================================================================================
U.S. 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 quarterly period ended March 31, 2002 Commission File Number 0-30559
eDiets.com, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 56-0952883
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3801 W. Hillsboro Boulevard
Deerfield Beach, Florida 33442
(Address of principal executive offices)
(954) 360-9022
(Issuer's telephone number, including area code)
---------------
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ___
---
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date.
At May 3, 2002, there were 15,755,263 shares of common stock, par value $.001
per share, outstanding.
Transitional Small Business Disclosure Format (check one): ____ Yes X No
-----
--------------------------------------------------------------------------------
Index to Items
Page
----
Part I - Financial Information
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of March 31, 2002 3
Condensed Consolidated Income Statements - Three months ended
March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDIETS.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(In thousands)
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,836
Accounts receivable, net 229
Prepaid advertising costs 819
Prepaid expenses and other current assets 364
-----------
Total current assets 4,248
Restricted cash 269
Property and equipment, net 1,025
Intangibles, net 1,271
Goodwill 5,191
Other assets 47
-----------
Total assets $ 12,051
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 546
Accrued liabilities 1,971
Current portion of capital lease obligations 123
Current portion of notes payable 2,000
Deferred revenue 2,668
-----------
Total current liabilities 7,308
Capital lease obligations, net of current portion 91
Notes payable, net of current portion 4
Deferred tax liability 478
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock 16
Additional paid-in capital 9,727
Unearned compensation (1)
Accumulated deficit (5,572)
-----------
Total stockholders' equity 4,170
-----------
Total liabilities and stockholders' equity $ 12,051
===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EDIETS.COM, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
----------------------------------
2002 2001
------------- -------------
REVENUE $ 6,998 $ 4,370
COSTS AND EXPENSES:
Cost of revenue 820 467
Product development 361 81
Sales and marketing 3,572 3,119
General and administrative 1,470 583
Depreciation and amortization 324 98
------------- -------------
Total costs and expenses 6,547 4,348
------------- -------------
Income from operations 451 22
Other (expense) income, net (32) 4
Income tax benefit 53 -
------------- -------------
Net income $ 472 $ 26
============= =============
Earnings per common share
Basic $ 0.03 $ -
============= =============
Diluted $ 0.03 $ -
============= =============
Weighted average common and common
equivalent shares outstanding
Basic 15,609 13,553
============= =============
Diluted 17,706 14,659
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EDIETS.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
---------------------------------------------
2002 2001
------------------ ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 472 $ 26
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 159 98
Amortization of intangibles 165 -
Net recoveries of bad debts and sales returns (19) (24)
Stock based compensation 78 42
Deferred tax benefit (62) -
Changes in operating assets and liabilities:
Accounts receivable 43 374
Prepaid expenses and other current assets (116) (247)
Restricted cash - (116)
Other assets (2) -
Accounts payable and accrued liabilities (93) (112)
Deferred revenue 475 1,126
------------------ ----------------
Net cash provided by operating activities 1,100 1,167
CASH FLOWS FROM INVESTING ACTIVITY:
Purchases property and equipment (79) (113)
------------------ ----------------
Net cash used in investing activity (79) (113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6 -
Repayment of capital lease obligations (33) (19)
------------------ ----------------
Net cash used in financing activities (27) (19)
------------------ ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 994 1,035
Cash and cash equivalents, beginning of period 1,842 1,087
------------------ ----------------
Cash and cash equivalents, end of period $ 2,836 $ 2,122
================== ================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest $ 8 $ 4
================== ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Equipment acquired under capital leases $ - $ 18
================== ================
Value of warrants issued for services $ - $ 158
================== ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
EDIETS.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(Unaudited)
1. ORGANIZATION
eDiets.com, Inc. (the Company) was incorporated in the State of Delaware on
March 18, 1996 for the purpose of developing and marketing an Internet-based
diet and nutrition program. In addition to a personalized and regularly updated
plan, subscribers to the Company's program can also purchase related items and
attend online motivational meetings. The Company markets its program primarily
through advertising and other promotional arrangements on the world wide web.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements included
herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to those rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. All the adjustments which, in the opinion of
management, are considered necessary for a fair presentation of the results of
operations for the periods shown are of a normal recurring nature and have been
reflected in the unaudited condensed consolidated financial statements. Results
of operations for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. The information included in these unaudited condensed consolidated
financial statements should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in this
report and the consolidated financial statements and accompanying notes included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. While the Company believes that
such estimates are fair when considered in conjunction with the condensed
consolidated financial position and results of operations taken as a whole, the
actual amount of such estimates, when known, may vary from these estimates.
