UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from ________________ to ______________
Commission File Number 000-29171
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MED GEN, INC.
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(Exact name of registrant as specified in its charter)
Nevada 65-0703559
- ------------------------ -------------------
(State of incorporation) (IRS Employer
Identification No.)
7284 W. Palmetto Park Road, Suite 207, Boca Raton, FL 33433
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(Address of principal executive offices)
(561) 750-1100
---------------------------
(Issuer's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12B-2).
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of December 31, 2006, 289,311,265 shares of common stock, .001 par
value per share, were outstanding.
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet - December 31, 2006 (Unaudited)
Statements of Operations - Three months ended December 31,
2006 and 2005 (Unaudited).
Statements of Cash Flows - Three months ended December 31,
2006 and 2005 (Unaudited).
Notes to Financial Statements (Unaudited).
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
MED GEN, INC.
PART I - FINANCIAL INFORMATION Item 1.
Financial Statements
Med Gen, Inc.
Balance Sheet
December 31, 2006
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 808,165
Accounts receivable, net of reserve of $15,196 39,009
Inventory 95,126
Other current assets 5,700
-----------
Total Current Assets 948,000
-----------
Property and Equipment, net 52,125
-----------
Other Assets
Deferred financing fees 146,263
Deposits and other 199,124
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$ 1,345,512
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,303,070
Accrued litigation judgment 591,676
-----------
Total Current Liabilities 1,894,746
-----------
Derivative financial instruments 6,628,624
-----------
Convertible debentures 299,870
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Redeemable common shares 200,000
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Stockholders' (deficit)
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, 2,495,000,000
shares authorized, 289,311,265 shares
issued and outstanding 289,311
Paid in capital 27,510,725
Accumulated (deficit) (35,477,764)
-----------
(7,677,728)
-----------
$ 1,345,512
===========
See accompanying notes to the financial statements.
3
Med Gen, Inc.
Statements of Operations
For the Three Months Ended December 31, 2005 and 2006
(Unaudited)
2005 2006
----------- -----------
Net sales $ 100,148 $ 181,753
Cost of sales 28,150 50,707
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Gross profit 71,998 131,046
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Operating expenses:
Selling, general and administrative expenses -
non cash stock compensation - not included
in selling, general and administrative
expenses below 55,700 313,500
Selling, general and administrative expenses 705,222 540,957
----------- -----------
760,922 854,457
----------- -----------
(Loss) from operations (688,924) (723,411)
----------- -----------
Other (income) expense:
Derivative instrument income (49,717) 349,401
Interest income (3,888) (6,937)
Interest expense 144,580 85,390
----------- -----------
90,975 427,854
----------- -----------
Net (loss) $ (779,899) $(1,151,265)
=========== ===========
Per share information - basic and fully diluted:
Weighted average shares outstanding 6,739,173 273,622,622
=========== ===========
Net (loss) per share $ (0.12) $ (0.00)
=========== ===========
See accompanying notes to the financial statements.
4
Med Gen, Inc.
Statements of Cash Flows
For the Three Months Ended December 31, 2005 and 2006
(Unaudited)
2005 2006
----------- -----------
Cash flows from operating activities:
Net cash (used in) operating activities $ (745,128) $ (525,843)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (9,174) (15,600)
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Net cash (used in) investing activities (9,174) (15,600)
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Cash flows from financing activities:
Proceeds from convertible debentures 575,000 -
----------- -----------
Net cash provided by financing activities 575,000 -
----------- -----------
Net increase in cash (179,302) (541,443)
Beginning - cash balance 760,934 1,349,608
----------- -----------
Ending - cash balance $ 581,632 $ 808,165
=========== ===========
See accompanying notes to the financial statements.
4
MED GEN, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for
interim financial information and Item 310(b) of Regulation S-B. They do
not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. For further
information, refer to the financial statements of the Company as of
September 30, 2006, 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 2006 through December 2006, the Company
issued an aggregate of 55,300,000 shares of common stock for services
rendered to a significant shareholder. The shares were valued at their
fair market value of $313,500 which was charged to operations during the
period.
During the period from October 2006 through December 2006 the Company
issued an aggregate of 2,161,381 shares of common stock for the
conversion $7,089 of the notes described on Note 6.
