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, 2004 Commission File No. 0-23016
Medifast, Inc.
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(Exact name of small business issuer in its charter)
Delaware 13-3714405
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(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 [ ]
Number of shares outstanding of Registrant's Common Stock, as of March 31, 2004:
10,650,142 shares
Index
Part I
Financial Information:
Condensed Consolidated Balance Sheets -
March 31, 2004 (unaudited) and December 31, 2003........................... 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2004 and 2003 (unaudited)..................... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2004 and 2003(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.................................................................. 10
Certifications.................................................................. 11
2
Medifast, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2004 December 31, 2003
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash ...................................................................... $ 1,539,000 $ 2,524,000
Accounts receivable-net of allowance for doubtful accounts of $55,000 ..... 788,000 641,000
Inventory ................................................................. 4,083,000 2,988,000
Investment Securities ..................................................... 3,974,000 3,983,000
Deferred Compensation ..................................................... 321,000 321,000
Prepaid expenses and other current assets ................................. 1,267,000 936,000
Deferred tax asset ........................................................ 350,000 596,000
------------ ------------
Total Current Assets ...................................................... 12,322,000 11,989,000
Property, plant and equipment - net ........................................... 7,379,000 7,449,000
Trademarks and Intangibles .................................................... 4,389,000 4,419,000
Other assets .................................................................. 423,000 375,000
------------ ------------
TOTAL ASSETS ......................................................... $ 24,513,000 $ 24,232,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ..................................... $ 1,500,000 $ 1,714,000
Dividends payable ......................................................... 58,000 58,000
Line of credit ............................................................ 86,000 55,000
Current maturities of long term debt ...................................... 745,000 764,000
------------ ------------
Total Current Liabilities ............................................ 2,389,000 2,591,000
Long-term debt, net of current portion .................................... 4,342,000 4,564,000
------------ ------------
Total Liabilities .................................................... 6,731,000 7,155,000
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Stockholders' Equity:
Series B Convertible Preferred Stock; par value $1.00; 600,000 shares
authorized; 353,734 and 403,734 shares issued and outstanding, respectively 354,000 404,000
Series C Convertible Preferred Stock; stated value $1.00; 1,015,000 shares
authorized; 267,000 and 267,000 shares issued and outstanding, respectively 267,000 267,000
Common stock; par value $.001 per share; 15,000,000 authorized;
10,650,142 and 10,482,609 shares issued and outstanding, respectively ..... 10,000 10,000
Additional paid-in capital .................................................... 20,214,000 20,120,000
Accumulated comprehensive loss ................................................ (20,000) (25,000)
Accumulated deficit ........................................................... (2,369,000) (3,016,000)
------------ ------------
18,456,000 17,760,000
Less Cost of Common Stock in treasury; 88,500 and 83,863
shares, respectively ...................................................... (674,000) (683,000)
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Total Stockholder's Equity .................................................... 17,782,000 17,077,000
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TOTAL LIABILITIES & STOCKHOLDER EQUITY ........................................ $ 24,513,000 $ 24,232,000
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3
Medifast, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
Three Months Ended March 31,
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Revenue ...................................... $ 6,817,000 $ 6,347,000
Cost of sales ................................ 1,350,000 1,683,000
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Gross Profit ................................. 5,467,000 4,664,000
Selling, general, and administration ......... 4,548,000 3,220,000
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Income from operations ....................... 919,000 1,444,000
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Other income/(expense)
Interest expense ......................... (23,000) (33,000)
Other income (expense) ................... (2,000) (10,000)
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Income before provision for income taxes ..... 894,000 1,401,000
Provision for income tax benefit (expense) ... (247,000) (537,000)
------------ ------------
Net income ................................... 647,000 864,000
Less: Stock dividend on preferred stock ...... -- 19,000
------------ ------------
Net income attributable to common shareholders $ 647,000 $ 845,000
============ ============
Basic earnings per share ..................... $ .06 $ .11
Diluted earnings per share ................... $ .05 $ .08
Weighted average shares outstanding -
Basic .................................... 10,610,391 7,940,238
Diluted .................................. 12,157,860 10,240,712
4
Medifast, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31,
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income ....................................................... $ 647,000 $ 864,000
Adjustments to reconcile net income to net cash provided
By (used in) operating activities from continuing Operations:
Depreciation and amortization ............................... 303,000 101,000
Issuance of stock for services .............................. 47,000 24,000
Net change in other comprehensive (income) loss ............. 5,000 --
Deferred income taxes ....................................... 246,000 537,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .................. (147,000) 60,000
(Increase) decrease in inventory ............................ (1,095,000) 203,000
(Increase) in prepaid expenses & other current assets ....... (331,000) (93,000)
(Increase) in other assets .................................. (48,000) (89,000)
(Decrease) in accounts payable and accrued expenses ......... (214,000) (420,000)
----------- -----------
Net cash provided by (used in) operating activities .............. (587,000) 1,187,000
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Cash Flows from Investing Activities
Purchase of investment securities, net ...................... 9,000 --
Purchase of equipment / leasehold / improvements ............ (82,000) (255,000)
Purchase of intangible assets ............................... (121,000) (86,000)
----------- -----------
Net Cash (used in) investing activities .......................... (194,000) (341,000)
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Cash Flows from Financing Activities:
Increase in credit line .......................................... 31,000 31,000
Issuance of common stock, options and warrants ................... 6,000 139,000
Proceeds from long term debt ..................................... -- 200,000
Principal repayments of long-term debt ........................... (241,000) (127,000)
Dividends paid on preferred stock ................................ -- (12,000)
Net Cash provided by (used in) financing activities: ........ (204,000) 231,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................................. (985,000) 1,077,000
Cash and cash equivalents - beginning of period ...................... 2,524,000 837,000
----------- -----------
Cash and cash equivalents - end of period ............................ $ 1,539,000 $ 1,914,000
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid .................................................... $ 23,000 $ 33,000
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Income taxes ..................................................... $ -- $ --
=========== ===========
Supplemental disclosure of non-cash activity:
Conversion of preferred stock B and C to common stock ............ $ 50,000 $ --
=========== ===========
Common stock for services ........................................ $ 47,000 $ 24,000
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5
Notes to Condensed Consolidated Financial Statements
General
1. Basis of Presentation
The information contained herein with respect to the three month periods ended
March 31, 2004 and 2003 has been reviewed by the independent auditors and was
prepared in conformity with accounting principles generally accepted in the
United States of America 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 accounting principles generally accepted in the United States of
America. 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, 2004 and 2003. 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 fair 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.
