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, this Form 10-Q 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 created a new business model by combining the most powerful aspects of direct selling, 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 91.0% 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
products, called "Fuelings," backed by dietitians, scientists and physicians.
We help clients achieve their health goals through a network of more than 52,000 independent OPTAVIA Coaches, 90.0% 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. 14
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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. Our scalable coach-based approach drives both client success and growth. We believe 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 tothe United States . InMarch 2020 , theWorld Health Organization declared COVID-19 a worldwide pandemic. As ofApril 2021 , the virus continues to spread and has had a significant impact on worldwide economic activity and on macroeconomic conditions.
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
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.
15 Table of Contents 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 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, limited visitation to our plant and
? distribution center and rolling out additional sick leave (crisis pay) for our
onsite essential employees;
successfully implementing a work-from-home plan for all non-essential employees
? to comply with guidelines from government and health officials and also
extended crisis pay;
? changing the
prioritizing production to our highest volume products limiting our stock
? keeping unit ("SKU") assortment to ensure that we are able to meet anticipated
product demand across core items;
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.
Vaccines are available in various countries and distribution of the vaccine also varies by country and in theU.S. by state. The duration and severity of this COVID-19 pandemic is uncertain, and 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 estimates. Factors that could cause actual results to differ from management's estimates 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.
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. We consider all of our significant accounting policies and estimates to be critical.
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. 16 Table of Contents
Overview of Results of Operations
Our product sales accounted for approximately 98.0% of our revenues for each of
the three months ended
The following tables reflect our income statements (in thousands, except percentages): Three months ended March 31, 2021 2020 $ Change % Change Revenue$ 340,669 $ 178,461 $ 162,208 90.9% Cost of sales 92,122 43,221 (48,901) (113.1)% Gross profit 248,547
135,240 113,307 83.8%
Selling, general, and administrative 195,748 111,707 (84,041) (75.2)% Income from operations 52,799 23,533 29,266 124.4% Other income Interest income, net 23 110 (87) (79.1)% Other income (expense) 19 (19) 38 (200.0)% 42
91 (49) (53.8)%
Income from operations before income taxes 52,841
23,624 29,217 123.7%
Provision for income tax 11,778
5,147 (6,631) (128.8)%
Net income$ 41,063 $ 18,477 $ 22,586 122.2% % of revenue Gross profit 73.0% 75.8% Selling, general, and administrative 57.5%
62.6%
Income from operations 15.5%
13.2%
Income from operations before income taxes 15.5% 13.2% Revenue: Revenue increased$162.2 million , or 90.9%, to$340.7 million for the
three months endedMarch 31, 2021 from$178.5 million for the three months endedMarch 31, 2020 . The average revenue per active earning OPTAVIA Coach was$6,454 for the three months endedMarch 31, 2021 compared to$5,333 for the three months endedMarch 31, 2020 . Increase in the productivity per active earning OPTAVIA Coach for the quarter was driven by an increase in both the number of clients supported by each Coach as well as an increase in average client spend. The year-over-year growth in revenue resulted from more clients participating in our Optimal Weight 5 & 1 Plan®. OPTAVIA-branded products represented 88.9% of consumable units sold for the three months endedMarch 31, 2021 compared to 79.0% for the corresponding period in 2020. Consistent with business and brand strategy, the Company decided to sunset theMedifast -branded product line by the end of the second quarter of 2021. Costs of sales: Cost of sales increased$48.9 million , or 113.1%, to$92.1 million for the three months endedMarch 31, 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, as well as inventory write-offs related to the sunset ofMedifast -branded product line. Acceleration of demand in OPTAVIA-branded products led to the increase in the Company's use of co-manufacturers and the increased need to provide expedited shipments of our products to keep customer experience at acceptable levels in advance of our fulfillment capacity being fully on-line, both of these items increased costs. 