10QSB 1 june07-10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 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 June 30, 2007, 649,438,946 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 - June 30, 2007 (Unaudited) Statements of Operations - Three months ended June 30, 2006 and 2007 and Nine Months ended June 30, 2006 and 2007 (Unaudited) Statements of Cash Flows - Nine months ended June 30, 2006 and 2007 (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 June 30, 2007 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 1,367,266 Accounts receivable, net of reserve of $15,196 24,752 Inventory 101,858 Other current assets 5,700 ------------- Total Current Assets 1,499,576 ------------- Property and Equipment, net 30,191 ------------- Other Assets Deferred financing fees 156,878 Deposits and other 45,089 ------------- $ 1,731,734 ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) Current Liabilities Accounts payable and accrued expenses $ 84,797 Accrued registration rights penalties and accrued interest 1,499,472 Accrued litigation judgment 401,675 ------------- Total Current Liabilities 1,985,944 ------------- Derivative financial instruments 10,193,618 ------------- Convertible debentures 455,856 ------------- 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, 649,438,946 shares issued and outstanding 649,439 Paid in capital 28,572,630 Accumulated (deficit) (40,125,753) ------------- (10,903,684) ------------- $ 1,731,734 ============= See accompanying notes to financial statements. 4 Med Gen, Inc. Statements of Operations For the Three Months and Nine Months Ended June 30, 2006 and 2007 (Unaudited)
Three Months Nine Months -------------------------- -------------------------- 2006 2007 2006 2007 ----------- ----------- ----------- ----------- Revenue Product $ 32,729 $ 39,170 $ 178,697 $ 116,899 Service - 700,000 - 1,300,000 ----------- ----------- ----------- ----------- 32,729 739,170 178,697 1,416,899 ----------- ----------- ----------- ----------- Cost of sales 141,221 113,209 221,050 278,411 ----------- ----------- ----------- ----------- Gross profit (loss) (108,492) 625,961 (42,353) 1,138,488 ----------- ----------- ----------- ----------- Operating expenses: Non cash stock compensation - selling, general and administrative 269,070 319,000 494,420 1,317,800 Selling, general and administrative expenses 503,211 721,321 1,562,198 1,738,648 ----------- ----------- ----------- ----------- 772,281 1,040,321 2,056,618 3,056,448 ----------- ----------- ----------- ----------- (Loss) from operations (880,773) (414,360) (2,098,971) (1,917,960) ----------- ----------- ----------- ----------- Other (income) expense: Interest expense 484,224 133,193 692,190 770,182 Gain on litigation settlement (782,848) - (782,848) - Derivative instruments 372,927 2,447,321 8,659,454 2,999,279 Interest income - (7,645) - (20,405) ----------- ----------- ----------- ----------- 74,303 2,572,869 8,568,796 3,749,056 ----------- ----------- ----------- ----------- (Loss) before income taxes (955,076) (2,987,229) (10,667,767) (5,667,016) Income taxes - - - - ----------- ----------- ----------- ----------- Net (loss) $ (955,076) $ (2,987,229) $(10,667,767) $(5,667,016) =========== ============ ============ =========== Per share information - basic and fully diluted: Weighted average shares outstanding 80,687,925 531,586,317 38,102,335 387,018,666 =========== ============ ============ =========== Net (loss) per share $ (0.01) $ (0.01) $ (0.28) $ (0.01) =========== ============ ============ ===========
See accompanying notes to financial statements. 5 Med Gen, Inc. Statements of Cash Flows For the Nine Months Ended June 30, 2006 and 2007 (Unaudited)
2006 2007 ------------- ------------- Cash flows from operating activities: Net cash (used in) operating activities $ (1,196,513) $ (1,316,742) ------------- ------------- Cash flows from investing activities: Net cash (used in) investing activities (9,174) (15,600) ------------- ------------- Cash flows from financing activities: Proceeds from option exercise 350 - Proceeds from convertible debentures 1,850,000 1,350,000 ------------- ------------- Net cash provided by financing activities 1,850,350 1,350,000 ------------- ------------- Net increase in cash 644,663 17,658 Beginning - cash and cash equivalents - 1,349,608 ------------- ------------- Ending - cash and cash equivalents $ 644,663 $ 1,367,266 ============= =============
