What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-26 · 71 added, 97 removed, 86 unchanged (66% 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.

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.

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.

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Management considers the following accounting policies to be the most critical in preparing our consolidated financial statements.

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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 healthy living products.

Our revenue is derived primarily from point of sale transactions executed over an e-commerce 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.

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When determining whether the customer has obtained control of the products, we consider any future performance obligations.

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 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 Accounting Standards Codification ("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, each performance obligation is satisfied.

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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.

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

We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to clients.

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Shipping and handling costs incurred by the Company for the delivery of products to clients are considered a cost to fulfill the contract and are included in cost of sales in our Consolidated Statements of Income.

We expense sales commissions and credit card fees during the period in which the corresponding revenue is earned.

We expense OPTA VIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned.

These costs are deferred along with the revenues for goods that are in transit and not received by clients by period end.

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

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.

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

Long-lived Asset Impairment:

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset.

If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Income Taxes:

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

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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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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.

Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.

For the years ended December 31, 2020, 2019 and 2018, no material estimated interest or penalties were recognized for the uncertainty of certain tax positions.

We file income tax returns in the United States and various states and foreign jurisdictions.

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

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.

All the Company’s leases are operating leases.

The right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.

As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.

The ROU asset also consists of any prepaid lease payments and lease incentives received.

The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

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

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.

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

Medifast is the global company behind one of the fastest-growing health and wellness communities, OPTA VIA, 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 direct-to-consumer business model to continue to deliver 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.

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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.

We review and analyze a number of key operating and financial metrics to manage our business, including the number of active earning OPTA VIA Coaches and average quarterly revenue generated per OPTA VIA Coach in the OPTA VIA business unit.

Our product sales accounted for approximately 98.0% of our revenues in each of 2021, 2020, and 2019.

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.

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

We outsource a distribution center in Hong Kong to provide 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.

Our OPTA VIA business unit accounted for approximately 99.9%, 98.0%, and 96.4% of our revenues in 2021, 2020 and 2019, respectively.

In March 2018, we announced a change in how our business is managed, operating performance is reviewed and resources are allocated.

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.

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

We have operated and reported as a single sales segment, OPTA VIA, since 2018.

Consistent with business and brand strategy, the Company has completed the sunset of the Medifast Direct channel and Medifast-branded product line during the second quarter of 2021.

By maintaining our commitment to building capabilities in the areas that matter most to our OPTA VIA Coaches and clients within the OPTA VIA channel, we believe we will enhance our ability to further grow our business over the next several years, enabling robust revenue growth while also maintaining our profitability in the long-term.

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CONSOLIDATED RESULTS OF OPERATIONS - 2021 COMPARED TO 2020

The following table reflects our consolidated statements of income for the years ended December 31, 2021 and 2020 (in thousands, except percentages):

2021 2020 $ Change % Change

Revenue $ 1,526,087 $ 934,842 $ 591,245 63.2%

Cost of sales 398,490 237,027 (161,463) (68.1)%

Gross Profit 1,127,597 697,815 429,782 61.6%

Selling, general, and administrative 911,356 563,656 (347,700) (61.7)%

Income from operations 216,241 134,159 82,082 61.2%

Interest income, net

Other (expense) income

Interest (expense) income (231) 246 (477) (193.9)%

Other income (expense) 119 (140) 259 (185.0)%

(112) 106 (218) (205.7)%

Income from operations before income taxes 216,129 134,265 81,864 61.0%

Provision for income taxes 52,098 31,406 (20,692) (65.9)%

Net income $ 164,031 $ 102,859 $ 61,172 59.5%

Gross Profit 73.9% 74.6%

Selling, general, and administrative 59.7% 60.3%

Income from Operations 14.2% 14.4%

Income from Operations before income taxes

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

Revenue increased $591.2 million, or 63.2%, to $1.526 billion in 2021 from $934.8 million in 2020.

The average revenue per active earning OPTA VIA Coach increased 6.6% to $6,321 for the three months ended December 31, 2021 from $5,932 for the three months ended December 31, 2020.

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.

Increase in the productivity per active earning OPTA VIA Coach for the quarter continued to be 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 was primarily driven by the continued growth in active earning OPTA VIA Coach count and increase in the productivity per active earning OPTA VIA Coach.

Costs of Sales:

Cost of sales increased $161.5 million, or 68.1%, to $398.5 million in 2021 from $237.0 million in 2020.

This increase in cost of sales was primarily driven by an increase in product sales.

This increase in cost of sales was primarily driven by an increase in OPTA VIA product sales, higher product costs and shipping costs resulting from inflation in raw ingredient, freight and labor costs.

In addition, acceleration of demand in OPTA VIA-branded products led to the increase in the Company’s use of co-manufacturers, which further increased cost of sales.

Gross Profit:

In 2020, gross profit increased $160.9 million, or 30.0%, to $697.8 million from $536.9 million in 2019.

In 2021, gross profit increased $429.8 million, or 61.6%, to $1.128 billion from $697.8 million in 2020.

The increase in gross profit was primarily attributable to higher revenue partially offset by increased cost of sales.

As a percentage of sales, gross profit decreased 70 basis points to 73.9% for 2021 from 74.6% for 2020.

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

The decrease in gross margin percentage was primarily the result of higher product and shipping costs resulting from inflation in raw ingredient, freight and labor costs.

