UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-23016
MEDIFAST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3714405
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF ORGANIZATION) IDENTIFICATION NO.)
11445 CRONHILL DRIVE
OWINGS MILLS, MD 21117
TELEPHONE NUMBER (410) 581-8042
Indicate by checkmark 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 |_|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by checkmark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS MAY 3, 2006
--------------------------------------- --------------
Common stock, $.001 par value per share 13,363,624 shares
INDEX
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets -
March 31, 2006 (unaudited) and December 31, 2005 (audited)........... 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2006 and 2005 (unaudited)............... 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2006 and 2005 (unaudited)............... 5
Notes to Condensed Consolidated Financial Statements..................... 7
Management Discussion and Analysis of Financial Condition
and Results of Operations............................................ 13
PART II
Exhibits................................................................. 17
EX 31.1
EX 31.2
EX 32.1..
2
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 3,793,000 $ 1,484,000
Accounts receivable-net of allowance for doubtful accounts of $100,000 775,000 985,000
Inventory 5,072,000 5,475,000
Investment securities 2,764,000 2,700,000
Deferred compensation 627,000 525,000
Prepaid expenses and other current assets 2,438,000 3,273,000
Note receivable - current 183,000 --
Deferred tax asset 90,000 --
------------ ------------
TOTAL CURRENT ASSETS 14,442,000
15,742,000
Property, plant and equipment - net 10,076,000 9,535,000
Trademarks and intangibles - net 4,785,000 6,508,000
Deferred tax asset, net of current portion 172,000 --
Note receivable, net of current portion 1,320,000 --
Other assets 61,000 60,000
------------ ------------
TOTAL ASSETS $ 32,156,000 $ 30,545,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,918,000 $ 2,263,000
Income taxes payable 483,000 899,000
Line of credit 624,000 633,000
Current maturities of long-term debt 542,000 561,000
Deferred tax liability - current -- 90,000
------------ ------------
TOTAL CURRENT LIABILITIES 4,567,000 4,446,000
Long-term debt, net of current portion 3,851,000 3,977,000
Deferred tax liability - non-current -- 101,000
------------ ------------
TOTAL LIABILITIES 8,418,000 8,524,000
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock; par value $.001 per share; 20,000,000 authorized;
13,363,624 and 12,782,791 shares issued and outstanding, respectively 13,000 13,000
Additional paid-in capital 25,579,000 21,759,000
Accumulated other comprehensive income 227,000 282,000
Retained Earnings 2,843,000 1,149,000
------------ ------------
28,662,000 23,203,000
Less: cost of 210,902 shares of common stock in treasury (1,075,000) (1,075,000)
Less: unearned compensation (3,849,000) (107,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,738,000 22,021,000
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 32,156,000 $ 30,545,000
============ ============
See accompanying notes to condensed consolidated financial statements.
3
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
------------ ------------
(Unaudited) (Unaudited)
Revenue $ 19,183,000 $ 8,326,000
Cost of sales 4,778,000 2,073,000
------------ ------------
GROSS PROFIT 14,405,000 6,253,000
Selling, general, and administration 11,351,000 5,341,000
------------ ------------
INCOME FROM OPERATIONS 3,054,000 912,000
Other income/(expense)
Interest expense (89,000) (65,000)
Loss on sale of Consumer Choice Systems (323,000)
Interest income 98,000 28,000
Other income (expense) 79,000 (21,000)
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,819,000 854,000
Provision for income tax (expense) (1,125,000) (347,000)
------------ ------------
NET INCOME 1,694,000 507,000
Less: Preferred stock dividend requirement -- --
------------ ------------
NET INCOME $ 1,694,000 $ 507,000
============ ============
Basic earnings per share $ 0.13 $ 0.04
Diluted earnings per share $ 0.13 $ 0.04
Weighted average shares outstanding -
Basic 12,965,518 11,916,241
Diluted 13,474,411 12,729,459
See accompanying notes to condensed consolidated financial statements.