3. STOCKHOLDERS' EQUITY
In connection with the Company's 1999 Private Placement, the Company had issued
640,625 warrants, each to purchase one share of common stock at an exercise
price of $2.50 per share, to the placement agent. The quantity and price of such
warrants were subject to adjustment in certain events. On March 28, 2001 an
adjustment was made to the quantity and price of the placement agent warrants.
Under the terms of the modified warrant agreement, the placement agent and its
designees held 950,000 warrants, each to purchase one share of common stock at
an exercise price of $1.38 per share. Such warrants remain exercisable through
November 2004 and under the modified agreement are now redeemable at the option
of the Company upon the occurrence of certain events. The excess of the fair
value of the new warrants over the value of the original warrants at the date of
modification was charged to equity during the quarter ended March 31, 2001.
In January 2001, the Company entered into a consulting agreement whereby the
consultant worked with management to strategize and coordinate all public, media
and investor relations efforts of the Company for a one-year period. As
compensation to the consultant, the Company issued 400,000 warrants with an
exercise price of $0.75 per share. The warrants had immediate vesting and are
exercisable through January 2004. The fair value of the warrants totaled
approximately $158,000 and has been recognized as consulting expense over the
term of the agreement.
In January 2002, the Company issued 25,000 stock options to a member of the
Company's Board of Directors for services provided to the company beyond his
duties as a Board Member. The fair value of the options totaled approximately
$24,000, which was recognized as consulting expense in the accompanying
condensed consolidated income statement for the quarter ended March 31, 2002.
During the first quarter of 2002, the Company issued a total of 61,000 stock
options to non-employees. The fair value of the options totaled approximately
$53,000, which was recognized as general and administrative expense in the
accompanying condensed consolidated income statement for the quarter ended
March 31, 2002.
6
4. EQUITY INVESTMENT
The Company has a 60% interest in a foreign joint venture, eDiets Europe
Limited, that is accounted for under the equity method of accounting. The
investment recorded to date is zero as it has been limited to the license of the
Company's international technology rights. Accordingly, since the Company has
not invested any funds, nor is it committed to do so, the Company has not
recorded its share of the joint venture's losses since inception. eDiets Europe
Limited's losses since inception totaled approximately $325,000 through March
31, 2002. Once the Company makes a cash investment or commitment to the joint
venture, the Company will record its share of the losses to date, up to the
amount funded.
5. EARNINGS PER COMMON SHARE
Basic earnings per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive potential
common shares outstanding during the period. Dilutive potential common shares
consist of the incremental common shares issuable upon exercise of stock options
and warrants (using the treasury stock method).
The following table sets forth the computation of basic and diluted earnings per
common share (in thousands, except per share information):
Three Months Ended
March 31,
-----------------------------
2002 2001
----------- -----------
Basic earnings per common share:
Net income $ 472 $ 26
Weighted average common shares outstanding 15,609 13,553
Basic earnings per common share $ 0.03 $ -
=========== ===========
Diluted earnings per common share:
Net income $ 472 $ 26
Weighted average common shares outstanding 15,609 13,553
Effect of dilutive potential common shares:
Stock options and warrants 2,097 1,106
----------- -----------
Adjusted weighted average shares and
assumed conversions 17,706 14,659
=========== ===========
Diluted earnings per common share $ 0.03 $ -
=========== ===========
6. INCOME TAXES
The Company recorded approximately $62,000 of income tax benefit for the three
months ended March 31, 2002 related to the amortization of intangible assets
resulting from the DietSmart acquisition in October 2001. The Company expects to
be able to offset substantially all taxable income for the current year with
available net operating loss carryforwards from prior years.
7. NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 142 (SFAS
No. 142), "Goodwill and Other Intangible Assets", as of January 1, 2002. Under
SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the statement. Other intangible assets will continue to be
amortized over their useful lives. The Company performed the transitional
impairment test required under SFAS No. 142 and has determined that no
impairment exists. As of March 31, 2002, the Company had goodwill of $5.2
million.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information contained in this Current Report on Form 10-QSB, other than
historical information may include forward-looking statements as defined in the
Private Securities Reform Act of 1995. Words such as "may", "will", "expect",
"intend", "anticipate", "believe", "estimate", "continue", "plan" and similar
expressions in this report identify forward-looking statements. The forward-
looking statements are based on current views with respect to future events and
financial performance. Actual results may differ materially from those
projected in the forward-looking statements. The forward-looking statements are
subject to risks, uncertainties and assumptions, including, among other things
those:
. associated with our ability to meet our financial obligations;
. associated with the relative success of marketing and advertising;
. associated with the continued attractiveness of our diet and fitness
programs;
. competition, including price competition and competition with self-
help weight loss and medical programs;
. adverse results in litigation and regulatory matters, more aggressive
enforcement of existing legislation or regulations, a change in the
interpretation of existing legislation or regulations, or promulgation
of new or enhanced legislation or regulations; and
. general economic and business conditions.
The factors listed in the section entitled "Certain Factors Which May Affect
Future Results" in the section "Management's Discussion and Analysis of
Financial Condition and Results of Operations", as well as any other cautionary
language in this report, provide examples of risks, uncertainties and events
which may cause our actual results to differ materially from the expectations we
described in our forward-looking statements. We do not undertake any obligation
to publicly release the result of any revisions to these forward-looking
statements, which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OUR BUSINESS
We are the leader in personalized online diet and fitness programs, with a
current base of over 200,000 paying customers and a total online community of
over 10 million consumers. We were named a Forbes Best of the Web Fitness and
Nutrition Website by Forbes(TM) Magazine in 2000 and 2001.
We are one of the original marketers of customized fee-based diet programs
exclusively online. We have developed a proprietary software engine that enables
us to create a diet program that is unique to each individual and then deliver
it directly to the individual's home or office via the Internet. We believe our
personalization features, low cost and centralized Internet distribution creates
a unique competitive advantage in a market where the market leader, Weight
Watchers(R) International, Inc., primarily operates a decentralized network of
brick and mortar storefronts.
8
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of total revenue:
Three Months Ended March 31,
2002 2001
--------------------------------
Revenue 100% 100%
Cost of revenue 12 11
Product development 5 2
Sales and marketing 51 71
General and administrative 21 13
Depreciation and amortization 5 2
Other income, net * *
Income tax benefit * -
Net income 7 1
* less than 1%
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 TO MARCH 31, 2001
Our revenue for the three months ended March 31, 2002 was $6,998,000 as compared
to $4,370,000 for the three months ended March 31, 2001. The 60% increase in
revenue was mainly due to the increase in the number of subscribers to our diet
and fitness programs and price increases over the prior year. Paying members as
of March 31, 2002 were approximately 205,000 compared to approximately 185,000
as of March 31, 2001. Revenue growth was also driven by a 34% increase in
revenues per average subscriber. The majority of the increase was due to price
increases in the form of a shorter initial membership period combined with a
higher absolute price for our program. Approximately 7% of our revenues in the
three months ended March 31, 2002 came from additional sources of revenue, such
as opt-in email revenue, advertising revenue, commission revenue and e-commerce
revenue.
