn
Schweigerdt, author of the UNDIET program, a book based on the author's
experiences and testimonials regarding weight loss, nutrient intake and human
habits. The Agreement specifies the price to be paid, a royalty payment
agreement and a donation to Compassion International (an international
charity for needy children). The actual payment amounts cannot be publicly
disclosed due to secrecy agreements. The book, while related to nutrition, is
closely aligned with the Company's UN-DIET[TM] System. In practice, following
the author's directives while using the UN-DIET[TM] System as directed, will
enhance the entire weight loss process. The Company believes that following
these directives in the UNDIET book will bring about a faster and more
effective weight loss experience. The company will offer the UNDIET Book as a
free bonus with the purchase of the UN-Diet[TM] System.
Dominant Customers
- ------------------
In fiscal year 2005, our three largest customers were Wal-Mart, Walgreens and
Eckerd which represented 66% of our annual sales that year with WalMart
accounting for 47%. Our largest customer in fiscal 2004 was Wal-Mart, which
represented 41% of annual sales that year.
The issue of dominance will disappear during fiscal 2006 as the Company
completes its marketing focus to Direct to Consumer programs. While the
transition has just begun, we expect cash flow to increase and expenses to
decrease as the program matures. Instead of directed store advertising
programs, the Company will concentrate on direct consumer advertising
programs, receiving a direct and easily calculable return on investment.
Internet Sales
- --------------
In 2005 we converted our marketing efforts from directing the consumer to
retail stores, where they could buy our product, to direct response commonly
known as DRTV and DTC. In doing so, we are hoping to reverse the effects of
the capital intensive store and consumer advertising programs we have had to
maintain to remain on store shelves. Internet pricing is consistent with unit
pricing in the retail network. However, our [per unit] profit will increase
as the actual cost of sales is reduced.
During the year 2005 and as recently as July, 2006, the Company has
maintained a restructuring posture, hiring outside companies and creating a
new position within the company titled Internet Marketing Manager. We expect
to show steady increases in future sales on our five new internet sites.
During the fourth quarter of fiscal 2006 (July to September), we expect that
our web site re-designing programs will be completed with attendant increases
in sales.
Investor Relations programs will also be included in the enhancement of the
corporate web site utilizing frequent up-dates.
Although no sales figures can be given or estimated, we expect that the
efforts previously mentioned will produce substantial increases in e-commerce
sales in fiscal 2007.
23
Trademarks and Licenses
- -----------------------
The name "SNORenz[R]" is a registered trademark of Med Gen with the United
States Patent and Trademark Office (Reg. No. 2,210,381
12/15/98). An application for trademark of the name "SNORE Quell[TM]", "4
in 1[TM]" and COMFORT CARE[TM] has been made. We have registered UN-DIET[TM]
System, Snorenz[R] and Snoraway[R] and Good Night's Sleep[R] in all countries
participating in the EU as a Community Trademark. In addition, we have
registered Snorenz[R] in Korea.
Government Regulation
- ---------------------
The manufacturing, processing, formulation, packaging, labeling and
advertising of our products may be subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission ("FTC"),
the Consumer Product Safety Commission, the United States Department of
Agriculture, the United States Postal Service, the United States
Environmental Protection Agency and the Occupational Safety and Health
Administration. Our products may also be regulated by various agencies of the
states and localities in which our products will be sold. In particular, the
FDA regulates the safety, labeling and distribution of dietary supplements,
including vitamins, minerals, herbs, food, OTC and prescription drugs and
cosmetics.
The regulations that are promulgated by the FDA relating to the manufacturing
process are known as Current Good Manufacturing Practices ("CGMPs"), and are
different for drug and food products. In addition, the FTC has overlapping
jurisdiction with the FDA to regulate the labeling, promotion and advertising
of vitamins, OTC drugs, cosmetics and foods. The FDA is generally prohibited
from regulating the active ingredients in dietary supplements as drugs unless
product claims, such as claims that a product may heal, mitigate, cure or
prevent an illness, disease or malady, trigger drug status.
Governmental regulations in foreign countries where wemay sell our products
may prevent or delay entry into a market or prevent or delay the
introduction, or require the reformulation, of certain of our products. New
domestic or foreign legislation regulating our activities may be enacted in
the future, which could have a material adverse effect on us.
Federal Trade Commission
- ------------------------
Our product packaging and advertised claims strictly adhere to FTC
regulations and guidelines. Our Company has complied with all FTC regulations
with respect to making changes to our packaging and labels with "APNEA"
warnings that meet all new compliance issues. Our Company intends to comply
with all government regulations, both in domestic and foreign markets,
regarding the distribution and sales marketing of its product lines.
Reports to Security Holders
- ---------------------------
We periodically prepares and publishes News Releases and other significant
reports that are deemed newsworthy. These reports are sent to Business Wire
for wide distribution. In addition, shareholder reports are mailed to all
shareholders, as the Company deems necessary. Notices of yearly shareholders'
meetings, proxy statements and events of this nature are distributed with the
help of Liberty Transfer Company, our transfer agent, and with information
obtained from ADP Investor Communication in regard to street name accounts.
Employees
- ---------
We currently has seven full-time employees. Paul B. Kravitz is the Chairman,
Secretary and Chief Executive Officer of our Company; Paul S. Mitchell is
President, Treasurer and Chief Operating Officer; and Jack Chien is Chief
Financial Officer.
Description of our Property
- ---------------------------
Our offices are located at 7284 W. Palmetto Park Road, Suite 207, Boca Raton,
Florida 33433 which we lease for $6200.00 per month. The telephone number at
this address is (561) 750-1100.
24
Legal Proceedings
- -----------------
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.
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.
25
MANAGEMENT AND EXECUTIVE COMPENSATION
The following table sets forth the name, age and position held by each of our
executive officers and directors as of December 31, 2005.
Name Age Position
- --- -- --------
Paul B. Kravitz 74 Chairman; Chief Executive
Officer Secretary and
Director
Paul S. Mitchell 53 President, Treasurer, Chief
Operating Officer and
Director
Jack Chien 56 Chief Financial Officer, Chief
Accounting Officer
In 2006, at the Annual shareholders meeting the shareholders elected the
Board of Directors for a five year term. Officers were elected for the same
term and, subject to existing employment and consulting contracts and
agreements, serve at the discretion of the Board. We intend to conduct an
annual shareholders meeting in accordance with Nevada state law at our
principal office location at 7284 West Palmetto Park Road, Boca Raton,
Florida.
Paul B. Kravitz has been our Chairman, Chief Executive Officer and a director
since our inception in 1996, and as such, he has handled our public affairs,
investor relations, advertising and funding. Prior to founding Med Gen and
its principal product Snorenz [R], Mr. Kravitz was the President and CEO of
AppleTree Companies, Inc., a public company, which was engaged in the
manufacture and distribution of food supplies to convenience stores in 24
states. Annual Sales exceeded $38 million. Mr. Kravitz retired from that
company in 1996.
From 1986 until 1992, Mr. Kravitz was the CEO and principal shareholder of
The Landon Group, a financial services company. From 1990 through 1991, Mr.
Kravitz was Chairman of Southeast Bank's Leasing Division, an appointment
made by the Federal Deposit Insurance Corporation, which was in the process
of liquidating that bank. From 1960 until the mid-1980's, Mr. Kravitz was the
CEO of American Furniture Company, Inc., and Furniture Resources
International, Inc., whose operations encompassed manufacturing of and
marketing to retail showrooms nationwide.
Mr. Kravitz is a graduate of Boston University with a minor in Business
Administration and a Bachelor of Science Degree. He is a published writer for
the aviation industry and a constant contributor to the "Green Sheet" a
weekly aviation publication. He has also published articles for the food
industry and the natural supplement industry. He has appeared on national
television, in infomercials for SNORenz[R]and Med Gen. Mr. Kravitz is a
veteran of the Korean War and served honorably as an officer and pilot in the
United States Air Force. Mr. Kravitz was honorably discharged receiving the
Distinguished Service Medal for his military service during the Korean War.
In 1955 he was retired from active duty and placed on Reserve. In 1972 he was
retired with honors after twenty years of service to his country.
Paul S. Mitchell has been our President, Chief Operating Officer and a
Director since 1997 and as such, handled our day-to-day operations, sales,
marketing and packaging. In 1995, Mr. Mitchell sold his food services company
(the Sandwich Makers) to AppleTree, becoming that company's Chief Operating
Officer. From $135,000 in sales in 1987, sales had increased to almost $5
million by the time it was sold to AppleTree. Prior to 1987, Mr. Mitchell
worked for Tasty Baking Company based in Pennsylvania, and for whom he held
several positions nationwide.
26
Jack Chien, has been our Chief Financial Officer and Chief Accounting Officer
since 1999. A native of Taiwan, he has over 27 years of domestic and
international bookkeeping experience. Prior to moving to the United States,
he was Chief Financial Officer of Cannontex Industrial Company, Taiwan. After
relocating here, was employed by Kantor Bros. Neckware Company, Inc.,
Brooklyn, NY, for 19 years where he became Controller/Director of Finance and
Administration. His duties included interaction/preparation of independent
annual audits, budgeting, managing daily office operations and presenting to
the board members the financial status of the company. After leaving this
company, he became an independent consultant for various companies, including
Akira Trading Company, McKinna Yachting, Retail Management Acquisitions
Group, Inc., d.b.a. Fyetems International, and RaceWay Net, Inc., assisting
these companies in implementing accounting/bookkeeping infrastructures and
developing internal controls. Mr. Chien received his accounting degree from
the University of Taiwan.
