MEDIFAST: DISCUSSION AND ANALYSIS BY THE MANAGEMENT OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
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 of
Medifast'sobjectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of the management of Medifastand 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 the SEC. Although Medifastbelieves 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 accompanying notes included elsewhere in this document.
Medifastis 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. Medifasthas created a new business model by combining the most powerful aspects of direct selling, while eliminating those dimensions that have typically challenged other companies. Medifastis 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 advice to
clients on the path to optimal health and well-being.
real-time connection and support.
? The Habits of Health® transformational system: an exclusive system that
offers easy steps to a sustainably healthy lifestyle.
Products and plans: clinically proven and scientifically developed plans
? The nutritional products of the OPTAVIA brand, called “Fuelings”, supported by dieticians,
scientists and doctors.
We help clients achieve their health goals through a network of more than 59,000 independent OPTAVIA Coaches, 90.7% 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
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,
whosupport 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 clients whoare 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 in the United States, with a large and growing market opportunity. Our scalable coach-based model 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 and OPTAVIA Health Consultation (Shanghai) Co., Ltd.As we previously disclosed, global expansion is an important component of our long-term growth strategy. In July 2019, we commenced our international operations, entering into the Asia Pacificmarkets of Hong Kongand 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 Company outsources a distribution center in Hong Kongto give the Company adequate product distribution capacity for the foreseeable
future in these markets. COVID-19 Update
A new strain of coronavirus (“COVID-19”) surfaced at the end of 2019 and has spread around the world, especially for
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 the
U.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 offers no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, skill and leadership. Please see OPTAVIA’s Income Disclosure Statement (http://bit.ly/idsOPTAVIA) for statistics on actual coaching income.
15 Table of Contents 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 security protocols to comply with government guidelines
? and health officials, limited visits to our factory and distribution center
and the deployment of additional sick leave (crisis compensation) for our essential on-site services
successfully implement a home work plan for all non-essential employees
? comply with guidelines from government and health officials and also
prolonged crisis salary;
prioritize production over our largest products limiting our stock
? assortment of retention units (“SKUs”) to ensure we are able to meet expectations
demand for commodities for basic items;
provide additional health and safety precautions at our head office,
? manufacturing and distribution centers, including the use of personal protection
equipment and frequent hand disinfection; and
? process controls for 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 conventions and estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our main 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 the results of operations
Our product sales represented approximately 98.0% of our revenue for each of the three and six months ended.
The following tables reflect our income statements (in thousands, except percentages): Three months ended June 30, 2021 2020 $ Change % Change Revenue
$ 394,189 $ 219,999 $ 174,19079.2% Cost of sales 100,482 60,699 (39,783) (65.5)% Gross profit 293,707 159,300 134,407 84.4% Selling, general, and administrative 232,273 131,201 (101,072) (77.0)% Income from operations 61,434 28,099 33,335 118.6% Other (expense) income
Interest (expense) income (67) 58 (125) (215.5)% Other (expense) income (22)
1 (23) (2300.0)%
59 (148) (250.8)%
Income from operations before income taxes 61,345
28,158 33,187 117.9%
Provision for income tax 14,382 6,223 (8,159) (131.1)% Net income
$ 46,963 $ 21,935 $ 25,028114.1% % of revenue Gross profit 74.5% 72.4% Selling, general, and administrative costs 58.9%
Income from operations 15.6%
Income from operations before income taxes 15.6% 12.8% 17 Table of Contents Six months ended June 30, 2021 2020 $ Change % Change Revenue
$ 734,858 $ 398,460 $ 336,39884.4% Cost of sales 192,604 103,920 (88,684) (85.3)% Gross Profit 542,254 294,540 247,714 84.1% Selling, general, and administrative 428,021 242,908 (185,113) (76.2)% Income from operations 114,233 51,632 62,601 121.2% Other (expense) income Interest (expense) income (44) 168 (212) (126.2)% Other expense (3) (18) 15 (83.3)% (47)
150 (197) (131.3)%
Income from operations before income taxes 114,186
51 782 62 404 120.5%
Provision for income taxes 26,160 11,370 (14,790) (130.1)% Net income
