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 June 30, 2004 Commission File No. 0-23016
Medifast, Inc.
(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
incorporation or organization) Identification No.)
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
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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 JUNE 30, 2004:
10,965,569 SHARES
Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
June 30, 2004 (unaudited) and December 31, 2003................ 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 2004 and 2003 (unaudited).. 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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
CEO Certification.................................................. 11
2
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 December 31, 2003
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 396,000 $ 2,524,000
Accounts receivable-net of allowance for doubtful accounts of $55,000 1,058,000 641,000
Inventory 4,227,000 2,988,000
Investment securities 3,040,000 3,983,000
Deferred compensation 450,000 321,000
Prepaid expenses and other current assets 3,169,000 936,000
Deferred tax asset 97,000 596,000
--------------- --------------
Total Current Assets 12,437,000 11,989,000
Property, plant and equipment - net 7,938,000 7,449,000
Trademarks and intangibles 4,664,000 4,419,000
Other assets 72,000 375,000
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TOTAL ASSETS $ 25,111,000 $ 24,232,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,146,000 $ 1,714,000
Dividends payable 58,000 58,000
Line of credit - 55,000
Current maturities of long-term debt 750,000 764,000
--------------- --------------
Total current liabilities 1,954,000 2,591,000
Long-term debt, net of current portion 4,752,000 4,564,000
--------------- --------------
Total Liabilities 6,706,000 7,155,000
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Stockholders' Equity:
Series B Convertible Preferred Stock; par value $1.00; 600,000 shares
authorized; 300,614 and 403,734 shares issued
and outstanding, respectively 301,000 404,000
Series C Convertible Preferred Stock; stated value $1.00; 1,015,000 shares
authorized; 200,000 and 267,000 shares issued
and outstanding, respectively 200,000 267,000
Common stock; par value $.001 per share; 15,000,000 authorized;
10,965,569 and 10,482,609 shares issued and outstanding, respectively 11,000 10,000
Additional paid-in capital 20,381,000 20,120,000
Accumulated comprehensive loss (88,000) (25,000)
Accumulated deficit (1,713,000) (3,016,000)
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19,092,000 17,760,000
Less cost of common stock treasury; 102,142 and 83,863
shares, respectively (687,000) (683,000)
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Total Stockholders' Equity 18,405,000 17,077,000
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 25,111,000 $ 24,232,000
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See accompanying notes to condensed consolidated financial statements.
3
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months Ended June 30, Six months Ended June 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue 7,357,000 $ 6,417,000 14,174,000 $ 12,764,000
Cost of sales 1,946,000 1,628,000 3,296,000 3,311,000
--------------- --------------- --------------- --------------
Gross Profit 5,411,000 4,789,000 10,878,000 9,453,000
Selling, general, and administration 4,429,000 3,818,000 8,977,000 7,038,000
--------------- --------------- --------------- --------------
Income from operations 982,000 971,000 1,901,000 2,415,000
Other income/(expense)
Interest expense (52,000) (31,000) (75,000) (64,000)
Other income (expense) (5,000) 19,000 (7,000) 9,000
--------------- --------------- --------------- --------------
Income before provision for income taxes 925,000 959,000 1,819,000 2,360,000
Provision for income tax benefit (expense) (251,000) (368,000) (498,000) (905,000)
--------------- --------------- --------------- --------------
Net income 674,000 591,000 1,321,000 1,455,000
Less: Stock dividend on preferred stock 18,000 (11,000) 18,000 (30,000)
--------------- --------------- --------------- --------------
Net income attributable to common shareholders $ 656,000 $ 602,000 $ 1,303,000 $ 1,485,000
=============== =============== =============== ==============
Basic earnings per share $ 0.06 $ 0.06 $ 0.12 $ 0.17
Diluted earnings per share $ 0.06 $ 0.05 $ 0.11 $ 0.14
Weighted average share outstanding -
Basic 10,731,021 9,207,119 10,670,706 8,486,681
Diluted 12,176,819 11,112,458 12,014,833 10,676,714
See accompanying notes to condensed consolidated financial statements.
