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(Exact
name of registrant as specified in its charter)
iDelaware
i13-3714405
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i100 International Drive
iBaltimore, iMarylandi21202
Telephone Number: (i410) i581-8042
(Address
of Principal Executive Offices, Zip Code and Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon
Stock, par value $0.001 per share
iMED
iNew York Stock Exchange
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.
iYesx No o
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYesx No o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ix
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. iSUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of Medifast, Inc. and its wholly-owned subsidiaries (“Medifast,” the “Company,”“we,”“us,” or “our”) included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim reporting and pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and notes that are normally required by GAAP have been condensed or omitted. However, in the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included and management believes the disclosures that are made are adequate to make the information presented not misleading. The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”).
The
results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2022. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the 2021 Form 10-K.
iPresentation
of Financial Statements - The unaudited condensed consolidated financial statements included herein include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated.
iReclassification - Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation. No reclassification in the condensed consolidated financial statements had a
material impact on the presentation.
iUse of Estimates - The preparation of financial statements in conformity with GAAP 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 reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.
iAccounting
Pronouncements Adopted in 2022
In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying accounting principles under GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and to other derivative instruments if there is a change to the interest rates used for discounting, margining or contract
price alignment. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We adopted Topic 848 beginning in the first quarter of fiscal 2022 without any material impact on the Company's financial position and results of operations.
2. iINVENTORIES
Inventories
consist principally of raw materials, non-food finished goods and packaged meal replacements held in the Company’s warehouses and outsourced distribution centers. Inventories are stated at the lower of cost or net realizable value, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventories for unsalable or obsolete inventories.
The Company donated inventory with an aggregate cost of $i1.1 million
and $i10.5 million to Ukrainian refugees and those in need in Ukraine, increasing selling, general and administrative (“SG&A”) expenses during the three and nine months ended
iSeptember 30,
2022. The donations were made to two 501(c)(3) organizations that are coordinating the distribution throughout refugee camps in Europe and in Ukraine.
i
Inventories consisted of the following (in thousands):
Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of the Company’s common stock outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of the Company’s common stock outstanding adjusted for the effect of dilutive common stock equivalents.
i
The
following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):
Weighted
average shares of common stock outstanding
i10,964
i11,692
i11,290
i11,739
Effect
of dilutive common stock equivalents
i78
i93
i79
i101
Weighted
average shares of common stock outstanding
i11,042
i11,785
i11,369
i11,840
Earnings
per share - basic
$
i3.30
$
i3.59
$
i10.37
$
i11.07
Earnings
per share - diluted
$
i3.27
$
i3.56
$
i10.30
$
i10.98
/
The
calculation of diluted EPS excluded i10 thousand and i0
thousand antidilutive restricted stock awards for the three months ended September 30, 2022 and 2021, respectively, and i3 thousand and i0
thousand antidilutive restricted stock awards for the nine months ended September 30, 2022 and 2021, respectively. EPS is computed independently for each of the periods presented above, and accordingly, the sum of the quarterly earnings per common share may not equal the year-to-date total computed.
4. iSHARE-BASED
COMPENSATION
Stock Options
The Company has issued non-qualified and incentive stock options to employees and non-employee directors. The fair value of these options are estimated on the date of grant using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the risk-free interest rate, the expected volatility of the price of the Company’s common stock, and dividend yield. Options outstanding as of iSeptember 30,
2022 generally vest over a period of ithree years and expire iten years
from the date of grant. The exercise price of these options ranges from $i26.52 to $i66.68.
