What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-03-02 · 77 added, 49 removed, 106 unchanged (54% of the section changed)

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The preparation of our consolidated 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.

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.

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Revenue Recognition:

Our revenue is derived primarily from point of sale transactions executed over an ecommerce platform for weight loss, weight management, and other consumable health and nutritional products.

recognized upon receipt by customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs and estimated returns.

Our revenue is derived primarily from point of sale transactions executed over an ecommerce platform for weight loss, weight management, and other healthy living products.

Revenue is recognized upon receipt by customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns.

Revenue is recognized when control of the promised products is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products.

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A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606, Revenue from Contracts with Customers .

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied.

Our contracts have performance obligations to fulfill and deliver products from the point of sale transaction along with the related customer reward programs.

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Generally, this occurs with the transfer of control upon receipt of products by our clients.

Any consideration received prior to the fulfillment of the Company performance obligation is deferred and recognized as a liability.

Any consideration received prior to the fulfillment of the Company’s performance obligation is deferred and recognized as a liability.

Our return policy allows for customer returns within 30 days of purchase and upon our authorization.

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Options to acquire additional products at a discount can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements, and promotions.

We reduce the transaction price for certain customer reward programs and incentive offerings including pricing arrangements, promotions, incentives that represent variable consideration and separate performance obligations.

The Company accounts for sales rewards as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the customer reward program and incentive offering.

We reduce the transaction price for certain customer reward programs and incentive offerings including pricing arrangements, promotions, and incentives that represent variable consideration and separate performance obligations.

The Company accounts for sales rewards that provide the customer with a material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the customer reward program and incentive offering.

Amounts billed to clients for shipping and handling activities are treated as a promised service performance obligation and are recorded in revenue in our Consolidated Statements of Income upon fulfillment of the performance obligation.

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These costs are recorded in selling, general and administrative expense in our Consolidated Statements of Income.

Impairment of Long-lived Fixed Assets:

Impairment of Long-lived Assets:

We continually assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and our operating performance.

Future events could cause us to conclude that impairment indicators exist and the carrying values of fixed and long-lived assets may be impaired.

Future events

could cause us to conclude that impairment indicators exist and the carrying values of fixed and long-lived assets may be impaired.

Any resulting impairment loss would be limited to the value of net fixed and long-lived assets.

Income Taxes:

Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.

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Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as

described above is reflected as a liability for unrecognized tax benefits in our Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in our Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We evaluated our tax positions and determined that we did not have any material uncertain tax positions.

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We are generally no longer subject to United States federal, state and local income tax examinations by tax authorities for the years before 2017.

Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company determines if an arrangement is a lease at inception and categorizes leases with contractual terms longer than twelve months as either operating or finance.

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Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense.

Medifast is the company behind one of the fastest-growing health and wellness communities called OPTA VIA ® , which offers Lifelong Transformation, One Healthy Habit at a Time ® .

Reflecting the success of its approach to health and wellness for its clients, Medifast has consistently grown revenue ahead of peers and competitors.

Of equal importance, our business model is expected to deliver reliable growth year after year.

Medifast is the global company behind one of the fastest-growing health and wellness communities called OPTA VIA ® , which offers Lifelong Transformation, One Healthy Habit at a Time ® .

Reflecting the success of its approach to health and wellness for its clients, Medifast has consistently grown revenue for the past three years.

Of equal importance, our business model is expected to deliver long-term growth in the foreseeable future.

Medifast has redefined direct selling by combining the best aspects of the model, while eliminating those dimensions that have typically challenged other companies.

Medifast is often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is very different.

The Company supports clients through independent OPTA VIA Coaches, majority of whom were clients first.

The Company supports clients through independent OPTA VIA Coaches, the majority of whom were clients first.

Our product sales accounted for 98.0% of our revenues in 2020, 2019, and 2018, respectively.

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In July 2019, we commenced our international operations, entering into the Asia Pacific markets of Hong Kong and Singapore.

The Company outsources a distribution center in Hong Kong to give the Company adequate product distribution capacity for the foreseeable future.

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.

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As a result, beginning in the first quarter of 2018, we changed how we report financial performance to align with changes in the way we now manage the business and now operate and report as a single sales segment, OPTA VIA.

We previously disclosed entity-wide financial information for multiple segments (e.g.

OPTA VIA, Medifast Direct, Franchise Medifast Weight Control Centers and Medifast Wholesale).

Although we have

one reportable segment, we continue to market our products and programs through our Medifast Direct ecommerce platform and our Franchise Medifast Weight Control Center channels.

Although we have one reportable segment, we continue to market our products and programs through our Medifast Direct ecommerce platform.

CONSOLIDATED RESULTS OF OPERATIONS - 2020 COMPARED TO 2019

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Interest income, net

Other income (expense)

Income from operations before income taxes

Provision for income taxes

Selling, general, and administrative costs

Selling, general, and administrative

Income from Operations

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Revenue increased $221.1 million, or 31.0%, to $934.8 million in 2020 from $713.7 million in 2019.

The total number of active earning OPTA VIA Coaches for the three months ended December 31, 2019 increased to 31,800 from 24,100 for the corresponding period in 2018, an increase of 32.0%.