17 Table of Contents Gross profit: For the three months endedMarch 31, 2021 , gross profit increased$113.3 million , or 83.8%, to$248.5 million from the corresponding period in 2020. As a percentage of revenue, gross profit decreased 280 basis points to 73.0% for 2021 from 75.8% for 2020. The decrease in gross profit as a percentage of revenue was primarily driven by higher product costs and shipping costs, as well as obsolescence costs associated with the sunset ofMedifast -branded product line. Selling, general, and administrative: Selling, general, and administrative ("SG&A") expenses were$195.7 million for the three months endedMarch 31, 2021 , an increase of$84.0 million , or 75.2%, as compared to$111.7 million from the corresponding period in 2020. As a percentage of revenue, SG&A expenses were 57.5% as compared to 62.6% for the three months endedMarch 31, 2021 and 2020, respectively. The$84.0 million increase in SG&A for the quarter was primarily due to higher OPTAVIA commission expense, increased salaries and benefits related expenses for employees and increased credit card fees resulting from higher sales. SG&A expenses included research and development ("R&D") costs of$1.0 million and$0.5 million for the three months endedMarch 31, 2021 and 2020, respectively. OPTAVIA commission expense, which is a variable expense, increased$71.9 million , or 96.7%, to$146.2 million for the three months endedMarch 31, 2021 from$74.3 million for the corresponding period in 2020. The increase was primarily the result of increased OPTAVIA 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 130 basis points to 42.9% for the first quarter of 2021 compared to 41.6% for the corresponding quarter last year. This trend is the result of the success we are experiencing with our growing OPTAVIA IntegratedCoach Model . The total number of active earning OPTAVIA Coaches for the three months endedMarch 31, 2021 increased to 52,500 from 32,600 for the corresponding period in 2020, an increase of 61.0%. Income from operations: For the three months endedMarch 31, 2021 , income from operations increased$29.3 million to$52.8 million from$23.5 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 15.5% and 13.2% for the three months ended March
31, 2021 and 2020, respectively.
Other income: For the three months ended
Income from operations before income taxes: Income from operations before income taxes was$52.8 million for the three months endedMarch 31, 2021 as compared to$23.6 million for the three months endedMarch 31, 2020 , an increase of$29.2 million . Income from operations before income taxes as a percentage of revenue increased to 15.5% for the three months endedMarch 31, 2021 from 13.2% for the three months endedMarch 31, 2020 . Provision for income tax: For the three months endedMarch 31, 2021 , the Company recorded$11.8 million in income tax expense, an effective tax rate of 22.3%, as compared to$5.1 million in income tax expense, an effective tax rate of 21.8%, for the three months endedMarch 31, 2020 . The slight increase in the effective tax rate was primarily driven by an increase in the state income tax rate and limitations on the deductibility of officer compensation offset by an increase in the tax benefit of stock compensation.
Net income: Net income was
Liquidity and Capital Resources
The Company had stockholders' equity of$174.9 million and working capital of$137.0 million atMarch 31, 2021 as compared with$157.2 million and$123.0 million atDecember 31, 2020 , respectively. The$17.7 million net increase in stockholders' equity reflects$41.1 million in net income for the three months endedMarch 31, 2021 offset by$7.5 million spent on repurchases of the Company's common stock and$16.9 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 onMarch 18, 2021 , to stockholders of record as ofMarch 30, 2021 that will be paid in the second quarter of 2021. While we intend to continue the dividend program and believe 18 Table of Contents 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$174.5 million atDecember 31, 2020 to$212.9 million atMarch 31, 2021 . Net cash provided by operating activities increased$38.6 million to$65.3 million for the three months endedMarch 31, 2021 from$26.7 million for the three months endedMarch 31, 2020 as a result of a$22.6 million increase in net income and$14.5 million increase in operating assets and liabilities. Net cash used in investing activities was$0.9 million for the three months endedMarch 31, 2021 as compared to net cash provided by investing activities of$0.7 million for the three months endedMarch 31, 2020 . This change resulted from a$4.3 million increase in cash used in capital expenditures for the three months endedMarch 31, 2021 from the corresponding period in 2020 partially offset by a$2.7 million increase in sale and maturities of investment securities.
Net cash used in financing activities increased
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.
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