4
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
--------------------------
2006 2005
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 1,694,000 $ 507,000
Adjustments to reconcile net income to net cash
provided by operating activities from
continuing operations:
Depreciation and amortization 759,000 470,000
Realized (gain) loss on investment securities (19,000) 22,000
Loss on sale of Consumer Choice Systems 323,000
Common stock issued for services 33,000 103,000
Stock options vested during period 18,000 --
Excess tax benefits from share-based payment arrangements (6,000) --
Vesting of unearned compensation 15,000 --
Net change in other comprehensive (loss) income (55,000) (57,000)
Deferred income taxes (35,000)
(262,000)
Provision for bad debts -- 13,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 79,000 (109,000)
(Increase) decrease in inventory 46,000 (211,000)
(Increase) decrease in prepaid expenses & other current assets 835,000 (214,000)
(Increase) in deferred compensation (102,000) --
(Increase) in other assets (1,000) --
Increase in accounts payable and accrued expenses 652,000 197,000
(Decrease) in deferred tax liability (191,000) --
(Decrease) in income taxes payable (416,000) (317,000)
----------- -----------
Net cash provided by operating activities 3,402,000 369,000
----------- -----------
Cash Flow from Investing Activities:
Sale (Purchase) of investment securities, net (44,000) (32,000)
(Purchase) of property and equipment (763,000) (486,000)
(Purchase) of intangible assets (150,000) (66,000)
----------- -----------
Net cash provided by (used in) investing activities (957,000) (584,000)
----------- -----------
Cash Flow from Financing Activities:
Issuance of common stock, options and warrants 13,000 1,000
Increase in credit line, net -- 660,000
Principal repayments of long-term debt (155,000) (131,000)
Excess tax benefits from share-based payment arrangements 6,000 --
Dividends paid on preferred stock -- (11,000)
----------- -----------
Net cash provided by (used in) financing activities (136,000) 519,000
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,309,000 304,000
Cash and cash equivalents - beginning of the period 1,484,000 612,000
----------- -----------
Cash and cash equivalents - end of period $ 3,793,000 $ 916,000
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 89,000 $ 65,000
=========== ===========
Income taxes $ 1,231,000 $ 25,000
=========== ===========
Supplemental disclosure of non cash activity:
Common stock issued to executives over 6-year vesting period $ 3,373,000 $ --
=========== ===========
Common shares issued for options and warrants $ 384,000 $ --
=========== ===========
Options vested during period $ 18,000 $ --
=========== ===========
Conversion of preferred stock B and C to common stock $ -- $ 300,000
=========== ===========
Common stock issued for services $ 33,000 $ 103,000
=========== ===========
Preferred B and C stock dividends converted to common stock $ -- $ 269,000
=========== ===========
Line of credit converted to long-term debt $ -- $ 369,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
5
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2006 2005
----------- -----------
(Unaudited) (Unaudited)
Supplemental disclosure of non cash activity:
Sale of Consumer Choice Systems
-----------------------------------------------------
Inventory $ 358,000 $ --
Accounts Receivable 131,000 --
Intangible assets, net 1,337,000 --
Note receivable (1,503,000) --
Loss on sale of Consumer Choice Systems (323,000) --
----------- -----------
$ --
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. Basis of Presentation
The condensed unaudited interim consolidated financial statements included
herein have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not contain
information included in the Company's annual statements and notes. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
December 31, 2005 audited consolidated financial statements and the accompanying
notes thereto. While management believes the procedures followed in preparing
these condensed consolidated financial statements are reasonable, the accuracy
of the amounts are in some respects dependent upon the facts that will exist,
and procedures that will be accomplished by the Company later in the year.
These condensed unaudited consolidated financial statements reflect all
adjustments, including normal recurring adjustments, which, in the opinion of
management, are necessary to present fairly the operations and cash flows for
the period presented.
2. Presentation of Financial Statements
The Company's condensed consolidated financial statements include the accounts
of Medifast, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
3. Inventories
Inventories consist principally of finished packaged foods, packaging and raw
materials held in either the Company's manufacturing facility and distribution
warehouse. Inventories are valued with cost determined using the first-in,
first-out (FIFO) method.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 142 "Goodwill and Other Intangible Assets". This statement addresses
financial accounting and reporting for acquired goodwill and other intangible
assets and supersedes APB Opinion No. 17, "Intangible Assets". It addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. This Statement also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. On January 17, 2006, the
Company sold its goodwill balance of $893,500 when the Consumer Choice Systems
division was sold.
