MED 10-Q
Medifast Inc (MED)
10-Q
2022-08-03
For: 2022-06-30
View Original
Added on
April 07, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2022
OR
For the transition period from________ to ________.
Commission File Number: 001-31573
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
Telephone Number: (410 ) 581-8042
(Address of Principal Executive Offices, Zip Code and Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | |||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of the registrant’s common stock outstanding at July 25, 2022 was 11,017,899 .
Medifast, Inc. and Subsidiaries
Index
1
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(U.S. dollars in thousands, except per share amounts & dividend data)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general, and administrative | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Other expense | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other expense | ( | ( | ( | ( | |||||||||||||||||||
| ( | ( | ( | ( | ||||||||||||||||||||
| Income from operations before income taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share - basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share - diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Cash dividends declared per share | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(U.S. dollars in thousands)
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation | ( | $ | $ | ||||||||||||||||||||
| Unrealized losses on investment securities | ( | ( | $ | ( | $ | ( | |||||||||||||||||
| ( | $ | $ | |||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(U.S. dollars in thousands, except par value)
| June 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Inventories | |||||||||||
| Investment securities | |||||||||||
| Income taxes, prepaid | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment - net of accumulated depreciation | |||||||||||
| Right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Deferred tax assets | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
Revolving credit facility | |||||||||||
| Current lease obligations | |||||||||||
| Total current liabilities | |||||||||||
| Lease obligations, net of current lease obligations | |||||||||||
| Total liabilities | |||||||||||
| Stockholders' Equity | |||||||||||
Common stock, par value $ | |||||||||||
at June 30, 2022 and December 31, 2021, respectively | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Retained earnings | |||||||||||
| Total stockholders' equity | |||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(U.S. dollar in thousands)
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to cash provided by operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Non-cash lease expense | |||||||||||
| Share-based compensation | |||||||||||
| Amortization of premium on investment securities | |||||||||||
| Change in operating assets and liabilities: | |||||||||||
| Inventories | ( | ||||||||||
| Income taxes, prepaid | ( | ||||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Net cash flow provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Sale and maturities of investment securities | |||||||||||
| Purchase of property and equipment | ( | ( | |||||||||
| Net cash flow used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
Borrowing under revolving credit facility | |||||||||||
| Options exercised by executives and directors | |||||||||||
| Net shares repurchased for taxes | ( | ( | |||||||||
| Cash dividends paid to stockholders | ( | ( | |||||||||
Stock repurchases, settled | ( | ( | |||||||||
Stock repurchases, not yet settled | ( | ||||||||||
| Net cash flow used in financing activities | ( | ( | |||||||||
| Foreign currency impact | |||||||||||
| (Decrease) Increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents - beginning of the period | |||||||||||
| Cash and cash equivalents - end of period | $ | $ | |||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Income taxes paid | $ | $ | |||||||||
| Dividends declared included in accounts payable | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
(U.S. dollars in thousands)
| Six months ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Number of Shares Issued | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net shares repurchased for taxes | ( | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Treasury stock from stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Treasury stock retired from stock repurchases | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Cash dividends declared to stockholders | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net shares repurchased for taxes | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Treasury stock from stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Treasury stock retired from stock repurchases | ( | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Stock repurchases, not yet settled | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Cash dividends declared to stockholders | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
| Six months ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Number of Shares Issued | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income | Retained Earnings | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Options exercised by executives and directors | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net shares repurchased for taxes | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury stock from stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Cash dividends declared to stockholders | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Options exercised by executives and directors | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Net shares repurchased for taxes | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||
| Treasury stock from stock repurchases | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Treasury stock retired from stock repurchases | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Cash dividends declared to stockholders | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of Medifast, Inc. and its wholly-owned subsidiaries (“Medifast,” the “Company,” “we,” “us,” or “our”) included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and notes that are normally required by GAAP have been condensed or omitted. However, in the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included and management believes the disclosures that are made are adequate to make the information presented not misleading. The condensed consolidated balance sheet at December 31, 2021 has been derived from the audited consolidated financial statements at that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (“2021 Form 10-K”).
The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2022. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the 2021 audited consolidated financial statements and notes thereto, which are included in the 2021 Form 10-K.
2. INVENTORIES
8
and indirect labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventories for unsalable or obsolete inventories.