Due to the Company’s lack of option exercise history on the date of grant, the expected term is calculated using the simplified method defined as the midpoint
between the vesting period and the contractual term of each option. The risk free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant that most closely corresponds to the expected term of the option. The expected volatility is based on the historical volatility of the Company’s common stock
over the period of time equivalent to the expected term for each award. The dividend yield is computed as the annualized dividend rate at the grant date divided by the strike price of the stock option. For the nine months ended September 30, 2022 and 2021, the Company did iino/t
grant stock options.
i
The following table is a summary of our stock option activity (in thousands, except per share data):
As
of iSeptember 30, 2022, the weighted-average remaining contractual life for outstanding stock options was i55
months with an aggregate intrinsic value of $i1.8 million and the weighted-average remaining contractual life for exercisable stock options was i53
months with an aggregate intrinsic value of $i1.5 million. The unrecognized compensation expense calculated under the fair value method for stock options expected to vest as of iSeptember 30,
2022 was less than $i0.1 million and is expected to be recognized over a weighted-average period of i4
months. For the nine months ended September 30, 2022, there was no exercise activity of stock options. For the nine months ended September 30, 2021, the Company received $i0.8 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the nine months ended September
30, 2021 was $i3.3 million.
Restricted Stock
The Company has issued restricted stock to employees and non-employee directors generally with vesting terms up to ifive
years after the date of grant. The fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period.
i
The following table summarizes our restricted stock activity (in thousands, except per share data):
The
Company withheld approximately i8 thousand and i7
thousand shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock for the nine months ended September 30, 2022 and 2021, respectively. The total fair value of restricted stock awards vested during the nine months ended September 30, 2022 and 2021 was $i3 million
and $i7 million, respectively.
Market and Performance-based Share Awards
The Company has issued market and performance-based share awards to certain key executives who were granted
deferred shares and may earn between i0% and i250%
of the target number depending upon both the Company’s total stockholder return
(“TSR”) and the Company’s performance against predetermined performance goals over a ithree-year
performance period after the date of grant. Market and performance-based share awards that are tied to the Company’s TSR are valued using the Monte Carlo method and are recognized ratably as expense over the award’s performance period. The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date of grant adjusted by expected level of achievement over the performance period. Expense for performance-based share awards is amortized ratably over the performance period.
Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Condensed Consolidated Statements of Income. iThe
total expenses during the three months ended September 30, 2022 and 2021 are as follows (in thousands):
Market
and performance-based share awards granted in 2022
i25
i950
i—
i—
Performance-based
share awards granted in 2021
i15
i1,941
i14
i666
Performance-based
share awards granted in 2020
i26
i1,423
i26
i1,329
Performance-based
share awards granted in 2019
i—
i—
i16
i1,443
Total
share-based compensation
i156
$
i8,103
i145
$
i6,613
The
total income tax benefit recognized in the accompanying Condensed Consolidated Statements of Income for restricted stock awards was $i0.4 million and $i0.1
million for the three months ended September 30, 2022 and 2021, respectively, and $i1.2 million and $i2.3 million
for the nine months ended September 30, 2022 and 2021, respectively.
There was $i7.6 million of total unrecognized compensation cost related to restricted stock awards as of iSeptember 30,
2022, which is expected to be recognized over a weighted-average period of i23 months. There was $i7.9
million of unrecognized compensation costs related to the i66 thousand market and performance-based shares presented in the table above as of iSeptember 30,
2022, which is expected to be recognized over a weighted-average period of i23 months.
5. iLEASES
Operating
Leases
The Company has operating leases for office and warehouse space and certain equipment. In certain of the Company’s lease agreements, the rental payments are adjusted periodically based on defined terms within the lease. The Company did not have any finance leases as of iSeptember 30, 2022
and 2021, respectively, or for the nine-month periods then ended, respectively.
Our leases relating to office and warehouse space have lease terms of i18 months to i126 months. Our leases relating
to equipment have lease terms of i24 months to i203 months, with certain of them having automatic renewal clauses.
The Company’s warehouse agreements also
contain non-lease components, in the form of payments towards variable logistics services and labor charges, which the Company is obligated to pay based on the services consumed by it. Such amounts are not included in the measurement of the lease liability but are. recognized as expenses when they are incurred.
The operating lease expense was $i1.7 million and $i1.4 million
for the three months ended September 30, 2022 and 2021, respectively, and $i5.2 million and $i3.8
million for the nine months ended September 30, 2022 and 2021, respectively.
i
Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):
Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.
Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
The following tables present the Company’s cash and financial assets that are measured at fair value on a recurring basis for each of the hierarchy levels (in thousands):
On April 13, 2021, the Company and certain of its subsidiaries
(collectively, the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on Secured Overnight Financing Rate (“SOFR”), from London Inter-Bank Offered Rate (LIBOR) (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $i225.0
million senior secured revolving credit facility with a $i20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $i100.0
million. The Amended Credit Agreement matures on April 13, 2026.
The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors. The obligations of the Company and the Guarantors are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.
Under
the Amended Credit Agreement, the Company will pay to the administrative agent for the account of each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the revolving facility from i0.20% to i0.40%
per annum depending on the Company’s Total Net Leverage Ratio (as defined in the Amended Credit Agreement). The Company is also obligated to pay the administrative agent customary fees for credit facilities of this size and type.
Revolving borrowings under the Amended Credit Agreement bear interest at a rate per annum equal to (i) the Term SOFR Rate for the interest period plus the Applicable Rate (as defined in the Amended Credit Agreement) based on the Company’s Total Net Leverage Ratio or (ii) the Alternate Base Rate (as defined in the Amended Credit Agreement) as in effect from time to time plus the Applicable Rate based on the
Company’s Total Net Leverage Ratio. As of iSeptember 30, 2022, the Applicable Rate for Term SOFR Loans is i1.25% per annum and the Applicable Rate for ABR Loans is i0.25%
per annum. SOFR based loans also include a Credit Spread Adjustment based on the duration of the borrowing.
The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Amended Credit Agreement also contains customary events
of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default. In addition, the Amended Credit Agreement requires the Company to maintain a Total Net Leverage Ratio of no more than i2.75 to 1.00 and an Interest Coverage Ratio of at least i3.50
to 1.00.
In the second quarter of fiscal 2022, the Company entered into an ASR
agreement with JPMorgan Chase, National Association ("JPMorgan Chase") to purchase shares of its common stock from JPMorgan Chase for an aggregate purchase price of $i100.0 million. Pursuant to the ASR program, the Company received an initial delivery of approximately i480 thousand
shares of common stock based on the closing price of the common stock on May 31, 2022. Approximately i91 thousand additional shares of the Company's common stock were delivered upon termination of the agreement on August 8, 2022. The final number of shares delivered to the Company under the ASR agreement
was based on the average of the daily volume-weighted average trading prices of the Company’s common stock during the term of the ASR program, less a discount.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
Certain information in this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Act”). These forward-looking statements generally can be identified by use of phrases or terminology such as “intend,”“anticipate,”“expect” or other similar words or the negative of such terminology. Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of our management and are subject to certain events, risks, uncertainties and other factors. These risks and uncertainties include, but are not limited to, those described in our 2021 Form 10-K and those described from time to time in our future reports filed with the SEC. Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of the
risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this report. All of the forward-looking statements contained herein speak only as of the date of this report.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
Medifast is the global company behind one of the fastest-growing
health and wellness communities, OPTAVIA®, which offers Lifelong Transformation, One Healthy Habit at a Time®. Reflecting the success of our holistic approach to health and wellness, we have consistently grown annual revenue over the past five years. Of equal importance, we expect our differentiated model to continue to deliver growth in the foreseeable future.
Our OPTAVIA brand offers a highly competitive and effective lifestyle solution centered on developing new healthy habits through smaller, foundational changes called micro-habits. The program is built around four key components:
•Independent OPTAVIA Coaches: Provide
individualized support and guidance to customers on the path to optimal health and wellbeing.
•OPTAVIA Community:A Community of like-hearted people providing each other with real-time connection and support.
•The Habits of Health® Transformational System: A proprietary system which offers easy steps to a sustainably healthy lifestyle.
•Products & Plans: Clinically proven plans and scientifically developed products, called “Fuelings,” backed by dietitians, scientists and physicians.