(5) Commitments, Concentrations and Contingencies
During the period ended December 31, 2006, the Company derived
$125,000 dollars of its total sales from consulting services.
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
5
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 year ended September 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. The balance due is $591,676 at December 31, 2006.
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
6
believes that the sales did not involve a public offering of its
securities and that the Company did comply with the "safe harbor"
exemptions from registration, if such exemptions were found not to
apply, this could have a material impact on the Company's financial
position and results of operations. In addition, the Company issued
shares of common stock pursuant to Form S-8 registration statements
and pursuant to Regulation S. The Company believes that it complied
with the requirements of Form S-8 and Regulation S in regard to these
issuances, however if it were determined that the Company did not
comply with these provisions this could have a material impact on the
Company's financial position and results of operations.
(6) Callable Secured Convertible Notes and Derivative Instrument
Liabilities
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 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. 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 ended August 31, 2006.
On August 10, 2006, the Company sold an additional $1,500,000 of
Convertible Notes and 15,000,000 warrants to the same four investors.
The terms of these Convertible Notes and Warrants are the same as those
7
previously issued, except that the conversion price is $0.04 and the
exercise price of the Warrants is $0.05 per share.
The conversion price of the Convertible Notes and the exercise price of
the warrants will be adjusted in the event that the Company issues
common stock at a price below the initial fixed conversion or exercise
price, with the exception of any shares of common stock issued in
connection with the Convertible Notes. The conversion price of the
Convertible Notes and the exercise price of the warrants may also be
adjusted in certain circumstances such as if the Company pays a stock
dividend, subdivides or combines outstanding shares of common stock into
a greater or lesser number of shares, or takes such other actions as
would otherwise result in dilution of the Note Holders' position. The
Note Holders have contractually agreed to restrict their ability to
convert their Convertible Notes or exercise their warrants and receive
shares of the Company's common stock such that the number of shares of
common stock held by the Note Holders and their affiliates after such
conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock. In addition, the Company has granted
the Note Holders registration rights and a security interest in
substantially all of the Company's assets. The Company has the right to
prepay the Convertible Notes under certain circumstances at a premium
ranging from 25% to 50% of the principal amount, depending on the timing
of such prepayment.
Pursuant to the terms of a Registration Rights Agreement entered into
with the Note Holders, the Company is obligated to register for resale,
within a defined time period, the shares underlying the Warrants and the
shares issuable on conversion of the Convertible Notes. The terms of the
Registration Rights Agreement provide that, in the event that the
registration statement does not become effective within 105 days of the
issuance of the Warrants or Convertible Notes, the Company is required
to pay to the Note Holders as liquidated damages, an amount equal to 2%
per month of the principal amount of the Convertible Notes. 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 September 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 $30,673 at
September 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, 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.
8
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 September 30, 2006, is as follows:
Callable Secured Convertible Notes; 8% per annum;
due March 30, 2008 $ 740,000
Less: face amount of Notes converted (740,000)
----------
-
----------
Callable Secured Convertible Notes; 8% per annum;
due May 25, 2008 $ 700,000
Less: face amount of Notes converted (472,950)
----------
227,050
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (227,050)
----------
$ -
----------
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 (322,158)
----------
$ 277,842
----------
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)
----------
$ -
----------
9
Callable Secured Convertible Notes; 8% per annum;
due April 21, 2009 $ 750,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (750,000)
----------
$ -
----------
Callable Secured Convertible Notes; 8% per annum;
due April 21, 2009 $ 750,000
Less: unamortized discount related to warrants and
bifurcated embedded derivative instruments (750,000)
----------
$ -
----------
Total carrying value at September 30, 2006 $ 277,842
==========
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, 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 September 30, 2006, the following derivative liabilities related to
common stock Warrants and embedded derivative instruments were
outstanding:
Issue Expiry Exercise Value-
Date Date Price Per Value-Issue September
Share Date 2006
- ---------------------------------------------------------------------------------
03-30-2005 03-30-2010 740,000 warrants $ 0.085 $ 673,400 $ 28
05-25-2005 05-25-2010 700,000 warrants 0.085 693,000 33
08-23-2005 08-23-2010 100,000 warrants 0.085 31,000 5
08-26-2005 08-26-2010 500,000 warrants 0.090 145,000 28
10-31-2005 10-31-2010 600,000 warrants 0.010 6,000 30
02-23-2006 02-23-2011 600,000 warrants 0.050 2,081 183
04-21-2006 04-21-2011 30,000,000 warrants 0.050 363,005 24,347
10
Contd...
