MEDIFAST, INC. 14
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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. 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 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 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 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 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 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
68,000 independent 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,
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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 customerswho 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 inthe United States ("U.S."), 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 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. We outsource a distribution center inHong Kong to provide 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 the
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. Nutritional supplements and health foods have been designated critical/essential infrastructure in theU.S. As a manufacturer and distributor 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 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:
•enhanced safety protocols, limiting visitation to our plant and distribution center and rolling out additional sick leave (crisis pay) for our onsite essential employees;
•through the majority of 2021, our non-essential employees continued to work
from home. Effective
•established additional health and safety precautions in our headquarters and manufacturing and distribution centers, including use of personal protective equipment and frequent hand sanitization;
•created process controls in relation to social distancing, visitors, travel and quarantine; and
•organized 16 vaccination clinics in partnership with the health department across all our operations.
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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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 the 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 customers. 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 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 six 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 six 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 six months ended
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The following tables reflect our income statements (in thousands, except
percentages):
Three months ended June 30,
2022 2021 $ Change % Change
Revenue $ 453,333 $ 394,189 $ 59,144 15.0 %
Cost of sales 131,651 100,482 31,169 31.0 %
Gross profit 321,682 293,707 27,975 9.5 %
Selling, general, and administrative 272,718 232,273 40,445 17.4 %
Income from operations 48,964 61,434 (12,470) (20.3) %
Other expense
Interest expense (164) (67) (97) 144.8 %
Other expense (4) (22) 18 (81.8) %
(168) (89) (79) 88.8 %
Income from operations before income taxes 48,796 61,345 (12,549) (20.5) %
Provision for income taxes 9,683 14,382 (4,699) (32.7) %
Net income $ 39,113 $ 46,963 $ (7,850) (16.7) %
% of revenue
Gross profit 71.0 % 74.5 %
Selling, general, and administrative costs 60.2 % 58.9 %
Income from operations 10.8 % 15.6 %
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Six months ended June 30,
2022 2021 $ Change % Change
Revenue $ 870,933 $ 734,858 $ 136,075 18.5 %
Cost of sales 246,965 192,604 54,361 28.2 %
Gross profit 623,968 542,254 81,714 15.1 %
Selling, general, and administrative 519,917 428,021 91,896 21.5 %
Income from operations 104,051 114,233 (10,182) (8.9) %
Other expense
Interest expense (259) (44) (215) 488.6 %
Other expense (20) (3) (17) 566.7 %
(279) (47) (232) 493.6 %
Income from operations before income taxes 103,772 114,186 (10,414) (9.1) %
Provision for income taxes 22,878 26,160 (3,282) (12.5) %
Net income $ 80,894 $ 88,026 $ (7,132) (8.1) %
% of revenue
Gross profit 71.6 % 73.8 %
Selling, general, and administrative costs 59.7 % 58.2 %
Income from operations 11.9 % 15.5 %
Revenue: Revenue increased $59.1 million , or 15.0%, to $453.3 million for the
three months ended June 30, 2022 from $394.2 million for the three months ended
June 30, 2021 . The average revenue per active earning OPTAVIA Coach was $6,667
for the three months ended June 30, 2022 compared to $6,662 for the three months
ended June 30, 2021 . Revenue increased $136.1 million , or 18.5%, to $870.9
million for the six months ended June 30, 2022 from $734.9 million for the six
months ended June 30, 2021 . The average revenue per active earning OPTAVIA Coach
was $6,602 for the six months ended June 30, 2022 compared to $6,558 for the six
months ended June 30, 2021 . Increase in the productivity per active earning
OPTAVIA Coach for the quarter was driven by an increase 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
and in the productivity per active earning OPTAVIA Coach.