The average revenue per active earning OPTA VIA Coach decreased 9.2% to $5,229 for the three months ended December 31, 2019 from $5,756 for the three months ended December 31, 2018.

This year-over-year growth in revenue resulted from business initiatives accelerating new OPTA VIA Coach conversions, increased OPTA VIA client acquisition rates and the transition of clients to higher priced OPTA VIA branded products.

The average revenue per active earning OPTA VIA Coach increased 13.4% to $5,932 for the three months ended December 31, 2020 from $5,229 for the three months ended December 31, 2019.

Increase in the productivity per active earning OPTA VIA Coach for the quarter was driven by an increase in both the number of clients supported by each Coach as well as an increase in average client spend.

The year-over-year growth in revenue resulted from program initiatives which drove more clients to participate in our plans, aided by the ongoing transition of clients to higher priced OPTA VIA-branded products.

OPTA VIA-branded products represented 83.5% of consumable units sold for the year ended December 31, 2020 compared to 76.0% for the corresponding period in 2019.

Costs of Sales:

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As a percentage of sales, gross profit decreased 60 basis points to 74.6% for 2020 from 75.2% for 2019.

The decrease in gross profit as a percentage of sales was primarily driven by higher shipping expenses and higher product returns related to disruptions to normal business operations during the year.

The decrease in gross margin percentage was primarily the result of promotional activity as well as higher production costs in 2020.

Selling, General and Administrative:

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As a percentage of sales, SG&A expenses were 60.3% for 2020 as compared to 62.5% for 2019.

The $135.0 million increase was primarily a result of higher variable costs such as OPTA VIA commission expense and credit card processing fees as a result of higher sales.

In addition, SG&A expenses increased as a result of increased consulting costs related to technology projects, along with higher salaries and benefits related expenses.

SG&A expenses included $3.3 million of cost incurred in Q3 2019, which were related to a highly organized automated scheme using stolen credit cards from outside the Company’s systems, to transact business on the Company’s ecommerce sites.

Each of these transactions was pre-approved, prior to shipment, by the payment processor and subsequently reported to the Company as utilizing a stolen card.

These expenses were $2.9 million higher than the corresponding period in 2018 and were primarily comprised of higher bad debt and credit card fees.

Bad debt levels have returned to historical levels throughout the fourth quarter of 2019 as a result of software and new processes implemented in the third quarter of 2019.

The $117.9 million increase was primarily due to higher OPTA VIA commission expense as a result of growth in OPTA VIA sales, incremental professional service costs in connection with the Schedule 13D filing and increased salaries and benefits related expenses partially offset by sales and marketing expenses.

SG&A expenses included research and development costs of $2.8 million and $2.7 million for 2020 and 2019, respectively.

For the year ended December 31, 2020, Non-GAAP adjusted SG&A expenses increased $110.8 million to $556.6 million and Non-GAAP adjusted SG&A as a percentage of revenue decreased 300 basis points year-over-year to 59.5%.

Non-GAAP adjusted SG&A excludes expenses in connection with the Schedule 13D filing of $5.8 million and severance related costs of $1.2 million resulting from the departure of the Company's previous Chief Financial Officer.

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.

OPTA VIA commission expense, which is a variable expense, increased $100.4 million, or 34.1%, to $395.1 million in 2020 from $294.7 million in 2019.

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As OPTA VIA revenue increased as a portion of the Company’s total sales mix, the commission rate as a percentage of revenue increased 100 basis points to 42.3% in 2020 compared to 41.3% in 2019.

This is an outcome of the success we are experiencing with our growing OPTA VIA Integrated Coach Model.

This trend of the success we are experiencing with our growing OPTA VIA Integrated Coach Model.

The total number of active earning OPTA VIA Coaches for the three months ended December 31, 2020 increased to 44,200 from 31,800 for the corresponding period in 2019, an increase of 39.0%.

Income from operations:

Income from operations in 2020 increased $43.2 million to $134.2 million from $91.0 million in 2019 primarily as a result of increased gross profits partially offset by increased SG&A expenses.

Income from operations as a percentage of sales decreased to 12.8% for 2019 as compared to 13.8% for 2018.

Income from operations as a percentage of sales increased to 14.4% for 2020 as compared to 12.8% for 2019.

For the year ended December 31, 2020, Non-GAAP adjusted income from operations increased $50.2 million to $141.2 million and Non-GAAP adjusted income from operations as a percentage of revenue increased 230 basis points year-over-year to 15.1%.

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.

Other income:

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Income from operations before income taxes was $134.3 million in 2020 as compared to $92.4 million in 2019, an increase of $41.9 million.

Income from operations before income taxes as a percentage of sales decreased to 12.9% for 2019 from 14.1% for 2018.

Income from operations before income taxes as a percentage of sales increased to 14.4% for 2020 from 12.9% for 2019.

Provision for income taxes:

For 2020, the Company recorded $31.4 million in income tax expense, an effective tax rate of 23.4%, as compared to $14.4 million in income tax expense and an effective tax rate of 15.6%, for 2019.