Issue Expiry Exercise Value-
Date Date Price Per Value-Issue September
Share Date 2006
- ---------------------------------------------------------------------------------
08-10-2006 08-10-2013 15,000,000 warrrants 0.050 22,196 6,019
----------
Fair value of freestanding derivative
instrument liabilities for warrants $ 30,673
==========
Issue Expiry Value-
Date Date Value-Issue September
Date 2006
- -----------------------------------------------------------------------------
05-25-2005 05-25-2008 $700,000 convertible notes 9,451,556 288,531
08-23-2005 08-23-2008 $100,000 convertible notes 413,333 131,609
08-26-2005 08-26-2008 $500,000 convertible notes 1,928,889 769,048
10-31-2005 10-31-2008 $500,000 convertible notes 372,000 915,997
02-23-2006 02-23-2009 $600,000 convertible notes 1,487,973 899,630
04-21-2006 04-21-2009 $750,000 convertible notes 1,758,445 1,113,291
08-10-2006 08-10-2009 $1,500,000 convertible notes 1,975,842 2,362,632
----------
Fair value of bifurcated embedded derivative
instrument liabilities associated with the above
convertible notes $6,480,738
----------
Total derivative financial instruments $6,511,411
==========
(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 December 31, 2006, the
Company incurred a net loss of $1,151,265 and has a working capital
deficit, an accumulated deficit and a stockholders' deficit of $946,746,
$35,477,764 and $7,677,728 at December 31, 2006.
The Company's ability to continue as a going concern is contingent upon
its ability to secure additional financing, increase ownership equity
and attain profitable operations. In addition, the Company's ability to
continue as a going concern must be considered in light of the problems,
expenses and complications frequently encountered in established markets
and the competitive environment in which the Company operates.
The Company is pursuing financing for its operations and seeking
additional investments. In addition, the Company is seeking to expand
its revenue base by adding new customers and increasing its advertising.
Failure to secure such financing or to raise additional equity capital
and to expand its revenue base may result in the Company depleting its
available funds and not being able pay its obligations.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a going
concern.
(8) Subsequent Events
On January 30th, 2007 the Company borrowed $350,000.00 dollars from its
lender on the same terms and conditions of the prior fundings. The Company
agreed to adjust the conversion price from 40% to 50% on all prior fundings
(8 separate tranches) as part of the loan agreement.
On February 10th, 2007 the Company borrowed $350,000.00 dollars from its
lender on the same terms and conditions of the prior fundings. The lender
waived all prior penalties and registration penalties as part of the loan
agreement.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three months ended December 31, 2006 Compared with three months ended
December 31, 2005
- ---------------------------------------------------------------------
GENERAL
The Company is headquartered at 7284 W. Palmetto Park Rd., Suite
207,Boca Raton, Florida 33433.The Company has elected to outsource all
the manufacturing of its products under protective agreements at this
time.
Results of Operations
- ---------------------
For the 2006 first fiscal quarter ended December 31, 2006, Sales
increased 81.14 % to $181,753 from $100,148.This increase is
attributable principally to a one time consulting fee of $125,000.
In addition, the Company launched its new updated website that
offers a multitude of products. The Company has concentrated its
efforts on increasing the "hits" to the website and this has equated
into increased sales.
During the quarter the sales on its website slowly increased.
Management is exploring other various methods to increase traffic flow
as a result of its Direct Marketing Programs and will launch several
joint venture programs as well as its own TV programs in the next
quarter.
Gross profit for the first quarter was $ 131,046 versus $71,998 for
the year ago quarter, an increase of 45.06%. The increase was due to
the consulting fee described above.
Gross profit margins for the quarter increased to 72.10% of sales up
from 71.89 % in the previous year ago quarter. The increase was due to
consulting fee described above.
Operating expenses (selling, general and administrative expenses)
decreased $317,677 to $540,957 from $705,222, a decrease of 23.30%.
The decrease is due to several factors that include, decreased legal
fees, lower operating costs, reduced travel expenses and reduced
entertainment expenses. Management believes that operating expenses
will continue at this modest level until sales increases force the
company to increase personnel.