The Company has intangible assets, which include: customer lists, non-compete
agreements, trademarks and patents. The non-compete agreements are being
amortized over the legal life of the agreements ranging between 3 to 7 years.
The customer lists are being amortized over a period ranging between 5 to 10
years based on management's best estimate of the expected benefits to be
consumed or otherwise used up. Trademarks and patents are regularly reviewed to
determine whether the facts and circumstances exist to indicate that the useful
life is shorter than originally estimated or the carrying amount of the assets
may not be recoverable. The Company assesses the recoverability of its
7
trademarks and patents by comparing the projected discounted net cash flows
associated with the related asset, over their remaining lives, in comparison to
their respective carrying amounts. Impairment, if any, is based on the excess of
the carrying amount over the fair value of those assets.
AS OF MARCH 31, 2006 AS OF DECEMBER 31, 2005
--------------------------------------------- --------------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------------- ------------------- ---------------------- -------------------
Customer lists $ 4,295,000 $ 1,090,000 $ 4,514,000 $ 873,000
Non-compete agreements 840,000 663,000 840,000 566,000
Trademarks and patents 1,482,000 78,000 1,821,000 121,000
Goodwill -- -- 894,000 --
---------------------- ------------------- ---------------------- -------------------
Total $ 6,617,000 $ 1,831,000 $ 8,069,000 $ 1,560,000
====================== =================== ====================== ===================
AMORTIZATION EXPENSE FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 WAS AS
FOLLOWS:
2006 2005
---------------------- -------------------
Customer lists $ 419,000 161,000
Non-compete agreements 97,000 72,000
Trademarks and patents 20,000 --
---------------------- -------------------
Total Trademarks and Intangibles $ 536,000 $ 233,000
====================== ===================
On January 17, 2006 the Consumers Choice Systems division of the Company was
sold which included the sale of $1,601,000 in gross intangible assets and
$265,000 in accumulated amortization.
Amortization expense is included in selling, general and administrative
expenses.
5. Fixed Assets
Fixed assets are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets,
which are generally three to seven years. Leasehold improvements and equipment
under capital leases are amortized on a straight-line basis over the lesser of
the estimated useful life of the asset or the related lease terms. Expenditures
for repairs and maintenance are charged to expense as incurred, while major
renewals and improvements are capitalized.
8
6. Note Receivable
Medifast realized a $1,503,000 note receivable as a result of the sale of
Consumer Choice Systems on January 17, 2006 to a former board member. The note
has a 10-year term with imputted interest of 4% collateralized by 50,000 shares
of Medifast stock and all the assets of the Company. The amount of principal to
be collected over each of the next 5 years is $183,000 per year with the
remaining amount collectible thereafter of $588,000.
7. Income Per Common Share
Basic income per share is calculated by dividing net income 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.
8. Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
9. Share Based Payments
Stock-Based Compensation
Effective December 31, 2005, the Company adopted the provisions of Financial
Accounting Standards Board Statement of Financial Accounting Standard ("SFAS")
No. 123(R), "Share-Based Payments," which establishes the accounting for
employee stock-based awards. Under the provisions of SFAS No.123(R), stock-based
compensation is measured at the grant date, based on the calculated fair value
of the award, and is recognized as an expense over the requisite employee
service period (generally the vesting period of the grant). The Company adopted
SFAS No. 123(R) using the modified prospective method and, as a result, periods
prior to December 31, 2005 have not been restated. The Company recognized
stock-based compensation for awards issued under the Company's stock option
plans in the Selling, General and Administrative line item of the Condensed
Consolidated Statement of Operations. Additionally, no modifications were made
to outstanding stock options prior to the adoption of SFAS No. 123(R), and no
cumulative adjustments were recorded in the Company's financial statements.
Prior to December 31, 2005, the Company accounted for stock-based compensation
in accordance with provisions of Accounting Principles Board Opinion No. 25
("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations. Under APB No. 25, compensation cost was recognized based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock. The Company
grants stock options at an exercise price equal to 100% of the market price on
the date of grant. Accordingly, no compensation expense was recognized for the
stock option grants in periods prior to the adoption of SFAS No. 123(R).