$ 88,026 $ 40,412 $ 47,614117.8% % of revenue Gross Profit 73.8% 73.9% Selling, general, and administrative costs 58.2%
Income from Operations 15.5%
Income from operations before income taxes 15.5% 13.0% Revenue: Revenue increased
$174.2 million, or 79.2%, to $394.2 millionfor the three months ended June 30, 2021from $220.0 millionfor the three months ended June 30, 2020. The average revenue per active earning OPTAVIA Coach was $6,662for the three months ended June 30, 2021compared to $5,851for the three months ended June 30, 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. Revenue increased $336.4 million, or 84.4%, to $734.9 millionfor the six months ended June 30, 2021from $398.5 millionfor the six months ended June 30, 2020. This increase in revenue for the quarter and six months ended June 30, 2021was primarily driven by the growth in active earning OPTAVIA Coach count and increase in the productivity per active earning OPTAVIA Coach, which resulted in more clients participating in our Optimal Weight 5 & 1 Plan®. OPTAVIA-branded products represented 94.1% of consumable units sold for the three months ended June 30, 2021compared to 83.0% for the corresponding period in 2020 and 91.7% of consumable units sold for the six months ended June 30, 2021compared to 81.0% for the corresponding period in 2020. Consistent with business and brand strategy, the Company has completed the sunset of the Medifast-branded product line during the quarter ended June 30, 2021. Cost of sales: Cost of sales increased $39.8 million, or 65.5%, to $100.5 millionfor the three months ended June 30, 2021from the corresponding period in 2020 and increased $88.7 million, or 85.3%, to $192.6 millionfor the six months ended June 30, 2021from 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 of the Medifast-branded product line. 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 ended June 30, 2021, gross profit increased $134.4 million, or 84.4%, to $293.7 millionfrom the corresponding period in 2020. As a percentage of revenue, gross profit increased 210 basis points to 74.5% for 2021 from 72.4% for 2020. For the six months ended June 30, 2021, gross profit increased $247.7 million, or 84.1%, to $542.3 millionfrom the corresponding period in 2020. As a percentage of sales, gross margin remained flat at 73.8% for the six months ended June 30, 2021as compared to the corresponding period in 2020. The increase in gross 18
The margin percentage for the quarter is mainly the result of the promotional activity that we deployed during the second quarter of 2020 and which did not take place in the second quarter of 2021.
Selling, general, and administrative: Selling, general, and administrative ("SG&A") expenses were
$232.3 millionfor the three months ended June 30, 2021, an increase of $101.1 million, or 77.0%, as compared to $131.2 millionfrom the corresponding period in 2020. As a percentage of revenue, SG&A expenses were 58.9% as compared to 59.6% for the three months ended June 30, 2021and 2020, respectively. For the six months ended June 30, 2021, SG&A expenses increased $185.1 million, or 76.2%, to $428.0 millionfrom $242.9 millionfor the corresponding period in 2020. As a percentage of sales, SG&A expenses were 58.2% for the six months ended June 30, 2021as compared to 61.0% for the corresponding period in 2020. The increase in SG&A for the quarter and six months ended June 30, 2021were primarily due to higher OPTAVIA commission expense, increased salaries and benefits related expenses for employees, increased consulting costs related to information technology projects, and increased credit card fees resulting from higher sales. SG&A expenses included research and development ("R&D") costs of $1.1 millionand $0.5 millionfor the three months ended June 30, 2021and 2020, respectively, and $2.2 millionand $1.1 millionfor the six months ended June 30, 2021and 2020, respectively. OPTAVIA commission expense, which is a variable expense, increased $80.4 million, or 87.5%, to $172.4 millionfor the three months ended June 30, 2021from $92.0 millionfor the corresponding period in 2020. For the six months ended June 30, 2021, OPTAVIA commission expense increased $152.3 million, or 91.6%, to $318.7 millionfrom $166.3 millionfor 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 June 30, 2021increased to 59,200 from 36,500 for the corresponding period in 2020, an increase of 62.2%. As OPTAVIA revenue increased as a portion of the Company's total sales mix, the commission rate as a percentage of revenue increased 190 basis points to 43.7% for the second quarter of 2021 compared to 41.8% for the second quarter last year and increased 170 basis points to 43.4% for the six months ended June 30, 2021compared to 41.7% for the corresponding period in 2020. Income from operations: For the three months ended June 30, 2021, income from operations increased $33.3 millionto $61.4 millionfrom $28.1 millionfor 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 15.6% and 12.8% for the three months ended June 30, 2021and 2020, respectively. For the six months ended June 30, 2020, income from operations increased $62.6 millionto $114.2 millionfrom $51.6 millionfor 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 sales was 15.5% and 13.0% for the six months ended June 30, 2021and 2020, respectively.
