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 September 30, 2002 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
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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
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NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK, AS OF SEPTEMBER 30,
2002: 6,832,969 SHARES
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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 September 30, 2002 (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.
October 8, 2002 /s/ BRADLEY T. MACDONALD
------------------------
Bradley T. MacDonald
Chairman, President and
Chief Executive Officer
Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
September 30, 2002 (unaudited) and December 31, 2001.................3
Condensed Consolidated Statement of Operations -
Three and Six Months Ended September 30, 2002 and 2001 (unaudited)...4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended September 30, 2002 and 2001 (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
September 30, December 31,
2002 2001
(Unaudited)
ASSETS
Current assets:
Cash ................................................................. $ 1,099,000 $ 270,000
Certificates of Deposit .............................................. 417,000 312,000
Accounts receivable, net of allowance ................................ 269,000 283,000
Merchandise inventory ................................................ 887,000 640,000
Prepaid expenses and other current assets ............................ 76,000 76,000
Deferred tax asset ................................................... 742,000 355,000
----------- -----------
Total Current Assets ............................................... 3,490,000 1,936,000
Property, plant and equipment - net .................................... 4,342,000 767,000
Trademarks and Intangibles ............................................. 604,000
Other assets ........................................................... 45,000 200,000
Deferred tax asset ..................................................... 1,024,000 454,000
----------- -----------
TOTAL ASSETS ....................................................... $ 9,505,000 $ 3,357,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of obligations under capital lease ................ $ -- $ 23,000
Current maturities of long-term obligations .......................... 393,000 75,000
Accounts payable and accrued expenses ................................ 1,056,000 337,000
----------- -----------
Total Current Liabilities ............................................ 1,449,000 435,000
Long-term obligations less current maturities ........................ 2,777,000 234,000
----------- -----------
Total Liabilities .................................................. 4,226,000 669,000
----------- -----------
Commitments and contingencies:
Series A Redeemable Convertible 8% Preferred Stock;
par value $.001; 2,000,000 authorized; 0 and 75,000 shares issued and
outstanding at September 30, 2002 and December 31, 2001, respectively,
redemption value $150,000 at December 31, 2001 ....................... 150,000
Stockholders' Equity:
Series B Redeemable Convertible Preferred Stock; stated value $1.00;
600,000 shares authorized; 521,290 shares issued and outstanding ..... 521,000 553,000
Series C Convertible Preferred Stock; stated value $1.00;
1,015,000 shares authorized; 1,015,000 shares issued and outstanding . 1,015,000 849,000
Common stock; par value $.001 per share; 15,000,000 authorized;
6,832,969 shares issued and outstanding .............................. 7,000 7,000
Additional paid-in capital ............................................. 9,125,000 8,915,000
Accumulated deficit .................................................... (5,378,000) (7,786,000)
----------- -----------
5,290,000 2,538,000
Less Subscriptions for 37,000 shares of Common Stock ................... (11,000) 0
----------- -----------
Total Stockholder's Equity ............................................. 5,279,000 2,538,000
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TOTAL LIABILITIES & STOCKHOLDER EQUITY ................................. $ 9,505,000 $ 3,357,000
=========== ===========
3
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
(Unaudited) (Unaudited)
Revenue ......................................... $3,058,000 $1,221,000 $7,858,000 $3,877,000
Cost of sales..................................... 961,000 434,000 2,593,000 1,634,000
---------- ---------- ---------- ----------
Gross Profit...................................... 2,097,000 787,000 5,265,000 2,243,000
Selling, general, and administration.............. 1,323,000 624,000 3,512,000 1,558,000
---------- ---------- ---------- ----------
Income from operations............................ 774,000 163,000 1,753,000 685,000
---------- ---------- ---------- ----------
Other income/(expenses)
Interest expense.............................. (26,000) (39,000) (80,000) (160,000)
Other income (expense)........................ (14,000) 11,000 (151,000) 41,000
---------- ---------- ---------- ----------
Income before provision for income taxes.......... 734,000 134,000 1,522,000 567,000
Provision for income tax benefit.................. 809,000 0 957,000 0
---------- ---------- ---------- ----------
Net income........................................ 1,543,000 134,000 2,479,000 567,000
Less: Stock dividend on preferred stock........ 26,000 6,000 71,000 (37,000)
Accretion of preferred stock............. 0 0 0 (10,000)
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Net income attributable to common shareholders.... $1,517,000 $140,000 $2,408,000 $520,000