9
Unearned compensation represents shares issued to executives that will be vested
over a 5-6 year period. These shares will be amortized over the vesting period
in accordance with FASB 123(R). The expense related to the vesting of unearned
compensation was $15,000 and $0 at March 31, 2006 and March 31, 2005,
respectively.
SFAS No. 123(R) requires disclosure of pro-forma information for periods prior
to the adoption. The pro-forma disclosures are based on the fair value of awards
at the grant date, amortized to expense over the service period. The following
table illustrates the effect on net income and earnings per share as if the
Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", for the period prior to the adoption
of SFAS No. 123(R), and the actual effect on net income and earnings per share
for the period after the adoption of SFAS No. 123(R).
Three Months Ended
---------------------------------
03/31/06 03/31/05
--------------- ----------------
Net income, as reported $ 1,694,000 $ 507,000
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 11,000
Deduct: Total stock-based employee compensation expense
determined under fair value based method (11,000) (247,000)
--------------- ----------------
for all awards, net of related tax effects
Net income, pro forma $ 1,694,000 $ 260,000
Earning per share:
Basic, as reported 0.13 0.04
Basic, pro forma 0.13 0.02
Diluted, as reported 0.13 0.04
Diluted, pro forma 0.13 0.02
For the purpose of the above table, the fair value of each option granted
is estimated as of the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
Three Months Ended
March 31, 2006 March 31, 2005
Dividend yield ................... 0.0% 0.0%
Expected volatility .............. 0.70 0.70
Risk-free interest rate .......... 4.50% 4.5%
Expected life in years ........... 1-5 1-5
10
March 31, 2006
Weighted Weighted
Average Average
Exercise Contractual
Shares Price Term (Years)
------------ ------------- -------------
Outstanding, December 31, 2005 284,727 1.51
Options granted 100,000 6.25
Options reinstated -- -- --
Options exercised (3,333) (3.83)
Options forfeited or expired
------------ ------------- -------------
Outstanding March 31, 2006 381,394 4.02 4.05
============ ============= =============
Options exercisable, March 31, 2006 254,726 3.43 3.43
============ ============= =============
Options available for grant at end of year 965,273 860,603
============ =============
The following summarizes the stock option activity for the three months
ended March 31, 2006:
10. Recent Accounting Pronoumcements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, "Inventory Costs."
SFAS No. 151 requires abnormal amounts of inventory costs related to idle
facility, freight handling and wasted material expenses to be recognized as
current period charges. Additionally, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. The standard is effective for fiscal
years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a
material impact on the Company's financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 replaces Accounting Principles Board ("APB") Opinion
No. 20, "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements." SFAS No. 154 requires retrospective application
to prior periods' financial statements of a voluntary change in accounting
principle unless it is impracticable. APB No. 20 previously required that most
voluntary changes in accounting principle be recognized by including the
cumulative effect of changing to the new accounting principle in net income in
the period of the change. SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The adoption of SFAS No. 154 did not have a material impact on the Company's
financial position or results of operations.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140." SFAS
No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets," and permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133, establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired or
issued after the beginning of the first fiscal year that begins after September
15, 2006. The Company is currently evaluating the effect the adoption of SFAS
No. 155 will have on its financial position or results of operations.
11
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 156 requires
an entity to recognize a servicing asset or liability each time it undertakes an
obligation to service a financial asset by entering into a servicing contract
under a transfer of the servicer's financial assets that meets the requirements
for sale accounting, a transfer of the servicer's financial assets to a
qualified special-purpose entity in a guaranteed mortgage securitization in
which the transferor retains all of the resulting securities and classifies them
as either available-for-sale or trading securities in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" and an
acquisition or assumption of an obligation to service a financial asset that
does not relate to financial assets of the servicer or its consolidated
affiliates. Additionally, SFAS No. 156 requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, permits an entity to choose either the use of an amortization or fair
value method for subsequent measurements, permits at initial adoption a one-time
reclassification of available-for-sale securities to trading securities by
entities with recognized servicing rights and requires separate presentation of
servicing assets and liabilities subsequently measured at fair value and
additional disclosures for all separately recognized servicing assets and
liabilities. SFAS No. 156 is effective for transactions entered into after the
beginning of the first fiscal year that begins after September 15, 2006. The
Company is currently evaluating the effect the adoption of SFAS No. 156 will
have on its financial position or results of operations.
