-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlDx+G+xmCLXbrQ/dqDsSeuIt2cACMnuu9FuOBnj9wBLa80mj6F1sVw8pRZ54ht0 eXtWCEz5AVo0kkISssAqtA== 0000943440-06-000171.txt : 20060516 0000943440-06-000171.hdr.sgml : 20060516 20060516123312 ACCESSION NUMBER: 0000943440-06-000171 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060516 DATE AS OF CHANGE: 20060516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MED GEN INC CENTRAL INDEX KEY: 0001045707 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 650703559 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-29171 FILM NUMBER: 06844830 BUSINESS ADDRESS: STREET 1: 7284 W PALMETTO ROAD STREET 2: SUITE 106 CITY: BOCA RATON STATE: FL ZIP: 33433 BUSINESS PHONE: 5617501100 MAIL ADDRESS: STREET 1: 7284 W PALMETTO ROAD STREET 2: SUITE 106 CITY: BOCA RATON STATE: FL ZIP: 33433 10QSB 1 mar06-10q.txt 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 March 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 ----------- MED GEN, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 65-0703559 ---------------------- ------------------------------- (State of incorporation) (IRS Employer Identification No.) 7284 W. Palmetto Park Road, Suite 207, Boca Raton, FL 33433 ------------------------------------------------------------- (Address of principal executive offices) (561) 750-1100 ------------------------- (Issuer's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12B-2). Yes [ ] No [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of March 31st, 2006, 41,621,727 shares of common stock,.001 par value per share, were outstanding. The Company's stock trades on the OTCBB under the symbol "MGEN". Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] INDEX ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheet - March 31, 2006 (Unaudited) Statements of Operations - Three months ended March 31,2006 and 2005 and Six Months ended March 31,2006 and 2005 (Unaudited) Statements of Cash Flows - Six months ended March 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 3 Med Gen, Inc. Balance Sheet March 31, 2006 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 766,427 Accounts receivable 92,356 Inventory 125,102 Other current assets 5,700 ----------- Total Current Assets 989,585 ----------- Property and Equipment, net 36,467 ----------- Other Assets Deferred loan costs 226,420 Deposits and other 121,673 ----------- 348,093 ----------- $ 1,374,145 =========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) Current Liabilities Accounts payable and accrued expenses $ 2,641,689 ----------- Total Current Liabilities 2,641,689 ----------- Derivative financial instruments 9,858,355 ----------- Convertible debentures 246,887 ----------- Stockholders' (Deficit) Preferred stock, $.001 par value, 5,000,000 shares authorized Series A 8% cumulative, convertible, 1,500,000 shares authorized - Undesignated, 3,500,000 shares authorized - Common stock, $.001 par value, 495,000,000 shares authorized, 41,621,727 shares issued and outstanding 41,622 Paid in capital 24,718,044 Accumulated (deficit) (36,132,452) ----------- (11,372,786) ----------- $ 1,374,145 =========== See accompanying note to the financial statements. 4 Med Gen, Inc. Statements of Operations For the Three Months and Six Months Ended March 31, 2006 and 2005 (Unaudited)
Three Months Six Months -------------------------- -------------------------- 2006 2005 2006 2005 ----------- ----------- ----------- ------------ Net sales $ 45,820 $ 201,471 $ 145,968 $ 483,644 Cost of sales 51,679 71,449 79,829 171,089 ----------- ----------- ----------- ------------ Gross profit (5,859) 130,022 66,139 312,555 ----------- ----------- ----------- ------------ Operating expenses: Selling, general and administrative expenses - Non cash stock compensation 169,650 185,640 225,350 305,640 Selling, general and administrative expenses - Other 353,765 309,479 1,058,987 627,156 ----------- ----------- ----------- ------------ 523,415 495,119 1,284,337 932,796 ----------- ----------- ----------- ------------ (Loss) from operations (529,274) (365,097) (1,218,198) (620,241) ----------- ----------- ----------- ------------ Other (income) expense: Interest expense 67,274 184,806 207,966 189,060 Derivative instrument expense 8,336,244 9,328,111 8,286,527 9,328,111 ----------- ----------- ----------- ------------ 8,403,518 9,512,917 8,494,493 9,517,171 ----------- ----------- ----------- ------------ (Loss) before income taxes (8,932,792) (9,878,014) (9,712,691) (10,137,412) Income taxes - - - - ----------- ----------- ----------- ------------ Net (loss) $(8,932,792) $(9,878,014) $(9,712,691) $(10,137,412) =========== =========== =========== ============= Per share information - basic and fully diluted: Weighted average shares outstanding 27,103,694 1,474,045 16,809,540 1,409,734 =========== =========== =========== ============= Net (loss) per share $ (0.33) $ (6.70) $ (0.58) $ (7.19) =========== =========== =========== =============
See accompanying note to the financial statements. 5 Med Gen, Inc. Statements of Cash Flows For the Six Months Ended March 31, 2006 and 2005 (Unaudited)