4
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
2004 2003
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,321,000 $1,455,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities from
continuing operations:
Depreciation and amortization 541,000 209,000
Issuance of stock for services 47,000 46,000
Net change in other comprehensive income (loss) (63,000) -
Deferred income taxes 499,000 905,000
Changes in assets and liabilities:
(Increase) in accounts receivable (417,000) (294,000)
(Increase) in inventory (1,239,000) (220,000)
(Increase) in prepaid expenses & other current assets (2,233,000) (332,000)
Decrease (increase) in other assets 303,000 (28,000)
(Increase) in deferred compensation (129,000) -
(Decrease) in accounts payable and accrued expenses (540,000) (195,000)
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Net cash provided by (used in) operating activities (1,910,000) 1,546,000
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Cash Flow from Investing Activities:
Sale of investment securities, net 943,000 -
Purchase of equipment/leasehold/improvements (644,000) (411,000)
Purchase of intangible assets (631,000) (119,000)
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Net cash (used in) investing activities (332,000) (530,000)
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Cash Flow from Financing Activities:
Increase in credit line (55,000) (18,000)
Issuance of common stock, options and warrants 6,000 164,000
Proceeds from long-term debt 475,000 200,000
Principal repayments of long-term debt (301,000) (185,000)
Dividends paid on preferred stock (11,000) (12,000)
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Net cash provided by financing activities 114,000 149,000
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,128,000) 1,165,000
Cash and cash equivalents - beginning of the period 2,524,000 837,000
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Cash and cash equivalents - end of period $ 396,000 $2,002,000
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Supplemental disclosure of cash flow information:
Interest paid $ 47,000 $ 64,000
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Income taxes $ - $ -
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Supplemental disclosure of non cash activity:
Common shares issued for options and warrants
Conversion of preferred stock B and C to common stock $ 50,000 $ -
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Common stock for services $ 47,000 $ -
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Purchase of Consumer Choice Systems for stock, options,
warrants, and other liabilities $ - $1,766,000
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Conversion of debt to equity $ 28,000 $ -
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Common stock issued for preferred stock C dividends $ 7,000 $ -
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See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. Basis of Presentation
The information contained herein with respect to the three month period and six
month period ended June 30, 2004 and 2003 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 period and six-month period ended June
30, 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 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 June, 30 Six months ended June 30,
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2004 2003 2004 2003
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Net Income:
As reported $674,000 $591,000 $1,321,000 $1,455,000
Total stock based director compensation
Expense determined under fair value based
method for all awards, net of related tax effects (0) (53,000) (169,725) (53,000)
--- -------- --------- --------
Pro forma $674,000 $538,000 $1,151,275 $1,402,000
======== ======== ========== ==========
Net Income per share:
As reported:
Basic $.06 $.06 $ 0.12 0.17
Diluted .06 .05 0.11 0.14
Pro forma:
Basic .06 .06 0.11 0.16
Diluted .06 .05 0.10 0.13
6
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Revenues for the first six months of 2004 were $14,174,000, representing an
increase of $1,410,000 (11%) from the $12,764,000 reported for the six-month
period ending June 30, 2003. Domestic sales for the first half of 2004 were up
$2,860,000 (26%) from the same time period last year. The growth in revenue was
a result of the success of the Hi-Energy Clinic model, which experienced
continuous revenue growth throughout the first half of the year. This was
largely attributed to the increase in the number of licensed clinics nationwide,
which at the end of the first half of the year totaled over 100 clinics. 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. The increase in revenue was also attributable to the Company's
extensive national advertising campaign, which consisted of television
advertising followed by direct mail and marketing programs. International sales
during the first quarter of 2004 attributed to approximately $50,000, as
compared to $1,500,000 for the same period last year. This large influx was due
to delayed product launches throughout multiple countires in the Middle and Far
East as a result of the conflict in Iraq. Cost of sales for the first half of
2004 decreased by $15,000 (1%) from 2003. Gross profit for the first half of
2004 increased by $1,425,000 (15%) from 2003 due to the increased manufacturing
and distribution efficiencies related to the acquired distribution facility
located in Ridgley, Maryland. Selling, general and administrative expenses for
the first half of 2004 was $8,977,000 which increased by $1,939,000 (27%) over
the same period of 2003, due to the increased cost of a National television
advertising campaign, the expansion of its commissioned sales organization,
expenses related to introducing the Hi Energy Clinic model to additional
locations, as well as overall corporate infrastructure improvements. Income from
Operations was $1,901,000 a decrease of $514,000 (21%), due to the increased
selling, general and administrative expenses which the Company deemed necessary
to allow future growth along with the non existence of the high margin
International sales, which attributed to a substantial amount of operational
income in the first half of 2003. The Company also had to delay its introduction
of Medifast Maintain for people with diabetes because the Johns Hopkins study,
which provides significant health improvement outcomes, was not complete until
July 2004. Maintain's introduction on a major TV retailer was a tremendous
success, and the Company expects a significant boost in revenues as a result of
its expanded launch in the next three quarters.