Income from operations before income taxes: Income from operations before income taxes was
$61.3 millionfor the three months ended June 30, 2021as compared to $28.2 millionfor the three months ended June 30, 2020, an increase of $33.1 million. Income from operations before income taxes as a percentage of revenue increased to 15.6% for the three months ended June 30, 2021from 12.8% for the three months ended June 30, 2020. Income from operations before income taxes was $114.2 millionfor the six months ended June 30, 2021as compared to $51.8 millionfor the six months ended June 30, 2020. Income from operations before income taxes as a percentage of sales increased to 15.5% for the six months ended June 30, 2021from 13.0% for the six months ended June 30, 2020. Provision for income tax: For the three months ended June 30, 2021, the Company recorded $14.4 millionin income tax expense, an effective tax rate of 23.4%, as compared to $6.2 millionin income tax expense, an effective tax rate of 22.1%, for the three months ended June 30, 2020. For the six months ended June 30, 2021, the Company recorded $26.2 millionin income tax expense, an effective rate of 22.9%, as compared to $11.4 millionin income tax expense, an effective rate of 22.0%, for the six months ended June 30, 2020. The increase in the effective tax rate for the quarter and six months ended June 30, 2021was 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 $47.0 millionand $88.0 million, or $3.96and $7.42per diluted share, for the three and six months ended June 30, 2021as compared to $21.9 millionand $40.4 million, or $1.86and $3.42per diluted share, for the 19 Table of Contents
three and six months completed
Liquidity and capital resources
The Company had stockholders' equity of
$194.7 millionand working capital of $150.3 millionat June 30, 2021as compared with $157.2 millionand $123.0 millionat December 31, 2020, respectively. The $37.5 millionnet increase in stockholders' equity reflects $88.0 millionin net income for the six months ended June 30, 2021offset by $19.7 millionspent on repurchases of the Company's common stock and $33.8 millionfor 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 $1.42per share on June 3, 2021, to stockholders of record as of June 22, 2021that will be paid in the third quarter of 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 increased from $174.5 millionat December 31, 2020to $197.4 millionat June 30, 2021.
Increased net cash flow from operating activities
Net cash used in investing activities was
$7.1 millionfor the six months ended June 30, 2021as compared to net cash provided by investing activities of $0.4 millionfor the six months ended June 30, 2020. This change resulted from a $11.6 millionincrease in cash used in capital expenditures for the six months ended June 30, 2021from the corresponding period in 2020 partially offset by a $4.1 millionincrease in sale and maturities of investment securities. Cash used in capital expenditures for the six months ended June 30, 2021expanded our technology and supply chain capabilities to support our planned growth. Net cash used in financing activities increased $20.2 millionto $51.0 millionfor the six months ended June 30, 2021from $30.8 millionfor the six months ended June 30, 2020. This increase was primarily due to a $14.7 millionincrease in stock repurchases, a $3.5 millionincrease in cash dividends paid to stockholders and a $1.3 millionincrease in net shares repurchased for employee taxes.
In pursuit of its business strategy, the Company may require additional liquidity for its operating and investing activities. The Company expects that future cash requirements, if any, will be funded from operating cash flows and financing activities.
The Company evaluates acquisitions from time to time.
June 30, 2021, the Company maintained a credit facility, which provides for a $125.0 millionsenior secured revolving credit facility with a $20.0 millionletter 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 restrictive and negative covenants usually applicable to the credit facilities. From
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