2006 2005 ----------- ----------- Cash flows from operating activities: Net cash (used in) operating activities $(1,120,683) $ (566,030) ----------- ----------- Cash flows from investing activities: Accquisition of property and equipment (9,174) - ----------- ----------- Net cash (used in) investing activities (9,174) - ----------- ----------- Cash flows from financing activities: Borrowing on related party notes - 230,000 Proceeds from option exercise 350 101,987 Proceeds from convertible debentures 1,135,000 665,000 ----------- ----------- Net cash provided by financing activities 1,135,350 996,987 ----------- ----------- Net increase in cash 5,493 430,957 Beginning - cash and cash equivalents 760,934 213,708 ----------- ----------- Ending - cash and cash equivalents $ 766,427 $ 644,665 =========== ===========
See accompanying note to the financial statements. 6 MED GEN, INC. NOTES TO FINANCIAL STATEMENTS MARCH 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, 2005, and for the two years then ended, including notes thereto included in the Company's Form 10-KSB. (2) Earnings Per Share The Company calculates net income (loss) per share as required by Statement of Financial Accounting Standards (SFAS) 128, "Earnings per Share." Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods when anti-dilutive commons stock equivalents are not considered in the computation. (3) Inventory Inventory is stated at the lower of cost, determined on a first in, first out basis, or market value. Inventory consists principally of finished goods and packaging materials. (4) Stockholders' (Deficit) During the period from October 2005 through March 2006 the Company issued an aggregate of 12,290,000 shares of common stock for services rendered. The shares were valued at their fair market value of $225,350 which was charged to operations during the period. During the period from October 2005 through March 2006 the Company issued an aggregate of 26,452,950 shares of common stock for the conversion $199,390 of the notes described on Note 6. During December 2005 the Company cancelled an aggregate of 400,000 shares of common stock which it held for issuance to settle the litigation described in Note 5. During the period ended March 31, 2006, the Company adjusted the receivable related to common shares held by an officer from $35,000 to $350 and charged $34,650 to operations related to this repricing. The officer also paid the $350 to the Company. Stock-based Compensation The Company did not issue options during the period ended March 31, 2006. 7 A summary of stock option activity is as follows: Weighted Weighted Number average average of exercise fair shares price value ------- ----- ----- Balance at September 30, 2005 9,197 $24.50 $24.50 Granted - Exercised/Forfeited - ------ Balance at March 31, 2006 9,197 $24.50 $24.50 ====== The following table summarizes information about fixed-price stock options at March 31, 2006:
Outstanding Exercisable ----------- ----------- Weighted Weighted Weighted- Average Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $1.01 1,597 1.0 years $20.20 1,597 $20.20 $1.25 5,000 3.0 years $25.00 100,000 $25.00 $1.31 2,600 3.0 years $26.20 2,600 $26.20 -------- -------- 9,197 9,197 ======== ========
(5) Commitments, Concentrations and Contingencies During the period ended March 31, 2006, the Company derived 19%, 12% and 11% of its total sales from three customers. At March 31, 2006, $18,000 is due from these customers. Litigation During May 2003 Global Healthcare Laboratories, Inc. (Global) made a claim against the Company for breach of contract under a master license agreement. Management contended that Global committed fraud and multiple breaches of the master license agreement and that the claim was without merit. The matter was re-filed for the third time by the plaintiffs after two prior dismissals by the Federal courts for failure to state a cause of action. On August 31, 2004 a verdict was rendered in favor of the plaintiffs and they were awarded a judgment in the sum of $2,501,191. The Company initially intended to appeal the verdict, however on December 3, 2004, the Company and Global settled the matter as follows: 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. 8 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 March 31, 2006, the Company recorded an additional $43,770 of post judgment interest. In December 2005, the Company filed litigation against CVS, Inc. The Company sold CVS in excess of $140,000 dollars of goods and received payment of approximately $26,000 during an 18 month period. CVS terminated the product in late May 2005 and claims the Company owes them $77,000. Management cannot determine the outcome of this litigation at this time. During the periods covered by these financial statements the Company issued shares of common stock and subordinated debentures without registration under the Securities Act of 1933. Although the Company believes that the sales did not involve a public offering of its securities and that the Company did comply with the "safe harbor" exemptions from registration, if such exemptions were found not to apply, this could have a material impact on the Company's financial position and results of operations. In addition, the Company issued shares of common stock pursuant to Form S-8 registration statements and pursuant to Regulation S. The Company believes that it complied with the requirements of Form S-8 and Regulation S in regard to these issuances, however if it were determined that the Company did not comply with these provisions this could have a material impact on the Company's financial position and results of operations. (6) CALLABLE SECURED CONVERTIBLE NOTES AND DERIVATIVE INSTRUMENT LIABILITIES Derivative financial instruments The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including the embedded conversion option, that are required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative instrument, including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. Also, in connection with the sale of convertible debt and equity instruments, the Company may issue freestanding options or warrants that may, depending on their terms, be accounted for as derivative instrument liabilities, rather than as equity. The Company may also issue options or warrants to non- employees in connection with consulting or other services they provide. 