The Company donated inventory with an aggregate cost of $9.4 million to Ukrainian refugees and those in need in Ukraine, increasing SG&A during the three months ended June 30, 2022. The donations were made to two 501(c)(3) organizations that are coordinating the distribution throughout refugee camps in Europe and in Ukraine.
Inventories consisted of the following (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Packaging | |||||||||||
| Non-food finished goods | |||||||||||
| Finished goods | |||||||||||
| Reserve for obsolete inventory | ( | ( | |||||||||
| Total | $ | $ | |||||||||
3. EARNINGS PER SHARE
Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of the Company’s common stock outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of the Company’s common stock outstanding adjusted for the effect of dilutive common stock equivalents.
The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):
| Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding | |||||||||||||||||||||||
| Effect of dilutive common stock equivalents | |||||||||||||||||||||||
| Weighted average shares of common stock outstanding | |||||||||||||||||||||||
| Earnings per share - basic | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share - diluted | $ | $ | $ | $ | |||||||||||||||||||
The calculation of diluted EPS excluded 3 and 0 antidilutive restricted stock awards for the three months ended June 30, 2022 and 2021, respectively, and 1 and 0 antidilutive restricted stock awards for the six months ended June 30, 2022 and 2021, respectively. EPS is computed independently for each of the periods presented above, and accordingly, the sum of the quarterly earnings per common share may not equal the year-to-date total computed.
4. SHARE-BASED COMPENSATION
Stock Options
The Company has issued non-qualified and incentive stock options to employees and non-employee directors. The fair value of these options are estimated on the date of grant using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the risk-free interest rate, the expected volatility of the price of the Company’s common stock, and
9
dividend yield. Options outstanding as of June 30, 2022 generally vest over a period of three years and expire ten years from the date of grant. The exercise price of these options ranges from $26.52 to $66.68 . Due to the Company’s lack of option exercise history on the date of grant, the expected term is calculated using the simplified method defined as the midpoint between the vesting period and the contractual term of each option. The risk free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant that most closely corresponds to the expected term of the option. The expected volatility is based on the historical volatility of the Company’s common stock over the period of time equivalent to the expected term for each award. The dividend yield is computed as the annualized dividend rate at the grant date divided by the strike price of the stock option. For the six months ended June 30, 2022 and 2021, the Company did no
The following table is a summary of our stock option activity (in thousands, except per share data):
| Six months ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Awards | Weighted-Average Exercise Price | Awards | Weighted-Average Exercise Price | ||||||||||||||||||||
| Outstanding at beginning of period | $ | $ | |||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Outstanding at end of the period | $ | $ | |||||||||||||||||||||
| Exercisable at end of the period | $ | $ | |||||||||||||||||||||
As of June 30, 2022, the weighted-average remaining contractual life for outstanding stock options was 4.8 years with an aggregate intrinsic value of $4.2 million and the weighted-average remaining contractual life for exercisable stock options was 4.7 years with an aggregate intrinsic value of $3.6 million. The unrecognized compensation expense calculated under the fair value method for stock options expected to vest as of June 30, 2022 was $0.1 million and is expected to be recognized over a weighted-average period of 0.6 year. For the six months ended June 30, 2022, there was no exercise activity of stock options. For the six months ended June 30, 2021, the Company received $0.7 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the six months ended June 30, 2021 was $2.3 million.
Restricted Stock
The Company has issued restricted stock to employees and non-employee directors generally with vesting terms up to five years after the date of grant. The fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period.
The following table summarizes our restricted stock activity (in thousands, except per share data):
| Six months ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Shares | Weighted-Average Grant Date Fair Value | Shares | Weighted-Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at beginning of period | $ | $ | |||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Vested | ( | ( | |||||||||||||||||||||
| Forfeited | ( | ( | |||||||||||||||||||||
| Outstanding at end of the period | $ | $ | |||||||||||||||||||||
The Company withheld approximately 8,000 and 7,000 shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock for the six months ended June 30, 2022 and 2021, respectively. The total fair value of restricted stock awards vested during the six months ended June 30, 2022 and 2021 was $3.3 million and $6.7 million, respectively.
