UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2003 Commission File No. 0-23016
Medifast, Inc.
(Exact name of small business issuer in its charter)
DELAWARE 13-3714405
-------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11445 CRONHILL DRIVE, OWINGS MILLS, MD 21117
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(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (410) 581-8042
----------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 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
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NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK, AS OF MARCH 31,
2003: 8,904,644 SHARES
----------------
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
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 Quarterly Report of Medifast, Inc. (the
"Company") on Form 10-QSB for the quarter ended March 31, 2003 (the "Report")
filed with the Securities and Exchange Commission, I, Bradley T. MacDonald,
Chairman, President and 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 Company's 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 Form 10-QSB fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
May 5, 2003 /S/ BRADLEY T. MACDONALD
----------------------------
Bradley T. MacDonald
Chairman, President and
Chief Executive Officer
Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
March 31, 2003 (unaudited) and December 31, 2002........... 3
Condensed Consolidated Statement of Operations -
Three Months Ended March 31, 2003 and 2002 (unaudited)..... 4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2003 and 2002(unaudited)...... 5
Notes to Condensed Consolidated Financial Statements........... 6
Management Discussion and Analysis of Financial Condition
and Results of Operations.................................. 7
PART II
Signature Page................................................. 11
2
MEDIFAST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
(Unaudited)
ASSETS
Current assets:
Cash .................................................................. $1,914,000 $837,000
Certificates of Deposit................................................ 419,000 418,000
Accounts receivable, net of allowance.................................. 224,000 284,000
Merchandise inventory.................................................. 1,056,000 1,259,000
Prepaid expenses and other current assets.............................. 342,000 249,000
Deferred tax asset..................................................... 1,197,000 1,079,000
------------ ---------------
Total Current Assets ............................................. 5,152,000 4,126,000
Property, plant and equipment - net........................................ 4,669,000 4,498,000
Trademarks and Intangibles................................................. 677,000 608,000
Other assets............................................................... 90,000 1,000
Deferred tax asset......................................................... 0 655,000
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TOTAL ASSETS...................................................... $10,588,000 $9,888,000
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations ........................... $293,000 $304,000
Line of Credit......................................................... 122,000 91,000
Dividends payable...................................................... 32,000 25,000
Accounts payable and accrued expenses.................................. 762,000 1,189,000
------------ ---------------
Total Current Liabilities.............................................. 1,209,000 1,609,000
Long-term obligations less current maturities.......................... 2,790,000 2,701,000
------------ ---------------
Total Liabilities................................................. 3,999,000 4,310,000
------------ ---------------
Stockholders' Equity:
Series B Redeemable Convertible Preferred Stock; stated value $1.00;
600,000 shares authorized; 478,734 and 521,290 shares issued
and outstanding, respectively.......................................... 479,000 521,000
Series C Convertible Preferred Stock; stated value $1.00; 1,015,000 shares
authorized; 427,000 and 985,000 shares issued
and outstanding, respectively.......................................... 427,000 985,000
Common stock; par value $.001 per share; 15,000,000 authorized;
8,904,644 and 7,204,693 shares issued and outstanding, respectively ... 9,000 7,000
Additional paid-in capital................................................. 10,471,000 9,613,000
Accumulated deficit........................................................ (4,536,000) (5,381,000)
------------ ---------------
6,850,000 5,745,000
Less Cost of Common Stock in treasury; 45,713 and 30,178
shares, respectively................................................... (261,000) (167,000)
------------ ---------------
Total Stockholder's Equity................................................. 6,589,000 5,578,000
------------ ---------------
TOTAL LIABILITIES & STOCKHOLDER EQUITY .................................... $10,588,000 $9,888,000
============ ===============
3
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended March 31,
2003 2002
(Unaudited) (Unaudited)
Revenue ......................................... $6,347,000 $1,772,000
Cost of sales..................................... 1,683,000 659,000
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Gross Profit...................................... 4,664,000 1,113,000
Selling, general, and administration.............. 3,220,000 811,000
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Income from operations............................ 1,444,000 302,000
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Other income/(expenses)
Interest expense.............................. (33,000) (41,000)
Other income (expense)........................ (10,000) 1,000
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Income before provision for income taxes.......... 1,401,000 262,000
Provision for income tax benefit (expense)........ (537,000) 0
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Net income........................................ 864,000 262,000
Less: Stock dividend on preferred stock........ 19,000 24,000
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Net income attributable to common shareholders.... $845,000 $238,000
========== ==========
Basic earnings per share.......................... $.11 $.04
Diluted earnings per share........................ $.08 $.03
Weighted average shares outstanding -
