--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-QSB/A
Amendment No. 1
_______________
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 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)
_______________
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 ___
Indicate the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date.
At August 6, 2001, there were 13,586,566 shares of common stock, par value $.001
per share, outstanding.
Transitional Small Business Disclosure Format (check one): ____Yes X No
---
Explanatory Note:
This amendment on Form 10-QSB/A amends the registrant's quarterly report on Form
10-QSB for the quarterly period ended June 30, 2001 as filed by the registrant
on August 8, 2001, and is being filed to reflect the restatement of the
registrant's unaudited condensed consolidated financial statements. See Note 8
to the unaudited condensed consolidated financial statements.
--------------------------------------------------------------------------------
Index to Items
Page
----
Part I - Financial Information
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet (Restated) as of June 30, 2001 3
Condensed Consolidated Statements of Operations (Restated) - Three
months and six months ended June 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows (Restated) - Six months
ended June 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements (Restated) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signature Page 14
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EDIETS.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2001
(In thousands)
(Unaudited)
ASSETS
CURRENT ASSETS: (Restated)
Cash and cash equivalents $ 1,867
Accounts receivable, net 442
Prepaid advertising costs 333
Prepaid expenses and other current assets 226
----------
Total current assets 2,868
Restricted cash 238
Prepaid advertising costs 1,043
Property and equipment, net 930
----------
Total assets $ 5,079
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 391
Accrued liabilities 1,593
Current portion of capital lease obligations 120
Deferred revenue 2,549
----------
Total current liabilities 4,653
Capital lease obligations, net of current portion 141
STOCKHOLDERS' EQUITY:
Common stock 14
Additional paid-in capital 7,308
Unearned compensation (5)
Accumulated deficit (7,032)
----------
Total stockholders' equity 285
----------
Total liabilities and stockholders' equity $ 5,079
==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
EDIETS.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------------
2001 2000 2001 2000
(Restated) (Restated)
------------- ---------- ------------ ------------
REVENUE $ 5,774 $ 2,266 $ 10,144 $ 3,400
COSTS AND EXPENSES:
Cost of revenue 227 110 522 238
Product development 127 65 208 108
Sales and marketing 4,555 4,569 7,669 6,150
General and administrative 966 756 1,726 1,398
Depreciation and amortization 118 82 216 140
-------- -------- -------- --------
Total costs and expenses 5,993 5,582 10,341 8,034
-------- -------- -------- --------
Loss from operations (219) (3,316) (197) (4,634)
Other income, net 3 37 7 111
Provision for income taxes (4) - (4) -
-------- -------- -------- --------
Net loss $ (220) $ (3,279) $ (194) $ (4,523)
======== ======== ======== ========
Loss per common share
Basic and diluted $ (0.02) $ (0.25) $ (0.01) $ (0.35)
======== ======== ======== ========
Weighted average common shares outstanding
Basic and diluted 13,562 13,094 13,557 12,870
======== ======== ======== ========
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)
Six Months Ended June 30,
-------------------------------------
2001 2000
(Restated)
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (194) $ (4,523)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 216 140
Provision (recovery) for bad debt (6) 34
Non-cash compensation 121 121
Changes in operating assets and liabilities:
Accounts receivable 224 (179)
Prepaid expenses and other current assets (415) (635)
Restricted cash (118) -
Accounts payable and accrued liabilities 60 1,029
Deferred revenue 1,197 868
------------------ ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,085 (3,145)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (249) (343)
------------------ ----------------
NET CASH USED IN INVESTING ACTIVITIES (249) (343)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance costs of common stock (10) (173)
Repayment of capital lease obligations (46) (23)
------------------ ----------------
NET CASH USED IN FINANCING ACTIVITIES (56) (196)
------------------ ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 780 (3,684)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,087 6,283
------------------ ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,867 $ 2,599
================== =================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Value of warrants issued for services $ 158 $ -
================== =================
Equipment acquired under capital leases $ 149 $ 55
================== =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
EDIETS.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(Unaudited)
1. Nature of Operations
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
generally accepted accounting principles 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 and six
months ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2001. 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, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles 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 now hold 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.