Executive Compensation
- ----------------------
The following table shows that for the fiscal years ended September 30, 2003,
September 30, 2004 and September 30, 2005 the cash and other compensation
paid to each of the executive officers and directors of Med Gen.
Annual Compensation
- -------------------
Name and Other Ann. Securities
Position Held Year Salary Bonus Compen- Rest. Underlying LTIP Other
sation Stock Options Payouts Comp.
- ------------ ---- ------ ----- ---------- ------ --------- ------- -----
Paul B. Kravitz, 2005 $65,000 -0- 10,000,000 -0- -0- -0- -0-
Chairman & CEO, 2004 $65,000 -0- -0- -0- -0- -0- -0-
Director 2003 $65,000 -0- -0- -0- -0- -0- -0-
Paul S. Mitchell 2005 $65,000 -0- -0- -0- -0- -0- -0-
President & COO, 2004 $65,000 -0- -0- -0- -0- -0- -0-
Director 2003 $65,000 -0- -0- -0- -0- -0- -0-
Option/stock appreciation rights granted in last fiscal year
- -----------------------------------------------------------
Name Quantity Price Date Granted Vest Date Expiration Date
- ---- -------- ----- ------------ --------- ---------------
Paul B. Kravitz -0- -0- -0- -0- -0-
Aggregated option/SAR exercise table
- ------------------------------------
Name Shares Agg. No. Sec. Value
Acquired Dollar Unexer. Unexer.
On Value at in-the-money
Exercise Year end at Year end
------- ------ --------- ------------
Paul B. Kravitz -0- -0- -0- -0-
27
Employment Agreements
- ---------------------
On February 16, 2005, Mssrs. Kravitz and Mitchell entered into two five-year
renewable employment agreements with Med Gen with the following provisions:
a) gross income of $150,000 per year;
b) participation in our benefit plan and stock option plan; and
c) a bonus of 5% of pre-tax income or net cash flow, whichever is greater.
These employment agreements were subsequently cancelled.
Med Gen paid Messrs. Kravitz and Mitchell the amounts indicated in the above
Annual Compensation chart. On the effective date of this registration
statement, we agreed to issue 100,000,000 shares to Mr. Kravitz and
50,000,000 shares to Mr. Mitchell.
Compensation of Board of Directors
- ----------------------------------
Currently, our directors do not receive any extra compensation for their
services as members of the Board of Directors. However, we anticipate that in
the future, independent directors will receive stock options for their
services.
Key Man Insurance
- -----------------
We currently maintain life insurance covering the death of Mr. Kravitz in the
amount of $1,000,000.
Stock Option Plan
- -----------------
On June 14th, 2006 we granted options to purchase 150,000,000 shares of our
common stock to our employees with an exercise price of $.01 per share and
an expiration date of June 14th, 2014 pursuant to a Nonqualified Employee
Stock Option Plan. The plan was filed on Form S-8. We have issued 9,500,000
common shares to consultants in the month of June 2006 and 7,000,000 common
shares in the month of August 2006 pursuant to this plan.
Indemnification
- ---------------
Our Articles of Incorporation and By-Laws provide for the indemnification by
us of our officers and directors against any losses or liabilities they may
incur as a result of the manner in which they operate our business or conduct
our internal affairs, provided that in connection with these activities they
act in good faith and in a manner which they reasonably believe to be in, or
not opposed to, the best interests of our Company, and their conduct does not
constitute gross negligence, misconduct or breach of fiduciary obligations.
To further implement the permitted indemnification, we have entered into
Indemnity Agreements with our officers and directors.
28
TERMS OF SECURED CONVERTIBLE NOTES AND WARRANTS
To obtain funding for our ongoing operations, we entered into a Securities
Purchase Agreement with four accredited investors, AJW Partners, LLC, AJW
Offshore, Inc., AJW Qualified Partners, LLC and New Millennium Capital
(sometimes referred to in this registration statement as the "NIR Group") as
of July 30th, 2005 for the sale of (i) $1,350,000 in callable secured
convertible notes. This prospectus relates to the resale of the common stock
underlying the February 27th, 2006 and April 21st,2006 callable secured
convertible notes and warrants. The sale of callable secured convertible
notes and warrants occurred in eight tranches as follows:
* $740,000 was disbursed on March 31st, 2005;
* $700,000 was disbursed on April 25th, 2005; and
* $100,000 was disbursed on August 15th,2005; and
* $500,000 was disbursed on August 31st,2005; and
* $600,000 was disbursed on October 31st,2005; and
* $600,000 was disbursed on February 27th,2006; and
* $750,000 was disbursed on April 21st, 2006 ; and
* $1,500,000 was disbursed on August 10th ,2006.
In August 2005 a prospectus covering the first three notes in the sum of
$1,540,000 dollars was declared effective. The Company registered
171,111,111 common shares to cover those notes. As of the date of this filing
$1,011,235.65 of convertible notes have been converted into 123,429,850
common shares of stock.
In the first six tranches totaling $3,240,000,the Company agreed to issue
3,240,000 warrants at a price of $.01 to $.09. In the last two tranches
totaling $2,250,000, the Company agreed to issue 45,000,000 warrants at a
price of .05 cents. The warrants have a five year exercise period prior to
expiration.
Each closing under the Securities Purchase Agreement is subject to the
following conditions:
* We must have delivered to the investors duly executed callable secured
convertible notes and warrants;
* No litigation, statute, regulation or order shall have been commenced,
enacted or entered by or in any court, governmental authority or any
self-regulatory organization which prohibits consummation of the
transactions contemplated by the Securities Purchase Agreement; and
* No event shall have occurred which could reasonably be expected to have a
material adverse effect on our business.
We also agreed not, without the prior written consent of a majority-in-
interest of the investors, to negotiate or contract with any party to obtain
additional equity financing (including debt financing with an equity
component) that involves (i) the issuance of common stock at a discount to
the market price of the common stock on the date of issuance (taking into
account the value of any warrants or options to acquire common stock in
connection therewith), (ii) the issuance of convertible securities that are
convertible into an indeterminate number of shares of common stock, or (iii)
the issuance of warrants during the lock-up period beginning March 30, 2005
and ending on the later of (A) 270 days from March 30, 2005 and (B) 180 days
from the date this registration statement is declared effective. In addition
we agreed not to conduct any equity financing (including debt financing with
an equity component) during the period beginning March 30, 2005 and ending
two years after the end of the above lock-up period unless we have first
provided each investor an option to purchase its pro-rata share (based on the
ratio of each investor's purchase under the Securities Purchase Agreement) of
the securities being offered in any proposed equity financing. Each investor
must be provided written notice describing any proposed equity financing at
least 20 business days prior to the closing of such proposed equity financing
and the option must be extended to each investor during the 15-day period
following delivery of such notice.
The callable secured convertible notes bear interest at 8% per annum from the
date of issuance. Interest is computed on the basis of a 365-day year and is
payable monthly. Any amount of principal or interest on the callable secured
convertible notes which is not paid when due will bear interest at the rate
of 15% per annum from the due date thereof until such amount is paid. The
callable secured convertible notes mature three years from the date of
issuance, and are convertible into our common stock, at the selling
stockholders' option, as follows: the conversion price will be equal to 40%
29
of the lesser of $0.09 and the average of the lowest intraday trading prices
during the 20 trading days immediately prior to the conversion. Accordingly,
there is in fact no limit on the number of shares into which the notes may be
converted. As of August 4th, 2006, the average of the three lowest intraday
trading prices for our common stock during the preceding 20 trading days as
reported on the Over-The-Counter Bulletin Board was $0.01 and, therefore, the
conversion price for the callable secured convertible notes was $0.0066.
Based on this conversion price, the $3,990,000 callable secured convertible
notes, excluding interest, were convertible into 660,000,000 shares of our
common stock. As of the date of this registration statement,$ 1,011,235.65 of
the callable secured convertible notes have been converted into 123,429,850
common shares of stock.
The warrants (3,240,000) are exercisable until five years from the date of
issuance at a purchase price of $0.085 per share. Additional warrants
(45,000,000) are exercisable at .05 cents per share. The investors may
exercise the warrants on a cashless basis if the shares of common stock
underlying the warrants are not then registered pursuant to an effective
registration statement. In the event the investors exercise the warrants on a
cashless basis, then we will not receive any proceeds. In addition, the
exercise price of the warrants will be adjusted in the event we issue common
stock at a price below market, with the exception of any securities issued as
of the date of the warrants or issued in connection with the callable secured
convertible notes issued pursuant to the Securities Purchase Agreement.
The selling stockholders have agreed to restrict their ability to convert
their callable secured convertible notes or exercise their warrants and
receive shares of our common stock such that the number of shares of common
stock held by them in the aggregate and their affiliates after such
conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. However, the selling stockholders may
repeatedly sell shares of common stock in order to reduce their ownership
percentage, and subsequently convert additional callable secured convertible
notes.