Basic......................................... 7,940,238 6,564,531
Diluted....................................... 10,240,712 8,463,185
4
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended March 31,
2003 2002
(Unaudited) (Unaudited)
Cash Flow from Operating Activities:
Net income....................................................... $864,000 $262,000
Depreciation & amortization................................. 101,000 52,000
Issuance of stock for services ............................. 24,000 24,000
Deferred Income Taxes....................................... 537,000 0
Changes in assets and liabilities:
Decrease in accounts receivable............................. 60,000 44,000
(Increase)/Decrease in inventory............................ 203,000 (33,000)
(Increase) in prepaid expenses & other current assets....... (93,000) (1,000)
(Increase)/Decrease in other assets......................... (89,000) 34,000
(Decrease)/Increase in A/P and accrued expenses............. (420,000) 265,000
----------- ----------
Net Cash provided by Operating Activities........................ 1,187,000 647,000
----------- ----------
Cash Flow from Investing Activities
Purchase of equipment / Leasehold / Improvements............ (255,000) (27,000)
Purchase of intangible assets............................... (86,000) 0
----------- ----------
Total Cash used in Investing Activities..................... (341,000) (27,000)
----------- ----------
Cash Flow from Financing Activities:
Increase in credit line (net).................................... 31,000 0
Repayment of capital lease obligations........................... 0 (3,000)
Redemption Series "A"............................................ 0 (75,000)
Issuance of Series "C" Convertible Preferred..................... 0 102,000
Issuance of Common Stock......................................... 139,000 0
Proceeds from long term debt..................................... 200,000 0
Payment of Debt.................................................. (127,000) (22,000)
Dividends paid on preferred stock................................ (12,000) 0
----------- ----------
Net Cash provided by Financing Activities: ................. 231,000 2,000
----------- ----------
NET INCREASE/(DECREASE) IN CASH...................................... 1,077,000 622,000
Cash and cash equivalents at beginning of period..................... 837,000 270,000
----------- ----------
Cash and cash equivalents at end of period........................... $1,914,000 $892,000
=========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest.................................................... $33,000 $37,000
Income Taxes................................................ 0 0
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Total............................................................ $33,000 $37,000
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
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1. Basis of Presentation
The information contained herein with respect to the three month periods ended
March 31, 2003 and 2002 has been reviewed by the independent auditors and was
prepared in conformity with generally accepted accounting principles for interim
financial information and instructions for Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, the condensed consolidated financial statements do
not include information and footnotes required by generally accepted accounting
principles. Included are the adjustments, which in the opinion of management are
necessary for a fair presentation of the financial information for the
three-month periods ended March 31, 2003 and 2002. The results are not
necessarily indicative of results to be expected for the year.
2. Income Per Common Share
Basic income per share is calculated by dividing net income attributable to
common stockholders by the weighted average number of outstanding common shares
during the year. Basic income per share excludes any dilutive effects of
options, warrants and other stock-based compensation.
3. Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123"). The provisions of SFAS
123 allow companies to either expense the estimated value of stock options or to
continue to follow the intrinsic value method set forth in Accounting Principles
Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
but disclose the pro forma effects on net income (loss) had the fair value of
the options been expensed. The Company has elected to continue to apply APB 25
in accounting for its employee stock option incentive plans. Under APB 25, where
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation is
recognized.
If compensation expense for the Company's stock-based compensation plans had
been determined consistent with SFAS 123, the Company's net income per share
including pro forma results would have been the amounts indicated below:
THREE MONTHS ENDED MARCH 31,
---------------------------
2003 2002
------------ -----------
Net Income:
As reported $864,000 $262,000
Total stock based employee compensation
Expense determined under fair value based
Method for all awards, net of related tax effects 0 (1,000)
------------ -----------
Pro forma $864,000 $261,000
Net Income per share:
As reported:
Basic 0.11 0.04
Diluted 0.08 0.03
Pro forma:
Basic 0.11 0.04
Diluted 0.08 0.03
6
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002
First quarter revenue for 2003 of 6,347,000 increased by $4,575,000 (258%) from
$1,772,000 for the first quarter of 2002. The Company initiated the following
sales and marketing programs that have significantly boosted revenue and
profits: the Company's robust and aggressive advertising program in national
print magazines and newspapers such as Parade, the continued growth and success
of the Take Shape for Life Health Network, and export sales of the Company's
Take Shape/Dr. Diet to its Asian distributor. Cost of sales for the first
quarter of 2003 increased by $1,024,000 (155%) from 2002. Gross profit for the
first three months of 2003 increased by $3,551,000 (319%) from 2002 due to the
growth of the lifestyles program and the sales of higher margin disease
management products, such as Medifast Plus for Diabetics, Joint Health, and
Women's Health. Selling, general and administrative expenses for the first
quarter of 2003 increased $2,409,000 (297%) over the same quarter of 2002 due to
increased advertising, expansion of its sales organization, product development,
customer service improvements, and infrastructure costs. Despite the increases,
the Company maintained overall better cost controls.
