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, 2003 Commission File No. 0-23016
Medifast, Inc.
(Exact name of small business issuer in its charter)
Delaware 13-3714405
-------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11445 Cronhill Drive, Owings Mills, MD 21117
--------------------------------------------- ------------------
(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 SEPTEMBER 30,
2003: 10,064,995 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 September 30, 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.
November 10, 2003 /s/ Bradley T. MacDonald
--------------------------------------
Bradley T. MacDonald
Chairman, President and
Chief Executive Officer
INDEX
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
September 30, 2003 (unaudited) and December 31, 2002.......................... 3
Condensed Consolidated Statement of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 (unaudited).......... 4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 2003 and 2002(unaudited)...................... 5
Notes to Condensed Consolidated Financial Statements.............................. 6
Management Discussion and Analysis of Financial Condition
And Results of Operations..................................................... 8
PART II
Signature Page.................................................................... 12
CEO Certification .............................................................................. 13
2
MEDIFAST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 December 31, 2002
(Unaudited)
ASSETS
Current assets:
Cash .................................................................. $ 4,163,000 $ 837,000
Certificates of Deposit ............................................... 421,000 418,000
Accounts receivable, net of allowance ................................. 568,000 284,000
Merchandise inventory ................................................. 2,029,000 1,259,000
Investment Securities Available for Sale - Cost of $3,750,000 ........ 3,802,000 --
Prepaid expenses and other current assets ............................. 868,000 249,000
Deferred tax asset .................................................... 683,000 1,079,000
------------ ------------
Total Current Assets ............................................. 12,534,000 4,126,000
Property, plant and equipment - net ....................................... 7,056,000 4,498,000
Trademarks and Intangibles ................................................ 1,463,000 608,000
Other assets .............................................................. 73,000 1,000
Goodwill .................................................................. 1,439,000 --
Deferred tax asset ........................................................ -- 655,000
------------ ------------
TOTAL ASSETS ..................................................... $ 22,565,000 $ 9,888,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Dividends Payable ..................................................... 52,000 25,000
Line of Credit ........................................................ 257,000 91,000
Current maturities of long-term obligations ........................... 411,000 304,000
Accounts payable and accrued expenses ................................. 2,400,000 1,189,000
------------ ------------
Total Current Liabilities ............................................. 3,120,000 1,609,000
Deferred Compensation ................................................. 79,000 0
Long-term obligations less current maturities ......................... 4,259,000 2,701,000
------------ ------------
Total Liabilities ................................................ 7,458,000 4,310,000
------------ ------------
Commitments and contingencies:
Stockholders' Equity:
Series B Redeemable Convertible Preferred Stock; stated value $1.00;
600,000 shares authorized; 453,734 and 521,290 shares issued and
outstanding, respectively ....................................... 454,000 521,000
Series C Convertible Preferred Stock; stated value $1.00; 1,015,000 shares
authorized; 317,000 and 985,000 shares issued and
outstanding, respectively ............................................. 317,000 985,000
Common stock; par value $.001 per share; 15,000,000 authorized;
10,064,995 and 7,204,693 shares issued and outstanding, respectively .. 10,000 7,000
Additional paid-in capital ..................................................... 18,169,000 9,613,000
Accumulated deficit ....................................................... (3,445,000) (5,381,000)
Accumulated Comprehensive Income .......................................... 31,000 --
------------ ------------
15,536,000 5,745,000
Less Cost of Shares of Common Stock in Treasury of 66,195 and
30,178, respectively ...................................................... (429,000) (167,000)
------------ ------------
Total Stockholders' Equity ................................................ 15,107,000 5,578,000
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY .................................. $ 22,565,000 $ 9,888,000
============ ============
3
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
(Unaudited) (Unaudited)
Revenue ...................................... $ 6,775,000 $ 3,058,000 $ 19,539,000 $ 7,858,000
Cost of sales ................................ 1,925,000 961,000 5,236,000 2,593,000
------------ ------------ ------------ ------------
Gross Profit ................................. 4,850,000 2,097,000 14,303,000 5,265,000
Selling, general, and administration ......... 4,149,000 1,323,000 11,187,000 3,512,000
------------ ------------ ------------ ------------
Income from operations ....................... 701,000 774,000 3,116,000 1,753,000
------------ ------------ ------------ ------------
Other income/(expenses)
Interest expense ......................... (31,000) (26,000) (95,000) (80,000)
