MEDIFAST, INC. Note Regarding Forward-Looking Statements
Certain information in this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by use of phrases or terminology such as "intend," "anticipate," "expects" or other similar words or the negative of such terminology. Similarly, descriptions ofMedifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of the management ofMedifast 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 2020 Form 10-K and those described from time to time in our future reports filed with theSEC . AlthoughMedifast 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.
Overview
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 different. We employ a differentiated direct-to-consumer sales model in which 91.9% of our revenue comes from subscription-based meal-plan orders. 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
clients on the path to optimal health and wellbeing.
?
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
? OPTAVIA-branded nutritional products, called "Fuelings," backed by dietitians,
scientists and physicians.
We help clients achieve their health goals through a network of more than 61,000
independent OPTAVIA Coaches, 91.1% of whom were clients first, and have impacted
2.0 million lives to date. OPTAVIA Coaches introduce clients to a set of healthy
habits, in most cases starting with the habit of healthy eating, and offer
exclusive OPTAVIA-branded nutritional products, or Fuelings. Fuelings 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 clients' day-to-day lives.
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The OPTAVIA coaching model is client-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 clients and motivate them by sharing their passion for healthy living and lifestyle transformation. We believe this personal coaching is an essential factor in client success based on findings from a clinical study published in Obesity Science and Practice in 2018, which validated the OPTAVIA model when its meal plan was combined with education and support consistent with that 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 clients, 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 clients and market our products and services primarily through word of mouth, email and via 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 clientswho are working with an OPTAVIA Coach. OPTAVIA Coaches do not handle or deliver merchandise to clients. 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 inthe United States , with a large and growing market opportunity. We believe our coach-based model is scalable and drives both client success and growth. We expect our continued investment in fostering a robust community around our OPTAVIA brand and our OPTAVIA Coaching Model will 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 ,Medifast Franchise Systems, Inc. ,Seven Crondall Associates, LLC ,Corporate Events, Inc. , OPTAVIA (Hong Kong ) Limited, OPTAVIA (Singapore ) PTE. LTD andOPTAVIA Health Consultation (Shanghai) Co., Ltd. As we previously disclosed, global expansion is an important component of our long-term growth strategy. InJuly 2019 , we commenced our international operations, entering into theAsia Pacific markets ofHong Kong andSingapore . 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 Company outsources a distribution center inHong Kong to give the Company adequate product distribution capacity for the foreseeable
future in these markets. COVID-19 Update
A novel strain of coronavirus ("COVID-19") surfaced in late 2019 and has spread
around the world, including to
In response to the pandemic, many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing guidelines, shelter-in-place orders and other measures in response to the COVID-19 pandemic. Nutritional supplements and health foods have been designated critical/essential infrastructure in theU.S. As a manufacturer and distributer of these products our manufacturing and distribution facilities remain fully operational to date and we have not experienced any meaningful disruption to our worldwide supply chain. The Company's priorities
1 OPTAVIA 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.
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during the COVID-19 pandemic continue to be protecting the health and safety of
our employees and OPTAVIA Coaches, and their families and we have undertaken
numerous steps and instituted additional precautions to protect their safety and
well-being, including:
instituting enhanced safety protocols to comply with guidelines from government
? and health officials, limited visitation to our plant and distribution center
and rolling out additional sick leave (crisis pay) for our onsite essential
employees;
successfully shifted to a hybrid approach for all onsite employees, enabling
them to work 2-3 days from our offices with the flexibility to work 2-3 days
? from their home offices, in order to optimize productivity, foster strong
relationships and keep health and wellbeing in mind; Crisis pay continues to be
available for employees;
providing additional health and safety precautions in our headquarters,
? manufacturing and distribution centers, including use of personal protective
equipment and frequent hand sanitization; and
? process controls in relation to social distancing, visitors, travel and
quarantine. Although vaccines are available in various countries where we operate, it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of the potential of variant strains of the virus to cause a resumption of high levels of infection and hospitalization. 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, 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 health and safety of its various constituencies, and will continue to proactively respond to the situation and communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. 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 consumers. These uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue to actively monitor the impact of COVID-19 and related developments on our business and will update our practices accordingly, as we have done throughout the pandemic.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in
accordance with GAAP. Our significant accounting policies were described in
Note 2 to the audited consolidated financial statements included in the 2020
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 third quarter of 2021.
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 third quarter of 2021.