9 Certain instruments, including convertible debt and equity instruments and the freestanding options and warrants issued in connection with those convertible instruments, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock by a defined date. If the convertible debt or equity instruments are not considered to be "conventional", then the existence of the potential cash penalties under the related registration rights agreement requires that the embedded conversion option be accounted for as a derivative instrument liability. Similarly, the potential cash penalties under the related registration rights agreement may require us to account for the freestanding options and warrants as derivative financial instrument liabilities, rather than as equity. In addition, when the ability to physical or net-share settle the conversion option or the exercise of the freestanding options or warrants is deemed to be not within the control of the company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative financial instrument liability. Derivative financial instruments are initially measured at their fair value. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re- valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option- based derivative financial instruments, the Company uses the Black-Scholes option pricing model to value the derivative instruments. If freestanding options or warrants were issued in connection with the issuance of convertible debt or equity instruments and will be accounted for as derivative instrument liabilities (rather than as equity), the total proceeds received are first allocated to the fair value of those freestanding instruments. If the freestanding options or warrants are to be accounted for as equity instruments, the proceeds are allocated between the convertible instrument and those derivative equity instruments, based on their relative fair values. When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds allocated to the convertible host instruments are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, usually resulting in those instruments being recorded at a discount from their face amount. To the extent that the fair values of the freestanding and/or bifurcated derivative instrument liabilities exceed the total proceeds received, an immediate charge to income is recognized, in order to initially record the derivative instrument liabilities at their fair value. The discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to income, usually using the effective interest method. When the instrument is convertible preferred stock, the dividends payable are recognized as they accrue and, together with the periodic amortization of the discount, are charged directly to retained earnings. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed periodically, including at the end of each reporting period. If re-classification is required, the fair value of the derivative instrument, as of the determination date, is re-classified. Any previous charges or credits to income for changes in the fair value of the derivative instrument are not reversed. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the balance sheet date. 10 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. 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. 11 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 value of the warrants, amounting to an aggregate of $1,550,481 was recorded as a derivative instrument liability. The fair value of the warrants was determined using the Black-Scholes valuation model, based on the market price of the common stock on the 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 five year 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 December 31, 2005 using the Black-Scholes valuation model based on the market price of the common stock on that date, an expected dividend yield of 0%, a risk-free interest rate based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining term of the Warrants, expected volatility of 50% and an expected life equal to the remaining term of the Warrants. This resulted in a fair market value for the warrants of $17,599 at March 31, 2006. Upon the Company meeting its obligation to register the securities, the fair value of the Warrants on that date will be reclassified to equity. Because the conversion price of the Convertible Notes is not fixed, the Convertible Notes are not "conventional convertible debt" as that term is used in EITF 00-19. Accordingly, because the shares underlying the conversion of the Convertible Notes are subject to the Registration Rights Agreement with the Holders, the Company is required to bifurcate and account separately for the embedded conversion options, together with any other derivative