Upon the issuance of shares of common stock below the market price, the
exercise price of the warrants will be reduced accordingly. The market price
is determined by averaging the last reported sale prices for our shares of
common stock for the five trading days immediately preceding such issuance as
set forth on our principal trading market. The exercise price shall be
determined by multiplying the exercise price in effect immediately prior to
the dilutive issuance by a fraction. The numerator of the fraction is equal
to the sum of the number of shares outstanding immediately prior to the
offering plus the quotient of the amount of consideration received by us in
connection with the issuance divided by the market price in effect
immediately prior to the issuance. The denominator of such issuance shall be
equal to the number of shares outstanding after the dilutive issuance.
The conversion price of the callable secured convertible notes and the
exercise price of the warrants may be adjusted in certain circumstances such
as if we pay a stock dividend, subdivide or combine outstanding shares of
common stock into a greater or lesser number of shares, or take such other
actions as would otherwise result in dilution of the selling stockholder's
position.
Sample Conversion Calculation
- -----------------------------
The number of shares of common stock issuable upon conversion of the notes is
determined by dividing that portion of the principal of the notes to be
converted and interest, if any, by the conversion price. For example, the
lender has converted $980,000 of notes by August 7th, 2006 and a conversion
price of $0.00887 per share, the number of shares issuable upon conversion
would be:
$980,000.00/$0.008267 = 118,599,350 shares
The following is an example of the number of shares of our common stock that
are issuable upon conversion of the principal amount of our callable secured
convertible notes, based on market prices 25%, 50% and 75% below the market
price, as of August 7th, 2006 of $0.02.
30
% Below Price Per With 40% Number of Shares % of
Market Share Discount Issuable Outstanding*
- ---------------------------------------------------------------------
25% $0.015 $0.009 333,333,333 58.7%
50% $0.01 $0.006 500,000,000 65.8%
75% $0.005 $0.003 1,000,000,000 79.4%
* Based on 260,000,000 shares outstanding prior to issuance and convertible
debt of $3,000,000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 16, 2005, Mssrs. Kravitz and Mitchell entered into two five-year
renewable employment agreements with Med Gen with the following provisions:
a) gross income of $150,000 per year;
b) participation in our benefit plan and stock option plan; and
c) a bonus of 5% of pre-tax income or net cash flow, whichever is greater.
Med Gen paid Messrs. Kravitz and Mitchell the amounts indicated in the
Annual Compensation chart. On the effective date of this registration
statement, we agreed to issue 100,000,000 shares to Mr. Kravitz and
50,000,000 shares to Mr. Mitchell.
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.
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.
31
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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This prospectus relates to the resale by the selling stockholders of up
to 150,000,000 shares of our common stock, including up to 135,000,000
shares of common stock underlying callable secured convertible notes in
a principal amount of $1,350,000. All references in this prospectus as
to ownership of shares, number of shares outstanding and percentages of
shares owned will reflect the issuance of all 165,000,000 shares.
The following table sets forth, as of the date of the filing of this
prospectus, each person we know to be the beneficial owner of five percent or
more of our common stock, all directors and officers individually and as a
group. There are no shares of Preferred stock issued and outstanding. Unless
otherwise noted, each person named has sole voting and investment power with
respect to the shares shown.
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Owner
- ------------------------------------------------------------------------------------------
Common Stock Paul B. Kravitz
4320 NW 101 Drive
Coral Springs, FL 33065 10,213,685(1) 4.40%
Common Stock Paul S. Mitchell
7284 W. Palmetto Pk Rd
Boca Raton, FL 33433 173,680 0.007%
Directors and Executive
Officers as a group
(2 persons) 10,387,265 4.407%
(1) As part of the settlement of the litigation with Global Healthcare, Inc.
and Dan L. Williams & Co., Inc., our Company issued 15,000,000 shares of
common stock to the plaintiffs and/or their designees. In the Settlement
Agreement, the parties agreed that Mr. Kravitz would retain the voting rights
until the shares were sold. Mr. Kravitz, therefore, has full voting rights
and control of a total of 25,213,685 shares, giving him control of 10.87% of
the total shares outstanding.
32
SELLING STOCKHOLDERS
The shares to be offered by the selling stockholders are presently
"restricted" securities under applicable federal and state securities laws
and are being registered under the Securities Act of 1933, as amended (the
"Securities Act") in order to allow the selling stockholders to sell these
shares, at their option, in public transactions. The registration of these
shares does not require that any of the shares be offered or sold by the
selling stockholders.
No estimate can be given as to the amount or percentage of our common stock
that will be held by the selling stockholders after any sales made pursuant
to this prospectus because the selling stockholders are not required to sell
any of the shares being registered under this prospectus. The following
tables assume that the selling stockholders will sell all of the shares
listed in this prospectus.
For purposes of the tables below, the numbers of shares "beneficially owned"
are those beneficially owned as determined under the rules of the SEC. Such
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as
to which a person has sole or shared voting power or investment power and any
shares for which the person has the right to acquire such power within 60
days through the exercise of any option, warrant or right, through conversion
of any security or pursuant to the automatic termination of a power of
attorney or revocation of a trust, discretionary account or similar
arrangement. Percentages in the tables below are based on 37,136,447 shares
of our common stock being outstanding as of the effective date of this
prospectus.
Except as noted, the following named shareholders have no beneficial or
record ownership in other shares of our Company.
Name of Beneficial Owner Shares Beneficially Owned Maximum Number of Shares Beneficially Owned
of Common Stock Prior to Offering Shares to be sold in after Offering assuming
Being Offering (1) this Offering all sold (2) %
- ----------------------- ------------------------ ------------------- -------------------------
Dan L Williams 4,125,000 4,125,000 0 0%
13323Donnelly
Garndview, Missouri 64030
Joseph A. Crites, Esq. 1,500,000 1,500,000 0 0%
6031 McGee
Kansas City, Missouri 64113
Scott Sheftall 3,150,000 3,150,000 0 0%
1413 Sunset Harbor Dr
#407
Miami Beach, Florida 33139
Howard Gordon 4,125,000 4,125,000 0 0%
13315 Walnut
Kansas City, Missouri 64145
Brian Torres 2,100,000 2,100,0000 0 0%
3718 Sheridan Ave
Miami Beach, Florida 33140
AJW Partners LLC 122,111,111 77,871,911 (3)(4) 0 0%
1044 Northern Blvd., Ste 302
Roslyn, NY 11576
AJW Offshore LLC 277,333,211 29,333,211 (3)(4) 0 0%
1044 Northern Blvd., Ste 302
Roslyn, NY 11576
AJW Qualified Partners LLC 103,222,222 19,222,222 (3)(4) 0 0%
1044 Northern Blvd., Ste 302
Roslyn, NY 11576
New Millennium Capital 10,666,666 10,672,666 (3)(4) 0 0%
Partners II LLC
1044 Northern Blvd., Ste 302
Roslyn, NY 11576
33
(1) No selling stockholder has ever held any position or office or had any
other material relationship with us.
(2) Applicable percentage ownership is based on 167,838,127 shares of common
stock outstanding as of August 2nd, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
August 2nd, 2006 for each stockholder. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to
securities. Shares of common stock that are currently exercisable or
exercisable within 60 days of August 2nd, 2006 are deemed to be
beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(3) Assumes that all securities registered will be sold and that all shares
of common stock underlying the callable secured convertible notes and
warrants will be issued.
(4) Represents shares underlying callable secured convertible notes and
warrants, up to the maximum permitted ownership under the callable
secured convertible notes and warrants of 4.9% of our outstanding common
stock. The selling stockholders are affiliates of each other because
they are under common control. AJW Partners, LLC, which is providing 16%
of the funds, is a private investment fund that is owned by its
investors and managed by SMS Group, LLC. SMS Group, LLC, of which
Mr. Corey S. Ribotsky is the fund manager, has voting and investment
control over the securities owned by AJW Partners, LLC. AJW Offshore,
Ltd., which is providing 45% of the funds, is a private investment fund
that is owned by its investors and managed by First Street Manager II,
LLC. First Street Manager II, LLC, of which Corey S. Ribotsky is the
fund manager, has voting and investment control over the securities
owned by AJW Offshore, Ltd. AJW Qualified Partners, LLC, which is
providing 37% of the funds, is a private investment fund that is owned
by its investors and managed by AJW Manager, LLC, of which Corey S.
Ribotsky and Lloyd A. Groveman are the fund managers, have voting and
investment control over the securities owned by AJW Qualified Partners,
LLC. New Millennium Capital Partners II, LLC, which is providing 2% of
the funds, is a private investment fund that is owned by its investors
and managed by First Street Manager II, LLC. First Street Manager II,
LLC, of which Corey S. Ribotsky is the fund manager, has voting and
investment control over the securities owned by New Millennium Capital
Partners II, LLC. We have been notified by the selling stockholders
that they are not broker-dealers or affiliates of broker-dealers.
34
PLAN OF DISTRIBUTION
Each selling security holder of our common stock, and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all
of their shares of common stock on the trading market or any other stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These sales may be at fixed or negotiated prices. A
selling security holder may use any one or more of the following methods when
selling shares:
* ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
* block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
* purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
* an exchange distribution in accordance with the rules of the applicable
exchange;
* privately negotiated transactions;
* settlement of short sales entered into after the date of this prospectus;
* broker-dealers may agree with the selling security holders to sell a
specified number of such shares at a stipulated price per share;
* a combination of any such methods of sale;
* through the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; or
* any other method permitted pursuant to applicable law.
The selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available,
rather than under this prospectus.