As of March 31, 2002, we had deferred revenue of $2,668,000 relating to payments
for which services/products had not yet been provided/shipped.
Cost of revenue consists primarily of Internet access and service charges,
credit card fees, revenue sharing costs, consulting costs for professionals that
provide online meetings, advertising servicing fees and salary payments to our
nutritional staff. Cost of revenue increased to $820,000 or 12% of revenues for
the three months March 31, 2002 from $467,000 or 11% of revenues for the three
months ended March 31, 2001. We attribute the dollar increase primarily to
increased Internet access and service charges, credit card fees, and product and
shipping costs related to the sale of our proprietary products.
Product development costs consist primarily of salary payments to our
development staff and related expenditures for technology and software
development. These expenses increased to $361,000 or 5% of revenues for the
three months ended March 31, 2002 from $81,000 or 2% of revenues for the three
months ended March 31, 2001. The dollar increase for the three months ended
March 31, 2002 as compared to the corresponding period in the prior year was
primarily due to additional personnel costs related to creating and testing new
design concepts and tools to be used throughout our Website.
9
Sales and marketing expenses consist primarily of Internet advertising expenses
which we generally incur prior to the recognition of revenues from sales
generated from those efforts. These expenses increased to $3,572,000 or 51% of
revenues for the three months ended March 31, 2002 from $3,119,000 or 71% of
revenues for the three months ended March 31, 2001. Sales and marketing costs
for Internet advertising was approximately $2.7 million for the periods ended
March 31, 2002 and 2001. The Company also incurred approximately $800,000 of
compensation costs related to its sales and marketing activities for the period
ended March 31, 2002 as compared to approximately $400,000 in the corresponding
period in the prior year. The increase was primarily due to additional personnel
costs related to sales and marketing efforts.
General and administrative expenses consist primarily of salaries, overhead and
related costs for general corporate functions, including professional fees.
General and administrative expenses increased to $1,470,000 or 21% of revenues
for the three months ended March 31, 2002 from $583,000 or 13% of revenues for
the three months ended March 31, 2001. The dollar increase was primarily due to
increases in salaries for additional personnel, general overhead and
professional fees.
Depreciation and amortization expenses increased to $324,000 or 5% of revenues
for the three months ended March 31, 2002 from $98,000 or 2% of revenues for the
three months ended March 31, 2001. The dollar increase was primarily
attributable to the larger asset base subject to depreciation and amortization.
Other (expense) income, net, which consists of interest income and interest
expense, decreased by $36,000 to $(32,000) for the three months ended March 31,
2002 from the corresponding period in the prior year. The decrease was
primarily due to a lower average invested cash balance for the current year as
compared to the prior year in addition to interest expense incurred in
connection with the notes payable issued as a part of the acquisition of
DietSmart, Inc. (DietSmart) in October 2001.
Income tax benefit for the three months ended March 31, 2002 mainly relates to
the tax benefit from the amortization of intangible assets resulting from the
DietSmart acquisition. We expect to be able to offset substantially all taxable
income for the current year with available net operating loss carryforwards from
prior years.
As a result of the factors discussed above, we recorded net income of $472,000
for the three months ended March 31, 2002 compared to $26,000 for the three
months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had unrestricted cash and cash equivalents of
$2,836,000. For the three months ended March 31, 2002, net cash provided by
operating activities was $1,100,000, and was primarily due to net income during
the period and an increase in deferred revenue, offset by a decrease in
accounts payable and accrued liabilities. Net cash used in investing activities
was $79,000 and related to our purchases of property and equipment. Net cash
used in financing activities was $27,000 for the period and was primarily
related to the repayment of capital lease obligations.