Cost of sales: Cost of sales increased $31.2 million , or 31.0%, to $131.7
million from $100.5 million for the three months ended June 30, 2022 from the
corresponding period in 2021 and increased $54.4 million , or 28.2%, to $247.0
million from $192.6 million from the corresponding period in 2021. The increase
in cost of sales was primarily driven by an increase in OPTAVIA product sales
and higher product costs resulting from inflation in raw ingredient costs, and
labor costs. In addition, acceleration of demand for 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 ended June 30, 2022 , gross profit increased
$28.0 million , or 9.5%, to $321.7 million from $293.7 million for the three
months ended June 30, 2021 . As a percentage of revenue, gross profit decreased
350 basis points to 71.0% for 2022 from 74.5% for 2021. For the six months ended
June 30, 2022 , gross profit increased $81.7 million , or 15.1%, to $624.0 million
from $542.3 million for the six months ended June 30, 2021 . The increase in
gross profit was primarily attributable to higher revenue partially offset by
increased cost of sales. As a percentage of revenue, gross profit decreased 220
basis points to 71.6% for the six months ended June 30, 2022 from 73.8% for the
corresponding period in 2021. The decrease in gross margin percentage for the
first half of 2022 was primarily due to a customer acquisition program and
higher product costs resulting from inflation in raw ingredient costs, and labor
costs.
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Selling, general, and administrative: Selling, general, and administrative
("SG&A") expenses were $272.7 million for the three months ended June 30, 2022 ,
an increase of $40.4 million , or 17.4%, as compared to $232.3 million from the
corresponding period in 2021. As a percentage of revenue, SG&A expenses were
60.2% for the three months ended June 30, 2022 as compared to 58.9% for the
corresponding period in 2021. SG&A expenses included research and development
costs of $1.2 million and $1.1 million for the three months ended June 30, 2022
and 2021, respectively, in connection with the development of new products and
programs and clinical research activities. Selling, general, and administrative
("SG&A") expenses were $519.9 million for the six months ended June 30, 2022 , an
increase of $91.9 million , or 21.5%, as compared to $428.0 million from the
corresponding period in 2021. As a percentage of revenue, SG&A expenses were
59.7% for the six months ended June 30, 2022 as compared to 58.2% for the
corresponding period in 2021. SG&A expenses included research and development
costs of $2.2 million and $2.2 million for the six months ended June 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
six months ended June 30, 2022 was primarily due to higher OPTAVIA Coach
compensation expense, donations made to the Ukraine refugees, 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 $263.3 million for the three months ended
June 30, 2022 , an increase of $31.0 million , or 13.4%, as compared to
$232.3 million from the corresponding period in 2021. Non-GAAP adjusted SG&A
expenses were $510.5 million for the six months ended June 30, 2022 , an increase
of $82.5 million , or 19.3%, as compared to 428.0 million from the corresponding
period in 2021. Non-GAAP adjusted SG&A excludes expenses in connection with the
Ukraine Donations of $9.4 million . Refer to "Non-GAAP Financial Measures"
section 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, increased $28.2
million , or 16.4%, to $200.6 million for the three months ended June 30, 2022
from $172.4 million for the corresponding period in 2021. For the six months
ended June 30, 2022 , OPTAVIA compensation expense increased $64.9 million , or
20.4%, to $383.6 million from $318.7 million for the corresponding period in
2021. The increase was primarily the result of increased OPTAVIA product sales.
The total number of active earning OPTAVIA Coaches for the three months ended
June 30, 2022 increased to 68,000 from 59,200 for the corresponding period in
2021, an increase of 14.9%.
Income from operations: For the three months ended June 30, 2022 , income from
operations decreased $12.5 million to $49.0 million from $61.4 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 10.8% for the three months ended June 30,
2022 from 15.6% for the corresponding period in 2021 due to the factors
described above impacting gross profit and SG&A expenses. For the six months
ended June 30, 2022 , income from operations decreased $10.2 million to $104.1
million from $114.2 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 11.9% for the six
months ended June 30, 2022 from 15.5% for the corresponding period in 2021.
Non-GAAP adjusted income from operations was $58.4 million for the three months
ended June 30, 2022 , a decrease of $3.0 million , or 5.0%, as compared to
$61.4 million from the corresponding period in 2021. Non-GAAP adjusted income
from operations was $113.5 million for the six months ended June 30, 2022 , a
decrease of $0.7 million , or 0.7%, as compared to $114.2 million from the
corresponding period in 2021. Refer to "Non-GAAP Financial Measures" section
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 June 30, 2022 , the
Company recorded $9.7 million in income tax expense, an effective tax rate of
19.8%, as compared to $14.4 million in income tax expense, an effective tax rate
of 23.4%, for the three months ended June 30, 2021 . For the six months ended
June 30, 2022 , the Company recorded $22.9 million in income tax expense, an
effective tax rate of 22.0%, as compared to $26.2 million in income tax expense,
an effective tax rate of 22.9%, for the six months ended June 30, 2021 . The
decrease in the effective tax rate for the quarter and six months ended June 30,
2022 was primarily driven by the tax benefit for inventory donations in the
quarter, partially offset by an increase in state income tax rate and a decrease
in the tax benefit of stock compensation.