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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
The following tables reflect our income statements (in thousands,
except percentages):
Three months ended September 30,
2021 2020 $ Change % Change
Revenue $ 413,395 $ 271,470 $ 141,925 52.3%
Cost of sales 106,338 67,434 (38,904) (57.7)%
Gross profit 307,057 204,036 103,021 50.5%
Selling, general, and administrative 251,886
159,477 (92,409) (57.9)% Income from operations 55,171 44,559 10,612 23.8% Other income
Interest (expense) income (94)
44 (138) (313.6)%
Other income 115 30 85 283.3%
21 74 (53) (71.6)%
Income from operations before income taxes 55,192
44,633 10,559 23.7%
Provision for income tax 13,210
10,180 (3,030) (29.8)% Net income $ 41,982 $ 34,453$ 7,529 21.9% % of revenue Gross profit 74.3% 75.2%
Selling, general, and administrative costs 60.9%
58.7%
Income from operations 13.3%
16.4%
Income from operations before income taxes 13.4%
16.4%
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Nine months ended September 30,
2021 2020 $ Change % Change
Revenue $ 1,148,253 $ 669,930 $ 478,323 71.4%
Cost of sales 298,942 171,354 (127,588) (74.5)%
Gross Profit 849,311 498,576 350,735 70.3%
Selling, general, and administrative 679,907
402,385 (277,522) (69.0)% Income from operations 169,404 96,191 73,213 76.1% Other (expense) income
Interest (expense) income (138)
212 (350) (165.1)%
Other income 112 12 100 833.3%
(26) 224 (250) (111.6)%
Income from operations before income taxes 169,378
96,415 72,963 75.7%
Provision for income taxes 39,370
21,550 (17,820) (82.7)% Net income $ 130,008$ 74,865 $ 55,143 73.7% % of revenue Gross Profit 74.0% 74.4%
Selling, general, and administrative costs 59.2%
60.1%
Income from Operations 14.8%
14.4%
Income from operations before income taxes 14.8%
14.4% Revenue: Revenue increased$141.9 million , or 52.3%, to$413.4 million for the three months endedSeptember 30, 2021 from$271.5 million for the three months endedSeptember 30, 2020 . The average revenue per active earning OPTAVIA Coach was$6,773 for the three months endedSeptember 30, 2021 compared to$6,329 for the three months endedSeptember 30, 2020 . Increase in the productivity per active earning OPTAVIA Coach for the quarter continued to be driven by an increase in both the number of clients supported by each Coach as well as an increase in average client spend. Revenue increased$478.3 million , or 71.4%, to$1.1 billion for the nine months endedSeptember 30, 2021 from$669.9 million for the nine months endedSeptember 30, 2020 . This increase in revenue for the quarter and nine months endedSeptember 30, 2021 was primarily driven by the continued growth in active earning OPTAVIA Coach count and increase in the productivity per active earning OPTAVIA Coach. Cost of sales: Cost of sales increased$38.9 million , or 57.7%, to$106.3 million for the three months endedSeptember 30, 2021 from the corresponding period in 2020 and increased$127.6 million , or 74.5%, to$298.9 million for the nine months endedSeptember 30, 2021 from the corresponding period in 2020. The increase in cost of sales was primarily driven by an increase in OPTAVIA product sales, higher product costs and shipping costs resulting from inflation in raw ingredient, freight and labor costs. In addition, acceleration of demand in OPTAVIA-branded products led to the increase in the Company's use of co-manufacturers, which further increased cost of sales. Gross profit: For the three months endedSeptember 30, 2021 , gross profit increased$103.0 million , or 50.5%, to$307.1 million from the corresponding period in 2020. For the nine months endedSeptember 30, 2021 , gross profit increased$350.7 million , or 70.3%, to$849.3 million from the corresponding period in 2020. The increase in gross profit for the quarter and nine months endedSeptember 30, 2021 was primarily attributable to higher revenue partially offset by increased cost of sales. For the three months endedSeptember 30, 2021 , as a percentage of revenue, gross profit decreased 90 basis points to 74.3% for 2021 from 75.2% for 2020. For the nine months endedSeptember 30, 2021 , as a percentage of revenue, gross profit decreased 40 basis points to 74.0% for 2021 from 74.4% for 2020. The decrease in gross profit percentage for the quarter and nine months endedSeptember 30, 2021 was primarily the result of promotional activity and higher product and shipping costs resulting from inflation in raw ingredient, freight and labor costs. 19
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Selling, general, and administrative: Selling, general, and administrative
("SG&A") expenses were $251.9 million for the three months ended September 30,
2021 , an increase of $92.4 million , or 57.9%, as compared to $159.5 million from
the corresponding period in 2020. As a percentage of revenue, SG&A expenses were
60.9% as compared to 58.7% for the three months ended September 30, 2021 and
2020, respectively. For the nine months ended September 30, 2021 , SG&A expenses
increased $277.5 million , or 69.0%, to $679.9 million from $402.4 million for
the corresponding period in 2020. As a percentage of revenue, SG&A expenses were
59.2% for the nine months ended September 30, 2021 as compared to 60.1% for the
corresponding period in 2020. The increase in SG&A for the quarter and nine
months ended September 30, 2021 were primarily due to higher OPTAVIA commission
expense, increased salaries and benefits related expenses for employees,
incremental consulting costs related to information technology, increased credit
card fees resulting from higher sales, as well as costs for the Company's annual
convention held in July 2021 . As the OPTAVIA convention in July 2020 was a
virtual event in response to the COVID-19 pandemic, the costs were significantly
lower. SG&A expenses included research and development ("R&D") costs of $1.2
million and $0.8 million for the three months ended September 30, 2021 and 2020,
respectively, and $3.3 million and $1.9 million for the nine months ended
September 30, 2021 and 2020, respectively.