instruments embedded in the Convertible Notes. The conversion option related to each Convertible Note, together with the embedded call options represented by the Note Holders' right to receive interest payments and any registration rights penalties in common stock, were treated, for each Convertible Note, as a single compound derivative instrument, and were bifurcated from the Convertible Note and accounted for separately as a derivative instrument liability (see below). The bifurcated embedded derivative instruments, including the embedded conversion options which were valued using the Black-Scholes valuation model, were recorded at their initial fair value of an aggregate of $22,829,761. Because the initial fair values of these embedded derivative instruments, together with the fair values of the Warrants that were also accounted for as derivative instrument liabilities and recorded at their fair values, exceeded the proceeds received (the face amount of the Convertible Notes), the difference was recorded as an immediate charge to income. The discount from the face amount of the Convertible Notes represented by the value assigned to the Warrants and bifurcated derivative instruments is being amortized over the period to the due date of each Convertible Note, using the effective interest method. 12 A summary of the Callable Secured Convertible Notes and derivative instrument liabilities at March 31, 2006, is as follows: Callable Secured Convertible Notes; 8% per annum; due March 30, 2008 $740,000 Less: face amount of Notes converted (321,714) ---------- 418,286 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (416,810) ---------- $ 1,476 ---------- Callable Secured Convertible Notes; 8% per annum; due May 25, 2008 $700,000 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (700,000) ---------- $ - ---------- Callable Secured Convertible Notes; 8% per annum; due August 23, 2008 $100,000 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (100,000) ---------- $ - ---------- Callable Secured Convertible Notes; 8% per annum; due August 31, 2008 $500,000 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (500,000) ---------- $ - ---------- Callable Secured Convertible Notes; 8% per annum; due October 31, 2008 $600,000 Less: unamortized discount related to warrants and ---------- bifurcated embedded derivative instruments (356,782) ---------- $243,218 ---------- Callable Secured Convertible Notes; 8% per annum; due February 23, 2009 $600,000 Less: unamortized discount related to warrants and bifurcated embedded derivative instruments (597,807) ---------- $ 2,193 ========== Total carrying value at March 31, 2006 $246,887 ========== 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 March 31, 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. 13 At March 31, 2006, the following derivative liabilities related to common stock Warrants and embedded derivative instruments were outstanding: Exercise Value- Price Per Value-Issue March 31, Issue Date Expiry Date Share Date 2006 - --------------------------------------------------------------------------- 03-30-2005 03-30-2010 740,000 warrants $0.085 $673,400$ 3,210 05-25-2005 05-25-2010 700,000 warrants 0.085 693,000 3,211 08-23-2005 08-23-2010 100,000 warrants 0.085 31,000 464 08-26-2005 08-26-2010 500,000 warrants 0.090 145,000 2,339 10-31-2005 10-31-2010 600,000 warrants 0.010 6,000 2,582 02-23-2006 02-23-2009 600,000 warrants 0.050 2,081 5,729 -------- Fair value of freestanding derivative instrument liabilities for warrants $ 17,599 -------- Value- Value-Issue March 31, Issue Date Expiry Date Date 2006 - --------------------------------------------------------------------------- 03-30-2005 03-30-2008 $617,676 convertible notes $9,176,010 $1,433,863 5-25-2005 05-25-2008 $700,000 convertible notes 9,451,556 2,363,512 08-23-2005 08-23-2008 $100,000 convertible notes 413,333 329,356 08-26-2005 08-26-2008 $500,000 convertible notes 1,928,889 1,642,809 10-31-2005 10-31-2008 $500,000 convertible notes 372,000 1,939,909 02-23-2006 02-23-2009$600,000 convertible notes 1,487,973 2,148,906 ---------- Fair value of bifurcated embedded derivative instrument liabilities associated with the above convertible notes $9,858,355 ---------- Total derivative financial instruments $9,875,954 ========== (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 March 31, 2006, the Company incurred a net loss of $9,712,691 and has a working capital deficit, an accumulated deficit and a stockholders' deficit of $1,652,104, $36,132,452 and $11,372,786 at March 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. 14 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 April 21, 2006, the Company sold an additional $750,000 of Convertible Notes and 30,000,000 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. Through May 12, 2006, the Company issued 51,912,950 shares of common stock related to the conversion of an aggregate of $503,191 of the convertible debt described in Note 6. During April 2006 the Company settled the the litigation with Global for an aggregate of $1,250,000 payable $300,000 upon the signing of the agreement and 30 payments of $31,667 due monthly commencing wit the signing of the agreement. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------- Three months ended March 31, 2006 Compared with Three months ended March 31, 2004 and Six Months ended March 31, 2006 Compared with Six months ended March 31, 2005 - --------------------------------------------- GENERAL - ------- The Company is now headquartered at 7284 W. Palmetto Park Rd., Suite 207, Boca Raton, Florida 33433 since January 1,2004.It does not foresee any need to further expand its 2200 sq. ft. corporate facility. The Company has elected to outsource the manufacturing of all its products at this time. Results of Operations - --------------------- For the 2005 second fiscal quarter ended March 31, 2006, Sales decreased 67.26% to $45,820 from $201,471. This decrease was attributable to three distinct factors: A. The Company has significantly reduced its retail distribution and has introduced an entirely new marketing program based on Direct To Consumer ("DTC")technologies which include newly completed websites, a Direct Mail Program and TV infomercial broadcasts. Currently the Company's largest retail customers are Albertson's and Rite Aid's stores. In general, the product's retail distribution has dropped from a peak of 30,000 retail chain locations to approximately 7000 retail chain locations. The Company anticipates that within one or two more quarters there will be a further reduction in its retail distribution of the products, while at the same time the DTC program is taking effect. B. The ongoing litigation settlement negotiation's severely hampered the Company's sales efforts. During this quarter management spent all of its efforts in working out a structured settlement with the judgment creditor. The Company did not advertise or promote the products in any manner. All of the Company's vendor's were reluctant to proceed with any advertising campaigns and selling efforts until the threat of bankruptcy was removed. Sales plummeted because of this factor. Internet vendors did not want to be exposed to potential preference challenges in Federal Bankruptcy Court and declined management's assurances that the Company would eventually re-settle the litigation. C. The Company was unable to find competent outsourcing for its internet-direct to consumer marketing programs. For the Six months ended March 31, 2006 sales decreased 69.82% to $145,968 from $483,644,for the six months ending March 31, 2005. The decrease in sales is attributable to the factors outlined in paragraphs A,B,and C above Gross profit for the second quarter was <$5,859> versus $130,022 for the year ago quarter, a decrease of 105.85%. The decrease was due the large decline in sales for the quarter and the return of expired merchandise from many retail vendors who dropped the product's. For the six months ended March 31, 2006 Gross profit was $66,139 versus $312,555 for the six months ending March 31, 2005, a decrease of 78.84%. This decrease was due the large decline in sales for the quarter and the return of expired merchandise from many retail vendors. Gross profit margins for the quarter were non existent and down from 64.62% in the previous year ago quarter. The decrease was due to the destruction of expired product and increased costs of manufacturing. Gross profit margins for the Six Months ending March 31,2006 decreased to 54.69% of sales down from 64.62% for the six months ending March 31, 2005. The decrease was due to increased costs of manufacturing and a decline in sales. Operating expenses (selling, general and administrative expenses) increased to $353,765 from $309,479, an increase of 12.52%. The small increase is due to increased legal fees incurred in the settlement negotiations. Management does not believe these costs will be recurring in future quarters. Operating expenses for the six months increased from $627,156 to $1,058,987, an increase of 41.78%. The increase for the six months is attributable to the following; $78,000 for legal fees while negotiating the settlement agreement,$180,000 was spent in advertising,$52,000 for internet websites, $40,000 for consulting and $75,000 commissions and fees related to the new loans during this period. 16 Operating loss was $529,274 as opposed to a loss of $365,097 in the prior year's quarter. The loss was higher because of greatly reduced sales in the quarter as compared to a year ago. Overall operating expenses on a comparative basis were about the same. Operating loss for the Six months was $1,218,198 as compared to $620,241 for the six months a year ago. The loss was greater As sales drastically declined and costs increased. Interest expense decreased from $184,806 in the year ago quarter to $67,274 for this quarter. The Company did not have as much interest due this quarter as a year ago and the decline also relates to factors in derivative accounting more fully explained in the "notes to financials". Interest expense increased for the six month period from $189,060 to $207,966.The increase is directly attributable to more borrowings from the secured lender For the second fiscal quarter the company reported a loss of $0.33 per share versus a loss of $6.70 per share in the year ago quarter. For the six month period comparison the Company lost $0.58 during 2006 as compared to a loss of $7.19 during 2005. Liquidity and Capital Resources - ------------------------------- Cash on hand at March 31, 2006, was $766,427 and the Company had A working capital deficit of $1,652,104 Net cash used in operating activities was $1,120,683 during the Six months ended March 31, 2006. Net cash used in investing activities was $9174 during the six months ended March 31, 2006. 