6
EDIETS.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
In January 2001, the Company entered into a consulting agreement whereby the
consultant is to work 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 $160,000, of which approximately $80,000 has been recognized as
compensation expense in the condensed consolidated statement of operations for
the six months ended June 30, 2001.
4. Equity Investment
The Company has an investment in a foreign joint venture that is accounted for
under the equity method of accounting. Under the equity method of accounting,
the Company's share of the investee's earnings or loss is included in
consolidated operating results. To date, the Company's basis and current
commitment in its investment accounted for under the equity method of accounting
have not been significant. As a result, this investment has not significantly
impacted the Company's results of operations or its financial position.
5. Loss Per Common Share
Basic loss per common share is computed using the weighted average number of
common shares outstanding during the period. Potential common shares consist of
the incremental common shares issuable upon exercise of stock options and
warrants (using the treasury stock method). Potential common shares outstanding
have not been included in the computation of diluted loss per share for all
periods presented, as their effect is anti-dilutive.
6. Income Taxes
Income tax expense for the three and six months ended June 30, 2001 was $4,000
and relates to a provision for alternative minimum taxes as 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. Subsequent Event
On July 6, 2001, the Company and DietSmart, Inc. a Delaware corporation
("DietSmart"), entered into a Letter Agreement (the "Letter Agreement"),
pursuant to which the Company agreed to acquire all of the outstanding capital
stock of DietSmart for (i) 2 million shares of common stock, par value $.001 per
share, of the Company, and (ii) $2.5 million in cash, payable in installments
with interest beginning on the closing date and continuing over a period of time
not to exceed 15 months. The closing of the transaction is conditioned upon,
among other things, satisfactory completion by each of the parties of a
confirmatory due diligence review and the negotiation and execution of
definitive documentation (including employment agreements with certain executive
members of DietSmart), which the parties are obligated in good faith to
negotiate, execute and deliver. In the event the definitive agreements are not
entered into on or prior to August 20, 2001, under certain circumstances, the
Company will be obligated to pay DietSmart a fee of $250,000 plus reimburse
DietSmart for up to $50,000 of legal expenses incurred by DietSmart in
connection with the transaction.
Subsequent to the execution of the Letter Agreement, on July 11, 2001 eDiets
loaned DietSmart $50,000.
7
EDIETS.COM, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Restatement of Financial Statements
On February 12, 2002 the Company announced the restatement of its results of
operations for the three and six months ended June 30, 2001. The Company
determined that certain diet and fitness subscription payment plans launched in
the latter half of its second quarter had not been incorporated into the
Company's deferred revenue calculations at June 30, 2001, and, as a result, the
unaudited consolidated financial statements for the three and six months ended
June 30, 2001 should be restated.
The balance sheet as of June 30, 2001 and the statement of operations for the
three and six months ended June 30, 2001 presented herein reflect the
restatement as follows (in thousands, except per share data):
As Previously
Reported As Restated
--------------- ------------
Balance Sheet as of June 30, 2001:
Deferred revenue $ 2,174 $ 2,549
Accumulated deficit (6,657) (7,032)
Stockholders' equity 660 285
As Previously
Reported As Restated
-------------- ------------
Statements of Operations:
Three months ended June 30, 2001
--------------------------------
Revenue $ 6,149 $ 5,774
Net income (loss) 155 (220)
Earnings (loss) per common share
Basic and diluted 0.01 (0.02)
Six months ended June 30, 2001
------------------------------
Revenue $ 10,519 $ 10,144
Net income (loss) 181 (194)
Earnings (loss) per common share
Basic and diluted 0.01 (0.01)
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Subsequent to the issuance of the Company's financial statements for the three
and six months ended June 30, 2001 the Company concluded that the calculation
for deferred revenue did not include all the necessary information to be
complete, and, as a result, the unaudited consolidated financial statements for
the three and six months ended June 30, 2001 should be restated.