OPTAVIA commission expense, which is a variable expense, increased $67.2
million , or 58.5%, to $182.1 million for the three months ended September 30,
2021 from $114.9 million for the corresponding period in 2020. For the nine
months ended September 30, 2021 , OPTAVIA commission expense increased $219.5
million , or 78.1%, to $500.7 million from $281.2 million for the corresponding
period in 2020. The increase was primarily the result of increased OPTAVIA
product sales. This trend is the result of the success we are experiencing with
our growing OPTAVIA Integrated Coach Model . The total number of active
earning OPTAVIA Coaches for the three months ended September 30, 2021 increased
to 61,000 from 42,100 for the corresponding period in 2020, an increase of
44.9%. As OPTAVIA revenue increased as a portion of the Company's total sales
mix, the commission rate as a percentage of revenue increased 170 basis points
to 44.0% for the third quarter of 2021 compared to 42.3% for the third quarter
last year and increased 160 basis points to 43.6% for the nine months ended
September 30, 2021 compared to 42.0% for the corresponding period in 2020.
Income from operations: For the three months ended September 30, 2021 , income
from operations increased $10.6 million to $55.2 million from $44.6 million for
the corresponding period in 2020 primarily as a result of increased gross profit
partially offset by increased SG&A expenses. Income from operations as a
percentage of revenue was 13.3% and 16.4% for the three months ended September
30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 ,
income from operations increased $73.2 million to $169.4 million from $96.2
million for the corresponding period in 2020 primarily as a result of increased
gross profits partially offset by increased SG&A expenses. Income from
operations as a percentage of revenue was 14.8% and 14.4% for the nine months
ended September 30, 2021 and 2020, respectively.
Provision for income tax: For the three months ended September 30, 2021 , the
Company recorded $13.2 million in income tax expense, an effective tax rate of
23.9%, as compared to $10.2 million in income tax expense, an effective tax rate
of 22.8%, for the three months ended September 30, 2020 . For the nine months
ended September 30, 2021 , the Company recorded $39.4 million in income tax
expense, an effective rate of 23.2%, as compared to $21.6 million in income tax
expense, an effective rate of 22.4%, for the nine months ended September 30,
2020 . The increase in the effective tax rate for the quarter and nine months
ended September 30, 2021 was primarily driven by an increase in the state income
tax rate and limitations on the deductibility of officer compensation along with
the tax benefit of stock compensation.
Net income: Net income was $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 as
compared to $34.5 million and $74.9 million , or $2.91 and $6.32 per diluted
share, for the three and nine months ended September 30, 2020 . The
period-over-period changes were driven by the factors described above in the
explanations from operations.
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Liquidity and Capital Resources
The Company had stockholders' equity of$196.2 million and working capital of$140.1 million atSeptember 30, 2021 as compared with$157.2 million and$123.0 million atDecember 31, 2020 , respectively. The$39.0 million net increase in stockholders' equity reflects$130.0 million in net income for the nine months endedSeptember 30, 2021 offset by$46.0 million spent on repurchases of the Company's common stock and$50.3 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 quarterly dividend of$1.42 per share onSeptember 9, 2021 , to stockholders of record as ofSeptember 21, 2021 that will be paid onNovember 8, 2021 . 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$174.5 million atDecember 31, 2020 to$159.9 million atSeptember 30, 2021 .
Net cash provided by operating activities decreased
Net cash used in investing activities increased$15.6 million to$17.4 million for the nine months endedSeptember 30, 2021 from$1.9 million for the nine months endedSeptember 30, 2020 . This change resulted from an$18.7 million increase in cash used in capital expenditures for the nine months endedSeptember 30, 2021 from the corresponding period in 2020 partially offset by a$3.1 million increase in sale and maturities of investment securities. Cash used in capital expenditures for the nine months endedSeptember 30, 2021 expanded our technology and supply chain capabilities to support our planned growth. Net cash used in financing activities increased$49.9 million to$93.9 million for the nine months endedSeptember 30, 2021 from$44.0 million for the nine months endedSeptember 30, 2020 . This increase was primarily due to a$41.0 million increase in stock repurchases, a$7.0 million increase in cash dividends paid to stockholders and a$1.3 million increase in net shares repurchased for employee taxes.
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. We have no present understandings, commitments or agreements with respect to any material acquisitions.. As ofSeptember 30, 2021 , the Company maintained a credit facility, which provides for a$125.0 million senior secured revolving credit facility with a$20.0 million letter of credit sublimit and 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 credit facility contains affirmative and negative covenants customarily applicable to credit facilities. As ofSeptember 30, 2021 , the Company was in compliance with all of its debt covenants and there were no borrowings outstanding under the credit facility.
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