Broker-dealers engaged by the selling security holders may arrange for other
brokers-dealers to participate in sales. Brokerdealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser)
in amounts to be negotiated. Each selling security holder does not expect
these commissions and discounts relating to its sales of shares to exceed
what is customary in the types of transactions involved.
In connection with the sale of our common stock or interests therein, the
selling security holders may enter into hedging transactions with broker-
dealers or other financial institutions, which may in turn engage in short
sales of the common stock in the course of hedging the positions they assume.
The selling security holders may also sell shares of our common stock short
and deliver these securities to close out their short positions, or loan or
pledge the common stock to broker-dealers that in turn may sell these
securities. The selling security holders may also enter into option or other
transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to
such brokerdealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution
may resell pursuant to this prospectus (as supplemented or amended to reflect
such transaction).
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each selling security
holder has informed the Company that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the
common stock.
35
We are required to pay certain fees and expenses incurred by us incident to
the registration of the shares. We have agreed to indemnify the selling
security holders under certain circumstances against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act.
Because selling security holders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the Securities Act may be sold under Rule 144 rather than under this
prospectus. Each selling security holder has advised us that they have not
entered into any agreements, understandings or arrangements with any
underwriter or broker-dealer regarding the sale of the resale shares. There
is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the selling security holders.
We agreed to keep this prospectus effective until the earlier of
(i) the date the selling security holders are able to sell all the common
stock immediately without restriction pursuant to the volume limitation
provisions of Rule 144 under the Securities Act or any successor rule thereto
or otherwise or (ii) all of the shares have been sold pursuant to the
prospectus. The resale shares will be sold only through registered or
licensed brokers or dealers if required under applicable state securities
laws. In addition, in certain states, the resale shares may not be sold
unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to our common stock for a
period of two business days prior to the commencement of the distribution. In
addition, the selling security holders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including Regulation M, which may limit the timing of purchases and sales of
shares of our common stock by the selling security holders or any other
person. We will make copies of this prospectus available to the selling
security holders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.
36
DESCRIPTION OF SECURITIES
Common Stock
- ------------
We are authorized to issue 2,500,000,000 shares of common stock, with a par
value of $.001 per share.
The holders of common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders. Holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
board of directors out of funds legally available therefore. Upon a
liquidation, dissolution or winding up of Med Gen, the holders are entitled
to receive ratably the net assets available after the payment of all debts
and other liabilities, and subject further only to the prior rights of any
outstanding preferred stock. Common stock holders have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of
common stock are fully paid and non-assessable.
Cumulative voting in the election of directors is not permitted and the
holders of a majority of the number of outstanding shares will be in a
position to control the election of directors, at a general shareholder
meeting, and may elect all of the directors standing for election.
Preferred Stock
- ---------------
We are authorized to issue 5,000,000 shares of preferred stock with a par
value of $0.001 per share, all of which are undesignated. As of the date of
the filing of this prospectus, we have no shares of preferred stock issued or
outstanding.
Dividend Policy
- ---------------
Holders of common stock shall be entitled to receive, on an equal basis, such
dividends, payable in cash or otherwise, as may be declared thereon by the
Board of Directors from time to time out of the assets or funds of our
Company legally available therefore.
Options
- -------
From time to time, we grant options to our employees and consultants.
At the present time, there are 48,240,000 million options which have
been granted but not yet exercised with an exercise price of
45,000,000 at $.05 per share and 3,240,000 at $.01 to $.09 per share
and an expiration date of April 2009. These options are owned by the
four funds who own the convertible debentures. In August 2005 we
registered 18,117,647 shares underlying these warrants. To date no
warrants have been exercised.
On June 14th, 2006 we granted options to purchase 150,000,000 shares
of our common stock to our employees with an exercise price of $.01
per share and an expiration date of June 14th, 2014 pursuant to a
Nonqualified Employee Stock Option Plan. The plan was filed on Form S-
8. We have issued 9,500,000 common shares to consultants in the month
of June 2006 and 7,000,000 common shares in the month of August 2006
pursuant to this plan.
Shares Eligible For Future Issuance
- -----------------------------------
Since not all of our authorized common and preferred stock have been issued,
our Board of Directors may issue additional shares, from time to time in the
future, for any proper corporate purpose, including public and private equity
offerings, convertible debt offerings, stock splits, stock dividends,
acquisitions, warrants, stock option plans, and funding of employee benefit
plans. No further action or authorization by our stockholders would be
necessary prior to the issuance of additional shares. The future issuance by
us of shares may dilute the equity ownership position and the rights,
preferences and privileges of existing stockholders. Unissued shares could be
issued in circumstances that would serve to preserve control of our existing
management.
37
Future issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might
impede an acquisition or other business combination by including class voting
rights that would enable the holder to block such a transaction, or
facilitate a business combination by including voting rights that would
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of preferred stock could adversely affect
the voting power of the holders of the common stock. Although the board of
directors is required to make any determination to issue such stock based on
its judgment as to the best interests of our stockholders, our Board of
Directors could act in a manner that would discourage an acquisition attempt
or other transaction that some, or a majority, of the stockholders might
believe to be in their best interests or in which stockholders might receive
a premium for their stock over the then market price of such stock. Our Board
of Directors does not at present intend to seek stockholder approval prior to
any issuance of currently authorized stock, unless otherwise required by law
or stock exchange rules. We have no present plans to issue any preferred
stock.
Freely Tradable Shares After Offering
- -------------------------------------
After the completion of this Offering, there will be a total of 205,960,105
shares of our common stock that will be tradable without restriction under
the Securities Act. All of the remaining shares, including the 10,387,265
owned by control persons, will continue to be "restricted securities" as that
term is defined in Rule 144 promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted securities
shares for at least one year, including persons who may be deemed our
"affiliates," as that term is defined under the Securities Act, would be
entitled to sell within any three month period a number of shares that does
not exceed the greater of 1% of the then outstanding shares or the average
weekly trading volume of shares during the four calendar weeks preceding such
sale. Sales under Rule 144 are subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about
the company. A person who has not been our affiliate at any time during the
three months preceding a sale, and who has beneficially owned his shares for
at least two years, would be entitled under Rule 144(k) to sell such shares
without regard to any volume limitations under Rule 144. The sale, or
availability for sale, of substantial amounts of common stock could, in the
future, adversely affect the market price of the common stock and could
impair our ability to raise additional capital through the sale of our equity
securities or debt financing. The future availability of Rule 144 to our
holders of restricted securities would be conditioned on, among other
factors, the availability of certain public information concerning the
company.
Transfer Agent
- --------------
Our transfer agent for our common stock is Liberty Transfer Co., 274 New York
Ave, Huntington, NY 11743-2711. The telephone number is (631) 385-1616.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR
LIABILITIES UNDER THE SECURITIES ACT OF 1933
We are authorized in our Articles of Incorporation and our bylaws to
indemnify our officers and directors to the fullest extent allowed under the
provisions of the State of Nevada Corporation Laws for claims brought against
such persons in their capacity as officers and or directors. We may hold
harmless each person who serves at any time as a director or officer from and
against any and all claims, judgments and liabilities to which such person
shall become subject by reason of the fact that he is or was a director or
officer, and may reimburse such person for all legal and other expenses
reasonably incurred by him or her in connection with any such claim or
liability. We also have the power to defend such person from all suits or
claims in accord with Nevada Statutes. The rights accruing to any person
under our by-laws and Articles of Incorporation do not exclude any other
right to which any such person may lawfully be entitled, and we may indemnify
or reimburse such person in any proper case, even though not specifically
provided for by the bylaws and Articles of Incorporation. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
38
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel was hired on a contingent basis or will receive a direct
or indirect interest in our business that is valued at greater than $50,000.
Stark Winter Schenkein & Co., LLP, Certified Public Accountants, has audited
the financial statements included in this prospectus to the extent and for
the periods indicated in their reports thereon.
LEGAL MATTERS
Stewart A. Merkin, Esq., of the Law Office of Stewart A. Merkin, P.A., has
rendered an opinion with respect to the validity of the shares of common
stock covered by this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act for the common stock offered under this prospectus. We are
subject to the informational requirements of the Exchange Act, and file
reports, proxy statements and other information with the Commission. Copies
of these materials can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The SEC also maintains a Web site that contains reports, proxy
statements, information statements and other information concerning us at the
site located at www.sec.gov. This prospectus does not contain all the
information in the registration statement and its exhibits, which we have
filed with the Commission under the Securities Act and to which reference is
made.
39
FINANCIAL STATEMENTS
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 the financial statements.
F-1
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 the financial statements.
F-2
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 the financial statements.
F-3
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.
F-4
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:
F-5
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.
F-6
(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.
F-7
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
F-8
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,
F-9
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)
--------
$ -
--------
F-10
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.
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Med Gen, Inc.
We have audited the accompanying balance sheet of Med Gen, Inc.
as of September 30, 2005, and the related statements of
operations, stockholders' (deficit) and cash flows for the years
ended September 30, 2004 and 2005. These financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Med Gen, Inc. as of September 30, 2005, and results of its
operations and its cash flows for the years ended September 30,
2004 and 2005, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has incurred
significant losses from operations and has working capital and
stockholder deficiencies. These factors raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also discussed in
Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Stark Winter Schenkein & Co., LLP
/s/Stark Winter Schenkein & Co., LLP
Denver, Colorado
January 16, 2006
F-12
Med Gen, Inc.