========== ======== ========== ========
Basic earnings per share.......................... $.22 $.02 $.36 $.08
Diluted earnings per share....................... $.18 $.02 $.29 $.07
Weighted average shares outstanding -
Basic......................................... 6,765,849 6,524,531 6,650,571 6,524,531
Diluted....................................... 8,713,582 8,493,162 8,506,814 8,461,232
4
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
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2002 2001
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(Unaudited) (Unaudited)
Cash Flow from Operating Activities:
Net income .................................................... $ 2,479,000 $ 567,000
Depreciation & amortization .............................. 171,000 140,000
Issuance of C Convertible Preferred ...................... 24,000 0
Directors Compensation - Non Cash ........................ 41,000 0
Deferred Income Tax Benefit .............................. (957,000) 0
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable ............... 14,000 (96,000)
(Increase)/Decrease in inventory ......................... (247,000) 22,000
(Increase) in prepaid expenses & other current assets .... -- (100,000)
(Increase)/Decrease in other assets ...................... 155,000 17,000
(Decrease)/Increase in A/P and accrued expenses .......... 713,000 64,000
----------- -----------
Net Cash provided by and used in Operating Activities ......... 2,393,000 614,000
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Cash Flow from Investing Activities
Redemption of Certificates of Deposit .................... 201,000 0
Investment in certificates of deposit .................... (300,000) 0
Purchase of equipment / Leasehold / Improvements ......... (286,000) (33,000)
Purchase of Building - 11445 Cronhill Drive .............. (3,451,000) 0
Purchase of intangible assets ............................ (478,000) 0
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Total Cash Flow from Investing Activities ................ (4,314,000) (33,000)
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Cash Flow from Financing Activities:
Increase in credit line (net) ................................. 100,000 81,000
Repayment of capital lease obligations ........................ (23,000) (5,000)
Redemption Series "A" ......................................... (150,000) (170,000)
Issuance of Series "C" Convertible Preferred .................. 102,000 0
Mercantile building loan ...................................... 2,850,000 0
Proceeds from long term debt .................................. 0 25,000
Payment of Debt ............................................... (89,000) (70,000)
Dividends paid on preferred stock ............................. (40,000) (42,000)
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Net Cash provided by and used in Financing Activities: ... 2,750,000 (181,000)
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NET INCREASE/(DECREASE) IN CASH ................................... 829,000 400,000
Cash and cash equivalents at beginning of period .................. 270,000 102,000
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Cash and cash equivalents at end of period ........................ $ 1,099,000 $ 502,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................. $ 76,000 $ 42,000
Income Taxes ............................................. 0 0
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Total ......................................................... $ 76,000 $ 42,000
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. Basis of Presentation
The information contained herein with respect to the three month periods and
nine month periods ended September 30, 2002 and 2001 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 and nine
month periods ended September 30, 2002 and 2001. 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.
6
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Revenues for the first nine months of 2002 were $7,858,000, representing an
increase of $3,981,000 (103%) from the $3,877,000 reported for the nine month
period ending September 30, 2001. The Company initiated the following sales and
marketing programs that have significantly boosted revenue and profits:
Continued success of the Physicians Lifestyles Program supported by the
Company's teleweb programs, introductory sales of the Company's Medifast Plus
for Diabetics to physicians and patients, the Company's robust and aggressive
advertising program in National print magazines and newspapers such as Parade,
and the continued success of the Take Shape for Life Health Network. Cost of
sales for the first three quarters of 2002 increased by $959,000 (59%) from
2001. Gross profit for the first three quarters of 2002 increased by $3,022,000
(135%) from 2001 due to sales of higher margin products, such as Medifast Plus
for Diabetics. Selling, general and administrative expenses for the first three
quarters of 2002 of $3,512,000 increased by $1,954,000 (125%) over the same
period of 2001. This was a result of increased advertising, customer service
improvements, expansion, and infrastructure costs. Despite the increase, the
Company maintained overall better cost controls.
The net profit from operations for the first nine months of 2002 was $1,753,000,
which is $1,068,000 (156%) greater than the same period last year. The operating
profit is attributable primarily to an Internet-focused teleweb sales and
marketing strategy and higher margin new product and programs sales. Increased
sales via Medifast Direct(R), Take Shape Health Advisors, and the Internet to
medical practitioners and their patients significantly improved margins to 65%.