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,
----------------------------
2004 2003
---- ----
Net Income:
As reported $ 647,000 $ 864,000
Total stock based employee compensation
Expense determined under fair value based
Method for all awards, net of related tax effects (169,725) 0
Pro forma $ 487,275 $ 864,000
Net Income per share:
As reported:
Basic 0.06 0.11
Diluted 0.05 0.08
Pro forma:
Basic 0.05 0.11
Diluted 0.04 0.08
6
Management Discussion and Analysis of
Financial Condition and Results of Operations
General
Three Months Ended March 31, 2004 Compared to March 31, 2003
Overall revenues for the first three months of 2004 were $6,817,000,
representing an increase of $470,000 (7%) from the $6,347,000 reported for the
three-month period ending March 31, 2003. During the first quarter of 2004,
domestic sales increased by $1.4 million, or 26% versus the same period last
year. The growth was a result of improved traction from the national advertising
campaign, which has continued to increase brand awareness and generate
significant revenue increases throughout all of the Company's distribution
platforms. The recently acquired Hi-Energy Clinic model experienced incremental
revenues, during the quarter. This was largely attributed to the increase in the
number of licensed clinics nationwide, which at the end of the first quarter
totaled over 100 clinics. Hi-Energy also expanded its product line to include
Medifast disease management products, with a specific focus on nutritional
intervention for diabetics. The Take Shape For Life division continues to
experience increased sales due to the success of the newly implemented "Tasting
Party Plan", which has proven to be very effective at generating revenues, as
well recruiting new Health Advisors and customers. International sales during
the first quarter of 2004 attributed to approximately $40,000, as compared to
$1,010,000 for the same period last year. This large influx was due to the
pipeline orders to its Asian distributor shipped in the first quarter of 2003.
Medifast anticipates expansion into multiple foreign markets throughout 2004,
potentially generating significant International sales during the second, third,
and fourth quarter. Cost of sales for the first quarter of 2004 were $1,350,000,
a decrease of $333,000 (20%) versus the same period last year. The decrease in
cost of sales was attributable to an inventory buildup in the fourth quarter of
2003, allowing for more efficient production throughout the first quarter of
2004, and allowing the Company to benefit from economies of scale in inventory.
Gross profit for the first three months of 2004 increased by $803,000 (17%) from
2003 due to the growth in multiple distribution platforms throughout the
Company, in addition to the efficiencies in production shown by the decrease in
the cost of sales. Selling, general and administrative expenses for the first
quarter of 2004 increased $1,328,000 (41%) over the same quarter of 2003 due to
expansion of its commissioned sales organization, overall corporate
infrastructure improvements such as customer service and information technology,
as well as industry wide increases in expenses, such as insurance and legal
fees.
Income from operations was $919,000 for the first quarter of 2004, which
decreased by 36% or $525,000 for the same period last year. The decrease was due
to the difference from international sales in 2004 versus 2003. International
sales in 2003 were in excess of $1 million, of which the cost of building
inventory occurred primarily in the fourth quarter of 2002. Income before income
taxes was $894,000, ($0.07 per share on a fully diluted basis) a decrease of
$507,000 or $0.07 a share on a fully diluted basis.
