eDiets.com, Inc. (DIET)

One from the ‘needs more picks’ list.

From the profile on Yahoo, “eDiets.com, Inc. engages in the development and marketing of Internet-based diet and fitness programs in North America and Europe.” Basically, it’s an online diet and fitness book/system/meal plan.

The company’s earnings have been very inconsistent, with increasing losses three of the last four quarters. Tangible assets are negative, it has positive book value but that’s because there’s a lot of goodwill on the books.

The company lost money over the trailing 12 months. The two analysts that cover the stock both predict it will continue losing money through next year. One rates it a strong buy, the other a strong sell. It’s trading for over 7 times book value and 2.77 time sales. Enterprise Value to EBITDA is over 400. For reference, buyouts normally happen at EV/EBITDA ratios below about 8.

In a 4 Sep 07 8-K filing, the company outlines a senior secured note and warrant agreement with Pride’s Capital. From the 8-K, “Prides Capital loaned the Company $10 million with interest accruing at the rate of 15% per annum and the Company issued to Prides Capital the Note due August 31, 2010 and the Warrant to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $5.00 per share. The Company will use the proceeds from the sale of the Note to fund its business.” There are also between $175k and $200k of fees and expenses payable to Prides. At eDiet’s option, interest can either be paid or added to the principal balance. At note maturity, Prides has the option to get paid, convert the balance to shares at $3.29, or a combination. That’s over twelve million shares if the interest all gets added to the principal. There are just under 25 million shares outstanding.

The company has posted mediocre results and now will need to overcome a 15% interest rate on a loan that’s about 10% of the market cap. If the stock should do well, Pride’s stands to gain by exercising the warrants and diluting the share count. And, in 10 years there’s potential overhang of up to 12 million shares if interest accrues to principal and Prides elects to take shares instead of cash repayment.

The company’s success depends on transitioning from a subscription based service to a new meal delivery program. Seems like a tough path to success since there are already several well-known competitors in that field.

Prides Capital is positioned to capture most of any upside eDiets.com may have. The best case for current shareholders is substantial share dilution.