Other income (expense) ................... 17,000 (14,000) 26,000 (151,000)
------------ ------------ ------------ ------------
Income before provision for income taxes ..... 687,000 734,000 3,047,000 1,522,000
Provision for income tax (expense) benefit ... (167,000) 809,000 (1,072,000) 957,000
------------ ------------ ------------ ------------
Net income ................................... 520,000 1,543,000 1,975,000 2,479,000
Less: Stock dividend on preferred stock ...... 9,000 26,000 39,000 71,000
------------ ------------ ------------ ------------
Net income attributable to common shareholders $ 511,000 $ 1,517,000 $ 1,936,000 $ 2,408,000
============ ============ ============ ------------
Net Income ................................... 520,000 1,543,000 1,975,000 2,479,000
Other comprehensive income
Unrealized gains on investment securities 51,000 -- 51,000 --
Less: Income tax effect ................. (20,000) -- (20,000) --
------------ ------------ ------------ ------------
Comprehensive Income ......................... $ 551,000 $ 1,543,000 $ 2,006,000 $ 2,479,000
============ ============ ============ ============
Basic earnings per share ..................... $ .05 $ .22 $ .22 $ .36
Diluted earnings per share .................. $ .04 $ .18 $ .18 $ .29
Weighted average shares outstanding -
Basic .................................... 9,872,120 6,765,849 8,953,569 6,650,571
Diluted .................................. 11,863,185 8,713,582 11,076,550 8,506,814
4
MEDIFAST, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
2003 2002
(Unaudited) (Unaudited)
Cash Flow from Operating Activities:
Net income ................................................ $ 1,975,000 $ 2,479,000
Depreciation & Amortization .......................... 365,000 171,000
Issuance of Common Stock for Services ................ 61,000 --
Issuance of C Convertible Preferred .................. -- 24,000
Directors Compensation - Non-Cash .................... -- 41,000
Deferred Income Tax Expense (Benefit) ................ 1,031,000 (957,000)
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable ........... (234,000) 14,000
(Increase)/Decrease in inventory ..................... (524,000) (247,000)
(Increase) in prepaid expenses & other current assets (619,000) --
(Increase)/Decrease in other assets .................. (61,000) 155,000
(Decrease)/Increase in A/P and accrued expenses ...... (349,000) 713,000
----------- -----------
Net Cash provided by Operating Activities ................. 1,645,000 2,393,000
----------- -----------
Cash Flow from Investing Activities
Redemption of Certificates of Deposit ................ -- 201,000
Investment in certificates of deposit ................ -- (300,000)
Purchase of Investment Securities .................... (3,788,000) --
Purchase of equipment / Leasehold / Improvements ..... (2,720,000) (286,000)
Purchase of Building - 11445 Cronhill Drive .......... -- (3,451,000)
Purchase of intangible assets ........................ (147,000) (478,000)
----------- -----------
Total Cash Flow used in Investing Activities ......... (6,655,000) (4,314,000)
----------- -----------
Cash Flow from Financing Activities:
Increase in credit line (net) ............................. 166,000 100,000
Repayment of capital lease obligations .................... -- (23,000)
Issuance of Common Stock .................................. 6,496,000 --
Redemption Series "A" ..................................... -- (150,000)
Issuance of Series "C" Convertible Preferred .............. -- 102,000
Mercantile building loan .................................. -- 2,850,000
Proceeds from long term debt .............................. 1,951,000 --
Payment of Debt ........................................... (265,000) (89,000)
Dividends paid on preferred stock ......................... (12,000) (40,000)
----------- -----------
Net Cash provided by and used in Financing Activities: 8,336,000 2,750,000
----------- -----------
NET INCREASE IN CASH .......................................... 3,326,000 829,000
Cash and cash equivalents at beginning of period .............. 837,000 270,000
----------- -----------
Cash and cash equivalents at end of period .................... $ 4,163,000 $ 1,099,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ............................................. $ 96,000 $ 76,000
Income Taxes ......................................... 42,000 --
----------- -----------
Total ..................................................... $ 138,000 $ 76,000
=========== ===========
Purchase of Consumer Choice Systems for stock, options,
warrants, and other liabilities ............................... $ 1,766,000 $ --
=========== ===========
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, 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 and
nine-month periods ended September 30, 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 September 30 Nine months ended September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net Income:
As reported $ 520,000 $ 1,543,000 $ 1,975,000 $ 2,479,000
------------- ------------- ------------- -------------
Total stock based director compensation
Expense determined under fair value based
method for all awards, net of related tax effects (58,000) (94,000) (111 ,000 (95,000)
Pro forma $ 462,000 $ 1,449,000 $ 1,864,000 $ 2,384,000
============= ============= ============= =============
Net Income per share:
As reported:
Basic $ .05 $ .22 0.22 0.36
Diluted .04 .18 0.18 0.29
Pro forma:
Basic .05 .21 0.20 0.35
Diluted .04 .17 0.17 0.28
6
4. Business Combinations
On September 12, 2003, the Company signed an asset purchase agreement to acquire
the assets of Dunst & Associates, Inc. The agreement became effective October 1,
2003; therefore the results of operations have not been included in the
consolidated financial statements for the quarter ending September 30, 2003.