Balance Sheet
September 30, 2005
ASSETS
Current Assets
Cash and cash equivalents $ 760,934
Accounts receivable, net of reserve of $10,000 43,361
Inventory 129,201
Other current assets 5,700
---------------
Total Current Assets 939,196
---------------
Property and Equipment, net 37,999
---------------
Other Assets
Deferred financing fees 194,670
Deposits and other 52,735
---------------
$ 1,224,600
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 35,315
Accrued expenses 265,080
Accrued litigation judgment 2,426,191
---------------
Total Current Liabilities 2,726,586
---------------
Derivitive financial instruments 608,766
Convertible debentures -
Stockholders' Equity
Preferred stock, $.001 par value, 5,000,000 shares
authorized:
Series A 8% cumulative, convertible, 1,500,000 shares
authorized, no shares issued and outstanding -
Undesignated, 3,500,000 shares authorized -
Common stock, $.001 par value, 495,000,000
shares authorized, 3,278,777 shares
issued and outstanding 3,279
Paid in capital 24,340,732
Accumulated (deficit) (26,419,763)
---------------
(2,075,752)
Receivable for common stock (35,000)
---------------
(2,110,752)
---------------
$ 1,224,600
===============
See accompanying notes to financial statements.
F-13
Med Gen, Inc.
Statements of Operations
For the Years Ended September 30, 2004 and 2005
2004 2005
------------ ------------
Net sales $ 1,043,101 $ 802,127
Cost of sales 436,534 330,069
------------ ------------
Gross profit 606,567 472,058
------------ ------------
Operating expenses:
Selling, general and administrative expenses -
non cash stock compensation not included
in selling, general and administrative expenses below 5,496,425 6,551,800
Litigation 1,320,000 1,181,191
Selling, general and administrative expenses 2,847,869 1,635,653
------------ ------------
9,664,294 9,368,644
------------ ------------
(Loss) from operations (9,057,727) (8,896,586)
------------ ------------
Other (income) expense:
Derivitive instrument expense 3,064,322
Interest expense 113,597 253,992
------------ ------------
113,597 3,318,314
------------ ------------
Net (loss) $ (9,171,324) $(12,214,900)
============ ============
Per share information basic and fully diluted:
Weighted average shares outstanding 594,592 1,714,454
============ ============
Net (loss) per share $ (15.42) $ (7.12)
============ ============
See accompanying notes to financial statements.
F-14
Med Gen, Inc.
Statement of Stockholders' Equity (Deficit)
For the Years Ended September 30, 2004 and 2005
Common Stock Receivable for
------------ Additional Common Accumulated
Shares Amount Paid in Capital Stock Deficit Total
------ ------ --------------- ------------ ------------ -------------
Balance September 30, 2003 61,212 $ 62 $ 4,904,447 $ (752,225) $ (5,033,539) $ (881,255)
Common stock issued pursuant to
Regulation S Offerings 588,215 588 2,126,187 2,126,775
Payment on option exercise 1,059,173 1,059,173
Common stock issued for services 16,000 16 302,584 302,600
Stock options issued 112,500 112,500
Exercise of stock options 566,250 566 5,442,334 (5,442,900) -
Reduction in exercise price of
stock options 5,081,325 5,081,325
Conversion of notes payable 15,101 15 399,985 400,000
Stock issuable pursuant to
settlement of litigation 1,120,000 1,120,000
Net (loss) (9,171,324) (9,171,324)
--------- ----- ------------ ----------- ------------- ------------
Balance September 30, 2004 1,246,777 1,247 14,408,037 (54,627) (14,204,863) 149,794
Cancellation of stock issuable pursuant
to settlement of litigation (1,120,000) (1,120,000)
Conversion of convertible debentures
including embedded derivative
instruments 832,000 832 4,419,735 4,420,567
Exercise of stock options 100,000 100 199,900 (200,000) -
Payments on stock options 101,987 101,987
Adjustment of option price 117,640 117,640
Value of options issued 120,000 120,000
Common stock issued for services 700,000 700 6,313,460 6,314,160
Common stock issued for settlement
of litigation and subsequently
cancelled 400,000 400 (400) -
Net (loss) (12,214,900) (12,214,900)
--------- ----- ------------ ----------- ------------- ------------
Balance September 30, 2005 3,278,777 $ 3,279 $ 24,340,732 $ (35,000) $(26,419,763) $ (2,110,752)
========= ======= ============ =========== ============ ============
See accompanying notes to financial statements.
F-15
Med Gen, Inc.
Statements of Cash Flows
For the Years Ended September 30, 2004 and 2005
2004 2005
------------- ---------------
Cash flows from operating activities:
Net (loss) $ (9,171,324) $ (12,214,900)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation and amortization 30,709 24,518
Derivatives 4,298,243
Common shares and options issued for services 5,496,425 6,551,800
Common stock subscriptions for settlement
of litigation 1,120,000 -
Changes in assets and liabilities:
Decrease in accounts receivable 323,042 135,029
(Increase) decrease in inventory 97,817 (8,332)
Decrease in other current assets 15,700 -
(Increase) decrease in deposits and
other assets 90,297 (18,963)
(Decrease) in accounts payable (263,197) (49,755)
Derivative classification of convertible
debentures (1,308,910)
Increase in accrued litigation 1,306,191
Increase in accrued expenses 200,000 65,080
------------- --------------
Net cash (used in) operating activities (2,060,531) (1,219,999)
------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (5,092)
------------- --------------
Net cash (used in) investing activities (5,092)
------------- --------------
Cash flows from financing activities:
Proceeds from advances and notes payable -
related parties 340,200 411,000
Repayment of advances notes payable -
related parties (1,312,700) (586,000)
Proceeds from convertible debentures 1,935,000
Financing fees (89,670)
Repayment of convertible debentures (30,000) -
Proceeds from option exercises -
related parties 1,059,173 101,987
Proceeds from stock issuances 2,126,775 -
------------- --------------
Net cash provided by financing activities 2,183,448 1,772,317
------------- --------------
Net increase in cash 122,917 547,226
Beginning cash balance 90,791 213,708
------------- --------------
Ending cash balance $ 213,708 $ 760,934
============= ==============
Supplemental cash flow information:
Cash paid for income taxes $ $ -
============= ==============
Cash paid for interest $ 113,597 $ 52,267
============= ==============
Non cash investing and financing activities:
Common shares issued for receivable $ 5,442,900 $ -
============= ==============
Conversion of notes payable to common stock $ 400,000 $ 122,324
============= ==============
Reclassification of paid in capital to accrued
litigation $ $ 1,120,000
============= ==============
See accompanying notes to financial statements.
F-16
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Med Gen, Inc. the (Company) was incorporated October 22, 1996,
under the laws of the State of Nevada and began operations in the
State of Florida on November 12, 1996. The Company currently
markets an all natural product, SNORENZ, which is designed to aid
in the prevention of snoring. The Company also plans to offer
additional products dealing with alternative nutritionals as well
as other health related items.
Reclassifications
Certain items presented in the previous year's financial
statements have been reclassified to conform to current year
presentation.
Revenue Recognition
In general, the Company records revenue when persuasive evidence
of an arrangement exists, services have been rendered or product
delivery has occurred, the sales price to the customer is fixed
or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the various
revenues streams of the Company:
Revenue is recognized at the time the product is delivered.
Provision for sales returns will be estimated based on the
Company's historical return experience. Revenue is presented net
of returns.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
At September 30, 2005, the Company's cash on deposit at 3
financial institutions exceeded the federally insured limits by
$460,934.
Inventory
Inventory is stated at the lower of cost, determined on the first-
in, first-out method, or net realizable market value. Inventory
at September 30, 2005, consisted of finished goods and packaging
materials.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for
major improvements and additions are added to the property and
equipment accounts while replacements, maintenance and repairs,
which do not extend the life of the assets, are expensed.
Accounts Receivable
Accounts receivable are stated at estimated net realizable value.
Accounts receivable are comprised of balances due from customers
net of estimated allowances for uncollectible accounts. In
determining collectability, historical trends are evaluated and
specific customer issues are reviewed to arrive at appropriate
allowances. Accounts receivable are stated net of an allowance of
$10,000.
The Company's standard credit terms are net 30 days. In certain
limited instances and in conjunction with initial orders by large
established retailers the Company will extend credit terms to 90
to 120 days.
F-17
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
Depreciation and Amortization
Depreciation and amortization are computed by using the straight-
line method over the estimated useful lives of the assets. The
estimated useful lives are summarized as follows:
Furniture and fixtures 7 years
Office and computer equipment 5 years
Computer software 3 years
Leasehold improvements 5 years
Financial Instruments
Fair value estimates discussed herein are based upon certain
market assumptions and pertinent information available to
management as of September 30, 2005. The respective carrying
value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments
include cash, accounts receivable, accounts payable and accrued
expenses. Fair values were assumed to approximate carrying values
for these financial instruments because they are short term in
nature and their carrying amounts approximate fair values. The
carrying value of the Company's long-term debt approximated its
fair value based on the current market conditions for similar
debt instruments.
Long Lived Assets
The carrying value of long-lived assets is reviewed on a regular
basis for the existence of facts and circumstances that suggest
impairment. To date, no material impairment has been indicated.
Should there be an impairment, in the future, the Company will
measure the amount of the impairment based on the amount that the
carrying value of the impaired assets exceed the undiscounted
cash flows expected to result from the use and eventual disposal
of the from the impaired assets.
