MEDIFAST, INC. Note Regarding Forward-Looking Statements
This report contains information that may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words "believe," "expect," "intend," "estimate," "anticipate," "project," "will," and similar expressions, which are not historical in nature, identify forward-looking statements. However, the absence of these words or expressions does not necessarily mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to future operating results, are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our 2019 Form 10-K, this Form 10-Q and those described from time to time in our future reports filed with theSEC .
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
Overview
Medifast is the company behind one of the fastest-growing health and wellness communities called OPTAVIA®, which offers Lifelong Transformation, One Healthy Habit at a Time®. Reflecting the success of its approach to health and wellness for its clients,Medifast has consistently grown revenue ahead of peers and competitors. Of equal importance, our business model is expected to deliver long-term growth.Medifast has redefined direct selling by combining the best aspects of the model, while eliminating those dimensions that have typically challenged other companies.Medifast is often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is very different. The company supports clients through independent OPTAVIA Coaches, majority of whom were clients first. Our operations are conducted through our wholly owned subsidiaries,Jason Pharmaceuticals, Inc. ,OPTAVIA LLC ,Jason Enterprises, Inc. ,Jason Properties, LLC ,Medifast Franchise Systems, Inc. ,Medifast Nutrition, Inc. ,Seven Crondall Associates, LLC ,Corporate Events, Inc. , OPTAVIA (Hong Kong ) Limited, OPTAVIA (Singapore ) PTE. LTD andOPTAVIA Health Consultation (Shanghai) Co., Ltd. OPTAVIA is a highly effective lifestyle solution for people for whom diets alone have failed. Habits of Health®, the approach developed by OPTAVIA Co-founder and independent OPTAVIA Coach, Dr.Wayne Scott Andersen , combines clinically proven plans with scientifically developed products and the ongoing support of Coaches. We sell a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the Medifast®, OPTAVIA, Thrive byMedifast ,Optimal Health by Take Shape for Life, and Flavors of Home® brands. Our product line includes more than 170 consumable options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups. The Thrive byMedifast andOptimal Health by Take Shape for Life lines include a variety of specially formulated bars, shakes, and smoothies for those who are maintaining their weight for long-term healthy living. We identify opportunities to expand our product line by regularly surveying our clients and studying industry and consumer trends. This allows us to introduce new, high quality products that meet consumer demand. Our nutritional products are formulated with high-quality ingredients. Products include individually portioned, calorie- and carbohydrate-controlled meal replacements that share a similar nutritional footprint and provide a balance of protein and good carbohydrates. Our meal replacements are also fortified to contain vitamins and minerals, as well as other nutrients essential for good health. We offer our OPTAVIA clients exclusive OPTAVIA-branded nutritional
products,
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or "Fuelings," and also offer a variety of other weight loss, weight management,
and healthy living products under other brands. OPTAVIA Fuelings come in a
variety of flavors that appeal to a broad variety of tastes. Our products are
nutrient-dense, portion-controlled, nutritionally interchangeable and simple to
use.
OPTAVIA encompasses our community of OPTAVIA Coaches, our OPTAVIA health and
wellness programs, and our proprietary OPTAVIA-branded products. The OPTAVIA
integrated coaching model is centered around providing focused, individualized
attention to our clients. Our OPTAVIA Coaches provide the support and
encouragement for clients to successfully learn and adopt a more healthy
lifestyle. This clinically-proven plan translates into better client results
when compared to programs that leave individuals to adopt and maintain healthy
habits on their own. Our clients receive personalized attention from our OPTAVIA
Coaches who share, educate, motivate and pass along their passion for healthy
living. We believe this personal, direct-sales and service strategy is optimal
for activating and supporting our clients. In a clinical study published in
Obesity Science and Practice in 2018, the OPTAVIA model's effectiveness was
validated when its meal plan was combined with education and support from
Coaches.
Our OPTAVIA Coaches are independent contractors, not employees, who support our
clients and market our products and services primarily through word of mouth,
email and via social media channels such as Facebook, Instagram, Twitter and
Zoom. As direct-sales entrepreneurs, OPTAVIA Coaches market our products to
friends, family and other acquaintances with whom they have established strong
relationships.