11. Revenue Recognition
Revenue is recognized for product sales upon shipment and passing of risk to the
customer and when estimates of discounts, rebates, promotional adjustments,
price adjustments, returns, and other potential adjustments are reasonably
determinable, collection is reasonably assured and the Company has no further
performance obligations. These estimates are presented in the financial
statements as reductions to net revenues and accounts receivable. Estimated
sales returns, allowances and discounts are provided for.
Outbound shipping charges to customers and outbound shipping-related costs are
netted and included in "cost of sales."
Returns - Consistent with industry practice, the Company maintains a return
policy that allows its customers to return product within a specified period (30
days). Because the period of payment generally approximates the period revenue
was originally recognized, refunds are recorded as a reduction of revenue when
paid. The Company's estimate for returns is based upon its historical experience
with actual returns. While such experience has allowed for reasonable estimation
in the past, history may not always be an accurate indicator of future returns.
The Company continually monitors its estimates for returns and makes adjustments
when it believes that actual product returns may differ from the established
accruals.
12
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this Report on Form 10-Q
contains certain forward-looking statements that involve substantial risks and
uncertainties. When used in this Report, the words "anticipate," "believe,"
"estimate," "expect" and similar expressions, as they relate to Medifast, Inc.
or its management, are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Accordingly, there is no assurance that the results in the forward-looking
statements will be achieved.
GENERAL
THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
Revenues for the first three months of 2006 were $19,183,000, representing an
increase of $10,857,000 (130%) from the $8,326,000 reported for the three-month
period ending March 31, 2005. The growth in revenue is primarily the result of
an increased advertising campaign which consisted of print, TV, internet and
radio advertising which is believed to have increased consumer awareness of the
Medifast brand. Advertising expense for the first quarter of 2006 was
approximately $2,500,000 as compared to approximately $850,000 in the first
quarter of 2005. The direct sales network, Take Shape For Life, continues to
experience increased sales volume as a result of the expansion of the sales
network. The Company continues to create new tools and training materials for
health advisors and is in the final stages of implementing a new IT platform.
The new software will empower the Take Shape for Life direct selling model by
implementing the infrastructure and tools that are critical in supporting health
advisors grow their business. At the same time, we are implementing an
Enterprise Resource Management solution to upgrade our technology infrastructure
and improve manufacturing and business processes. This will enable us to handle
future growth and improve efficiencies across the business platform.
As compared to the first quarter of 2005, the direct marketing sales channel,
which is fueled primarily by consumer advertising increased by approximately
240% in the first three months of 2006. Take Shape for Life sales, which are
fueled by person to person recruiting and support increased by 75% year over
year. The Hi-Energy corporate clinics experienced significant sales growth as
compared to the first three months of 2005.
Due to the significant growth in the first quarter of 2006, Medifast, Inc. began
exploring third party over-sourcing capabilities in both the call center and
product production. The Company began using an outsourced call center for
overflow call volume in late April. Also, an outsourced production facility was
employed in late April to produce certain high volume products in order to
increase our inventory levels for anticipated future growth. The Company
believes that these over-sourcing capabilities will provide the Company with the
scalability necessary to seamlessly handle increased demands as the business
continues to grow.
Cost of sales for the first quarter of 2006 increased by $2,705,000, which was a
130% increase from the first quarter of 2005. Cost of goods sold, as a
percentage of revenue, remained steady at 25% of sales. Gross profit for the
first quarter of 2006 increased by $8,152,000 (130%) from the first quarter of
2005. Selling, general and administrative expenses for the first quarter of 2006
were $11,351,000, which increased by $6,010,000 (113%) as compared to the same
period in 2005. Selling, general and administrative expenses as a percentage of
sales decreased from 64% at March 31, 2005 to 59% at March 31, 2006.