The income before provision for income taxes for the nine month period was
$1,522,000, which is $955,000 more than the $567,000 profit for the first three
quarters of 2001. Management significantly improved the balance sheet and the
Company's profitability by paying off its short term debt, its Series "A"
Preferred stockholders, purchasing its building and grounds and restructuring
the long term debt on more favorable terms. Interest expense was $80,000 during
the nine month period ending September 30, 2002 as compared to $160,000 for the
same period in 2001. Current interest expense was stabilized, increasing cash
flow and thereby reducing the need to increase borrowing. The Company has
deferred patent development costs of $125,000, which includes the Johns Hopkins
Clinical Study and development costs of the patent pending "Medifast Plus(R) for
Diabetics" product line. The Johns Hopkins Clinical Study is a two year clinical
trial study led by Dr. Larry Cheskin to further evaluate the disease and weight
management capabilities of Medifast Plus for Diabetics. This product line has
received the Seal of Approval from the National Glycemic Research Institute for
many of its products. The valuation allowance against income tax benefits to be
realized from net operating loss carry forwards was reduced by $957,000 during
the first nine months of 2002 because the Company's operating results exceeded
previous estimations.
7
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
Third quarter revenues for 2002 of $3,058,000 increased by $1,837,000 (150%)
from $1,221,000 for the three month period ended September 30, 2001. Cost of
sales for the period was $961,000, an increase of $527,000 (121%) from $434,000
during the same period of 2001. Gross profits of $2,097,000 for the third
quarter of 2002 increased by $1,310,000 (166%) from $787,000 in the third
quarter of 2001. During the quarter the Company experienced a profit from
operations of $774,000 compared to a profit of $163,000 for the third quarter of
2001. The income before provision for income taxes for the third quarter of 2002
was $734,000 compared to a net profit of $134,000 in the third quarter of 2001.
A provision for income tax benefits of $809,000 was recognized in the third
quarter of 2002 due to the reduction in the valuation allowance against benefits
to be realized from net operating loss carry forwards. This benefit arose
because the Company's operating results exceeded those previously estimated.
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
The Company was successful in refinancing its lines of credit as follows:
o On July 26, 2002 Jason Pharmaceuticals purchased Seven Crondall Associates,
a Maryland Limited Liability Corporation which owns the assets of the
building and grounds of 11445 Cronhill Drive, Owings Mills, Maryland. The
building is an FDA approved manufacturing facility. Medifast purchased the
LLC company for Three Million Four Hundred Thousand Dollars ($3,400,000).
The loan for $2,850,000 has a 15-year maturity and carries an interest rate
of LIBOR plus 275 basis points.
o On July 26, 2002 Jason Pharmaceuticals opened a $550,000 revolving line of
credit at the Prime rate, with Mercantile-Safe Deposit and Trust Company.
The purchase of the manufacturing facility and the new revolving credit line
gives the Company the necessary financing to fund its growth and business plan
while securing its future in a state of the art food and pharmaceutical grade
manufacturing facility.
8
o On September 1, 2002, the Company announced the implementation of Take
Shape for Life, Inc., a Delaware Corporation, which is a wholly owned
subsidiary of Medifast, Inc. This is a dynamic health network and marketing
program that is dedicated to providing disease and weight management
solutions through certified and trained health advisors and professionals
across the United States. Management anticipates that this program should
double in size over the next twelve to eighteen months given that new
physicians and health advisors are enrolled from the Company's efforts and
its database, which already contains over 15,000 medical professionals.
Based on historical trends, management estimates that approximately 15% of
the physicians and health advisors will be converted into the health
network. This program currently has 40 physicians and 200 certified and
trained health advisors. Dr. Wayne Anderson, Medical Director, Richard
Logsdail, President and Daniel Bell, Executive Vice President, are the
Executive Team recently hired to operate this subsidiary.
o The Company has recently formed Jason Properties, LLC, a Delaware Limited
Liability Corporation which is a wholly owned subsidiary of Medifast, Inc.