The Company had fully diluted earnings per share of $0.11 in the first half of
2004, versus $0.14 in 2003, with a dilution increase of 1.3 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 the 1st half of the year that will have a significant impact on
improving revenues, cash flow and operating results in the future. The Company
has increased shareholder equity to $18,405,000, which is $10,233,000 (125%)
greater than the same period last year, and has also increased the Company's
asset to liability ratio to 4 to 1, double what it was only one year ago.
7
THREE MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
Second quarter revenues for 2004 of $7,357,000 increased by $940,000 (15%) from
$6,417,000 for the three-month period ended June 30, 2003. Cost of sales for the
period was $1,946,000, an increase of $318,000 (19%) from $1,628,000 during the
same period of 2003. Gross profits of $5,411,000 for the second quarter of 2004
increased by $622,000 (13%) from $4,789,000 in the second quarter of 2003.
During the quarter the Company experienced a profit from operations of $982,000
compared to a profit of $971,000 for the second quarter of 2003. The income
before provision for income taxes for the second quarter of 2004 was $925,000
compared to $959,000 in the second quarter of 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. January and February
generally show increases in sales, as these months are considered the
commencement of the "diet season." The Company will not experience the same
degree of seasonality in 2004 because of the introduction of its full line of
products that are designed to provide nutritional solutions for people with
diabetes, arthritis, coronary health, and menopause.
LIQUIDITY AND CAPITAL RESOURCES
The Company had stockholders' equity of $18,405,000 and working capital of
$10,483,000 on June 30, 2004 compared with $8,172,000 and $2,996,000 at June 30,
2003, respectively. The $10,233,000 net increase in stockholder's equity and the
$7,487,000 net increase in working capital reflects the profits and equity
contributions in the first six months from operations.
INFLATION
To date, inflation has not had a material effect on the Company's business.
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. The suit has been stayed upon appeal to the FDA to
clarify its regulations.
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.
8
Other: On April 8, 2004, the Company announced that it had initiated a clinical
study with Johns Hopkins Bloomberg School of Public Health in Baltimore,
Maryland to test the efficacy of Medifast meal replacements versus a standard
reference diet on weight loss and weight maintenance in a joint parent-child
plan approach. The 18-month study will consist of 80 overweight or obese boys
and girls between the ages of 8 and 15 along with 40 of their parents. The
clinical study will examine whether a joint parent-child approach using Medifast
engineered foods will result in greater weight loss than children dieting alone,
and examine the positive impact of restricting and controlling the caloric
intake of adolescent patients which will provide clinical evidence to support
this therapy to pediatricians.
On April 15, 2004 The Company announced that its Medifast Plus for Diabetics
Shakes received an official patent (patent number 6,706,697) from the United
States Patent and Trademark Office.
On June 7, 2004 the Board of Directors authorized a stock buyback of up to
200,000 shares of its common stock. The buyback authorization allows the Company
to make purchases from time to time on the open market at prevailing prices or
in privately negotiated transactions. At the close of the quarter ending June
30, 2004 the Company had purchased 1,500 on the open market.
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 315,427 shares of common stock throughout the
second quarter of 2004. Of these shares issued, 295,640 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.
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 through the provided
"Whistleblower Hotline". As of June 30, 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 June 30, 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
June 30, 2004.
9
Significant Subsequent Events: In July 2004, The Company announced the
successful launch of Maintain by Medifast(TM), a line of low-calorie,
low-carbohydrate, diabetic friendly products, on a National Multi-Channel
Television Retailer. The line of low-glycemic shakes, bars and soups is backed
by an ongoing clinical stury whereby participants achieved a weight loss of up
to 2 pounds per week by incorporating the products into a 1200 to 1500 calorie
per day meal plan. The Company will continue to roll-out and expand the sale of
Maintain by Medifast(TM) throughout 2004.
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 2003
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
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Bradley T. MacDonald
Chairman & CEO
10