13
On January 17, 2006 the assets of Consumer Choice Systems, a division of
Medifast, Inc., were sold to a former Board member. The promissory note calls
for monthly principal only payments over a 10-year term. Therefore, when
imputing an interest rate on the loan, a $323,000 loss had to be realized due to
the difference in the present value of the note receivable compared to the
amount realizable over 10-years. This is a one-time loss that will not effect
any future periods.
The Company reported pre-tax income of $2,819,000, a 230% increase compared to
$854,000 for the quarter-ended March 31, 2005. The Company reported net income
of $1,694,000, or $0.13 per basic share ($0.13 per diluted share), versus
$507,000 or $0.04 per basic share ($0.04 per diluted share) in 2005. The
increase in earnings per share is due to sales growth as well as a decrease in
selling, general and administrative expenses as a percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company had stockholders' equity of $23,738,000 and working capital of
$11,175,000 on March 31, 2006 compared with $19,748,000 and $8,037,000 at March
31, 2005, respectively. The $4,072,000 net increase in stockholder's equity and
the $3,138,000 net increase in working capital reflects the increased
profitability of the Company. The Company's cash position increased from $1.5
million at December 31, 2005 to $3.8 million at March 31, 2006 which is
attributable to the increased sales and a decrease in expenses as compared to
total sales. On March 31, 2006 the Company's current ratio was 3.4 to 1.
SEASONALITY
The Company's weight management products and programs have historically been
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." In 2005 and into 2006 seasonality has not
been much of a factor. This is largely due to the increase in the consumer's
awareness of the overall health and nutritional benefits accompanied with the
use of the Company's product line. As consumers continue to increase their
association of nutritional weight loss programs with overall health, seasonality
will continue to decrease.
INFLATION
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
Litigation:
There was no material pending or threatened litigation as of 3/31/06.
Long-Term Employment Contracts
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The Board of Directors of Medifast, Inc. is in the process of implementing a
management succession plan which will take place over the next 24 months. In
doing so, they have had 3 key executive officers sign 6-year employment
contracts to ensure that there will be minimal turnover in selected key
management positions. The Executives associated with this succession plan
include Michael S. McDevitt, President and Chief Financial Officer, Margaret
MacDonald, VP of Operations and Brendan Connors, CPA, VP of Finance. Bradley T.
MacDonald, the Executive Chairman of the Board of Directors and CEO has signed
and executed a new 5 year employment agreement as the Executive Chairman of the
Board of Directors and will provide on-going executive mentoring, financial and
M&A advice, and new business development for the Company.
On February 8, 2006, three executive officers of the company signed 6-year
employment contracts. The officers received shares of common stock in varying
amounts totaling 380,000 shares at $6.25 per share that will be vested over 6
years. In addition, Bradley T. MacDonald, Chairman and CEO signed a new 5-year
employment agreement and was granted 100,000 stock options at $6.25 that will
vest over 5 years beginning on February 8, 2007.
Planned stock sale
In order to diversify his retirement portfolio which is largely invested in
Medifast stock, Bradley MacDonald, Chairman and CEO is planning on selling
approximately 250,000 shares of Medifast stock over the next 12 months. After
the sale, he will still beneficially own approximately 1.1 million shares of
Medifast, Inc. common stock which would currently represent about 8% of the
outstanding shares.
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 all remaining shares of
Series "B" preferred stock, dividends paid on Series "C" preferred stock and the
exercising of warrants the Company issued 1,172,386 shares of common stock
throughout the first quarter of 2005. Of these shares issued, 1,122,386 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-K, 10-Q and 8-K in order to insure
that investors have available the same information necessary to make investment
decisions as insiders.
Internal Control Policy: As of March 31, 2006, the Company's management, with
the participation of the Chief Executive Officer and the President, performed an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based
on that evaluation, the Chief Executive Officer and the President have concluded
that the design and operation of these disclosure controls and procedures were
effective as of the end of the period covered by this report. In connection with
this evaluation, no change in the Company's internal control over financial
reporting was identified that occurred during the period covered by this report
that has materially affected, or is reasonably likely to affect the Company's
internal control over financial reporting.
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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.
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Index to Exhibits
Exhibit Number Description of Exhibit
31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-K, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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