Jason Properties, LLC., introduced the implementation of the
MEDSLIM(R)Program, which allows licensing opportunities for its medically
prescribed weight control program. Since 1980, the Company estimates that
over 15,000 physicians nationwide have used Medifast as a treatment for
their overweight patients and that an estimated 750,000 patients have used
its products to lose and maintain their weight. The new MEDSLIM(R)Program
has already signed up two functioning clinics during the fourth quarter of
2002. The Company anticipates that over the next two years at least 100
clinics across the country will be fully engaged. The program offers a
competitive marketing edge through a regional advertising program providing
exclusive territories, marketing support, and web-based patient referrals
o On July 26, 2002 Jason Properties, LLC., a wholly owned subsidiary,
purchased the intellectual property of Jason Pharmaceuticals, Inc., which
consists of the Medifast, Inc., Trademarks and Patents. The Company will
also import health related items from the Far East to support its weight
management business.
o On September 23, 2002, the Company announced a joint venture with Elegant
World SDN BHD (Elken) of Indonesia. The venture calls for Medifast, Inc. to
manufacture its Take Shape(R) weight management products and programs for
the Asian market. Medifast Take Shape products were selected in the
four-year U.S. government National Institute of Health (Doctor Koop Study)
weight management study at the University of Vermont, and achieved
significant weight loss results. The Company has received large orders for
the Take Shape(R) product that will be shipped in the next six months, and
anticipates continuous orders in the upcoming quarters, supporting their
efforts to launch this clinical product in Asia.
The Company had working capital of $2,041,000 on September 30, 2002 compared
with $1,501,000 at December 31, 2001. The $540,000 net increase reflects the
profits in the first, second and third quarters from operations. The Company has
sufficient cash flow from operations to fund its current business plan.
9
INFLATION
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
Litigation:
1) The Company is the Plaintiff against Mr. Carl Valore (former attorney),
Mrs. Beverly Valore (former Director), Mr. William Money (former consultant),
and Mr. Reed Vordenberg, the former President of HealthRite, Inc. The Company
received a summary judgment in favor of Jason Pharmaceuticals, Inc., its
subsidiary, for over $383,000 against Worldwide Universal Health Network, the
predecessor in merger and interest to Century Industries, which is in Chapter 7,
and for which the court appointed a trustee on March 26, 2001. The Company has
settled the controversy with the Century Trustee for $20,000 which provided for
the dismissal of all claims against the Company and its CEO, in order to reduce
its legal costs, since recovery of its claim is remote. Additionally, the New
Jersey Federal Bankruptcy Court dismissed with prejudice all third-party claims
against the Company.
2) 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.
SETTLEMENT AGREEMENT: The Company resolved a contract dispute with Health
Inventions, Inc. by a settlement to acquire selected assets of the company to
include software, infrastructure, customer lists and protocols for 100,000
shares of Medifast stock to the principals of Health Inventions, Inc., Sharper
Zone, Inc. and BEK Family Trust. Assumption of costs associated with the
transition of moving the assets to Medifast is estimated to be in excess of
$400,000 in cash to be paid over the next three years.
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.
On July 2, 2002 the Board of Directors granted ten thousand (10,000) shares of
common stock to each of the five Independent Directors of the Company at a price
of $.65, equal to the fair market price on the date the shares were authorized
by the Board.
On August 2, 2002 the Board of Directors granted one hundred thousand (100,000)
shares of common stock, fifty thousand (50,000) shares to Sharper Zone, Inc. and
fifty thousand (50,000) shares to BEK Trust, LLC at a price of $1.26, equal to
the fair market price on the date the shares were authorized by the Board.
10
On September 13, 2002 certain members of the Board executed twenty thousand
(20,000) options and seventeen thousand (17,000) warrants at an option/warrant
price equal to the fair market price on the date of the grant. Bradley MacDonald
purchased twenty-seven (27,000) thousand shares of common stock, and Michael
MacDonald purchased ten thousand (10,000) shares of common stock.
Revenue Recognition-Revenue is recognized at the time of shipment.
AUTHORIZATION OF COMMON STOCK. Throughout the third quarter of 2002, the Company
issued 137,000 shares of Common Stock. To include the conversion of options and
warrants to common stock on behalf of Messrs. Bradley T. and Michael MacDonald,
Directors of the Company.
ELECTION OF ADDITIONAL INDEPENDENT DIRECTOR: Mrs. Mary T. Travis, a mortgage
banking corporate officer with thirty-one years of diversified mortgage banking
and finance experience, currently with Sunset Mortgage Company, has been elected
to the Board of Directors of Medifast, Inc., as an additional Independent
Director, preparing the Company for its application to the AMEX or NASDAQ
exchange. Mrs. Travis was issued 5,000 shares of Medifast, Inc. stock at market
as compensation for her services as a Director for 2002.
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
11