17 Net cash provided by financing activities was $1,135,350 during the Six months ended March 31, 2006, which consisted of $350.00 from the proceeds from the sale of management options and $1,135,000 of net draw downs on the credit facility. The Company has affected a 10% price increase for all of its products. The Company believes it has sufficient cash resources, and cash flow to provide for all general corporate operations in the foreseeable future, but there can be no assurance of this. The Company intends to drawdown an additional 750,000 dollars in August 2006 as part of its credit facility. 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 March 31, 2006, the Company incurred a net loss of $9,712,691 and has an accumulated deficit of $36,132,452 at March 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. 18 CRITICAL ACCOUNTING POLICIES - ---------------------------- Our discussion of results of operations and financial condition relies on our consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. We believe that investors need to be aware of these policies and how they impact our financial reporting to gain a more complete understanding of our financial statements as a whole, as well as our related discussion and analysis presented herein. While we believe that these accounting policies are grounded on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the notes to our financial statements for the year ended September 30, 2005 are those that depend most heavily on these judgments and estimates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - ----------------------------------------- Recently issued accounting pronouncements and their effect on us Are discussed in the notes to the financial statements in our September 30, 2005 audited financial statements. FORWARD LOOKING STATEMENTS - -------------------------- When used throughout in this form 10QSB filing, the words "believe", "should", "would", and similar expressions that are not historical are intended to identify forward-looking statements that involve risks and uncertainties. Such statements include, without limitation, expectations with respect to the results for the next fiscal year, the Company's beliefs and its views about the long term future of the industry and the Company, its suppliers or its strategic business partners. In addition to factors that may be described in the Company's other Securities and Exchange Commission ("SEC") filings, unforeseen circumstances or events could cause the Company's financial performance to differ materially from that expressed in any forward-looking statements made by, or on behalf of, the Company. The Company does not undertake any responsibility to update the forward-looking statements contained in this Form 10QSB filing. 19 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. 20 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 in the Company's most recent proxy filing and attached as an Exhibit for shareholder perusal. Item 2. CHANGE IN SECURITIES Not Applicable. Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 17th, 2006 the Company filed its Definitive Proxy Statement requesting an increase of the authorized shares from 500,000,000 to 2,500,000,000. The results of the proxy vote which are scheduled for May 29th, 2006 may be extended, if necessary to comply with any additional SEC requirements. The results of the proxy vote will be disclosed on an 8-K filing. Item 5. OTHER INFORMATION During the last six months the secured lender has converted $199,390 dollars of outstanding convertible debentures into a total of 26,462,950 common shares. 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 21 - ------------------------------------------------------------------- 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: May 15, 2006 By: /s/Paul B. Kravitz -------------------------------- Paul B. Kravitz Chief Executive Officer 22 EX-31.1 2 mar06q-ex311.txt [EXHIBIT 31.1] CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Paul Kravitz, certify that: 1. I have reviewed this annual report on Form 10-QSB of Med Gen, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15th, 2006 By: /s/Paul Kravitz ---------------------------- Paul Kravitz Chief Executive Officer EX-31.2 3 mar06q-ex312.txt [EXHIBIT 31.2] CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Jack Chien, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Med Gen, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15th, 2006 By: /s/Jack Chien ------------------------------------ Jack Chien /Chief Financial Officer, and Principal Accounting Officer EX-32.1 4 mar06q-ex321.txt [Exhibit 32.1] CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Med Gen, Inc. (the "Company") on Form 10-QSB for the period ended March 31st 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report'), I, Jack Chien, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 15th, 2006 /s/ Paul B. Kravitz --------------------------- Paul B. Kravitz, Chief Executive Officer EX-32.2 5 mar06q-ex322.txt [Exhibit 32.2] CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Med Gen, Inc. (the "Company") on Form 10-QSB for the period ended March 31st, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report'), I, Paul B. Kravitz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 15th, 2006 /s/ Jack Chien ----------------------- Jack Chien, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----