We help customers
achieve their health goals through a network of approximately 66,200 independent active earning OPTAVIA Coaches, about 90% of whom were customers first, and have impacted more than 2 million lives to date. OPTAVIA Coaches introduce customers to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive Fuelings, which are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with probiotic cultures, vitamins and minerals, as well as other nutrients essential for good health. Our products support the process of integrating healthy habits into our customer’s day-to-day lives.
The OPTAVIA coaching model is customer-centric and boasts an energized
health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. OPTAVIA Coaches provide personalized support to customers and motivate them by sharing their passion for healthy living and lifestyle transformation. We believe this personal coaching is an essential factor in customer success based on findings from a clinical study published in Obesity Science and Practice in 2018, which validated the effectiveness of combining the OPTAVIA meal plan with education and support consistent with that was provided by OPTAVIA Coaches.
The entrepreneurial spirit of our OPTAVIA Coaches is another key to our success, as they create a continuous cycle of growth, activating
new customers, many of whom go on to become OPTAVIA Coaches. We offer economic incentives designed to support each OPTAVIA Coach’s long-term success, which we believe plays an important role in their financial wellness, providing the opportunity to improve their finances while changing the health trajectory of families, communities and generations.1
OPTAVIA Coaches are independent contractors, not employees, who support customers and market our products and services primarily through word of mouth, email and social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. As entrepreneurs, OPTAVIA Coaches market our products to friends, family and other acquaintances. OPTAVIA
products are shipped directly to OPTAVIA customers who are working with an OPTAVIA Coach. OPTAVIA Coaches do not handle or deliver merchandise to customers. This arrangement frees our OPTAVIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.
We are one of the fastest growing health and wellness companies in the United States, with a large and growing market opportunity. We believe our coach-based model is scalable and drives both customer success and growth. We expect our continued investment in fostering a robust community around our OPTAVIA brand and our OPTAVIA
Coaching model will
1OPTAVIA makes no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership. Please see the OPTAVIA Income Disclosure Statement (http://bit.ly/idsOPTAVIA) for statistics on actual earnings of Coaches.
continue to drive a sustainable, repeatable business rhythm focused on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time.
Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD and OPTAVIA Health Consultation (Shanghai) Co., Ltd.
As we previously disclosed, global expansion is an important
component of our long-term growth strategy. In July 2019, we commenced our international operations, entering into the Asia Pacific markets of Hong Kong and Singapore. Our decision to enter these markets was based on industry market research that reflects a dynamic shift in how health care is being prioritized and consumed in those countries. We outsource a distribution center in Hong Kong to provide adequate product distribution capacity for the foreseeable future in these markets.
Macroeconomic Conditions
Global economic challenges including the impact of rising inflation, adverse labor market conditions, the war in Ukraine and the continuing impact of the COVID-19 pandemic have caused macroeconomic uncertainty and volatility in markets where we, our suppliers
and our OPTAVIA Coaches operate.
We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and put pressure on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could also adversely impact our business, financial condition or results of operations. Our variable cost structure can be utilized to adapt to changing market conditions with potential actions including adjustments to our manufacturing, distribution and customer support infrastructure. In addition, adverse labor market conditions could constrain our ability to manufacture and deliver products or increase the associated costs. We continue to take steps to attract, train, and develop personnel. As a response, we may periodically take incremental pricing
actions to offset supply chain costs, inflationary pressures, and adverse labor market conditions.
In addition, beginning in February 2022, the war in Ukraine and corresponding events have had, and could continue to have, adverse effects on regional and global markets. While our operations are not directly impacted by the war in Ukraine, the duration of hostilities and the vast array of sanctions and related events (including cyberattacks) cannot be predicted. As a result, those events present uncertainty and risk. To date, the war in Ukraine has had no material impact on our business.