Market and Performance-based Share Awards
10
The Company has issued market and performance-based share awards to certain key executives who were granted deferred shares and may earn between 0 % and 250 % of the target number depending upon both the Company's total stockholder return and the Company's performance against predetermined performance goals over a three-year performance period after the date of grant. Market and performance-based share awards that are tied to the Company’s total stockholder return are valued using the Monte Carlo method and are recognized ratably as expense over the award’s performance period. The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date of grant adjusted by expected level of achievement over the performance period. Expense for performance-based share awards is amortized ratably over the performance period.
Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Condensed Consolidated Statements of Income. The total expenses during the three months ended June 30, 2022 and 2021 are as follows (in thousands):
| Three months ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Shares | Share-Based Compensation Expense | Shares | Share-Based Compensation Expense | ||||||||||||||||||||
| Options and restricted stock | $ | $ | |||||||||||||||||||||
| Market and performance-based share awards granted in 2022 | |||||||||||||||||||||||
| Performance-based share awards granted in 2021 | |||||||||||||||||||||||
| Performance-based share awards granted in 2020 | |||||||||||||||||||||||
| Performance-based share awards granted in 2019 | |||||||||||||||||||||||
| Total share-based compensation | $ | $ | |||||||||||||||||||||
The total expenses during the six months ended June 30, 2022 and 2021 are as follows (in thousands):
| Six months ended June 30, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Shares | Share-Based Compensation Expense | Shares | Share-Based Compensation Expense | ||||||||||||||||||||
| Options and restricted stock | $ | $ | |||||||||||||||||||||
| Market and performance-based share awards granted in 2022 | |||||||||||||||||||||||
| Performance-based share awards granted in 2021 | |||||||||||||||||||||||
| Performance-based share awards granted in 2020 | |||||||||||||||||||||||
| Performance-based share awards granted in 2019 | |||||||||||||||||||||||
| Total share-based compensation | $ | $ | |||||||||||||||||||||
The total income tax benefit recognized in the accompanying Condensed Consolidated Statements of Income for restricted stock awards was $0.4 million and $0.9 million for the three months ended June 30, 2022 and 2021, respectively, and $0.9 million and $2.1 million for the six months ended June 30, 2022 and 2021, respectively.
There was $8.9 million of total unrecognized compensation cost related to restricted stock awards as of June 30, 2022, which is expected to be recognized over a weighted-average period of 2.0 years. There was $9.4 million of unrecognized compensation costs related to the 65,477 performance-based shares discussed above as of June 30, 2022, which is expected to be recognized over a weighted-average period of 2.1 years.
5. LEASES
Operating Leases
The Company has operating leases for office and warehouse space and certain equipment. In certain of the Company’s lease agreements, the rental payments are adjusted periodically based on defined terms within the lease. The Company did not have any finance leases as of June 30, 2022 and 2021, respectively, or for the six-month periods then ended, respectively.
11
Our leases relating to office and warehouse space have lease terms of 18 months to 126 months. Our leases relating to equipment have lease terms of 24 months to 203 months, with certain of them having automatic renewal clauses.
The Company’s warehouse agreements also contain non-lease components, in the form of payments towards variable logistics services and labor charges, which the Company is obligated to pay based on the services consumed by it. Such amounts are not included in the measurement of the lease liability but are recognized as expenses when they are incurred.
The operating lease expense was $1.7 million and $1.4 million for the three months ended June 30, 2022 and 2021, respectively, and $3.5 million and $2.4 million for the six months ended June 30, 2022 and 2021, respectively.
Supplemental cash flow information related to the Company’s operating leases was as follows (in thousands):
| Six months ended June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for amounts included in the measurements of lease liabilities | |||||||||||
| Operating cash flow used in operating leases | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for lease obligations | |||||||||||
| Operating leases | $ | $ | |||||||||
As of June 30, 2022, the weighted average remaining lease term was 5.3 years and the weighted average discount rate was 2.1 %.