The entrepreneurial success of our OPTAVIA Coaches is the key to our success. We
are focused on scaling our OPTAVIA Integrated Coaching Model by offering
economic incentives that are attractive to independent entrepreneurs and
reflective of the new "gig economy." Our successful clients frequently become
enthusiastic health and wellness advocates themselves and choose to become
OPTAVIA Coaches. This process of clients becoming OPTAVIA Coaches underpins our
growth.
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.
The global spread of the novel coronavirus ("COVID-19"), which has been declared
by the World Health Organization to be a "pandemic," has spread to many
countries and is impacting worldwide economic activity. Many governments have
implemented policies intended to stop or slow the further spread of the disease,
such as social distancing and shelter-in-place orders, resulting in the
temporary closure of schools and non-essential businesses, and these measures
may remain in place for a significant period of time. Because the Company sells
products that are essential to the daily lives of consumers, the COVID-19
pandemic has not had a material impact to our consolidated operating results in
the current quarter. However, the impact of COVID-19 on the Company's business
was most pronounced in March. The extent to which our operations and business
trends will be impacted by, and any unforeseen costs will result from, the
outbreak will depend largely on future developments, which are highly uncertain
and cannot be accurately predicted. These developments include, among other
things, new information that may emerge concerning the severity of the outbreak
and health implications, future actions by government authorities to contain the
outbreak or treat its impact, and changes in consumer behavior resulting from
the outbreak and such government actions. We continue to actively monitor the
impact of COVID-19 and related developments and expect it will more
significantly impact our reported results for the second quarter of fiscal 2020
and may potentially do so in subsequent periods.
Importantly, our manufacturing facility remains fully operational to date and we have not experienced any meaningful disruption to our world-wide supply chain.
Additionally, nutritional supplements and health foods have been designated critical/essential infrastructure in theU.S. and, as such, we have continued to actively manufacture and distribute our products in our markets around the world. While our manufacturing and distribution employees continue to work on site, they are following additional health and safety guidelines. In response to the public health crisis posed by COVID-19, we have taken numerous actions, including:
? successfully implementing a work-from-home plan for all non-essential employees
to comply with guidelines from government and health officials;
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? changing this year's OPTAVIA convention from a live event in July to a virtual
event which will take place in July;
employing incentives and promotions to help OPTAVIA Coaches adjust to the
? adverse effect of overall economic conditions and the nationwide actions taken
to control the spread of the virus The Company's priorities during the COVID-19 pandemic are protecting the health and safety of our employees and their families, OPTAVIA Coaches; maximizing the availability of products that help consumers with their needs; and the use of our employees' talents and our resources to help society meet and overcome the current challenges. The Company will continue to proactively respond to the situation and may take further actions that alter the Company's business operations as may be required by governmental authorities, or that the Company determines are in the best interests of its employees, OPTAVIA coaches and consumers.
For additional information on risk factors that could impact our results, please refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q.
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 1 to the unaudited condensed consolidated financial statements included in this report.
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.