Net Income (Loss) Per Common 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 in which the
Company incurs losses common stock equivalents, if any, are not
considered, as their effect would be anti dilutive.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
In addition, the determination and valuation of derivative
financial instruments is a significant estimate.
F-18
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising
costs charged to expense included in selling, general and
administrative expenses, amounted to $958,259 and $406,168 for
the years ended September 30, 2004, and 2005. Advertising costs
include agreed upon amounts withheld from payments on accounts
receivable by certain customers for advertising done by the
specific customer.
Segment Information
The Company follows SFAS 131, Disclosures about "Segments of an
Enterprise and Related Information." Certain information is
disclosed, per SFAS 131, based on the way management organizes
financial information for making operating decisions and
assessing performance. The Company currently operates in a single
segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Income Taxes
The Company follows SFAS 109 "Accounting for Income Taxes" for
recording the provision for income taxes. Deferred tax assets and
liabilities are computed based upon the difference between the
financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when
the related asset or liability is expected to be realized or
settled. Deferred income tax expenses or benefits are based on
the changes in the asset or liability each period. If available
evidence suggests that it is more likely than not that some
portion or all of the deferred tax assets will not be realized, a
valuation allowance is required to reduce the deferred tax assets
to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision
for deferred income taxes in the period of change.
Stock-Based Compensation
The Company accounts for equity instruments issued to employees
for services based on the fair value of the equity instruments
issued and accounts for equity instruments issued to other than
employees based on the fair value of the consideration received
or the fair value of the equity instruments, whichever is more
reliably measurable.
The Company accounts for stock based compensation in accordance
with SFAS 123, "Accounting for Stock-Based Compensation." The
provisions of SFAS 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow
the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to
apply APB 25 in accounting for its stock option incentive plans.
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
F-19
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
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.
When the risks and rewards of any embedded derivative instrument
are not "clearly and closely" related to the risks and rewards of
the host instrument, the embedded derivative instrument is
generally required to be bifurcated and accounted for separately.
If the convertible instrument is debt, or has debt-like
characteristics, the risks and rewards associated with the
embedded conversion option are not "clearly and closely" related
to that debt host instrument. The conversion option has the risks
and rewards associated with an equity instrument, not a debt
instrument, because its value is related to the value of our
common stock. Nonetheless, if the host instrument is considered
to be "conventional convertible debt" (or "conventional
convertible preferred stock"), bifurcation of the embedded
conversion option is generally not required. However, if the
instrument is not considered to be conventional convertible debt
(or conventional convertible preferred stock), bifurcation of the
embedded conversion option may be required in certain
circumstances.
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.
F-20
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
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.
Deferred Financing Fees
The Company amortizes fees associated with obtaining debt
instruments over the term of the related debt using the effective
interest method. Deferred financing fees aggregated $194,670 at
September 30, 2005.
Recent Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB)
issued SFAS 151 "Inventory Costs". This Statement amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing, to clarify
the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). In
addition, this Statement requires that allocation of fixed
production overhead to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of
this Statement will be effective for the Company beginning with
its fiscal year ending September 30, 2006. The Company is
currently evaluating the impact this new Standard will have on
its operations, but believes that it will not have a material
impact on the Company's financial position, results of operations
or cash flows.
In December 2004, the FASB issued SFAS 153 "Exchanges of Non
monetary Assets an amendment of APB Opinion No. 29". This
Statement amended APB Opinion 29 to eliminate the exception for
non monetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of non monetary assets
that do not have commercial substance. A non monetary exchange
has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange.
The adoption of this Standard is not expected to have any
material impact on the Company's financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-
Based Payment". This Statement requires that the cost resulting
from all share-based transactions be recorded in the financial
statements. The Statement establishes fair value as the
measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-
based measurement in accounting for share-based payment
transactions with employees. The Statement also establishes fair
value as the measurement objective for transactions in which an
entity acquires goods or services from non-employees in share-
based payment transactions. The Statement replaces SFAS 123
"Accounting for Stock-Based Compensation" and supersedes APB
Opinion No. 25 "Accounting for Stock Issued to Employees". The
provisions of this Statement will be effective for the Company
F-21
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
beginning with its fiscal year ending September 30, 2007. The
Company is currently evaluating the impact this new Standard will
have on its financial position, results of operations or cash
flows.
In March 2005, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No.107 (SAB 107) which
provides guidance regarding the interaction of SFAS 123(R) and
certain SEC rules and regulations. The new guidance includes the
SEC's view on the valuation of share-based payment arrangements
for public companies and may simplify some of SFAS 123(R)'s
implementation challenges for registrants and enhance the
information investors receive.
In March 2005, the FASB issued FIN 47, Accounting for
Conditional Asset Retirement Obligations, which clarifies that
the term 'conditional asset retirement obligation' as used in
SFAS 143, Accounting for Asset Retirement Obligations, refers to
a legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement are conditional on
a future event that may or may not be within the control of the
entity. FIN 47 requires an entity to recognize a liability for
the fair value of a conditional asset retirement obligation if
the fair value can be reasonably estimated. FIN 47 is effective
no later than the end of the fiscal year ending after December
15, 2005. The Company does not believe that FIN 47 will have a
material impact on its financial position or results from
operations.
In August 2005, the FASB issued SFAS 154, Accounting Changes and
Error Corrections. This statement applies to all voluntary
changes in accounting principle and to changes required by an
accounting pronouncement if the pronouncement does not include
specific transition provisions, and it changes the
requirements for accounting for and reporting them. Unless it is
impractical, the statement requires retrospective application
of the changes to prior periods' financial statements. This
statement is effective for accounting changes and correction of
errors made in fiscal years beginning after December 15, 2005.
NOTE 2. 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 as discussed in
Note 9. For the years ended September 30, 2004 and 2005, the
Company incurred net losses of $9,171,324 and $12,214,900 and has
working capital and stockholders' deficits of $1,787,390 and
$2,110,752 at September 30, 2005.
The Company's ability to continue as a going concern is
contingent upon its ability to secure additional financing,
increase ownership equity, settle litigation 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 and to settle the litigation discussed in Note 9.
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
F-22
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
liabilities that may result from the possible inability of the
Company to continue as a going concern.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2005, consisted of the
following:
Furniture and office equipment $ 70,506
Computer equipment and software 80,339
Leasehold improvements 7,657
---------
158,502
Accumulated depreciation and amortization (120,503)
---------
$ 37,999
=========
Depreciation and amortization expense for the years ended
September 30, 2004, and 2005 was $30,709 and $24,518.
NOTE 4. NOTES AND ADVANCES PAYABLE RELATED PARTIES
Through September 2003 the Company had borrowed an aggregate of
$875,000 from an affiliated entity. During 2004 and 2005, the
Company borrowed an additional $225,000 and $286,000 from this
affiliated entity. The note bears interest at 8% per annum,
requires monthly interest payments and is due on demand. The
Company paid interest aggregating $102,005 and $10,124 during
2004 and 2005, related to this note. Substantially all of the
Company's assets secured this loan. Through September 30, 2005,
the Company repaid the entire balance of $1,386,000.
Through September 2003 the Company had borrowed an aggregate of
$205,000 from an officer. During 2004 and 2005, the Company
borrowed an additional $100,000 and $125,000 from this officer.
The loans were due on demand and accrued interest at 10% per
annum. Through September 30, 2005, the loans were repaid. The
Company paid interest aggregating $11,592 and $0 during 2004 and
2005, related to these advances.
During 2003 an officer advanced $70,000 to the Company. During
2004 this officer and another officer advanced an additional
$15,200. These advances were repaid $2,500 during 2003 and
$82,700 during 2004.
NOTE 5. CONVERTIBLE DEBENTURES
Convertible debentures, as of September 30, 2003, aggregated
$30,000 maturing on July 31, 2004 and providing for 8% annual
interest. Each $1,000 face value debenture is convertible into
100 shares of common stock. Additionally, each $1,000 face value
debenture includes 50 warrants, which were convertible into 50
shares of common stock at $125 per share. The warrants were non-
detachable and expired on July 31, 2004. During the year ended
September 30, 2004, the Company repaid this $30,000 debenture.
During February through April 2002 the Company issued $400,000 of
8% cumulative convertible debentures due in May 2004 for cash
aggregating $400,000. The debentures were convertible into common
shares of the Company as follows:
F-23
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
At any time after the Company's common stock price exceeds $3
per share for a period of ten consecutive trading days the holder
may convert 50% of the value of the debenture into common stock
at the rate of $40 per common share (election to convert).
The remaining 50% of the debenture may be redeemed by the
Company for cash or may be converted into the number of common
shares of the Company determined by dividing the balance of the
value of the debenture by the common stock price at the time of
the election to convert.
Notwithstanding the above, on the 25th monthly anniversary of the
date of the investments the debentures automatically convert into
common stock as follows:
50% of the value of the debentures converts into common stock
at the rate of $40 per common share and the remaining 50% of the
value of the debentures converts into the number of common shares
determined by dividing the balance of the value of the debentures
by the common stock price at the 25th monthly anniversary.
The shares of common stock to be issued upon conversion are
subject to certain registration rights.
During the year ended September 30, 2004, these debentures were
converted into an aggregate of 15,101 shares of common stock. The
conversions were made based on the fair market value of the
Company's common stock on the conversion date.