Non-GAAP adjusted income tax provision was $13.9 million for the three months
ended June 30, 2022 , an effective tax rate of 23.9% as compared to 23.4% for the
corresponding period in 2021. Non-GAAP adjusted income tax provision was
$27.1 million for the six months ended June 30, 2022 , an effective tax rate of
24.0%, as compared to 22.9% for the corresponding period in 2021. Refer to
"Non-GAAP Financial Measures" section below for a reconciliation of each of
Non-GAAP financial measures to its most comparable GAAP financial measure.
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Net income: Net income was$39.1 million and$80.9 million , or$3.42 and$7.01 per diluted share, for the three and six months endedJune 30, 2022 as compared to$47.0 million and$88.0 million , or$3.96 and$7.42 per diluted share, for the three and six months endedJune 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$44.3 million or$3.87 per diluted share for the three months endedJune 30, 2022 as compared to$3.96 per diluted share for the corresponding period in 2021. Non-GAAP adjusted net income was$86.1 million or$7.46 per diluted share for the six months endedJune 30, 2022 as compared to$7.42 per diluted share for the corresponding period in 2021. Refer to "Non-GAAP Financial Measures" section 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 Ukrainian refugees 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):
Three Months Ended June 30, 2022 Three Months Ended June 30, 2021
Donation Donation
GAAP Adjustments Non-GAAP GAAP Adjustments Non-GAAP
Selling, general, and
administrative 272,718 (9,426) 263,292 232,273 - 232,273
Income from operations 48,964 9,426 58,390 61,434 - 61,434
Provision for income taxes 9,683 4,256 13,939 14,382 - 14,382
Net income 39,113 5,170 44,283 46,963 - 46,963
Diluted earnings per share (1) 3.42 0.45 3.87 3.96 - 3.96
Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
Donation Donation
GAAP Adjustments Non-GAAP GAAP Adjustments Non-GAAP
Selling, general, and
administrative 519,917 (9,426) 510,491 428,021 - 428,021
Income from operations 104,051 9,426 113,477 114,233 - 114,233
Provision for income taxes 22,878 4,256 27,134 26,160 - 26,160
Net income 80,894 5,170 86,064 88,026 - 88,026
Diluted earnings per share (1) 7.01 0.45 7.46 7.42 - 7.42
(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
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equity reflects$80.9 million in net income for the six months endedJune 30, 2022 offset by$120.0 million in repurchases of the Company's common stock and$37.7 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. The Company declared a quarterly dividend of$1.64 per share onJune 16, 2022 , to stockholders of record as ofJune 28, 2022 that will be paid in the third quarter of 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 atDecember 31, 2021 to$61.1 million atJune 30, 2022 . Net cash provided by operating activities increased by$1.2 million to$87.4 million for the six months endedJune 30, 2022 from$86.2 million for the six months endedJune 30, 2021 primarily driven by a$65.5 million increase related to changes in inventory balances offset by a reduction in net income, as well as decreases related to changes in certain balance sheet accounts, including prepaid income taxes$7.6 million , other assets$7.4 million and accounts payable and accrued expenses$50.9 million . We continued to expand our cloud computing technology capabilities to support our planned growth during the six months endedJune 30, 2022 .
Net cash used in investing activities was
Net cash used in financing activities increased by$79.2 million to$130.1 million for the six months endedJune 30, 2022 from$51.0 million for the six months endedJune 30, 2021 . This increase was primarily due to the$100 million accelerated share repurchase ("ASR") program and$5.5 million increase in cash dividends paid to stockholders, partially offset by borrowings under the revolving credit facility in the amount of$27.0 million . Under the terms of the ASR agreement, approximately 480 thousand shares were delivered in the second quarter of 2022, with the remainder to be delivered at termination of the agreement, on or beforeOctober 3, 2022 .
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. OnApril 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 andCitibank, N.A ., in its capacity as administrative agent. OnMay 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 ofJune 30, 2022 , the Company had outstanding borrowings of$27.0 million under the credit facility and was in compliance with all of its debt covenants.
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