The decrease in the effective tax rate for 2019 as compared to 2018 was primarily driven by an increase in the share-based compensation benefit of 4.3%.

The Company anticipates a full year tax rate of 22.5% to 23.5% in 2020.

The increase in the effective tax rate for 2020 as compared to 2019 was primarily driven by a decrease in the share-based compensation benefit of 6.7%, an increase in the valuation allowance of 1.0%, and a decrease in the research and development benefit of 0.3% partially offset by other permanent differences.

Net income was $102.9 million, or $8.68 per diluted share, in 2020 as compared to $77.9 million, or $6.43 per diluted share, in 2019.

The period-over-period changes were driven by the factors described above in the explanations from operations.

Non-GAAP adjusted net income was $108.3 million or $9.14 per diluted share for the year

ended December 31, 2020.

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.

Additionally, refer to Item 7:

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2019 compared to fiscal year 2018.

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding our results, we disclose various Non-GAAP financial measures in this 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, net income and diluted earnings per share.

Each of these as Non-GAAP financial measures excludes the impact of certain amounts as further identified below that the Company believes are not indicative of its core ongoing operational performance.

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):

Selling, general, and administrative

Professional services for 13D Filing

Incremental severance costs

Non-GAAP adjusted selling, general, and administrative

Income from operations

Professional services for 13D Filing

Incremental severance costs

Non-GAAP adjusted income from operations

Adjustments, net of tax

Professional services for 13D Filing

Incremental severance costs

Non-GAAP adjusted net income

Diluted earnings per share (1)

Impact for adjustments (1)

Non-GAAP adjusted diluted earnings per share (1)

(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 $157.2 million and working capital of $123.0 million at December 31, 2020 compared with $104.8 million and $74.8 million at December 31, 2019.

The $4.3 million net decrease in stockholder’s equity reflects $77.9 million in net income for 2019 offset by $33.1 million spent on repurchases of common stock, and $40.0 million for declared dividends paid to our common stock holders as well as the other equity transactions described in the Consolidated Statements of Changes in Stockholders’ Equity included in our consolidated financial statements included in this report.

The $52.4 million net increase in stockholders’ equity reflects $102.9 million in net income for 2020 offset by $5.0 million spent on repurchases of common stock and $53.3 million for declared dividends paid to our common stock holders as well as the other equity transactions described in the Consolidated Statements of Changes in Stockholders’ Equity included in our consolidated financial statements included in this report.

The Company declared a dividend of $1.13 per share on December 10, 2020, to stockholders of record as of December 22, 2020 that was paid on February 5, 2021.

While we intend to continue the dividend program and believe we will have sufficient liquidity to do so, we can provide no assurance we will be able to continue the

declaration and payment of dividends.

The Company’s cash, cash equivalents and investment securities decreased from $101.0 million at December 31, 2018 to $92.7 million at December 31, 2019.

Net cash provided by operating activities increased $23.5 million to $84.3 million for 2019 from $60.8 million for 2018 primarily as a result of increased net income.

While we intend to continue the dividend program and believe we will have sufficient liquidity to do so, we can provide no assurance we will be able to continue the declaration and payment of dividends.

The Company’s cash, cash equivalents and investment securities increased from $92.7 million at December 31, 2019 to $174.5 million at December 31, 2020.

Net cash provided by operating activities increased $60.9 million to $145.2 million for 2020 from $84.3 million for 2019 primarily as a result of a $24.9 million increase in net income and $37.7 million increase in operating assets and liabilities.

Net cash used in investing activities was $1.3 million for 2020 as compared to $6.3 million for 2019.

This year-over-year change resulted primarily from an increase in cash used in capital expenditures for 2019 as compared to 2018.

Net cash used in financing activities increased $29.0 million to $82.3 million for 2019 from $53.3 million for 2018.

This increase was primarily due to increases in the net shares repurchased for employee taxes, cash dividends paid to stockholders, and stock repurchases for 2019 from 2018.

This year-over-year change resulted primarily from a $4.2 million decrease in cash used in capital expenditures for 2020 as compared to 2019 as well as a $0.9 million increase in sale and maturities of investment securities.

Net cash used in financing activities decreased $25.2 million to $57.1 million for 2020 from $82.3 million for 2019.

This decrease was primarily due to a $28.1 million decrease in stock repurchases, a $13.5 million decrease in net shares repurchased for employee taxes and a $1.3 million increase in options exercised by executives and directors partially offset by a $17.8 million increase in cash dividends paid to stockholders.

In pursuing its business strategy, the Company may require additional cash for operating and investing activities.

The Company expects future cash requirements, including its expansion of its operations into the Asia Pacific Markets of Hong Kong and Singapore, to be funded from operating cash flow.

The Company expects future cash requirements, if any, to be funded from operating cash flow and financing activities.

The Company evaluates acquisitions from time to time.

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(a) The Company has operating leases in place for leased corporate offices, warehouses, and certain equipment.

(b) The Company has unconditional purchase obligations primarily for outsourced information technology and Coach events.

(b) The Company has unconditional purchase obligations primarily for inventories, outsourced information technology and Coach events.

To date, inflation has not had a material effect on the Company’s business.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis