10QSB 1 dec04-10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB 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, 2004 ----------------- Commission file number 000-29171 MED GEN, INC. ----------------------------------------------------------------- [Exact name of small business issuer 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, Par Value $.001 per share 26,936,447 Shares outstanding as of December 31, 2004. The Company's stock trades on the OTCBB under the symbol "MDGN". Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] INDEX ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheet - December 31, 2004 (Unaudited) Statements of Operations - Three months ended December 31, 2004 and 2003 (Unaudited). Statements of Cash Flows - Three months ended December 31, 2004 and 2003 (Unaudited). Notes to Financial Statements (Unaudited). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Controls and Procedures PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 MED GEN, INC. PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Med Gen, Inc. Balance Sheet December 31, 2004 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 20,194 Accounts receivable, net of reserve of $10,000 339,451 Inventory 125,359 Other current assets 5,700 ----------- Total Current Assets 490,704 ----------- Property and Equipment, net 49,876 ----------- Other Assets Deposits and other 33,563 ----------- $ 574,143 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 31,520 Accrued expenses 150,000 Notes payable - related parties 331,000 ----------- Total Current Liabilities 512,520 ----------- 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, 50,000,000 shares authorized, 26,936,447 shares issued and outstanding 26,936 Paid in capital 14,702,348 Accumulated (deficit) (14,464,261) ----------- 265,023 Receivable for common stock (203,400) ----------- 61,623 ----------- $ 574,143 =========== See accompanying notes to the financial statements. 4 Med Gen, Inc. Statements of Operations For the Three Months Ended December 31, 2004 and 2003 (Unaudited)
2004 2003 ----------- ----------- Net Sales $ 282,173 $ 267,264 Cost of Sales 99,640 104,106 ----------- ----------- Gross profit 182,533 163,158 ----------- ----------- Operating expenses: Non-cash stock compensation 120,000 87,000 Selling, general and administrative expenses 317,677 485,077 ----------- ----------- 437,677 572,077 ----------- ----------- (Loss) from operations (255,144) (408,919) ----------- ----------- Other expenses: Interest expense 4,254 48,740 Other expenses - 6,250 ----------- ----------- 4,254 54,990 ----------- ----------- (Loss) before income taxes (259,398) (463,909) Income taxes - - ----------- ----------- Net (loss) $ (259,398) $ (463,909) =========== =========== Per share information - basic and fully diluted: Weighted average shares outstanding 26,936,447 3,983,655 =========== =========== Net income (loss) per share $ (0.01) $ (0.12) =========== ===========
See accompanying notes to the financial statements. 5 Med Gen, Inc. Statements of Cash Flows For the Three Months Ended December 31, 2004 and 2003 (Unaudited)
2004 2003 ----------- ----------- Cash flows from operating activities: Net cash (used in) operating activities $ (400,741) $ (225,079) ----------- ----------- Cash flows from investing activities: Net cash (used in) investing activities - - ----------- ----------- Cash flows from financing activities: Borrowing (repayment) of related party notes, net 156,000 (200,000) Proceeds from option exercise 51,227 369,603 ----------- ----------- Net cash provided by financing activities 207,227 169,603 ----------- ----------- Net (decrease) in cash (193,514) (55,476) Beginning - cash and cash equivalents 213,708 90,791 ----------- ----------- Ending - cash and cash equivalents $ 20,194 $ 35,315 =========== ===========
6 MED GEN, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2004 (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, 2004 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) Notes Payable - Related Parties During the period ended December 31, 2004, the Company repaid $21,000 in notes due to related parties and borrowed an additional $177,000 from related parties with interest at 8% per annum. The balance due this lender was $331,000 at December 31, 2004 (see Note 9). (5) Income Taxes The Company accounts for income taxes under SFAS 109, "Accounting for Income Taxes", 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. The Company's deferred tax asset of approximately $2,000,000 resulting from net operating loss carryforwards aggregating approximately $6,000,000 is fully offset by a valuation allowance. The Company has recorded a valuation allowance to state its deferred tax assets at estimated net realizable value due to the uncertainty related to realization of these assets through future taxable income. 