Income from operations was $1,444,000 for the first quarter of 2003 which
increased by 378% or $1,142,000 more than the same period last year. Income
before income taxes was $1,401,000, ($0.14 per share on a fully diluted basis)
an increase of $1,139,000 or 435% or $0.11 a share on a fully diluted basis.
Available cash and Certificates of Deposit's on the balance sheet has increased
by 86% to 2.3 million in the first quarter and is attributable to increased
revenues as a result of advertising and promotional programs of Medifast(R)
disease management products, the expansion of its lifestyles customers and
physicians, increased international sales and the robust growth of its Take
Shape for Life division.
Net income for the three month period is $864,000 which is $602,000 more than
the $262,000 income for the first quarter of 2002. Net income attributable to
common shareholders increased despite the fact that the Company is currently
accruing federal income taxes, whereas last year the Company did not accrue
Federal income Taxes because of its net loss carryforwards. The Company grew
fully diluted earnings per share from $0.03 in 2002 to $0.08 in 2003, an
increase of 166% with a planned dilution of 1.8 million shares, primarily from
conversions of preferred stock which increased the trading float by 1.5 million
shares. The Company has made substantial investments in growing revenues during
the 1st Quarter that will have a recurring impact on improving revenues, cash
flow and operating results in the future.
7
SEASONALITY
-----------
The Company's weight management products and programs are subject to
seasonality. Traditionally the holiday season in November/December of each year
is considered poor for diet control products and services. January and February
generally show increases in sales, as these months are considered the
commencement of the "diet season."
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On February 24, 2003, the Company's wholly owned subsidiary, Jason
Pharmaceuticals was granted a five-year $200,000 development loan at a 3%
interest rate on favorable terms from Baltimore County. The loan assisted in the
purchase of a nutritional bar line and will assist the supporting hardware and
software, marketing materials and tools needed to increase the nutritional bar
business. These improvements to the manufacturing facility and the overall
Company infrastructure will allow for expediential growth while supporting the
current business plan and securing the Company's future in a state of the art
food and pharmaceutical grade manufacturing facility.
In its first international venture, the Company recently began shipping its
clinically proven Take Shape/Dr. Diet product to Asia, through its strategic
partnership with Elegant World SDN BHD (Elken) of Malaysia. Through a joint
venture agreement signed in September 2002, Medifast's Take Shape/Dr, Diet line
of weight management products was launched throughout the Asian market in March
2003. Take Shape/Dr. Diet, was clinically tested by a National Institute of
Health study conducted by the University of Vermont. Patients lost 45 - 65
pounds on these products based on published study results. The strategic
partnership between Medifast and Elken should produce over $2 million in revenue
for 2003.
In the first quarter 2003, Jason Enterprises began importing health related
accessories such as a body composition analyzer, digital ear thermometer, touch
screen blood pressure monitor and a digital scale from the Far East to Support
Medifast's weight management business. The new business entity will market Take
Shape clinical support accessories to physicians and patients using the CEO's
import contacts developed over 20 years of doing business in Asia.
In January 2003, Jason Enterprises, Inc., a wholly owned subsidiary of Medifast,
Inc., and Health Care Products, a division of Hi Tech Pharmacal, signed a joint
venture and distribution agreement to develop and produce retail diabetic meal
replacement products for their extensive quality line of Diabetic products under
the DiabetiTrim brand. This agreement will be instrumental in providing both
Medifast and Health Care Products with an expanded reach to diabetic customers
nationwide with its clinically tested line of diabetic products.
On March 20, 2003, the Company's wholly owned subsidiary, Take Shape for Life,
signed a marketing agreement with NovaCare Rehabilitation, a division of Select
Medical Corporation. The initial agreement, which spans 18 months, will allow
Medifast to market its products through custom created retail kiosks in 200 of
NovaCare's eastern region clinics. Medifast expects the Agreement to generate
significant revenues and could result in the expansion of the program into an
additional 500 clinics.
8
The Company had stockholders' equity of $6,589,000 and working capital of
$3,943,000 on March 31, 2003 compared with $2,936,000 and $1,869,000 at March
31, 2002, respectively. The $3,653,000 net increase in stockholder's equity and
the $2,074,000 net increase in working capital reflects the profits and equity
contributions in the first quarter from operations. The Company has sufficient
cash flow from operations to fund its current business plan.