The information contained in this Current Report on Form 10-QSB/A, 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,"
"anticipate," "believe," "estimate," "plan," "intend" 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 the Company's ability to meet its' financial obligations;
- associated with the relative success of marketing and advertising;
- associated with the continued attractiveness of the Company's diets 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
For additional information regarding these and other risks and uncertainties
associated with our business, reference is made to the Company's Annual Report
filed on Form 10-KSB for the fiscal year ended December 31, 2000 and other
reports filed by the Company from time to time with the Securities and Exchange
Commission. No obligation is undertaken by the Company 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. The following discussion should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto included elsewhere in this report.
OUR BUSINESS
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, which we call our eDiets program, that is unique to
each consumer and then deliver it directly to the individual's home or office
via the Internet.
9
We also publish eDiets News, a newsletter that is an online diet information
resource. We currently email our newsletter four times a week to a community of
over 6.2 million consumers who have completed our questionnaire, received a
personal profile and have provided us with an email address.
In November 2000, we entered into a joint venture with Unislim Ireland, Limited,
the leading weight loss center business in Ireland, to market our online weight
loss programs in Europe, Australia and New Zealand. Under the terms of our joint
venture agreement, we received a 60% interest in the joint venture primarily in
return for the license of our international technology rights to the joint
venture. The initial international launch occurred in the United Kingdom in
March 2001.
In January 2001, we launched a personalized exercise and fitness program to
supplement our basic diet program. Our fitness model contains personalized
workout schedules, complete with animated exercise instruction.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the Company
expressed as a percentage of total revenue:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 2001 2000
(Restated) (Restated)
-------------------- ------------------
Revenue 100% 100% 100% 100%
Cost of revenue 4 5 5 7
Product development 2 3 2 3
Sales and marketing 79 202 76 181
General and administrative 17 33 17 41
Depreciation and amortization 2 4 2 4
Other income, net * 2 * 3
Income taxes * - * -
Net loss (4) (145) (2) (133)
* less than 1%
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THREE AND SIX MONTHS
ENDED JUNE 30, 2000
Revenue increased 155% for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000 and 198% to $10,144,000 for the six months
ended June 30, 2001 compared to $3,400,000 for the same period in 2000. The
increase in revenue for the three and six months ended June 30, 2001 was
primarily due to the increased number of subscribers to our diet program and, to
a lesser extent, an increase in membership prices in the first quarter. Unique
members during the three months ended June 30, 2001 were approximately 275,000
as compared to 130,000 unique members for the same period in the prior year.
Paying members as of June 30, 2001 were approximately 207,000 compared to
107,000 as of June 30, 2000. The principal reason for the increase in the number
of our members was the expansion of our online advertising efforts and the
continued success in the Company's internal marketing efforts via its
newsletters. Approximately 8% and 7% of our revenues in the three and
10
six months ended June 30, 2001, respectively, came from additional sources of
revenue such as opt-in email revenue, advertising revenue, affiliate or
commission revenue and e-commerce revenue.
As of June 30, 2001, the Company had deferred revenue of $2,549,000 relating to
membership payments for which services had not yet been provided.
Cost of revenue consists primarily of Internet access and service charges,
revenue sharing costs, consulting costs for professionals that provide online
meetings, and salary payments to the Company's nutritional staff. Cost of
revenue increased to $227,000 and $522,000 for the three and six months ended
June 30, 2001, respectively, as compared to $110,000 and $238,000 for the same
periods in the prior year, respectively. The dollar increases were primarily
attributable to increased revenue sharing costs and additional personnel costs
incurred for our nutritional staff.
Product development costs consist primarily of salary payments to our
development staff and related expenditures for technology and software
development. Product development expenses increased to $127,000 and $208,000 for
the three and six months ended June 30, 2001, respectively, as compared to
$65,000 and $108,000 for the corresponding periods in the prior year,
respectively. The dollar increases were primarily due to additional personnel
costs related to creating and testing new design concepts and tools to be used
throughout the Company's web site.