7 The provision for income taxes differs from the amount computed by applying the statutory rate of 34% to income before income taxes due to the effect of the net operating loss. The principal difference between the accumulated deficit for income tax purposes and for financial reporting purposes results from non-cash stock compensation being charged to operations for financial reporting purposes. (6) Stockholders' Equity During October 2004 the Company issued 2,000,000 shares of common stock to an officer pursuant to the exercise of options granted in October 2004 at $.10 per share. The fair value of the shares issued was $.16 per share. The difference between the fair value and the exercise price of $120,000 has been charged to operations during the period ended December 31, 2004. In addition, the Company recorded a receivable for common stock of $200,000 for the amount due for the shares. Stock-based Compensation During the period ended December 31, 2004, the Company issued options to purchase shares of common stock to certain officers. Compensation costs charged to operations aggregated $120,000 for these options. 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 period ended December 31, 2004: expected life of options of 5 years, expected volatility of 121%, risk-free interest rate of 3% and no dividend yield. The weighted average fair value at the date of grant for options granted during the period ended December 31, 2004, approximated $.14 per option. These results may not be representative of those to be expected in future years. 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: Net (loss) As reported $(259,398) Proforma $(419,398) Basic and diluted (loss) per share As reported $(.01) Proforma $(.02) 8 A summary of stock option activity is as follows:
Weighted Weighted Number average average of exercise fair shares price value --------- -------- -------- Balance at September 30, 2004 934,112 Granted 2,000,000 $1.23 $1.23 Exercised/Forfeited (2,750,260) $1.23 $1.23 --------- Balance at December 31, 2004 183,852 ---------
The following table summarizes information about fixed-price stock options at December 31, 2004:
Outstanding Exercisable ----------- ----------- Weighted Weighted Weighted- Average Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price -------- ----------- ----------- --------- ----------- -------- $1.01 31,852 2.0 years $1.01 31,852 $1.01 $1.25 100,000 5.0 years $1.25 100,000 $1.25 $1.31 52,000 5.0 years $1.31 52,000 $1.31 ----------- ----------- 183,852 183,852 =========== ===========
(7) Commitments, Concentrations and Contingencies During the period ended December 31, 2004 the Company derived 43%, 14%, 13% and 10% of its total sales from four customers. At December 31, 2004, $147,344 is due from these customers. 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. 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. Through December 31, 2004, the Company made payments aggregating $50,000 to Global. 9 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. (8) 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, 2004, the Company incurred a net loss of $259,398 and has an accumulated deficit of $14,464,261 at December 31, 2004. 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. (9) Subsequent Events During January 2005 the Company agreed to issue 2,000,000 shares of common stock to the related party lender described in Note 4, for future loans to be made to the Company pursuant to a line of credit. The fair value of these shares will be charged to operations as additional interest on the loans. In addition, the Company agreed to issue 200,000 shares of common stock to a consultant. The fair value of these shares will be charged to operations. During January 2005 the Company repaid $35,000 pursuant to a note to the related party described in Note 4. During January 2005 the Company filed a Form SB-2 registration statement covering the 8,000,000 common shares described in Note 7 and the 2,200,000 common shares described above. During January 2005 the Company entered into a professional services agreement with an entity acting as an independent contractor to distribute its products in the United States. As compensation the Company agreed to pay a commission of 10 the greater of 5% of invoiced shipments or $105,000 for the year ended December 31, 2005 and $144,000 for each of the years ended December 31, 2006 and 2007. The agreement may be terminated by either party for any reason within 6 months of the date of the agreement. Thereafter the Company may terminate the agreement with 6 months notice. During January 2005 the Company entered into a one year consulting agreement with an entity to assist the Company with its business plan and introduce the Company to potential investors. Should the Company decide to enter into a funding transaction as a result of an introduction by the consultant the consultant shall designate a registered broker Dealer to complete the transaction. The consultant shall receive a cash fee of 10% of the funds procured and warrants to purchase common stock equal to 10% of the toal shares issued for a period of 5 years at 105% of the price at which the shares are sold. The shares underlying the warrants are subject to certain registration rights. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------- Three months ended December 31, 2004 Compared with three months ended December 31, 2003 -------------------------------------------------- GENERAL ------- The Company is now headquartered at 7284 W. Palmetto Park Rd., Suite 207, Boca Raton, Florida 33433 since January 1,2004. It does not foresee any need to further expand its 2200 sq.ft. corporate facility. The Company has elected to outsource the manufacturing of all its products at this time. Results of Operations --------------------- For the 2004 first fiscal quarter ended December 31, 2004, Sales increased 5.58% to $282,173 from $267,264.This increase was due to an advertising campaign to compete with other products in the same marketplace. Gross profit for the first quarter was $182,533 versus $163,158 for the year ago quarter, an increase of 11.87%. The increase was due to an increase in the wholesale price of the products. Gross profit margins for the quarter increased to 64.68% of sales up from 61.04% in the previous year ago quarter. The increase was due to lowered manufacturing costs associated with the Company's products Operating expenses (selling, general and administrative expenses) decreased to $317,677 from $485,077,a decrease of 34.51%. The decrease is due to several factors including, decreased legal fees and consultants fees and overall operating costs. Operating loss was $255,144 as opposed to a loss of $408,919 in the prior year's quarter. Interest expense decreased from $48,740 in the year ago quarter to $4,254 for this quarter. This was due to reducing most of the secured lender's outstanding debt. For the first fiscal quarter the company reported a loss of $0.01 per share versus a loss of $0.12 per share in the year ago quarter. Liquidity and Capital Resources ------------------------------- Cash on hand at December 31, 2004 was $20,194 and the Company had a working capital deficit of $21,816 at December 31, 2004. Net cash used in operating activities was $400,741 during the quarter ended December 31, 2004. Net cash used in investing activities was $-0- during the quarter ended December 31, 2004. 12 Net cash provided by financing activities was $207,227 during the quarter ended December 31, 2004, which consisted of $51,227 from the proceeds from the sale of management options and $156,000 of net draw downs on the credit facility. The Company expects to introduce at least one new product into retail stores in the upcoming quarter. Further, the Company has affected a 5% price increase for all of its products. The Company has also 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 foreseeable future. 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, 2004 are those that depend most heavily on these judgments and estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS ----------------------------------------- Recently issued accounting pronouncements and their effect on us are discussed in the notes to the financial statements in our September 30, 2004 audited financial statements. FORWARD LOOKING STATEMENTS -------------------------- When used throughout in this form 10QSB filing, the words "believe", "should", "would", and similar expressions that are not historical are intended to identify forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, expectations with respect to the results for the next fiscal year, the Company's beliefs and its views about the long term future of the industry and the Company, its suppliers or its strategic business partners. In addition to factors that may be described in the Company's other Securities and Exchange Commission ("SEC") filings, unforeseen circumstances or events could cause the Company's financial performance to differ materially from that expressed in any forward-looking statements made by, or on behalf of, the Company. The Company does not undertake any responsibility to update the forward-looking statements contained in this Form 10QSB filing. Item 3. Controls & Procedures As required by Rule 13a-15 under the Exchange Act, as of the date of the filing of this report , the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's President, Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Company's President, Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Acts reports is recorded, processed and summarized and is reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure control procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 13 PART II ------- Item 1. LEGAL PROCEEDINGS All legal proceedings disclosed in the prior filings have been settled by the Company. The terms of the settlement were disclosed on From 8-K as filed on December 12, 2004. 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 Not Applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities Exchange Act of 1934, as amended 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities Exchange Act of 1934, as amended 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) On 12-13-2004 a Form 8-K was filed. --------------------------------------------------------------------------- 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: January 28, 2005 By: /s/Paul B. Kravitz -------------------------------- Paul B. Kravitz Chief Executive Officer 14