Throughout the COVID-19 pandemic, we took and continue to take significant measures to protect our employees, OPTAVIA Coaches and business, while remaining in compliance with local and national guidelines. Our manufacturing and distribution facilities
remained fully operational during the pandemic, and we have not experienced any meaningful disruption to our worldwide supply chain due to the pandemic. It is possible the COVID-19 pandemic could negatively impact our operations and the operations of our suppliers and vendors. Should that occur, the extent to which the pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current expectations. Factors that could cause actual results to differ from management’s expectations include inherent uncertainties regarding the duration and further spread of the outbreak, its severity, the emergence of variant strains, government actions taken to contain the virus or treat its impact, changes in consumer behavior resulting from the pandemic and how quickly and to what extent normal economic and operating
conditions can resume.
The senior management team meets regularly to review and assess the status of the Company’s operations and the health and safety of its various constituencies, and will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTAVIA Coaches and customers.
These macroeconomic uncertainties make it challenging for our management to estimate our future business
performance. However, we intend to continue to actively monitor the impact of the pandemic and related developments on our business and will update our practices accordingly.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the 2021 Form 10-K. We consider
all
of our significant accounting policies and estimates to be critical. There were no significant changes in our critical accounting policies during the first nine months of 2022.
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes in our critical estimates during the first nine months of 2022.
Overview
of Results of Operations
Our product sales accounted for approximately 98.0% of our revenues for each of the three and nine months ended September 30, 2022 and 2021.
The following tables reflect our income statements (in thousands, except percentages):
Revenue:
Revenue decreased $23.0 million, or 5.6%, to $390.4 million for the three months ended September 30, 2022 from $413.4 million for the three months ended September 30, 2021. The average revenue per active earning OPTAVIA Coach was $5,897 for the three months ended September 30, 2022 compared to $6,773 for the three months ended September 30, 2021. The decline in revenue for the three months ended September 30, 2022 was primarily driven by the decline in the productivity per active earning OPTAVIA Coach partially offset by the increase in the number of active earning OPTAVIA Coaches
to 66,200 as of September 30, 2022 from 61,000 as of September 30, 2021. The decrease in productivity per active earning OPTAVIA Coach for the quarter was driven by a decrease in the number of customers supported by each Coach. Revenue increased $113.1 million, or 9.8%, to $1,261.3 million for the nine months ended September 30, 2022 from $1,148.3 million for the nine months ended September 30, 2021. The average revenue per active earning OPTAVIA Coach was $6,367 for the nine months ended September 30, 2022 compared to $6,630 for the nine months ended September 30, 2021. The decrease
in the productivity per active earning OPTAVIA Coach for the nine months ended September 30, 2022 was driven by an decrease in the number of customers supported by each Coach. The year-over-year growth in revenue was primarily driven by the increase in the number of active earning OPTAVIA Coaches partially offset by the decrease in productivity per active earning OPTAVIA Coach.
Cost of sales: Cost of sales increased $1.2 million, or 1.1%, to $107.5 million from $106.3 million for the three months ended September 30, 2022 from the corresponding period in 2021. The increase in cost of sales for the three months ended September
30, 2022 was primarily driven by higher product costs resulting from increases in raw ingredient costs, shipping costs, and labor costs. Cost of sales increased $55.6 million, or 18.6%, to $354.5 million from $298.9 million for the nine months ended September 30, 2022 from the corresponding period in 2021. The increase in cost of sales for the nine months ended September 30, 2022 was primarily driven by an increase in OPTAVIA product sales and higher product costs resulting from increases in raw ingredient costs, shipping costs, and labor costs.
Gross profit: For the three months ended September 30, 2022, gross profit decreased $24.2 million, or 7.9%, to $282.8 million from $307.1 million for the three
months ended September 30, 2021. The decrease in gross profit for the three months ended September 30, 2022 was due to both a decrease in the number of customers supported by each Coach and higher products costs
resulting from increases in raw ingredient costs, shipping costs, and labor costs. As a percentage of revenue, gross profit decreased 183 basis points to 72.5% for the three months ended September 30, 2022 from 74.3% for the corresponding period in 2021. The decrease in gross profit as a
percentage of revenue for the three months ended September 30, 2022 is due to higher products costs resulting from increases in raw ingredient costs, shipping costs, and labor costs. For the nine months ended September 30, 2022, gross profit increased $57.5 million, or 6.8%, to $906.8 million from $849.3 million for the nine months ended September 30, 2021. The increase in gross profit for the nine-month period was primarily attributable to higher revenue partially offset by increased cost of sales. As a percentage of revenue, gross profit decreased 207 basis points to 71.9% for the nine months ended September 30, 2022 from 74.0% for the corresponding period in 2021. The decrease in gross margin percentage for the nine months ended September
30, 2022 was primarily due to a customer acquisition program, which ran from late March to early May in 2022, and higher product costs resulting from increases in raw ingredient costs, shipping costs, and labor costs.