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Overview of Results of Operations
Our product sales accounted for 98% of our revenues for the three months ended
The following tables reflect our income statements (in thousands,
except percentages):
Three months ended March 31,
2020 2019 $ Change % Change
Revenue $ 178,461 $ 165,876 $ 12,585 7.6%
Cost of sales 43,221 40,729 (2,492) -6.1%
Gross profit 135,240 125,147 10,093 8.1%
Selling, general, and administrative 111,707 100,432 (11,275) -11.2%
Income from operations 23,533 24,715 (1,182) -4.8%
Other income (expense)
Interest income, net 110 312 (202) -64.7%
Other expense (19) (6) (13) 216.7%
91 306 (215) -70.3%
Income from operations before income taxes 23,624 25,021 (1,397) -5.6%
Provision for income tax 5,147 4,271 (876) -20.5% Net income$ 18,477 $ 20,750 $ (2,273) -11.0% % of revenue Gross profit 75.8%
75.4%
Selling, general, and administrative costs 62.6%
60.5%
Income from operations 13.2%
14.9%
Income from operations before income taxes 13.2% 15.1% Revenue: Revenue increased$12.6 million , or 7.6%, to$178.5 million for the three months endedMarch 31, 2020 from$165.9 million for the three months endedMarch 31, 2019 . The total number of active earning OPTAVIA Coaches for the three months endedMarch 31, 2020 increased to 32,600 from 27,200 for the corresponding period in 2019, an increase of 19.9%. The average revenue per active earning OPTAVIA Coach decreased 8.3% to$5,333 for the three months endedMarch 31, 2020 from$5,817 for the three months endedMarch 31, 2019 . The$12.6 million increase in revenue resulted from business initiatives which drove more clients to be on our plans, aided by the ongoing transition of clients to higher priced OPTAVIA-branded products. OPTAVIA-branded products represented 79% of consumable units sold for the three months endedMarch 31, 2020 compared to 73% for the corresponding period in 2019. Costs of sales: Cost of sales increased$2.5 million , or 6.1%, to$43.2 million for the three months endedMarch 31, 2020 from the corresponding period in 2019. The increase in cost of sales was primarily driven by an increase in product sales. Gross profit: For the three months endedMarch 31, 2020 , gross profit increased$10.1 million , or 8.1%, to$135.2 million from the corresponding period in 2019. As a percentage of sales, gross margin increased 40 basis points to 75.8% for the three months endedMarch 31, 2020 from 75.4% for the corresponding period in 2019. The increase in gross margin percentage for the quarter was the result of our price increase taken mid-year 2019 coupled with a reduction of sales discounts realized during the first quarter of 2020 as compared to the corresponding period in 2019. 17
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Selling, general and administrative: Selling, general and administrative
("SG&A") expenses were $111.7 million for the three months ended March 31, 2020 ,
an increase of $11.3 million , or 11.2%, as compared to $100.4 million from the
corresponding period in 2019. The $11.3 million increase was primarily a result
of higher OPTAVIA commission expense, incremental professional service costs in
connection with the Schedule 13D filing, increased salaries and benefits and
severance. As a percentage of sales, SG&A expenses were 62.6% as compared to
60.5% for the three months ended March 31, 2020 and 2019, respectively. Non-GAAP
adjusted SG&A expenses increased $5.7 million to $106.1 million and Non-GAAP
adjusted SG&A as a percentage of revenue decreased 100 basis points
year-over-year to 59.5%. Non-GAAP adjusted SG&A excludes expenses in connection
with the Schedule 13D filing of $4.6 million and severance costs of $1.0
million resulting from organizational change related to the departure of the
Company's CFO for the three months ended March 31, 2020 . SG&A expenses included
research and development costs of $0.5 million and $0.7 million for the three
months ended March 31, 2020 and 2019, respectively.
OPTAVIA commission expense, which is variable expense, increased $5.7 million ,
or 8.3%, to $74.3 million for the three months ended March 31, 2020 from $68.6
million for the corresponding period in 2019. The increase was primarily the
result of increased product sales. As OPTAVIA revenue increased as a portion of
the Company's total sales mix, the commission rate as a percentage of revenue
increased 20 basis points to 41.6% for the first quarter of 2020 compared to
41.4% for the first quarter last year. This is an outcome of the success we are
experiencing with our OPTAVIA integrated coach model.
Income from operations: For the three months ended March 31, 2020 , income from
operations decreased $1.2 million to $23.5 million from $24.7 million for the
corresponding period in 2019 as increased gross profit was offset by increased
SG&A. Income from operations as a percentage of sales was 13.2% and 14.9% for
the three months ended March 31, 2020 and 2019, respectively. Non-GAAP adjusted
income from operations increased $4.4 million to $29.1 million and non-GAAP
adjusted income from operations as a percentage of revenue increased 140 basis
points year-over-year to 16.3%.