Selling, General and Administrative:

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As a percentage of sales, SG&A expenses were 59.7% for 2021 as compared to 60.3% for 2020.

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.

The increase was primarily the result of increased product sales.

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

The increase in SG&A was primarily due to higher OPTA VIA Coach compensation expense, increased salaries and benefits related expenses for employees, incremental costs related to continued investment in information technology and distribution, increased credit card fees resulting from higher sales, as well as costs for

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the Company’s hybrid annual convention held in July 2021.

As the OPTA VIA convention in July 2020 was a virtual event in response to the COVID-19 pandemic, the costs were significantly lower.

SG&A expenses included research and development costs of $4.4 million and $2.8 million for 2021 and 2020, respectively, in connection with the development of new products and programs and clinical research activities.

OPTA VIA Coach compensation expense, which is a variable expense, increased $272.1 million, or 68.9%, to $667.2 million in 2021 from $395.1 million in 2020.

The increase was primarily the result of increased OPTA VIA product sales.

This trend is the result 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, 2021 increased to 59,800 from 44,200 for the corresponding period in 2020, an increase of 35.3%.

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Income from operations in 2021 increased $82.0 million to $216.2 million from $134.2 million in 2020 primarily as a result of increased gross profits partially offset by increased SG&A expenses.

Income from operations as a percentage of sales 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:

In 2020 and 2019, other income (including interest income) was $0.1 million and $1.3 million, respectively.

Income from operations before income taxes:

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 increased to 14.4% for 2020 from 12.9% for 2019.

Income from operations as a percentage of sales decreased to 14.2% for 2021 as compared to 14.4% for 2020 due to the factors described above in the explanations from gross profit and SG&A expenses.

Provision for income taxes:

For 2021, the Company recorded $52.1 million in income tax expense, an effective tax rate of 24.1%, as compared to $31.4 million in income tax expense and an effective tax rate of 23.4%, for 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.

The increase in the effective tax rate for 2021 as compared to 2020 was primarily driven by an increase in the state tax expenses of 1.2% and an increase in the limitation for executive compensation of 0.5%, partially offset by a decrease in the current year impact of the valuation allowance of 0.8% and an increase in the stock compensation benefit of 0.5% as well as other permanent differences.

Net income was $164.0 million, or $13.89 per diluted share, in 2021 as compared to $102.9 million, or $8.68 per diluted share, in 2020.

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, 2020 for management’s discussion and analysis of financial condition and results of operations for the fiscal year 2020 compared to fiscal year 2019.

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 $202.5 million and working capital of $137.0 million at December 31, 2021 compared with $157.2 million and $123.0 million at December 31, 2020.

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.

The $45.3 million net increase in stockholders’ equity reflects $164.0 million in net income for 2021 offset by $56.0 million spent on repurchases of common stock and $67.2 million for declared dividends paid to our common stockholders 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 quarterly dividend of $1.42 per share on December 8, 2021, to stockholders of record as of December 21, 2021 that was paid on February 8, 2022.

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.

The Company’s cash, cash equivalents and investment securities decreased from $174.5 million at December 31, 2020 to $109.5 million at December 31, 2021.

Net cash provided by operating activities decreased $50.7 million to $94.5 million for 2021 from $145.2 million for 2020 primarily as a result of a $114.5 million decrease in operating assets and liabilities partially offset by a $61.2 million increase in net income.

Decrease in operating assets and liabilities was primarily due to a $122.0 decrease in the change in inventories.

We increased our inventory purchases significantly in 2021 to meet our sales growth demand.

Net cash used in investing activities was $29.0 million for 2021 as compared to $1.3 million for 2020.

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.

This year-over-year change resulted primarily from a $28.3 million increase in cash used in capital expenditures for 2021 as compared to 2020.

Cash used in capital expenditures for 2021 expanded our technology and supply chain capabilities to support our planned growth.

Net cash used in financing activities increased $68.0 million to $125.1 million for 2021 from $57.1 million for 2020.

This increase was primarily due to a $51.0 million increase in stock repurchases, a $10.7 million increase in cash dividends paid to stockholders and a $5.5 million increase in net shares repurchased for taxes.

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

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

The Company evaluates acquisitions from time to time.

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.

As of December 31, 2021, the Company maintained a credit facility, which provides for a $125.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit and also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million.

The credit facility contains affirmative and negative covenants customarily applicable to credit facilities.

As of December 31, 2021, the Company was in compliance with all of its debt covenants and there were no borrowings outstanding under the credit facility.

Contractual Obligations and Commercial Commitments

The Company had the following contractual obligations as of December 31, 2021 (in thousands):

2022 2023 - 2024 2025 - 2026 Thereafter Total

Operating leases (a)

$ 7,130 $ 11,900 $ 9,985 $ 5,412 $ 34,427

Unconditional purchase obligations (b)

94,618 99,886 3,621 756 198,881

Total contractual obligations $ 101,748 $ 111,786 $ 13,606 $ 6,168 $ 233,308

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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 inventories, outsourced information technology and Coach events.

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

During 2021, the Company's business experienced a certain amount of inflation impact on raw ingredient, freight and supply chain labor.

As a result, the Company increased its product sales prices by 3.5% in December 2021.

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