Sales and marketing expenses consist primarily of Internet advertising expenses
and are generally incurred prior to the recognition of revenues from sales
generated from those efforts. Sales and marketing expenses decreased by $14,000
for the three months ended June 30, 2001, and increased by $1,519,000 for the
six months ended June 30, 2001, as compared to the same periods in the prior
year. The change in sales and marketing expenses was primarily due to the
Company's more extensive advertising placements with major Internet portals,
including several of the American Online websites, Women.com, iVillage,
Microsoft and eUniverse offset by the minimal use of offline advertising in the
current periods. Included in sales and marketing expenses for the 2000 periods
is a $3.0 million expense related to the offline advertising campaign that began
in the second quarter of 2000. This campaign, which was the first offline
advertising campaign for the Company, consisted of radio commercials and print
advertisements in magazines targeted to potential members. New members from the
campaign were less than expected and as a result the Company terminated its
agreement with its advertising agency in June 2000 and halted any future offline
advertising spending not already committed. At June 30, 2001, the Company had
approximately $1,376,000 of prepaid advertising related to future advertising
with these Internet portals.
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 $966,000 and $1,726,000 for the
three and six months ended June 30, 2001, respectively, from $756,000 and
$1,398,000 for the same periods in the prior year, respectively. The dollar
increases were primarily due to increases in personnel costs, professional fees
and general overhead.
Depreciation and amortization expenses increased to $118,000 and $216,000 for
the three and six months ended June 30, 2001, respectively, from $82,000 and
$140,000 for the corresponding periods in the prior year, respectively. The
increases were primarily attributable to a greater amount of property and
equipment subject to depreciation and amortization as compared to the same
periods in the prior year.
Other income, net, which consists primarily of interest income, decreased by
$34,000 and $104,000 for the three and six months ended June 30, 2001,
respectively, from the corresponding periods in the prior year. The decrease was
primarily due to a lower average invested cash balance for the current periods
as compared to the same periods in the prior year.
11
Income tax expense for the three and six months ended June 30, 2001 relate to a
provision for alternative minimum taxes as 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. As a result of the factors
discussed above, we recorded a net loss of $220,000 and $194,000 for the three
and six months ended June 30, 2001, respectively, compared to a net loss of
$3,279,000 and $4,523,000 in the same periods in the prior year, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had cash and cash equivalents of $1,867,000.
For the six months ended June 30, 2001, net cash provided by operating
activities of $1,085,000 was primarily due to an increase in deferred revenue
and a decrease in accounts receivable. Net cash used in investing activities was
$249,000 and related to purchases of computer equipment and furniture. Net cash
used in financing activities was $56,000 for the period and was principally used
for the repayment of capital lease obligations.
We have online advertising commitments with major Internet portals totaling
approximately $7.5 million over the next two years, of which approximately $5.8
million is payable over the next twelve months.
In December 2000, we obtained an irrevocable standby letter of credit from a
bank in the amount of $75,000 that expires in January 2002. In March 2001, we
increased the letter of credit to $200,000. The letter of credit is collaterized
by our cash equivalents and is being used to guarantee the obligations under
capital leases for computer servers. As of June 30, 2001 we had approximately
$149,000 in leased equipment against the letter of credit.
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 the Company requires additional funds to
support its operations or the expansion of its business, the Company may seek to
undertake additional equity financing. There can be no assurance that additional
financing, if required, will be available to the Company in amounts or on terms
acceptable to the Company.
12
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 Amendment to Interactive Services Agreement dated May 23, 2001 between
the Company and America Online, Inc. (1) (2)
10.2 Amendment to Master Advertising Agreement dated June 4, 2001 between
the Company and Microsoft Corporation (1) (2)
10.3 Second Amendment to Content License Agreement dated June 25, 2001
between the Company and Yahoo! Inc. (1) (2)
(1) Confidential treatment requested pursuant to Rule 24B-2 promulgated
under the Securities Exchange Act of 1934. Confidential portions of this
document have been redacted and have been filed separately with the SEC.
(2) Incorporated by reference to the Registrant's Form 10-QSB for the
quarterly period ended June 30, 2001 and filed with the SEC on August 8,
2001.
(b) During the three months ended June 30, 2001, the Company did not file any
reports on Form 8-K.
13
SIGNATURE
---------
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.
eDiets.com, Inc.
/s/ ROBERT T. HAMILTON
-----------------------
ROBERT T. HAMILTON
Chief Financial Officer
(Principal Financial Officer)
DATE: February 13, 2002
14