On June 16, 2003, the Company acquired substantially all of the assets and
significant liabilities of Consumer Choice Systems, Inc. The results of Consumer
Choice System, Inc.'s operations have been included in the consolidated
financial statements since that date. Consumer Choice Systems, Inc. is a
distributor of women's health products across the United States. As a result of
the acquisition, the Company is expected to be a significant provider of such
products. It also expects to reduce costs through economies of scale.
The aggregate purchase price was $1,148,000 including the value of common stock,
options and warrants issued to Consumer Choice System, Inc.'s shareholders.
Direct acquisition costs were an additional $618,000.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The Company is in the
process of obtaining valuations of certain intangible assets; thus, the
allocation of the purchase price is subject to adjustment.
Current assets $ 307,000
Property and equipment 100,000
Intangible assets 810,000
Goodwill 1,439,000
----------
Total assets acquired 2,656,000
Current liabilities (936,000)
Long-term debt
--
----------
Total liabilities assumed (936,000)
----------
Net assets acquired $1,720,000
==========
Of the $810,000 of acquired intangible assets, $150,000 was assigned to
registered trademarks that are not subject to amortization. The remaining
intangible assets will be amortized over useful lives of between 1 and 7 years.
The $1,439,000 of goodwill was assigned to the new retail segment for purposes
of impairment testing. No determination has yet been made as to the amount of
goodwill that will be deductible for income tax purposes.
Unaudited pro forma consolidated results of operations for the nine months ended
September 30, 2003 and 2002 as though Consumer Choice Systems, Inc. had been
acquired as of January 1, 2002 follow:
2003 2002
---- ----
Revenue $ 19,903,000 $ 8,352,000
Net income 929,000 1,195,000
Basic earnings per share .10 .17
Diluted earnings per share .08 .14
7
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Revenues for the first nine months of 2003 were $19,539,000, representing an
increase of $11,681,000 (149%) from the $7,858,000 reported for the nine-month
period ending September 30, 2002. 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, expansion of the Company's Medifast Plus for
Diabetics program 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 2003 increased by $2,643,000
(102%) from the same period in 2002. Gross profit for the first three quarters
of 2003 increased by $9,038,000 (172%) from 2002 due to sales of higher margin
products, such as Medifast Plus for Diabetics. Selling, general and
administrative expenses for the first three quarters of 2003 of $11,187,000
increased by $7,675,000 (219%) over the same period of 2002. This was a result
of increased advertising, because the Company was testing multiple advertising
concepts and strategies to ensure the most effective advertising programs would
be in place at the start of 2004. The company spent approximately $550,000 in
print advertising which was $400,000 greater than last year because of the value
of testing the proper mix and results of each type of media in connection with
the direct response TV commercial. The increase was also a result of the
internal infrastructure buildup to ensure that adequate staff and equipment
would be in place for the significant boost in revenues expected in 2004. The
increase in expenses was also related to the distribution expenses of
introducing new products into the Consumer Choice Systems retail channel, such
as the Urinary Tract Infection Test Sticks, which increased distribution
expenses by $100,000 during the quarter.
The income before provision for income taxes for the first nine months of 2003
was $3,047,000, which is $1,525,000 (100%) greater than the same period last
year. The operating profit is attributable primarily to a consumer advertising
and Internet-focused teleweb sales and marketing strategy and higher margin new
product and programs sales. Increased sales via the web based Lifestyles
Program, Take Shape Health Advisors, and the Internet support to medical
practitioners and their patients significantly improved margins to 73%.
Management significantly improved the balance sheet and the Company's cash
position during the period. Interest expense was $95,000 during the nine-month
period ending September 30, 2003 as compared to $80,000 for the same period in
2002. The Company increased shareholders' equity to $15,107,000, which is
$9,529,000 (171%) greater than at December 31, 2002. Since December 31, 2000,
the Company has increased shareholders' equity by $13,897,000, which continues
to absorb the dilution of preferred stock, options/warrants and the sale of
equity in a private placement in July 2003.