See accompanying notes to financial statements. 6 MED GEN, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 2007 (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) Common stock During the period from October 2006 through June 2007, the Company issued an aggregate of 259,400,000 shares of common stock for services rendered to Bran Ltd. a foreign consultant and former lender. The shares were valued at their fair market value of $1,117,800 which was charged to operations during the period. During the period from October 2006 through June 2007 the Company issued an aggregate of 124,295,793 shares of common stock for the conversion $132,237 of the notes described on Note 6. During February 2007 the Company issued 100,000,000 options excersizable at $.004 per share for a period of five years to officers. The fair value of these shares of $200,000 was charged to operations during the period. 7 Stock Options A summary of stock option activity is as follows:
Weighted Weighted Number average average of exercise fair shares price value ------ ----- ----- Balance at September 30, 2006 9,197 $24.50 $0.000 Granted 100,000,000 $0.004 $0.002 Exercised/Forfeited - Balance at ----------- June 30, 2007 100,009,197 $0.004 $0.002 ===========
The following table summarizes information about fixed-price stock options at June 30, 2007:
Outstanding Exercisable ----------- ----------- Weighted Weighted Weighted- Average Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $0.004 100,000,000 4.8 years $00.004 100,000,000 $00.004 $1.010 1,597 0.3 years $20.200 1,597 $20.200 $1.250 5,000 1.3 years $25.000 5,000 $25.000 $1.310 2,600 1.3 years $26.200 2,600 $26.200 ----------- ----------- 100,009,197 100,009,197 =========== ===========
(5) Commitments, Concentrations and Contingencies During the period ended June 30, 2007, the Company performed consulting services for 7 companies for fees aggregating $1,300,000. 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 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 of June 30, 2007, the Company issued an aggregate of 48,293,269 (including the 15,000,000 shares described above) shares of common stock in full settlement of the $200,000 obligation. 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 $401,675 at March 31, 2007. 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 Between March 30, 2005 and June 21, 2007, the Company entered into a series of eleven Securities Purchase Agreements with four accredited investors ("Note Holders") for the sale of an aggregate of $6,840,000 of Callable Secured Convertible Notes (the "Convertible Notes") and warrants to purchase up to 68,240,000 shares of its common stock (the "Warrants"). The first eight tranches of the Convertible Notes bear interest at 8% and have a maturity date of three years from the date of issuance. The ninth, tenth and eleventh tranches of the Convertible Notes, issued on 9 January 30, 2007, February 9, 2007 and June 21, 2007, bear interest at 6% and also mature after three years. The Company is not required to make any principal payments during the term of the Convertible Notes. The first through the eighth tranche of 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) 50% 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. In connection with the sale of the ninth tranche on January 30, 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 ninth, tenth and eleventh tranches of the Convertible Notes, issued on January 30, 2007, February 9, 2007 and June 21, 2007, are convertible into shares of the Company's common stock at the Note Holders' option, at the lower of (i) a fixed price of $0.04 per share or (ii) 60% of the average trading price, computed as described above. As of June 30, 2007, that average was $0.00130, resulting in an effective conversion price as of June 30, 2007 of $0.00078 per share for tranches nine, ten and eleven and $0.00065 per share for all previous tranches. 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. The 68,240,000 warrants issued are exercisable for a period of five or seven years from the date of issuance and have exercise prices that range from $0.009 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 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. In connection with the sale of the ninth tranche on January 30, 2007, the Note Holders agreed to waive all penalties incurred through that date. The Company accrues any further 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 dependent on the price of the Company's common stock and is therefore indeterminate, the embedded 10 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 options 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. A summary of the Callable Secured Convertible Notes at June 30, 2007, is as follows:
Carrying Value - Principal Unamortized June 30, Issue Date Due Date Face Amount Outstanding Discount 2007 --------------------------------------------------------------------------------- 03-30-2005 03-30-2008 $ 740,000 $ 0 $ 0 $ - 05-25-2005 05-25-2008 700,000 99,308 94,800 4,508 08-23-2005 08-23-2008 100,000 100,000 97,438 2,562 08-26-2005 08-26-2008 500,000 500,000 488,361 11,639 10-31-2005 10-31-2008 600,000 600,000 244,878 355,122 02-23-2006 02-23-2009 600,000 600,000 578,712 21,288 04-21-2006 04-21-2009 750,000 750,000 729,573 20,427 08-10-2006 08-10-2009 1,500,000 1,500,000 1,475,663 24,337 01-30-2007 01-30-2010 350,000 350,000 343,365 6,635 02-09-2007 02-09-2010 350,000 350,000 344,162 5,838 06-21-2007 06-21-2010 650,000 650,000 646,500 3,500 ----------- Carrying Value $ 455,856 -----------
11 At June 30, 2007, the following derivative liabilities related to common stock Warrants and embedded derivative instruments were outstanding:
Number of Exercise Value - Value - Issue Date Expiry Date Warrants Price Per Issue Date June 30, Share 2007 --------------------------------------------------------------------- 03-30-2005 03-30-2010 740,000 $0.085 $673,400 $ - 05-25-2005 05-25-2010 700,000 0.085 693,000 - 08-23-2005 08-23-2010 100,000 0.085 31,000 - 08-26-2005 08-26-2010 500,000 0.090 145,000 - 10-31-2005 10-31-2010 600,000 0.100 6,000 - 02-23-2006 02-23-2011 600,000 0.050 2,081 - 04-21-2006 04-21-2011 30,000,000 0.050 363,005 22 08-10-2006 08-10-2013 15,000,000 0.050 22,196 19 01-30-2007 01-30-2014 5,000,000 0.010 8,321 1,121 02-09-2007 02-09-2014 5,000,000 0.010 8,019 1,130 06-21-2007 06-21-2014 10,000,000 0.009 1,945 1,430 ---------- Fair value of freestanding derivative instrument liabilities for warrants $3,722 ----------
Face Amount Value - -Convertible Value - June 30, Issue Date Expiry Date Notes Issue Date 2007 -------------------------------------------------------------------- 05-25-2005 05-25-2008 $700,000 $9,451,556 $ 160,929 08-23-2005 08-23-2008 100,000 413,333 166,888 08-26-2005 08-26-2008 500,000 1,928,889 913,151 10-31-2005 10-31-2008 500,000 372,000 1,115,006 02-23-2006 02-23-2009 600,000 1,487,973 1,156,938 04-21-2006 04-21-2009 750,000 1,758,445 1,471,880 08-10-2006 08-10-2009 1,500,000 1,975,842 3,157,697 01-30-2007 01-30-2010 350,000 512,077 535,363 02-09-2007 02-09-2010 350,000 494,584 533,916 06-21-2007 06-21-2010 650,000 1,047,596 978,128 ----------- Fair value of bifurcated embedded derivative instrument liabilities associated with the convertible notes $10,189,896 ----------- Total derivative financial instruments $10,193,618 ===========
12 (7) Basis of Reporting The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced a significant loss from operations including the settlement of certain litigation. For the period ended June 30, 2007, the Company incurred a net loss of $5,667,016 and has a working capital deficit, an accumulated deficit and a stockholders' deficit of $486,367, $40,125,753 and $10,903,684 at June 30, 2007. The Company's ability to continue as a going concern is contingent upon its ability to secure additional financing, increase ownership equity and attain profitable operations. In addition, the Company's ability to continue as a going concern must be considered in light of the problems, expenses and complications frequently encountered in established markets and the competitive environment in which the Company operates. The Company is pursuing financing for its operations and seeking additional investments. In addition, the Company is seeking to expand its revenue base by adding new customers and increasing its advertising. Failure to secure such financing or to raise additional equity capital and to expand its revenue base may result in the Company depleting its available funds and not being able pay its obligations. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. (8) Subsequent Events Through July 24, 2007, the Company issued 175,309,374 shares of common stock for as follows: Services: 76,000,000 Note conversions: 99,309,374 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended June 30, 2007, Compared with three months ended June 30, 2006, and Nine Months ended June 30, 2007, compared with Nine months ended June 30,2006. GENERAL The Company is now headquartered at 7284 W. Palmetto Park Rd., Suite 207, Boca Raton, Florida 33433 since January 1, 2004. The Company intends to move to a new, larger location by the end of the fiscal year 2006. The Company has elected to outsource the manufacturing of all its products at this time. Results of Operations --------------------- For the quarter ended June 30, 2007, Sales increased to $739,170 from $32,729. This increase is attributable to the Company's providing of financial consulting services which accounted for $700,000 of the quarterly revenue. The Company has advised seven public companies over the last nine months on investment relations and ancillary management techniques. For the Nine months ended June 30, 2007 sales increased to $1,416,899 from $178,697, for the nine months ending June 30, 2006. The increase is attributable to the Company's providing of financial consulting services which accounted for $1,300,000 of the nine months revenue. Sales of the Company's products were down by approximately $60,000 on a comparative nine month basis. This decline was due to market testing of several advertising campaigns which required extensive re-editing and building of the Company's website, which curtailed marketing efforts of the product lines. Gross profit for the third quarter was $625,961 versus $(108,492) for the year ago quarter. The increase was due to minimal expenses related to the financial services revenue. For the nine months ended June 30, 2007, Gross profit was $1,138,488 versus $(42,353) for the nine months ending June 30, 2006. The increase was due to minimal expenses related to the financial services revenue. 14 Operating expenses (selling, general and administrative expenses) for the 2007 quarter increased to $1,040,321 from $772,281, an increase of 25.77%. The increase is due to several factors including, increased legal fees, and consultants fees. Operating expenses for the nine months increased from $2,056,618 to $3,056,448, an increase of 32.82%. The increase for the nine months is attributable to the Company's increased non cash compensation of consultants and increased legal expenses related to foreign trademark registrations and the acquisition of certain www.com website names. Interest expense decreased from $484,224 in the year ago quarter to $133,193 for this quarter. Interest expense for the nine month period increased from $692,190 to $770,182. The increase is directly attributable to the increase of the borrowings by the Company from the four funds. At present the Company has borrowed a gross amount of $6,840,000 through June 30, 2007, and the fund has sold 295,406,300 common shares and reduced the total outstanding debt by $1,072,342 through the date of this filing. Net loss for the 2007 period was $2,987,229 as opposed to a loss of $955,076 in the prior year's quarter. The loss was substantially higher because of much higher charges related to derivative instruments. Net loss for the Nine months was $5,667,016 as compared to $10,667,767 for the nine months a year ago. The loss was substantially lower because of lower charges related to derivative instruments. For the third fiscal quarter the company reported a loss of $0.01 per share versus a loss of $0.01 per share in the year ago quarter. For the third quarter nine month comparison the Company lost $0.01 cents as compared to a loss of $0.28 in the year ago quarter. Liquidity and Capital Resources ------------------------------- Cash on hand at June 30, 2007 was $1,367,266 and the Company had working capital of $(486,368) at June 30, 2007. Net cash used in operating activities was $1,316,742 during the nine months ended June 30, 2007. Net cash used in investing activities was $15,600 during the nine months ended June 30, 2007. Net cash provided by financing activities was $1,350,000 during the nine months ended June 30, 2007, which consisted of borrowings under convertible debentures. The Company has affected a 5% price increase for all of its products. The Company has sufficient cash resources, receivables and cash flow to provide for all general corporate operations through the end of the fiscal year. 15 Net cash provided by financing activities was $1,350,350 during the nine months ended June 30, 2007, which consisted of $1,350,000 from the convertible debentures. The Company has affected a 5% price increase for all of its products. The Company has sufficient cash resources, receivables and cash flow to provide for all general corporate operations in the foreseeable future. Basis of Reporting ------------------ The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced a significant loss from operations including the settlement of certain litigation. For the period ended June 30, 2007, the Company incurred a net loss of $5,667,016 and has an accumulated deficit of $40,125,753 at June 30, 2007. 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. 16 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, 2006 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. 17 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. 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. The litigation was settled whereby each party released the other from its claims. 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 18 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Med Gen, Inc. (Registrant) Date: August 8, 2007 By:/s/Paul B. Kravitz ------------------------ Paul B. Kravitz Chief Executive Officer 19