Other income: For the three months ended
Income from operations before income taxes: Income from operations before income taxes was$23.6 million for the three months endedMarch 31, 2020 as compared to$25.0 million for the three months endedMarch 31, 2019 , a decrease of$1.4 million . Income from operations before income taxes as a percentage of sales decreased to 13.2% for the three months endedMarch 31, 2020 from 15.1% for the three months endedMarch 31, 2019 . Provision for income tax: For the three months endedMarch 31, 2020 , the Company recorded$5.1 million in income tax expense, an effective rate of 21.8%, as compared to$4.3 million in income tax expense, an effective rate of 17.1%, for the three months endedMarch 31, 2019 . The effective tax rate was negatively impacted by an increase in state income tax rate and a decrease in tax benefit of stock compensation. Net income: Net income was$18.5 million , or$1.56 per diluted share, for the three months endedMarch 31, 2020 as compared to$20.8 million , or$1.70 per diluted share, for the three months endedMarch 31, 2019 . The period-over-period changes were driven by the factors described above. Non-GAAP adjusted net income was$22.9 million , or$1.93 per diluted share for the three months endedMarch 31, 2020 . Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding our
results as determined by GAAP, we disclose various non-GAAP financial measures
in our quarterly earnings press release and other public disclosures. The
following GAAP financial measures have been presented on an as adjusted basis:
SG&A expenses, income from operations, net income and diluted earnings per
share. Each of these as adjusted financial measures excludes the impact of
certain amounts as further identified below and have not been calculated in
accordance with GAAP. A reconciliation of each of these non-GAAP financial
measures to its most comparable GAAP financial measure is included below. These
non-GAAP financial measures are not intended to replace GAAP financial measures.
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We use these non-GAAP financial measures internally to evaluate and manage the
Company's operations because we believe they provide useful supplemental
information regarding the Company's on-going economic performance. We have
chosen to provide this information to investors to enable them to perform more
meaningful comparisons of operating results and as a means to emphasize the
results of on-going operations.
The following tables reconcile the non-GAAP financial measures included in this
report (in thousands):
Three months ended March 31,
2020 2019
Selling, general, and administrative$ 111,707 $
100,432
Adjustments
Professional services for 13D Filing 4,608
-
Incremental severance costs 998
-
Non-GAAP Adjusted selling, general, and $ $
administrative 106,101 100,432
Three months ended March 31,
2020 2019
Income from operations $ 23,533 $ 24,715
AdjustmentsProfessional services for 13D Filing 4,608
-
Incremental severance costs 998
-
Non-GAAP Adjusted income from operations$ 29,139 $
24,715
Three months ended March 31,
2020 2019
Net income $ 18,477 $ 20,750
Adjustments, net of taxProfessional services for 13D Filing 3,604
-
Incremental severance costs 781
-
Non-GAAP Adjusted net income$ 22,862 $
20,750
Diluted earnings per share (1) $ 1.56 $
1.70
Impact for adjustments (1) 0.37
-
Non-GAAP Adjusted diluted earnings per share (1) $ 1.93 $
1.70
(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$110.7 million and working capital of$79.4 million atMarch 31, 2020 as compared with$104.8 million and$74.8 million atDecember 31, 2019 , respectively. The$5.9 million net increase in stockholders' equity reflects$18.5 million in net income for the three months endedMarch 31, 2020 offset by$13.1 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 our condensed consolidated financial statements included in this report. The Company declared a dividend of$13.1 million , or$1.13 per share, to common stockholders as ofMarch 31, 2020 that will be paid in the second quarter of 2020. 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 increased from$92.7 million atDecember 31, 2019 to$105.3 million atMarch 31, 2020 . 19
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Net cash provided by operating activities decreased$6.0 million to$26.7 million for the three months endedMarch 31, 2020 from$32.7 million for the three months endedMarch 31, 2019 as a result of a$2.3 million decrease in net income and changes in operating assets and liabilities. Net cash provided by investing activities was$0.7 million for the three months endedMarch 31, 2020 as compared to net cash used in investing activities of$3.4 million for the three months endedMarch 31, 2019 . This change resulted from a$4.2 million decrease in cash used in capital expenditures for the three months endedMarch 31, 2020 from the corresponding period in 2019. Net cash used in financing activities increased$4.9 million to$13.7 million for the three months endedMarch 31, 2020 from$8.8 million for the three months endedMarch 31, 2019 . This increase was primarily due to a$4.4 million increase in cash dividends paid to stockholders.
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.
The Company evaluates acquisitions from time to time as presented.
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