8
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
Third quarter revenues for 2003 of $6,775,000 increased by $3,717,000 (122%)
from $3,058,000 for the three-month period ended September 30, 2002. Cost of
sales for the period was $1,925,000, an increase of $964,000 (100%) from
$961,000 during the same period of 2002. Gross profits of $4,850,000 for the
third quarter of 2003 increased by $2,753,000 (131%) from $2,097,000 in the
third quarter of 2002. During the quarter the Company experienced a profit from
operations of $701,000 compared to a profit of $774,000 for the third quarter of
2002. The income before provision for income taxes for the third quarter of 2003
was $687,000 compared to $734,000 in the third quarter of 2002. A provision for
income tax of $167,000 was recognized in the third quarter of 2003, compared to
an income tax benefit of $809,000 realized from net operating loss carry forward
in the third quarter of 2002.
For the period ending September 30, 2003 the Company's Stockholders' Equity was
$15,107,000, which is an increase of $9,828,000 (186%) from $5,279,000 for the
period ended September 30, 2002. The Company's working capital at September 30,
2003 was $9,414,000, an increase of $7,373,000 (361%) from the $2,041,000
balance at September 30, 2002. The Company's Cash and Investment holdings at
September 30, 2003 was $7,965,000, an increase of $6,866,000 (625%) from the
period ending September 30, 2002. The increase in cash and liquid investments
allows the Company to absorb the initial costs associated with the 2004
advertising campaign, as well initiate the infrastructure buildup to prepare for
the expected increase in revenues in 2004.
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 25, 2003, the Company announced that it had sold an aggregate
of 550,000 shares of common stock and warrants to purchase 82,500
shares of common stock (the Private Investment in Public Entity "PIPE"
Shares) to Mainfield Enterprises, Inc. and Portside Growth &
Opportunity Fund. The shares of common stock were sold for a cash
consideration of $12.40 per share, or a total of $6,820,000 less direct
transaction costs of $514,000, and the warrants, exercisable for a
period of five years from the date of issuance, at an exercise price
equal to one hundred fifteen percent (115%) of the five-day volume
weighted average price (the PIPE Transaction), all pursuant to the
terms of that certain Securities Purchase Agreement by and between the
Company and Mainfield Enterprises, Inc. and Portside Growth &
Opportunity Fund dated as of July 24, 2003 (the Securities Purchase
Agreement). The PIPE Shares were issued in a private placement
transaction pursuant to Section 4(2) and Regulation D under the
Securities Act of 1933, as amended (the Securities Act).
9
o On July 18, 2003 Seven Crondall Associates, LLC, a wholly owned
subsidiary of Medifast, Inc., reached an agreement with NewRoads, Inc.
to purchase a 119,000 sq. foot distribution facility located in
Ridgely, Maryland. The new distribution facility will be responsible
for the storage and distribution of Medifast and Woman's Wellbeing
products to its vast network of medical practitioners, patients, health
advisors and retail drug stores. The Company intends to invest $3
million over the next 24 months, which includes the purchase price of
the facility along with initial start-up costs. The Company will
finance $1.7 million through Merrill Lynch Capital at the 30 day LIBOR
interest rate plus 220 basis points over the next seven years. The
purchase of the distribution facility assists in preparing the internal
infrastructure of the Company to handle future sales of up to $200
million of products per year.
o On July 25, 2003 the Medifast Annual Shareholder Meeting was held at
The American Stock Exchange. The Shareholders voted in favor of the
classification of the Board of Directors into three classes consisting
of Class I, Class II and Class III based on seniority and to amend the
Company bylaws accordingly . The shareholders voted Bradley MacDonald
(91%) and Donald Reilly (96%) into Class I, Scott Zion (96%) and
Michael MacDonald (91%) into Class II, and Mary Travis (96%) and
Michael J. McDevitt (96%) into Class III. Additionally, the
shareholders approved the reappointment of Wooden & Benson, Chartered,
as the Company's independent auditors for the fiscal year ending
December 31, 2003. The Directors elected Mr. Bradley T. MacDonald as
Chairman of the Board, CEO, Treasurer and Secretary, and Mr. Scott Zion
as Assistant Secretary of the Corporation. The stockholders approved
and the Directors amended the Company's 1993 stock option plan and
increased the number of authorized stock options from one million
(1,000,000) to one million two hundred fifty thousand (1,250,000) in
order to provide incentives for employees, directors, and consultants
performance.
The Company had stockholders' equity of $15,107,000 and working capital of
$9,414,000 on September 30, 2003 compared with stockholders' equity of
$5,578,000 and working capital of $2,517,000 at December 31, 2002. The
$9,529,000 net increase in stockholders' equity and the $6,897,000 net increase
in working capital reflects the profits and equity contributions in the first
nine months 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:
1) 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 through 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.