The following summarizes future cash outflow related to our contractual
obligations at March 31, 2002 (in thousands):
Total Less than 1 year 1-3 years After 3 years
--------------- -------------------- -------------- -----------------
Contractual obligations:
Long term debt (1) $2,000 $2,000 $ - $ -
Capital lease obligations 252 145 78 29
Operating leases 817 243 489 85
Online advertising 225 125 100 -
--------------- -------------------- -------------- -----------------
Total contractual cash obligations $3,294 $2,513 $667 $114
=============== ==================== ============== =================
(1) Long term debt represents amounts owed in connection with the DietSmart
acquisition. In accordance with the merger agreement, payments may be
accelerated under the following situations:
a) If we have cash and cash equivalents in excess of a certain amount at
October 31, 2002, we will be required to make the final installment
within ten (10) days after the availability of the monthly financial
statements.
10
b) If there is a change in control which results in beneficial owners
(excluding the current beneficial owners) owning an interest of at
least 51% of our outstanding common shares, all of the scheduled
payments, including interest, are payable within thirty (30) days of
the change in control.
c) If we raise equity in excess of $1,000,000, then 20% of those proceeds
will be used as a prepayment towards future scheduled payments.
We currently have online advertising commitments with major Internet portals
totaling approximately $225,000 through March 31, 2004.
We have an irrevocable standby letter of credit from a bank in the amount of
$200,000 that expires in January 2003. The letter of credit is collateralized by
certain cash equivalents and is being used to guarantee our obligations under
our capital leases for computer servers. As of March 31, 2002 we had
approximately $122,000 in leased equipment against the letter of credit.
We are committed to loan the three founders of DietSmart funds to satisfy their
tax obligations if the acquisition of DietSmart is determined not to be a tax-
free reorganization by the Internal Revenue Service. Such commitment is
outstanding as long as we have not yet fully paid the scheduled debt payments to
the DietSmart shareholders. If we grant loans, such loans would be interest
bearing and secured by an equal value of eDiets shares and due no later than
three years after the loans were made. Management does not expect the loans to
be required but to the extent they are granted, they could have a material
impact on the Company's liquidity.
Management believes that cash on hand and cash flows from operations will be
sufficient to fund its working capital and capital expenditures for at least the
next twelve months. To the extent we require additional funds to support our
operations or the expansion of our business, we may seek to undertake additional
equity financing. There can be no assurance that additional financing, if
required, will be available to us in amounts or on terms acceptable to us or at
all.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. The Company
adopted SFAS No. 141 effective July 1, 2001 and SFAS No. 142 as of January 1,
2002. The Company performed the transitional impairment test required upon the
adoption of SFAS No. 142 and has determined that no impairment of its goodwill
exists. As such, there was no impact as a result of the adoption of SFAS No. 142
on the Company's financial position, results of operations or cash flows.
11
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are omitted as they are either not applicable or have
been included in Part I.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.1 Employment Termination Agreement dated as of April 1, 2002 between
eDiets.com, Inc. and Carlos Lopez-Ona
10.2 Employment Termination Agreement dated as of April 17, 2002 between
eDiets.com, Inc. and Andrew G. Smith
(b) Reports on Form 8-K:
1. A report on Form 8-K was filed with the Securities and Exchange
Commission on February 15, 2002 reporting one event under Item 5. Other
Events, and filing one exhibit under Item 7. Exhibits.
12
SIGNATURE
---------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eDiets.com, Inc.
/s/ ROBERT T. HAMILTON
-----------------------
ROBERT T. HAMILTON
Chief Financial Officer
(Principal Financial Officer)
DATE: May 15, 2002
13
Exhibit Index
Exhibit
Number Description
------ -----------
Exh 10.1 - Employment Termination Agreement dated as of April 1, 2002
between eDiets.com, Inc. and Carlos Lopez-Ona
Exh 10.2 - Employment Termination Agreement dated as of April 17, 2002
between eDiets.com, Inc. and Andrew G. Smith