Selling, general, and administrative: SG&A expenses were $234.7 million for the three months ended September 30, 2022, a decrease of $17.2 million, or 6.8%, as compared to $251.9 million from the corresponding period in 2021. As a percentage of revenue, SG&A expenses were 60.1% for the three months ended September 30, 2022 as compared to 60.9% for the corresponding period in 2021. SG&A expenses included research and development costs of $1.1 million and $1.2 million for the three months ended September 30, 2022 and 2021,
respectively, in connection with the development of new products and programs and clinical research activities. The decrease in SG&A expenses for the three months ended September 30, 2022 was primarily due to lower OPTAVIA Coach compensation expense. SG&A expenses were $754.6 million for the nine months ended September 30, 2022, an increase of $74.7 million, or 11.0%, as compared to $679.9 million from the corresponding period in 2021. As a percentage of revenue, SG&A expenses were 59.8% for the nine months ended September 30, 2022 as compared to 59.2% for the corresponding period in 2021. SG&A expenses included research and development costs of $3.3 million and $3.3 million for the nine months ended September 30,
2022 and 2021, respectively, in connection with the development of new products and programs and clinical research activities. The increase in SG&A expenses for the nine months ended September 30, 2022 was primarily due to higher OPTAVIA Coach compensation expense, donations made to support the Ukraine relief effort, incremental costs related to continued investment in information technology and distribution infrastructure, as well as the increased credit card fees resulting from higher sales.
Non-GAAP adjusted SG&A expenses were $233.6 million for the three months ended September 30, 2022, a decrease of $18.3 million, or 7.3%, as compared to $251.9 million from the corresponding period in 2021. Non-GAAP adjusted SG&A
expenses were $744.1 million for the nine months ended September 30, 2022, an increase of $64.2 million, or 9.4%, as compared to 679.9 million from the corresponding period in 2021. Non-GAAP adjusted SG&A excludes expenses in connection with donations made to support the Ukrainian relief effort of $1.1 million and $10.5 million for the three and nine months ended September 30, 2022, respectively. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
OPTAVIA Coach compensation expense, which is a variable expense, decreased $17.2 million, or 9.5%, to $164.8 million for the three months ended September 30, 2022 from $182.1 million
for the corresponding period in 2021. The decrease was primarily the result of decreased OPTAVIA product sales. For the nine months ended September 30, 2022, OPTAVIA compensation expense increased $47.7 million, or 9.5%, to $548.4 million from $500.7 million for the corresponding period in 2021. The increase was primarily the result of increased OPTAVIA product sales in the first half of the year. The total number of active earning OPTAVIA Coaches as of September 30, 2022 increased to 66,200 from 61,000 for the corresponding date in 2021, an increase of 8.5%.
Income from operations: For the three months ended September
30, 2022, income from operations decreased $7.0 million to $48.2 million from $55.2 million for the corresponding period in 2021 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue decreased to 12.3% for the three months ended September 30, 2022 from 13.3% for the corresponding period in 2021 due to the factors described above impacting revenue and SG&A expenses. For the nine months ended September 30, 2022, income from operations decreased $17.2 million to $152.2 million from $169.4 million for the corresponding period in 2021 primarily as a result of increased SG&A expenses partially offset by increased gross profit. Income from operations as a percentage of revenue decreased to 12.1% for the nine months ended September
30, 2022 from 14.8% for the corresponding period in 2021 due to the factors described above impacting revenue, cost of sales and SG&A expenses.