10
2) In June 2003, Consumer Choice Systems, Inc. (CCS), transferred
assets consisting of accounts receivable to Medifast Inc. Included in these
receivables was $150,000 due from Dexxus, an export company based out of Chile
with a presence in the United States. The Company will vigorously pursue Dexxus
for failure to pay for the product according to the terms of the agreement. If
payment is not made promptly, the Company will pursue all legal and/or criminal
remedies available under the law. This receivable is not included in the balance
sheet of Medifast, Inc. at September 30, 2003.
Other:
1) During the quarter the Company, along with the assistance from its
advertising agencies, simultaneously tested several new methods of advertising
concepts and strategies. These tests were completed in order to ensure the most
effective plan would be in place at the start the Company's 2004 T.V. and Print
advertising campaign. The Company estimated its uncapitalized financial cost
attributable to these comparison tests to be an incremental Two Hundred Thousand
Dollars ($200,000). The Company believes the benefits from this expense will be
realized in 2004, although expensed in 2003.
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. Throughout the third quarter of 2003, the Company
issued 749,333 shares of Common Stock.
On July 24, 2003, the Company sold an aggregate of four hundred and twenty five
thousand (425,000) shares of common stock to Mainfield Enterprises at a cash
consideration of $12.40 per share. Mainfield Enterprises also received 63,750
warrants, exercisable for a period of five years form the date of the issuance,
and an exercise price equal to one hundred fifteen percent (115%) of the
five-day volume weighted average price.
On July 24, 2003, the Company sold an aggregate of one hundred and twenty five
thousand (125,000) shares of common stock, to Portside Growth & Opportunity Fund
at a cash consideration of $12.40 per share. Portside Growth % Opportunity Fund
also received 18,750 warrants, exercisable for a period of five years form the
date of the issuance, and an exercise price equal to one hundred fifteen percent
(115%) of the five-day volume weighted average price.
On September 5, 2003, Mary Travis, Director, was granted two thousand five
hundred (2,500) shares of common stock. The grant was for her performance as
financial expert on the audit committee.
On September 10, 2003, CEOcast, Inc. was granted six thousand (6,000) shares of
common stock for their work as advisor towards the Company's acquisition of
Consumers Choice Systems, as well as their work as Investor Relations consultant
to the Company.
11
Significant Subsequent Events:
1) On November 7, 2003, Jason Properties, LLC, a wholly owned subsidiary of
Medifast, Inc. purchased the assets of KOW, Inc. located in Gulf Breeze,
Florida. KOW, Inc., experiencing liquidity problems, held the assets of
Hi-Energy Control Centers, a national company with weight loss centers in over
50 locations. The acquisition includes equipment, inventory, trademarks, and
licenses for fifty Hi-Energy clinics. The clinics are located primarily in the
southeastern region of the United States. The purchase price was $1.5 million in
cash, which included selected liabilities, capital expenditures, costs of assets
and miscellaneous fees. Hi-Energy Centers specialize in weight management
programs, and customized patient support in a professionally trained
environment. The Company plans to incorporate its existing 25 Medslim clinics
with the new centers to provide a clinical and supportive environment for its
customers.
2) Seven Crondall, LLC, a real estate limited liability company and a wholly
owned subsidiary of Medifast, Inc. has decided not to purchase the real estate
located at 9791 Pintail Plaza St. Michaels, Maryland, due to zoning restrictions
that have a negative impact on the utilization of property as a conference
center, for training Take Shape for Life distributors, and Hi Energy Clinic
owners. The Company will now use the facilities leased in Gulf Breeze, FL, the
headquarters for Hi Energy Clinics, as a training facility for the next year.
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
------------------------
Bradley T. MacDonald
Chairman & CEO
12
MEDIFAST, INC.
-----------------------
CERTIFICATION PURSUANT OT RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
I, Bradley T. MacDonald, Chief Executive Officer/ Chief Financial Officer,
certify that:
(1) I have reviewed this quarterly report on form 10Q of Medifast, Inc.
(the "registrant");
(2) Based on my knowledge, this quarterly report 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 this quarterly report;
(3) Based on my knowledge, the financial statements and other financial
information included in this quarterly report, 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 quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintainng disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we 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 in which this quarterly report 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 quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly report 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 (or persons performing
the equivalent function):
(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 registrant's
auditors any material weaknesses in internal controls: and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
13
(6) The registrant's certifying officer has indicated in this quarterly
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect interal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2003 /s/ Bradley T. MacDonald
------------------------
Bradley T. MacDonald
Chief Executive Officer
Chief Financial Officer
14
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-Q for the quarter ended September 30, 2003 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:
(3) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended; and
(4) 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 Financial Officer
November 13, 2003
15