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
-----------------
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
-----------------------------------------------------------
(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 $15,196 39,009
Inventory 95,126
Other current assets 5,700
-------------
Total Current Assets 948,000
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Property and Equipment, net 52,125
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Other Assets
Deferred financing fees 146,263
Deposits and other 199,124
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$ 1,345,512
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LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 1,303,070
Accrued litigation judgment 591,676
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Total Current Liabilities 1,894,746
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Derivative financial instruments 6,628,624
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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, $.001 par value, 2,495,000,000
shares authorized, 289,311,265 shares
issued and outstanding 289,311
Paid in capital 27,510,725
Accumulated (deficit) (35,477,764)
-------------
(7,677,728)
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$ 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
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(Loss) from operations (688,924) (723,411)
----------- -----------
Other (income) expense:
Derivative instrument (income) expense (49,717) 349,401
Interest income (3,888) (6,937)
Interest expense 144,580 85,390
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90,975 427,854
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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.
5
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 performed
consulting services for fees aggregating $125,999 for a single
customer.
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-
6
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 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
7
the Company believes that the sales did not involve a public
offering of its securities and that the Company did comply with
the "safe harbor" exemptions from registration, if such
exemptions were found not to apply, this could have a material
impact on the Company's financial position and results of
operations. In addition, the Company issued shares of common
stock pursuant to Form S-8 registration statements and pursuant
to Regulation S. The Company believes that it complied with the
requirements of Form S-8 and Regulation S in regard to these
issuances, however if it were determined that the Company did not
comply with these provisions this could have a material impact on
the Company's financial position and results of operations.
(6) CALLABLE SECURED CONVERTIBLE NOTES AND DERIVATIVE
INSTRUMENT LIABILITIES
Between March 30, 2005 and August 10, 2006, the Company entered
into a series of eight Securities Purchase Agreements with four
accredited investors ("Note Holders") for the sale of an
aggregate of $5,490,000 of Callable Secured Convertible Notes
(the "Convertible Notes") and warrants to purchase up to
48,240,000 shares of its common stock (the "Warrants"). A ninth
agreement was entered into on January 31, 2007 for the sale of a
further $350,000 of Convertible Notes.
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) a fixed price which, depending on the note,
is between $0.04 and $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. As of December 31,
2006, that average was $0.00403, resulting in an effective
conversion price as of December 31, 2006 of $0.00242. The full
principal amount of the Notes is due upon the occurrence of an
event of default. 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. The Company has granted the Note
Holders a security interest in substantially all of the Company's
assets.
In connection with the sale of the ninth tranche on January 31,
2007, the Company agreed to reduce the conversion price of
tranches two to seven (tranche one has already been fully
converted) from 60% to 50% of the average market price (computed
as described above).
The warrants are exercisable for a period of five or seven years
from the date of issuance and have exercise prices that range
from $0.05 per share to $0.10 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.
Pursuant to Registration Rights Agreements entered into with the
Note Holders, the Company is obligated to register for resale,
within defined time periods, the shares underlying the Warrants
and the shares issuable on conversion of the Convertible Notes.
The terms of the Registration Rights Agreements provide that, in
the event that the required registration statements are not filed
or do not become effective within the required time periods, the
Company is required to pay to the Note Holders as liquidated
8
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. The
Company accrues any penalties incurred to date, together with an
estimate of the penalties that may be incurred in the future,
based on the Company's expectation of when registration
statements will be filed and/or effective and when the shares
obtained can be freely sold without registration under Rule 144.
Because the number of shares that may be required to be issued on
conversion of the Convertible Notes is indeterminate, the
embedded conversion option of the Convertible Notes and the
Warrants are accounted for as derivative instrument liabilities
(see below) in accordance with EITF Issue 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 embedded conversion
option and the Warrants were recorded as derivative instrument
liabilities. The Company is required to re-measure the fair
value of these derivative instrument liabilities at each
reporting period. For option-based derivative instruments, the
Company estimates fair value using the Black-Scholes valuation
model, based on the market price of the common stock on the
valuation 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
instruments, and an expected life equal to the remaining term of
the instruments. 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 discount from the face amount of the Convertible Notes
represented by the value initially 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. In certain instances, the interest
paid to date may equal or exceed the interest accrued to date
under the effective interest method, resulting in the Note having
no carrying value.
A summary of the 8% Callable Secured Convertible Notes at
December 31, 2006, is as follows:
Carrying Value -
Principal Unamortized December 31,
Issue Date Due Date Face Amount Outstanding Discount 2006
- -----------------------------------------------------------------------------
03-30-2005 03-30-2008 $ 740,000 $ 0 $ 0 $ -
05-25-2005 05-25-2008 700,000 227,050 227,050 0
08-23-2005 08-23-2008 100,000 100,000 100,000 0
08-26-2005 08-26-2008 500,000 500,000 500,000 0
10-31-2005 10-31-2008 600,000 600,000 300,129 299,870
02-23-2006 02-23-2009 600,000 600,000 600,000 0
04-21-2006 04-21-2009 750,000 750,000 750,000 0
08-10-2006 08-10-2009 1,500,000 1,500,000 750,000 0
------------
Carrying Value $299,870
------------
9
At December 31, 2006, the following derivative liabilities
related to common stock Warrants and embedded derivative
instruments were outstanding:
Exercise Value-
Price Per Value December 31,
Issue Date Expiry Date Warrants Share Issue Date 2006
- -------------------------------------------------------------------------
03-30-2005 03-30-2010 740,000 $0.085 $673,400 $ 4
05-25-2005 05-25-2010 700,000 0.085 693,000 5
08-23-2005 08-23-2010 100,000 0.085 31,000 1
08-26-2005 08-26-2010 500,000 0.090 145,000 5
10-31-2005 10-31-2010 600,000 0.010 6,000 6
02-23-2006 02-23-2011 600,000 0.050 2,081 51
04-21-2006 04-21-2011 30,000,000 0.050 363,005 2,945
08-10-2006 08-10-2013 15,000,000 0.050 22,196 1,882
------------
Fair value of freestanding derivative $4,899
instrument liabilities for warrants ------------
Face Amount Value -
- Convertible Value - December 31,
Issue Date Expiry Date Notes Issue Date 2006
- -------------------------------------------------------------------------
05-25-2005 05-25-2008 $700,000 9,451,556 275,370
08-23-2005 08-23-2008 $100,000 413,333 129,750
08-26-2005 08-26-2008 $500,000 1,928,889 796,926
10-31-2005 10-31-2008 $500,000 372,000 949,534
02-23-2006 02-23-2009 $600,000 1,487,973 933,359
04-21-2006 04-21-2009 $750,000 1,758,445 1,172,843
08-10-2006 08-10-2009 $1,500,000 1,975,842 2,370,842
----------------
Fair value of bifurcated embedded $6,628,624
derivative instrument liabilities ----------------
associated with the convertible notes
Total derivative financial instruments $6,633,523
================
10
(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.
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.
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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.
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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.
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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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Med Gen, Inc.
(Registrant)
Date: February 26th, 2006 By: /s/Paul B. Kravitz
-----------------------
Paul B. Kravitz
Chief Executive Officer
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