Non-GAAP adjusted income from operations was $49.2 million for the three months ended September 30, 2022, a decrease of $5.9 million, or 10.7%, as compared to $55.2 million from the corresponding period in 2021. Non-GAAP adjusted income from operations was $162.7 million for the nine months ended September 30, 2022, a decrease of $6.7 million, or 3.9%, as compared
to
$169.4 million from the corresponding period in 2021. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
Provision for income taxes: For the three months ended September 30, 2022, the Company recorded $11.7 million in income tax expense, an effective tax rate of 24.5%, as compared to $13.2 million in income tax expense, an effective tax rate of 23.9%, for the three months ended September 30, 2021. The increase in the effective tax rate for the three months ended September 30, 2022 was primarily driven by an increase in state income taxes partially
offset by increased tax benefits for inventory donations and research and development tax credits. For the nine months ended September 30, 2022, the Company recorded $34.6 million in income tax expense, an effective tax rate of 22.8%, as compared to $39.4 million in income tax expense, an effective tax rate of 23.2%, for the nine months ended September 30, 2021. The decrease in the effective tax rate for the nine months ended September 30, 2022 was primarily driven by the tax benefits for inventory donations and research and development tax credits partially offset by an increase in state income taxes and a decrease in the tax benefit of stock compensation.
Non-GAAP adjusted income tax provision
was $12.2 million for the three months ended September 30, 2022, an effective tax rate of 24.9% as compared to 23.9% for the corresponding period in 2021. Non-GAAP adjusted income tax provision was $39.4 million for the nine months ended September 30, 2022, an effective tax rate of 24.3%, as compared to 23.2% for the corresponding period in 2021. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
Net income: Net income was $36.2 million and $117.1 million, or $3.27 and $10.30 per diluted share, for the three and nine months ended September 30, 2022 as compared to $42.0 million and $130.0 million, or $3.56 and $10.98 per diluted
share, for the three and nine months ended September 30, 2021. The period-over-period changes were driven by the factors described above in the section titled “Income from operations.”
Non-GAAP adjusted net income was $36.8 million or $3.32 per diluted share for the three months ended September 30, 2022 as compared to $3.56 per diluted share for the corresponding period in 2021. Non-GAAP adjusted net income was $122.8 million or $10.81 per diluted share for the nine months ended September 30, 2022 as compared to $10.98 per diluted share for the corresponding period in 2021. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
Non-GAAP
Financial Measures
In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various non-GAAP financial measures in this quarterly report, our quarterly earnings press release and other public disclosures. The following GAAP financial measures have been presented on an as-adjusted basis: SG&A expenses, income from operations, provision for income taxes, net income and diluted earnings per share. Each of these as-adjusted financial measures excludes the impact of certain amounts related to our donations to support the Ukrainian relief effort as further identified below and have not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included below. These non-GAAP financial
measures are not intended to replace GAAP financial measures.
We use these non-GAAP financial measures internally to evaluate and manage the Company’s operations because we believe they provide useful supplemental information regarding the Company’s on-going economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.
The following tables reconcile the non-GAAP financial measures included in this report (in thousands, except per share amounts):
(1)
The weighted-average diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as the weighted-average shares outstanding used in the calculation of the reported per share amounts.
Liquidity and Capital Resources
The Company had stockholders’ equity of $150.5 million and working capital of $75.3 million at September 30, 2022 as compared with $202.5 million and $137.0 million at December 31, 2021, respectively. The $52.0 million net decrease in stockholders’ equity reflects $117.1 million in net income for the nine months ended September
30, 2022 offset by $120.0 million used for repurchases of the Company’s common stock and $55.8 million for declared dividends paid to holders of the Company’s common stock as well as the other equity transactions described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in this report. On September 8, 2022, the Company declared a quarterly dividend of $1.64 per share payable on November 8, 2022, to stockholders of record as of September 20, 2022. While we intend to continue the dividend program and believe we will have sufficient
liquidity to do so, we can provide no assurance that we will be able to continue to declare and pay dividends. The Company’s cash, cash equivalents and investment securities decreased from $109.5 million at December 31, 2021 to $69.7 million at September 30, 2022.