Operating loss was $723,411 as opposed to $688,924 in the prior year's
quarter.
Interest expense decreased from $144,580 in the year ago quarter to
$85,390 for this quarter. The Company secured a six month interest
waiver from its debenture holders and issued them 30,000,000 warrants
in lieu of interest payments to conserve cash.
For the first fiscal quarter the company reported a net loss of
$1,151,265 ($0.00) per share versus a loss of $779,899 ($0.12) per
share in the year ago quarter.
Liquidity and Capital Resources
- -------------------------------
Cash on hand at December 31, 2006 was $808,165 and the Company had a
working capital deficit of $946,746 at December 31, 2006.
Net cash used in operating activities was $525,843 during the three
months ended December 31, 2006.
Net cash used in investing activities was $15,600 during the three
months ended December 31, 2006.
12
Net cash provided by financing activities was $-0- during the quarter
ended December 31, 2006.
The Company expects to introduce its new product the Un-Diet Program
in the March quarter.
The Company believes it has sufficient cash resources, receivables
and cash flow to provide for all general corporate operations in the
foreseeable future. However, if the company has a successful test
programs with its newest TV commercials it might want to increase its
budget for the purchase of additional air time. Thus, in order to
avoid any disruption in business, the Company plans to raise
additional capital from its present lender.
Accordingly, should we be unable to fund our expenses through our
existing assets or cash, we may be required to issue shares of our
common stock, which will dilute the interest of current shareholders.
Moreover, we may still need additional financing through traditional
bank financing or a debt or equity offering; however, because we have
limited revenues, and a poor financial condition, we may be unsuccessful
in obtaining such financing or the amount of the financing may be
minimal and therefore inadequate to implement our business plans. In
the event that we do not receive financing or our financing is
inadequate, we may have to liquidate our business and undertake any or
all of the following actions:
* Significantly reduce, eliminate or curtail our business, operating
and research and development activities so as to reduce operating
costs;
* Sell, assign or otherwise dispose of our assets, if any, to raise
cash or to settle claims by creditors;
* Pay our liabilities in order of priority, if we have available cash
to pay such liabilities;
* If any cash remains after we satisfy amounts due to our creditors,
distribute any remaining cash to our shareholders in an amount equal
to the net market value of our net assets;
* File a Certificate of Dissolution with the State of Nevada to
dissolve our corporation and close our business;
* Make the appropriate filings with the Securities and Exchange
Commission so that we will no longer be required to file periodic and
other required reports with the Securities and Exchange Commission,
if, in fact, we are a reporting company at that time; and
* Make the appropriate filings with the National Association of
Security Dealers to affect a delisting of our stock.
Based upon our current assets, however, we would not have the ability
to distribute any cash to our shareholders.
If we have any liabilities that we are unable to satisfy and we
qualify for protection under the U.S. Bankruptcy Code, we may
voluntarily file for reorganization under Chapter 11 or liquidation
under Chapter 7. Our creditors may also file a Chapter 7 or Chapter 11
bankruptcy action against us. If our creditors or we file for Chapter
7 or Chapter 11 bankruptcy, our creditors will take priority over our
shareholders. If we fail to file for bankruptcy under Chapter 7 or
Chapter 11 and we have creditors; such creditors may institute
proceedings against us seeking forfeiture of our assets, if any. We do
not know and cannot determine which, if any, of these actions we will
be forced to take. If any of these foregoing events occur, you could
lose your entire investment in our shares.
To date, we have funded our activities principally from loans from
related parties and loans from third party lenders.
Contractual Obligations and Commercial Commitments We have no
contractual obligations, including lease obligations, apart from
agreements in the normal course of our business.
13
Basis of Reporting
- ------------------
The Company's financial statements are presented on a going concern
basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company has
experienced a significant loss from operations including the
settlement of certain litigation. For the period ended December 31,
2006, the Company incurred a net loss of $1,151,265 and has a working
capital deficit, an accumulated deficit and a stockholders' deficit of
$946,746, $35,477,764 and $7,677,728 at December 31, 2006.