The following table presents the maturity of the Company’s operating lease liabilities as of June 30, 2022 (in thousands):
2022 (excluding the six months ended June 30, 2022) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total lease payments | $ | ||||
| Less: imputed interest | ( | ||||
| Total | $ | ||||
6. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth the components of accumulated other comprehensive income, net of tax where applicable (in thousands):
| June 30, 2022 | December 31, 2021 | ||||||||||
| Foreign currency translation | $ | $ | |||||||||
| Unrealized gains on investment securities | |||||||||||
| Accumulated other comprehensive income | $ | $ | |||||||||
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7. FINANCIAL INSTRUMENTS
Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
The following tables present the Company’s cash and financial assets that are measured at fair value on a recurring basis for each of the hierarchy levels (in thousands):
| June 30, 2022 | |||||||||||||||||||||||||||||||||||
| Cost | Unrealized Gains | Accrued Interest | Estimated Fair Value | Cash & Cash Equivalents | Investment Securities | ||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | ||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||
| Money market accounts | — | — | — | ||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||
| Cost | Unrealized Gains | Accrued Interest | Estimated Fair Value | Cash & Cash Equivalents | Investment Securities | ||||||||||||||||||||||||||||||
| Cash | $ | $ | — | $ | — | $ | $ | $ | — | ||||||||||||||||||||||||||
| Level 1: | |||||||||||||||||||||||||||||||||||
| Money market accounts | — | — | — | ||||||||||||||||||||||||||||||||
| Government & agency securities | — | — | |||||||||||||||||||||||||||||||||
| — | |||||||||||||||||||||||||||||||||||
| Level 2: | |||||||||||||||||||||||||||||||||||
| Municipal bonds | — | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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8. DEBT
Credit Agreement
On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on Secured Overnight Financing Rate (SOFR), from London Inter-Bank Offered Rate (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 matures on April 13, 2026.
The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors. The obligations of the Company and the Guarantors are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.
Under the Amended Credit Agreement, the Company will pay to the administrative agent for the account of each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the revolving facility from 0.20 % to 0.40 % per annum depending on the Company’s Total Net Leverage Ratio (as defined in the Amended Credit Agreement). The Company is also obligated to pay the administrative agent customary fees for credit facilities of this size and type.
Revolving borrowings under the Amended Credit Agreement bear interest at a rate per annum equal to (i) the Term SOFR Rate for the interest period plus the Applicable Rate (as defined in the Amended Credit Agreement) based on the Company’s Total Net Leverage Ratio or (ii) the Alternate Base Rate (as defined in the Amended Credit Agreement) as in effect from time to time plus the Applicable Rate based on the Company’s Total Net Leverage Ratio. As of June 30, 2022, the Applicable Rate for Term SOFR Loans is 1.25 % per annum and the Applicable Rate for ABR Loans is 0.25 % per annum. SOFR based loans also include a Credit Spread Adjustment based on the duration of the borrowing.
The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Amended Credit Agreement also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default. In addition, the Amended Credit Agreement requires the Company to maintain a Total Net Leverage Ratio of no more than 2.75 to 1.00 and an Interest Coverage Ratio of at least 3.50 to 1.00.
The Company has $27.0 million of borrowings outstanding under the Amended Credit Agreement as of June 30, 2022.
9. ACCELERATED SHARE REPURCHASE (“ASR”) PROGRAM
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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 of Medifast'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 the SEC. Although Medifast 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 customers who 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 in the 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 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 Pacific markets of Hong Kong and Singapore. Our decision to enter these markets was based on industry market research that reflects a dynamic shift in how health care is being prioritized and consumed in those countries. We outsource a distribution center in Hong 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 U.S. In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic.
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 the U.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 October 2021, the Company implemented a hybrid work approach which enables our non-essential employees the flexibility to work partially from home and partially from the office;
•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 June 30, 2022 and 2021, respectively.
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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 ended June 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 ended June 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 ended June 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 ended June 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 | ||||||||||||||||||||||||||||||||||
| GAAP | Donation Adjustments | Non-GAAP | GAAP | Donation Adjustments | Non-GAAP | ||||||||||||||||||||||||||||||
| Selling, general, and administrative | (9,426) | 263,292 | — | 232,273 | |||||||||||||||||||||||||||||||
| Income from operations | 9,426 | 58,390 | — | 61,434 | |||||||||||||||||||||||||||||||
| Provision for income taxes | 4,256 | 13,939 | — | 14,382 | |||||||||||||||||||||||||||||||
| Net income | 5,170 | 44,283 | — | 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 | ||||||||||||||||||||||||||||||||||
| GAAP | Donation Adjustments | Non-GAAP | GAAP | Donation Adjustments | Non-GAAP | ||||||||||||||||||||||||||||||
| Selling, general, and administrative | (9,426) | 510,491 | — | 428,021 | |||||||||||||||||||||||||||||||
| Income from operations | 9,426 | 113,477 | — | 114,233 | |||||||||||||||||||||||||||||||
| Provision for income taxes | 4,256 | 27,134 | — | 26,160 | |||||||||||||||||||||||||||||||
| Net income | 5,170 | 86,064 | — | 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 $129.5 million and working capital of $55.1 million at June 30, 2022 as compared with $202.5 million and $137.0 million at December 31, 2021, respectively. The $73.0 million net decrease in stockholders’
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equity reflects $80.9 million in net income for the six months ended June 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 on June 16, 2022, to stockholders of record as of June 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 at December 31, 2021 to $61.1 million at June 30, 2022.