NOTE 6. CALLABLE SECURED CONVERTIBLE NOTES AND DERIVATIVE
INSTRUMENT LIABILITIES
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.
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
F-24
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
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 fair value of the warrants,
amounting to an aggregate of $1,548,800, 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 date 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 until the registration
statement is declared effective. Accordingly, the Company re-
measured the fair value of the Warrants at September 30, 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 $40,800 at
September 30, 2005. 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
F-25
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
aggregate of $20,969,788. 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.
A summary of the Callable Secured Convertible Notes and
derivative instrument liabilities at September 30, 2005,
is as follows:
Callable Secured Convertible Notes; 8% per annum; due
March 30, 2008 $740,000
Less: face amount of Notes converted (122,324)
-----------
617,676
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (617,676)
-----------
$ -
-----------
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)
-----------
$ -
-----------
Total carrying value at September 30, 2005 $ -
===========
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 September 30, 2005, 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.
F-26
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
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 September 30, 2005, the following derivative liabilities
related to common stock Warrants and embedded derivative
instruments were outstanding:
Exercise Value -
Price Per Value-Issue September 30,
Issue Date Expiry Date Share Date 2005
- ---------------------------------------------------------------------------------
03-30-2005 03-30-2010 740,000 warrants $0.085 $673,400 $14,800
05-25-2005 05-25-2010 700,000 warrants 0.085 693,000 14,000
08-23-2005 08-23-2005 100,000 warrants 0.085 31,000 2,000
08-26-2005 08-26-2005 500,000 warrants 0.090 145,000 10,000
_________
Fair value of freestanding derivative
instrument liabilities for warrants $40,800
_________
Value -
Value-Issue September 30,
Issue Date Expiry Date Date 2005
_________________________________________________________________________________
03-30-2005 03-30-2008 $617,676 convertible notes $9,176,010 $177,966
05-25-2005 05-25-2008 $700,000 convertible notes 9,451,556 210,000
08-23-2005 08-23-2008 $100,000 convertible notes 413,333 30,000
08-26-2005 08-26-2005 $500,000 convertible notes 1,928,889 150,000
--------
Fair value of bifurcated embedded derivative instrument
liabilities associated with the above convertible notes $567,966
---------
Total derivative financial instruments $608,766
=========
NOTE 7. INCOME TAXES
The Company accounts for income taxes under SFAS 109, which
requires use of the liability method. SFAS 109 provides that
deferred tax assets and liabilities are recorded based on the
differences between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes, referred
to as temporary differences. Deferred tax assets and liabilities
at the end of each period are determined using the currently
enacted tax rates applied to taxable income in the periods in
which the deferred tax assets and liabilities are expected to be
settled or realized.
F-27
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
The provision for income taxes differs from the amount computed
by applying the statutory federal income tax rate to income
before provision for income taxes. The sources and tax effects of
the differences are as follows:
Income tax provision at
the federal statutory rate 34 %
Effect of operating losses (34)%
----
-
====
As of September 30, 2005, the Company has a net operating loss
carryforward of approximately $8,000,000. This loss will be
available to offset future taxable income. If not used, this
carryforward will expire through 2025. The deferred tax asset of
approximately $2,700,000 relating to the operating loss
carryforward has been fully reserved at September 30, 2005. The
increase in the valuation allowance related to the deferred tax
asset was $400,000 during 2005. The principal difference between
the accumulated deficit for income tax purposes and for financial
reporting purposes results from non-cash stock compensation and
derivative instrument expense being charged to operations for
financial reporting purposes.
NOTE 8. STOCKHOLDERS' (DEFICIT)
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.
During June 2005 the Company amended its Articles of
Incorporation to authorize 5,000,000 shares of preferred stock
$.001 par value and 245,000,000 shares of common stock $.001 par
value. In October 2005 the Company amended its Articles of
Incorporation to authorize 5,000,000 shares of preferred stock
$.001 par value and 495,000,000 shares of common stock $.001 par
value.
During September 2005 the Company affected a one for twenty
reverse stock split and during November 2003 the Company affected
a four to one forward stock split. All share and per share
amounts have been restated to give effect to these splits.
Common stock
From February through July 2004 the Company issued 588,215 shares
of common stock for cash aggregating $2,126,775 pursuant to
Regulation S offerings.
During the year ended September 30, 2004 the Company issued
16,000 shares of common stock for services valued at $302,600
which represents the fair market value of the shares issued.
During the year ended September 30, 2004 officers of the Company
exercised 566,250 options and received 566,250 shares of common
stock. The aggregate value for the shares of $5,442,900 is due
F-28
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
from these officers at such time as they sell the shares and has
been recorded as a receivable for common stock.
The Company received an aggregate of $1,059,173 as payment for
shares issued to officers pursuant to option exercises during the
years ended September 30, 2004 and 2003, and reduced the amount
receivable related to 227,613 shares held by officers received
pursuant to option exercises to $.24 per share which represented
the fair market value of the shares on the date of the reduction.
The Company recorded $5,081,325 in compensation expense related
to this reduction. The aggregate receivable for shares issued to
officers was $54,627 at September 30, 2004. During the year ended
September 30, 2005, the Company issued 100,000 options to an
officer exercisable at $2.00 per share. In addition, during the
year ended September 30, 2005, this officer paid an aggregate of
$101,987 towards the exercise price of the options and the
options were repriced which resulted in a charge to operations of
$117,640 during the year. The balance due from this officer was
$35,000 at September 30, 2005.
From November 2003 through May 2004 the Company issued 15,101
shares of common stock for the conversion of $400,000 of debt.
The debt was converted at the fair market value of the shares
issued on the conversion date (see Note 5).
At September 30, 2004, the Company recorded an aggregate of
$1,120,000 related to shares issuable pursuant to the settlement
of a lawsuit with Global. During the year ended September 30,
2005, the settlement agreement was set aside by the court and the
$1,120,000 was reclassified to a liability.
During October 2004 the Company issued 100,000 shares of common
stock to an officer pursuant to the exercise of options granted
in October 2004 at $2.00 per share.
During the year ended September 30, 2005, the Company issued an
aggregate of 700,000 shares of it's common stock for services
with a fair value of $6,314,160 which has been charged to
operations during the year. Of these shares 690,000 shares with a
fair value of $6,203,600 were issued to officers, directors or
affiliates.
During the year ended September 30, 2005, the holder of the
debentures discussed in Note 6 converted $122,324 of debt into
832,000 shares of the Company's common stock.
Stock-based Compensation
During the year ended September 30, 2004, the Company issued
options to purchase shares of common stock to certain non-
employees and recorded $112,500 in compensation expense related
to these issuances. During the year ended September 30, 2005, the
Company issued options to purchase shares of common stock to
certain officers. Compensation costs charged to operations
aggregated $120,000 for the year ended September 30, 2005.
SFAS 123 requires the Company to provide proforma information
regarding net income and earnings per share as if compensation
cost for the Company's stock option plans had been determined in
accordance with the fair value based method prescribed in SFAS
123. The fair value of the option grants is estimated on the date
of grant utilizing the Black-Scholes option pricing model with
the following weighted average assumptions for grants during the
year ended September 30, 2005: expected life of options of 5
years, expected volatility of 200%, risk-free interest rate of 4%
and no dividend yield. The weighted average fair value at the
date of grant for options granted during the year ended September
30, 2005, approximated $2.00 per option. These results may not be
representative of those to be expected in future years.
F-29
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
Under the provisions of SFAS 123, the Company's net income (loss)
and earnings (loss) per share would have been reduced (increased)
to the proforma amounts indicated below:
2004 2005
---- ----
Net (loss)
As reported $(9,171,324) $(12,214,900)
Proforma $(9,171,324) $(12,294,900)
Basic and diluted (loss) per share
As reported $(15.42) $(7.12)
Proforma $(15.42) $(7.17)
A summary of stock option activity is as follows:
Weighted Weighted
Number average average
of exercise fair
shares price value
------- -------- --------
Balance at
September 30, 2003 573,980
Granted 38,980 $26.60 $26.60
Exercised/Forfeited (566,250) $ 9.60 $ 9.60
--------
Balance at
September 30, 2004 46,710
Granted 100,000 $ 2.00 $ 2.00
Exercised/Forfeited (137,513) $ 0.44 $ 0.44
---------
Balance at
September 30, 2005 9,197 $24.50 $24.50
=========
The following table summarizes information about fixed-price
stock options at September 30, 2005:
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
======= =======
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its office facilities under operating leases
for gross monthly rent, including common area maintenance, of
approximately $6,200. The office lease provides for no annual
cost of living adjustments in the base rent and the warehouse
leases provide for fixed annual increases in the base rent.
Future minimum lease payments under all non-cancelable operating
F-30
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
leases for years ending subsequent to September 30, 2005 are as
follows:
2006 $ 74,400
2007 74,400
2008 74,400
2009 18,600
-----------
$ 241,800
===========
Rent expense for the years ended September 30, 2004 and 2005 was
$159,086 and $75,910.
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 8,000,000 shares of common stock. The shares to be
issued were valued at their fair market value of $1,120,000. The
Company has recorded an accrual of $200,000 for the cash payments
due and a stock subscription of $1,120,000 for the common shares
issuable at September 30, 2004, 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 10,200,000 shares of common stock on or
before January 15, 2005, and should it not due so an additional
500,000 shares of common stock would be due to Global. Global
will be required to execute proxies giving the voting rights of
the shares issuable to an officer of the Company.