Net income for the three month period was $647,000 which is a $217,000 decrease
from the $864,000 reported in the first quarter of 2003. Net income attributable
to common shareholders decreased due to the timing of International shipments in
2003 versus 2004 and the pipeline orders in the 1st quarter of last year, which
lead to a significant increase in revenues and profit. The Company had fully
diluted earnings per share of $0.05 in the first quarter of 2004, versus $0.08
in 2003, with a dilution increase of 1.9 million shares, primarily from
conversions of preferred stock, the exercise of options and warrants, and the
sale of common stock in a capital raising completed in July 2003. The Company
has made substantial investments in growing infrastructure and revenues during
7
the 1st Quarter that will have a significant impact on improving revenues, cash
flow and operating results in the future. In late 2003 the Company completed a
test campaign to track the effectiveness of promoting the Company's products
through television commercials. The test proved to be a success, prompting the
Company to launch a television ad campaign in January 2004. The campaign was
modulated at low levels until the call center processes were matched with the
large influx of incoming calls, which provided closing rates similar to the test
in 2003. The company recently turned up its planned advertising campaign in late
April, featuring national and cable television commercials and print
advertising. The Company still showed a $1.4 million increase in domestic sales
with significantly less advertising expenditures in the 1st Quarter of 2004
versus 2003.
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. The first quarter of
the year generally shows increases in sales, as these months are considered the
commencement of the "diet season."
Liquidity and Capital Resources
On March 5, 2004 the Company entered into a joint venture agreement
with XL Health, Inc., one of the leading diabetic management companies in the
United States. Medifast, Inc.'s Medifast Plus for Diabetics line will be the
exclusive nutritional product for XL Health's CMS Medicare Demonstration
Project. The pilot project will use Medifast Plus for Diabetics as the exclusive
nutritional intervention program to prove the cost effectiveness of disease
management programs for Medicare beneficiaries. Take Shape For Life, Inc,
through its' parent Medifast, Inc, provided a one million dollar corporate
guarantee of XL's revolving credit line secured by the assets of the Company
through Mercantile Safe-Deposit and Trust company, the Company's lender.
The Company is continuing its marketing agreement with NovaCare Rehabilitation,
a division of Select Medical Corporation, however the venture has failed to meet
anticipated revenues. The lack of sales is due to certain states not permitting
physical therapists to promote private weight loss products, therefore not
allowing the joint venture to have an impact at the center level.
The Company had stockholders' equity of $17,782,000 and working capital of
$9,933,000 on March 31, 2004 compared with $6,589,000 and $2,517,000 at March
31, 2003, respectively. The $11,193,000 net increase in stockholder's equity and
the $7,416,000 net increase in working capital, reflects the profits during the
year from operations, acquisition of assets, execution of options and warrants,
conversion of Preferred Stock, and sales of additional shares.
Inflation
To date, inflation has not had a material effect on the Company's business
8
Item 5. Other Information
Litigation: On December 16, 2003 John Donavin, on behalf of the General Public,
filed suit, against Jason Pharmaceuticals, Inc. in the Superior Court of the
State of California, City and County of San Francisco. The suit alleges that
Medifast bars contain Vitamin D3 or Vitamin D in violation of Federal laws and
regulations, and asks for equitable relief and damages. The Company's general
council believes that the Company's formulation used in its "meal replacement"
bars for over 20 years has been and is in conformity with current and past FDA
regulations. The Company believes that the plaintiff's claim lacks merit and may
even be considered frivolous.
In January, Mr. Leonard Z. Sotomayor, former associate of Mr. David Scheffler, a
financial consultant for the Company, filed a complaint against Medifast, Inc.,
David Scheffler and T-1 Holdings LLC. The Company's counsel has filed a motion
to dismiss based on the facts of law. The Company believes the complaint has no
merit and in fact has been drawn into a personal dispute between two former
business associates.
On August 21, 2002 Food Sciences Corporation, Inc. trading as Robard
Corporation, a competitor of the Company, filed a lawsuit in the U.S. District
Court for the District of New Jersey Camden Vicinage, alleging, among other
things, slanderous and libelous statements made to Plaintiff's customers. The
Company filed a Counterclaim and Third Party Claims against other competitors,
alleging, among other things, business defamation, trademark infringement and
conspiracy. Plaintiff and Defendant both claim damages in excess of $75,000. 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 "B" preferred stock
and the exercising of warrants and options by investors, consultants, directors
and employees, the Company issued 167,533 shares of common stock throughout the
first quarter of 2003. Of these shares issued, 100,000 were from the conversion
of Series "B" convertible preferred stock.
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. As of March 31, 2004, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2004. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2004.
Forward Looking Statements: This document contains forward-looking statements
which may involve known and unknown risks, uncertainties and other factors that
may cause Medifast, Inc. actual results and performance in future periods to be
materially different from any future results or performance suggested by these
statements. Medifast, Inc. cautions investors not to place undue reliance on
forward-looking statements, which speak only to management's expectations 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
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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 12, 2004
/s/ Bradley T. MacDonald
-------------------------------
Bradley T. MacDonald
Chiarman of the Board & Chief Executive Officer
11
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 Quarterly Report of Medifast, Inc. (the "Company") on
Form 10-QSB for the quarter ended March 31, 2004 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I Bradley T.
MacDonald, Chief Financial Officer of the Company, certify, pursuant ot 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of the
operations of the Company.
By: /s/ Bradley T. MacDonald
---------------------------------
Bradley T. MacDonald
Chief Executive Officer
May 12, 2004
12