Net cash provided by operating activities increased by $1.2 million to $87.4 million for the six months ended June 30, 2022 from $86.2 million for the six months ended June 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 ended June 30, 2022.
Net cash used in investing activities was $0.6 million for the six months ended June 30, 2022 as compared to $7.1 million for the six months ended June 30, 2021.
Net cash used in financing activities increased by $79.2 million to $130.1 million for the six months ended June 30, 2022 from $51.0 million for the six months ended June 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 before October 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.
On April 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 and Citibank, N.A., in its capacity as administrative agent. On May 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 of June 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.
The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at June 30, 2022, the Company estimates that the fair value of its borrowings under its credit facility would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments.
There have been no material changes to our market risk exposure since December 31, 2021.
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Item 4. Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of June 30, 2022. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1. Legal Proceedings
The Company is, from time to time, subject to a variety of litigation and similar proceedings that arise out of the ordinary course of its business. Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its results of operations, financial position or liquidity. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that the Company’s results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.
Item 1A. Risk Factors
There have been no material changes to the risk factors set forth in Part I, Item 1A of the 2021 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
| 2022 | Total Number of Shares Purchased (1)(3) | Average Price Paid per Share | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||||||||||||
| April 1 - April 30 | 48,095 | $ | 181.40 | 47,982 | 1,986,034 | |||||||||||||||||||||
| May 1 - May 31 | 7,077 | $ | 182.95 | 7,077 | 1,978,957 | |||||||||||||||||||||
| June 1 - June 30 | 479,760 | $ | 166.75 | 479,760 | 1,499,197 | |||||||||||||||||||||
(1)Also included are shares of common stock surrendered by employees and directors to the Company to cover minimum tax liability withholding obligations upon the exercise of stock options or the vesting of shares of restricted stock previously granted to such employees and directors.
(2)At the outset of the quarter ended June 30, 2022, there were 2,034,016 shares of the Company's common stock eligible for repurchase under the stock repurchase authorization dated September 16, 2014 (the "Stock Repurchase Plan").
(3)In the second quarter of fiscal 2022, the Company paid $100 million under an Accelerated Share Repurchase (“ASR”) agreement and received an initial delivery of approximately 480 thousand shares with the remainder to be delivered at termination of the agreement, on or before October 3, 2022.’See Note 9 to the Consolidated Financial Statements included in this report for further description of the ASR.
As of June 30, 2022, there were 1,499,197 shares of the Company’s common stock eligible for repurchase under the Stock Repurchase Plan. There can be no assurances as to the amount, timing or prices of repurchases, which may vary based on market conditions and other factors. The Stock Repurchase Plan does not have an expiration date and can be modified or terminated by the Board of Directors at any time.
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Item 6. Exhibits
| Exhibit Number | Description of Exhibit | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101 | The following financial statements from Medifast, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 filed August 4, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity, and (vi) Notes to the Condensed Consolidated Financial Statements (filed herewith). | |||||||
| 104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
In accordance with SEC Release No. 33-8238, Exhibit 32.1 is being furnished and not filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Medifast, Inc.
| By: | /s/ DANIEL R. CHARD | |||||||
| Daniel R. Chard | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Dated: | August 3, 2022 | |||||||
| /s/ JAMES P. MALONEY | ||||||||
| James P. Maloney | ||||||||
| Chief Financial Officer | ||||||||
| (Principal Financial Officer) | ||||||||
| Dated: | August 3, 2022 | |||||||
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