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 has 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.
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.
NOTE 10. CONCENTRATIONS
During years ended September 30, 2004 and 2003, the Company
derived substantially all of its revenue from the sale of one
product, SNORENZ. Credit is granted to their customers in the
F-31
Med Gen, Inc.
Notes to Financial Statements
September 30, 2005
normal course of business. The Company has an exclusive contract
with a single manufacturing company to produce SNORENZ.
The Company's product SNORENZ will no longer be carried by
WalMart. The decision was made by Walmart because of declining
sales in the overall category and declining sales by its largest
competitor. WalMart sales were $344,218 in 2004 and $323,474 in
2005. They represented 38% and 40% of the annual volume of sales.
In August 2005 the Company was notified by Walgreen's that
Snorenz would no longer be carried by the chain. Sales at
Walgreens were $142,022 in 2004 and $91,715 in 2005. They
represented 16% and 11% of the annual sales volume.
NOTE 11. RELATED PARTY TRANSACTIONS
During the years ended September 30, 2004 and 2005, the Company
paid consulting fees to the affiliated entity discussed in Note 4
aggregating $480,373 and $35,000.
NOTE 12. SUBSEQUENT EVENTS
From October 1, 2005 through January 18, 2006, the holders of the
Callable Secured Convertible Notes advanced an additional
$600,000 to the Company and converted an aggregate of $77,728 of
debt into 6,337,950 shares of the Company's common stock. Through
January 18, 2006, the holders of the Callable Secured Convertible
Notes converted an aggregate of $200,052 into 7,169,950 shares of
common stock which represents approximately 68% of the issued and
outstanding shares. In addition, the Company issued 690,000
shares of common stock to an affiliate for services.
F-32
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Nevada law, our Articles of Incorporation and Bylaws
provide that our directors shall not be personally liable for monetary
damages for a breach of fiduciary duty as such, except for liability
resulting from: bad faith; intentional misconduct; knowing violation of the
law; or personal gain of a profit or advantage to which he was not entitled.
This provision is intended to afford our directors additional protection
from, and limit their potential liability from, suits alleging a breach of
their duty of care. We believe this provision will assist us in the future in
securing the services of directors who are not employees of our Company. As a
result of the inclusion of such a provision, shareholders may be unable to
recover monetary damages against directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are
found not to be available to shareholders for any particular case,
shareholders may not have any effective remedy against the challenged
conduct. Insofar as indemnification for liabilities for damages arising under
the Securities Act of 1933, (the "Securities Act") may be permitted to our
directors, officers, and controlling persons pursuant to the foregoing
provision, or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We estimate that expenses in connection with the distribution described in
this registration statement (other than brokerage commissions, discounts or
other expenses relating to the sale of the shares by the selling
stockholders) will be as set forth below. We will pay all of the expenses
with respect to the distribution, and such amounts, with the exception of the
SEC registration fee, are estimates.
SEC registration fee $ 238.30
Accounting fees and expenses 5,000.00
Legal fees and expense 20,000.00
Printing expenses -0-
Federal Taxes -0-
State Blue-Sky Registration -0-
Transfer Agent Fees 100.00
Miscellaneous -0-
------------
Total $ 25,238.30
RECENT SALES OF UNREGISTERED SECURITIES
Date Name No. of Shares* Consideration
- ---- ---- -------------- -------------
2/01/04 Various investors in
7/31/04 Regulation S private placement 11,764,294 $2,126,775
1/12/05 Bran, Ltd. 2,000,000 Extension of line of credit
1/12/05 Stewart A. Merkin, Esq. 203,750 Legal services
6/08/06 Settling Parties (see prospectus) 15,000,000 Settlement agreement
6-20-06 Bran Ltd. 4,500,000 Finder's Fee Mexico Distributor
6-27-06 Bran Ltd. 5,000,000 Finder's Fee Phillipines Distr.
7-17-2006 Wallace and Partners 7,000,000 Legal Fees
* Number of shares reflects 1:80 reverse split effected in February, 2003 and
a 4:1 stock dividend paid in November, 2003.
All of the foregoing shares were issued pursuant to exemptions available
under Sections 3 and 4(2) of the Securities Act, as nonpublic transactions,
effected without the use of an underwriter or the payment of any commission
or fee.
40
EXHIBITS
Exhibit
Number Description
- ------ -----------
3.1 Articles Incorporation of Registrant filed with the
State of Nevada on October 22, 1996 (1)
3.2 Bylaws of Registrant dated November 11, 1997 (1)
3.3 Amendment to Articles of Incorporation of Registrant
filed with the State of Nevada on June 8, 2006 (5)
4.1 NonQualified Stock Option Plan Dated June 14, 2006 (2)
5.2 Opinion of Stewart A. Merkin, Esq. (5)
10.5 Employment Agreement between Registrant and Paul
Kravitz dated February 16, 2005 (3)
10.6 Employment Agreement between Registrant and
Paul Mitchell dated February 16, 2005 (3)
10.7 Securities Purchase Agreements between Registrant
and Investors dated respectively February 27, 2006
and April 21, 2006 (5)
10.8 Stock Purchase Warrant between Registrant
and AJW Partners, LLC dated respectively
February 27, 2006 and April 21, 2006 (5)
10.9 Stock Purchase Warrant between Registrant
and AJW Offshore, Ltd. dated respectively
February 27, 2006 and April 21, 2006 (5)
10.10 Stock Purchase Warrant between Registrant and
AJW Qualified Partners, LLC dated respectively
February 27, 2006 and April 21, 2006 (5)
10.11 Stock Purchase Warrant between Registrant and New
Millennium Capital Partners II, LLC dated
respectively February 27, 2006 and April 21, 2006 (5)
10.12 Callable Secured Convertible Note between Registrant
and AJW Partners, LLC dated respectively
February 27, 2006 and April 21, 2006 (5)
10.13 Callable Secured Convertible Note between Registrant
and AJW Offshore, Ltd. dated respectively
February 27, 2006 and April 21, 2006 (5)
10.14 Callable Secured Convertible Note between
Registrant and AJW Qualified Partners, LLC
dated respectively February 27, 2006 and
April 21, 2006 (5)
10.15 Callable Secured Convertible Note between Registrant
and New Millennium Capital Partners II, LLC dated
respectively February 27, 2006 and April 21, 2006 (5)
10.16 Registration Rights Agreement between Registrant
and Investors dated respectively February 27, 2006
and April 21, 2006 (5)
10.17 Secretary's Certificate dated respectively
February 27, 2006 and April 21, 2006 (5)
10.18 Transfer Agent Instructions from Registrant
to Investors dated respectively February 27, 2006
and April 21, 2006 (5>
14.1 Code of Ethics (4)
21.1 Subsidiaries of Registrant (4)
23.1 Consent of Stark Winter Schenkein & Co., LLP (5)
23.2 Consent of Stewart A. Merkin, Esq., Counsel for
the Registrant, included in Exhibit 5.2 (5)
99.1 Settlement Agreement between Registrant and Global
Healthcare Laboratories, Inc. and Dan L. Williams & Co.,
Inc. dated March 31, 2006 (4)
(1) Previously filed as an exhibit to our Registration
Statement on Form 10SB filed on January 26, 2000
(2) Previously filed as an exhibit to our Registration
Statement on Form S-8 filed on June 14, 2006
(3) Previously filed as an exhibit to Form SB-2/A filed
on May 23, 2005
(4) Previously filed as an exhibit to Form SB-2 filed on
January 18, 2005
(5) Previously filed as an exhibit to Form SB-2 filed on
August 25, 2006
41
UNDERTAKINGS
A. Rule 415 Offering
We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement. Provided,
however, that paragraphs (1)(i) and (1)(ii) do not apply if the registration
statement is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by our Company pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
B. Request for Acceleration of Effective Date. We hereby request the
acceleration of the Effective Date hereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of us
pursuant to the foregoing provisions, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by our Company of expenses incurred or
paid by a director, officer or controlling person of us in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
42
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in Boca
Raton, Florida, on September 25, 2006.
Med Gen, Inc.
By:/S/Paul S. Mitchell By: /S/Paul B. Kravitz
-------------------------- --------------------------
Paul S. Mitchell Paul B. Kravitz
President Chief Executive Officer
Chief Operating Officer Secretary
Treasurer
POWER OF ATTORNEY
The officers and directors of Med Gen, Inc., whose signatures appear below,
hereby constitute and appoint Stewart A. Merkin, Esq., their true and lawful
attorney and agent, to sign, execute and cause to be filed on behalf of the
undersigned any amendment or amendments, including post-effective amendments,
to this registration statement of Med Gen, Inc. on Form SB-2. Each of the
undersigned does hereby ratify and confirm all that said attorney and agent
should do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the following
persons in the capacities and on the dates indicated have signed this
registration statement.
Signature Title Date
--------- ----- ----
/s/ Paul S. Mitchell President, Chief
- -------------------- Operating Officer, Treasurer September 25, 2006
Paul S. Mitchell
/s/ Paul B. Kravitz Chief Executive Officer,
- -------------------- Secretary September 25, 2006
Paul B. Kravitz
/s/ Jack Chien Chief Financial Officer, September 25, 2006
- -------------------- Chief Accounting Officer
Jack Chien
43