INFLATION
---------
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
-------------------------
LITIGATION: The Company is a defendant in a lawsuit with its competitor Robards,
Inc. / Food Sciences Corporation, Inc. pertaining to what Robards, Inc. / Food
Sciences Corporation alleged were slanderous and untrue statements made to its
customers. The Company thru local counsel filed a Counterclaim and Third Party
Claim, alleging conspiracy to damage the Company business and trademarks,
trademark infringement, violations of the Millennium Copyright Act, business
defamation, as well as other claims. Robards and Medifast both claim damages in
excess of $75,000. The Company also claims that selected third party defendants
also conspired to damage the reputation and quality of the Medifast brand. The
Company intends to vigorously defend its reputation of ethical integrity
(integrity of its products and formulas) and its trademarks.
EARNINGS PER SHARE: The Company follows the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The calculation of basic and
diluted earnings per share ("EPS") is reflected on the accompanying Consolidated
Statement of Operations.
ISSUANCE OF COMMON STOCK: Due to the conversion of Series "C" preferred stock
and the exercising of warrant and options by investors, consultants, directors
and employees, the Company issued 1,699,951 shares of common stock throughout
the first quarter of 2003. Of these shares issued, 1,116,000 were from the
conversion of Series "C" convertible preferred stock. The Company achieved the
board's stated objective of increasing the float by over 1.5 million shares in
the first quarter.
CODE OF ETHICS: In September 2002, the Company implemented a Code of Ethics by
which directors, officers and employees commit and undertake to personal and
corporate growth, dedicate themselves to excellence, integrity and
responsiveness to the marketplace, and work together to enhance the value of the
Company for the shareholders, vendors, and customers.
TRADING POLICY: In March 2003, the Company implemented a Trading Policy whereby
if a director, officer or employee has material non-public information relating
to the Company, neither that person nor any related person may buy or sell
securities of the Company or engage in any other action to take advantage of, or
pass on to others, that information. Additionally, insiders may purchase or sell
MED securities if such purchase or sale is made within 30 days after an earnings
or special announcement to include the 10-KSB, 10-QSB and 8-K in order to insure
that investors have available the same information necessary to make investment
decisions as insiders.
9
INTERNAL CONTROL POLICY: In April 2003, the Company implemented an Internal
Control Policy allowing for the confidential receipt and treatment of complaints
in regards to the Company's internal accounting controls and auditing matters. A
director, officer or employee may file a confidential and anonymous concern
regarding questionable accounting or auditing maters to an independent
representative of the Medifast Audit Committee.
RESIGNATION OF INDEPENDENT DIRECTOR: On March 27, 2003, Mr. David Scheffler,
Director and former consultant for Medifast, Inc., and investment banker for
D.S. Capital Investors, resigned from the Board of Directors due to his concern
about the Company's need for more independence on the Board and the limited
number of seats to fill that need in accordance with SEC and AMEX regulations.
It is with deep regret that the Board of Directors has accepted his resignation
but understands his concerns. Mr. Scheffler was instrumental in preventing the
Company from filing for Chapter 11 bankruptcy in 1999/2000 because of his sage
investment advice and his ability to raise funds at a time when the Company
received a "going concern" opinion from its auditors, preventing the Company
from receiving commercial financing on any reasonable terms. Mr. Scheffler will
continue to act as an Investment Relations Consultant for the Company under
contract for the next three years.
FORWARD LOOKING STATEMENTS: Some of the information presented in this quarterly
report constitutes forward-looking statements within the meaning of the private
Securities Litigation Reform Act of 1995. Statements that are not historical
facts, including statements about management's expectations for fiscal year 2002
and beyond, are forward-looking statements and involve various risks and
uncertainties. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge, there can be no
assurance that actual results will not differ materially from the Company's
expectations. The Company cautions investors not to place undue reliance on
forward-looking statements which speak only to management's experience on this
date.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Medifast Inc.
(Registrant)
/s/ Bradley T. MacDonald
--------------------------
Bradley T. MacDonald
Chairman & CEO
10
CEO CERTIFICATION
I, Bradley T. MacDonald, the registrant, Chairman of the Board and Chief
Executive Officer certify that:
1. The registrant's certifying officer has reviewed this Form 10-QSB of
Medifast, Inc.
2. Based on the registrant's certifying officer's knowledge, this 10-QSB 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 the Form 10-QSB.
3. Based on the registrant's certifying officer's knowledge, the financial
statements, and other financial information included in the Form 10-QSB,
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 10-QSB.
4. The registrant's certifying officer is 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 by which this Form 10-QSB 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 10-QSB (the "Evaluation Date") and
c. Presented in this 10-QSB our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of
the Evaluation Date.
5. The registrant's certifying officer has disclosed, based on our most recent
evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrnat's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not materials, that involves management or other
employees who have a significant role in the registant's internal
controls.
6. The registrant's certifying officer indicated in the Form 10-QSB whether
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 or material weaknesses, within the accounting
system.
May 5, 2003
/s/ Bradley T. MacDonald
Bradley T. MacDonald
Chiarman of the Board & Chief Executive Officer
11