The Company's ability to continue as a going concern is contingent
upon its ability to secure additional financing, increase ownership
equity and attain profitable operations. In addition, the Company's
ability to continue as a going concern must be considered in light of
the problems, expenses and complications frequently encountered in
established markets and the competitive environment in which the
Company operates.
The Company is pursuing financing for its operations and seeking
additional investments. In addition, the Company is seeking to expand
its revenue base by adding new customers and increasing its
advertising. Failure to secure such financing or to raise additional
equity capital and to expand its revenue base may result in the
Company depleting its available funds and not being able pay its
obligations.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may
result from the possible inability of the Company to continue as a
going concern.
Derivative Instruments
- ----------------------
In connection with the sale of debt or equity instruments, we may sell
options or warrants to purchase our common stock. In certain
circumstances, these options or warrants may be classified as
derivative liabilities, rather than as equity. Additionally, the debt
or equity instruments may contain embedded derivative instruments,
such as conversion options, which in certain circumstances may be
required to be bifurcated from the associated host instrument and
accounted for separately as a derivative instrument liability.
The identification of, and accounting for, derivative instruments is
complex. Our derivative instrument liabilities are re-valued at the
end of each reporting period, with changes in the fair value of the
derivative liability recorded as charges or credits to income, in the
period in which the changes occur. For options, warrants and
bifurcated conversion options that are accounted for as derivative
instruments liabilities, we determine the fair value of these
instruments using the Black-Scholes option pricing model. That model
requires assumptions related to the remaining term of the
instruments and risk-free rates of return, our current common stock
price and expected dividend yield, and the expected volatility
of our common stock price over the life of the option. We have
estimated the future volatility of our common stock price based the
history of our stock price. The identification of, and accounting for,
derivative instruments and the assumptions used to value them can
significantly affect our financial statements.
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.
14
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, 2006 audited financial statements.
15
FORWARD LOOKING STATEMENTS
When used throughout in this form 10QSB filing, the words "believe",
"should", "would", and similar expressions that are not historical are
intended to identify forward-looking statements that involve risks and
uncertainties. Such statements include, without limitation,
expectations with respect to the results for the next fiscal year, the
Company's beliefs and its views about the long term future of the
industry and the Company, its suppliers or its strategic business
partners. In addition to factors that may be described in the Company's
other Securities and Exchange Commission ("SEC") filings, unforeseen
circumstances or events could cause the Company's financial performance
to differ materially from that expressed in any forward-looking
statements made by, or on behalf of, the Company. The Company does not
undertake any responsibility to update the forward-looking statements
contained in this Form 10QSB filing.
Item 3. Controls & Procedures
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Company's Exchange Acts reports is recorded, processed and summarized
and is reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure control procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As of the date of this report, the Company's management, including the
President (principal executive officer) and Chief Financial Officer,
carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Our management, including our Chief
Executive Officer and Chief Financial Officer assessed the effectiveness
of our disclosure controls and procedures, as such terms are defined
under rules 13a-15(e) and 15d-15(e) promulgated under Securities
Exchange Act of 1934, as amended. Based on this assessment, our management
concluded that our disclosure controls and procedures were effective
as of the end period covered by this annual report. There have been no
significant changes in the Company's internal controls or in other
factors, which could significantly affect internal controls subsequent
to the date the Company's management carried out its evaluation.
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PART II
Item 1. 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.
In December 2005, the Company filed a 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 expects to recover fully in this litigation
but cannot determine the possible outcome at this time. The Company
and CVS will be entering into mutual releases and the litigation will
be terminated within 30 days.
17
Item 2. CHANGE IN SECURITIES
Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
Item 5. OTHER INFORMATION
At December 31, 2006, $5,450,000 was borrowed by the Company and
$1,212,949.30 was repaid through convertible debenture conversions
into approximately 173,271,687 common shares leaving a balance owed to
the lender of $4,237,050.70. On January 30th,2007 and February 10th,
2007 the Company borrowed an additional $350,000 dollars respectively,
which increased the total outstanding debt as of the date of this
filing to $4,937,050.70.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, promulgated under
the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, promulgated under the
Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) On 10-7-2005, 10-31-2005, and 11-25-2004 a Form 8-K was filed.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Med Gen, Inc.
(Registrant)
Date: February 15th, 2006 By: /s/Paul B. Kravitz
-----------------------
Paul B. Kravitz
Chief Executive Officer
19