Net cash provided by operating activities increased by $40.8 million to $142.8 million for the nine months ended September 30, 2022 from $102.0 million for the nine months ended September 30, 2021 primarily driven by a $111.0 million increase related to changes in inventory balances, a $7.0 million increase in prepaid expenses and other current assets partially offset by a reduction
in net income, as well as decreases related to changes in certain balance sheet accounts, including $5.2 million in other assets and $65.0 million in accounts payable and accrued expenses. We continued to expand our cloud computing technology capabilities to support our planned growth during the nine months ended September 30, 2022.
Net cash used in investing activities was $2.4 million for the nine months ended September 30, 2022 as compared to $17.4 million for the nine months ended September 30, 2021.
Net cash used in financing activities increased by $81.3 million to $175.3 million for the nine months ended September 30, 2022 from $93.9 million for the nine months ended September
30, 2021. This increase was primarily due to $74 million used for repurchases of the Company's common stock under the accelerated share repurchase (“ASR”) program and $6.9 million in cash dividends paid to stockholders. Under the terms of the ASR agreement, approximately 480 thousand shares were delivered in the second quarter of 2022. A final delivery of approximately 91 thousand shares was received on August 8, 2022 to complete the ASR agreement.
In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash requirements, if any,
to be funded from operating cash flow and financing activities.
From time to time the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity or debt. We have no present understandings, commitments or agreements with respect to any material acquisitions.
On April 13, 2021, the
Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on SOFR, from LIBOR (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $225.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the
Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to credit facilities. As of September 30, 2022, the Company had no borrowings under the credit facility and was in compliance with all of its debt covenants.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The
Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.
The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at September 30, 2022, the Company estimates that the fair value of its borrowings under its credit facility would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments.
There
have been no material changes to our market risk exposure since December 31, 2021.
Item 4. Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Act, as amended, as of September 30, 2022. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation
performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company is, from time to time, subject to a variety of litigation and similar proceedings that arise out of the ordinary course of its business. Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its results of operations, financial position or liquidity. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that
the Company’s results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I, Item 1A of the 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
2022
Total
Number of Shares Purchased (1)(3)
Average Price Paid per Share
Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program
Maximum Number of Shares that May
Yet Be Purchased Under the Plans or Programs (2)
July 1 - July 31
120
$
174.16
—
1,499,197
August
1 - August 31
91,292
$
178.66
91,292
1,407,905
September 1 - September 30
52
$
115.09
—
1,407,905
(1)Also
included are shares of common stock surrendered by employees and directors to the Company to cover minimum tax liability withholding obligations upon the exercise of stock options or the vesting of shares of restricted stock previously granted to such employees and directors.
(2)At the outset of the quarter ended September 30, 2022, there were 1,499,197 shares of the Company’s common stock eligible for repurchase under the stock repurchase authorization dated September 16, 2014 (the "Stock Repurchase Plan").
(3)In the second quarter of fiscal 2022, the
Company paid $100 million under an Accelerated Share Repurchase (“ASR”) agreement and received an initial delivery of approximately 480 thousand shares. A final delivery of approximately 91 thousand shares was received on August 8, 2022 to complete the ASR agreement. See Note 9 to the Consolidated Financial Statements included in this report for further description of the ASR.
As of September 30, 2022, there were 1,407,905 shares of the Company’s common stock eligible for repurchase under the Stock Repurchase Plan. There can be no assurances as to the amount, timing or prices of repurchases, which may vary based on market conditions and other factors. The Stock Repurchase Plan does not have an expiration date and can be modified or
terminated by the Board of Directors at any time.
The following financial statements from Medifast, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 filed November 3, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated
Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity, and (vi) Notes to the Condensed Consolidated Financial Statements (filed herewith).
104
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
In accordance with SEC Release No. 33-8238, Exhibit 32.1 is being furnished and not filed.
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.
