MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except par value)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
53,970
|
|
|
$
|
52,436
|
|
Accounts receivable-net of allowance for sales returns and doubtful accounts
|
|
|
|
|
|
|
|
|
of $422 and $449 at March 31, 2017 and December 31, 2016
|
|
|
1,493
|
|
|
|
1,387
|
|
Inventory
|
|
|
19,883
|
|
|
|
18,311
|
|
Investment securities
|
|
|
24,989
|
|
|
|
24,412
|
|
Income taxes, prepaid
|
|
|
384
|
|
|
|
1,249
|
|
Prepaid expenses and other current assets
|
|
|
2,925
|
|
|
|
3,502
|
|
Total current assets
|
|
|
103,644
|
|
|
|
101,297
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
|
|
19,137
|
|
|
|
19,753
|
|
Other assets
|
|
|
166
|
|
|
|
162
|
|
Long-term assets of discontinued operations
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
122,947
|
|
|
$
|
121,216
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
23,150
|
|
|
$
|
24,300
|
|
Current liabilities of discontinued operations
|
|
|
-
|
|
|
|
121
|
|
Total current liabilities
|
|
|
23,150
|
|
|
|
24,421
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
629
|
|
|
|
779
|
|
Total liabilities
|
|
|
23,779
|
|
|
|
25,200
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common stock; par value $.001 per share; 20,000 shares authorized;
|
|
|
|
|
|
|
|
|
12,132 and 12,027 issued and 11,927 and 11,871 outstanding
|
|
|
|
|
|
|
|
|
at March 31, 2017 and December 31, 2016, respectively
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
3,372
|
|
|
|
2,672
|
|
Accumulated other comprehensive loss
|
|
|
(29
|
)
|
|
|
(165
|
)
|
Retained earnings
|
|
|
95,813
|
|
|
|
93,497
|
|
Total stockholders' equity
|
|
|
99,168
|
|
|
|
96,016
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
122,947
|
|
|
$
|
121,216
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME (UNAUDITED)
(in thousands, except per share amounts
& dividend data)
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
70,622
|
|
|
$
|
72,345
|
|
Cost of sales
|
|
|
17,730
|
|
|
|
19,151
|
|
Gross profit
|
|
|
52,892
|
|
|
|
53,194
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
44,283
|
|
|
|
46,926
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8,609
|
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest and dividend income, net
|
|
|
63
|
|
|
|
115
|
|
Other income (expense)
|
|
|
39
|
|
|
|
(24
|
)
|
|
|
|
102
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
8,711
|
|
|
|
6,359
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
2,566
|
|
|
|
2,099
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
|
|
|
|
|
|
|
|
|
Earnings per share -basic
|
|
$
|
0.52
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Earnings per share -diluted
|
|
$
|
0.51
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding -
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,901
|
|
|
|
11,862
|
|
Diluted
|
|
|
12,009
|
|
|
|
11,922
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.32
|
|
|
$
|
0.25
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
2
|
|
|
|
12
|
|
Unrealized gains on marketable securities:
|
|
|
|
|
|
|
|
|
Change in fair value of marketable securities
|
|
|
124
|
|
|
|
71
|
|
Adjustment for net losses realized and included in net income
|
|
|
10
|
|
|
|
9
|
|
Total change in unrealized gains on marketable securities
|
|
|
134
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
136
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
6,281
|
|
|
$
|
4,352
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
|
|
Three months ended March 31, 2017
|
|
|
|
Number of
Shares
Issued
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
other
comprehensive
loss
|
|
|
Retained
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
12,027
|
|
|
$
|
12
|
|
|
$
|
2,672
|
|
|
$
|
(165
|
)
|
|
$
|
93,497
|
|
|
$
|
96,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,145
|
|
|
|
6,145
|
|
Share-based compensation
|
|
|
103
|
|
|
|
-
|
|
|
|
957
|
|
|
|
-
|
|
|
|
-
|
|
|
|
957
|
|
Options exercised by executives and directors
|
|
|
21
|
|
|
|
-
|
|
|
|
568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
568
|
|
Net shares repurchased for employee taxes
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(825
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(825
|
)
|
Other comprehensive income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
136
|
|
Cash dividends declared to stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,829
|
)
|
|
|
(3,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
|
12,132
|
|
|
$
|
12
|
|
|
$
|
3,372
|
|
|
$
|
(29
|
)
|
|
$
|
95,813
|
|
|
$
|
99,168
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(in thousands)
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
Adjustments to reconcile net income to cash provided by
|
|
|
|
|
|
|
|
|
operating activities - continuing operations
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,076
|
|
|
|
1,609
|
|
Share-based compensation
|
|
|
957
|
|
|
|
524
|
|
Gain on sale of disposal of property, plant and equipment
|
|
|
(49
|
)
|
|
|
-
|
|
Realized loss on investment securities, net
|
|
|
254
|
|
|
|
44
|
|
Deferred income taxes
|
|
|
(242
|
)
|
|
|
(740
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(102
|
)
|
|
|
(482
|
)
|
Inventory
|
|
|
(1,572
|
)
|
|
|
92
|
|
Income taxes, prepaid
|
|
|
865
|
|
|
|
1,024
|
|
Prepaid expenses and other current assets
|
|
|
577
|
|
|
|
7
|
|
Other assets
|
|
|
(4
|
)
|
|
|
36
|
|
Accounts payable and accrued expenses
|
|
|
(1,222
|
)
|
|
|
1,268
|
|
Net cash flow provided by operating activities- continuing operations
|
|
|
6,683
|
|
|
|
7,642
|
|
Net cash flow provided by operating activities- discontinued operations
|
|
|
-
|
|
|
|
25
|
|
Net cash flow provided by operating activities
|
|
|
6,683
|
|
|
|
7,667
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Sale of investment securities
|
|
|
760
|
|
|
|
2,021
|
|
Purchase of investment securities
|
|
|
(1,365
|
)
|
|
|
(1,192
|
)
|
Sale of property and equipment
|
|
|
59
|
|
|
|
456
|
|
Purchase of property and equipment
|
|
|
(470
|
)
|
|
|
(83
|
)
|
Net cash flow (used in) provided by investing activities
|
|
|
(1,016
|
)
|
|
|
1,202
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Repayment of capital leases
|
|
|
-
|
|
|
|
(53
|
)
|
Options exercised by executives and directors
|
|
|
568
|
|
|
|
26
|
|
Excess tax benefits from share-based compensation
|
|
|
-
|
|
|
|
96
|
|
Net shares repurchased for employee taxes
|
|
|
(825
|
)
|
|
|
(703
|
)
|
Cash dividends paid to stockholders
|
|
|
(3,878
|
)
|
|
|
(2,968
|
)
|
Net cash flow used in financing activities
|
|
|
(4,135
|
)
|
|
|
(3,602
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency impact
|
|
|
2
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
1,534
|
|
|
|
5,279
|
|
Cash and cash equivalents - beginning of the period
|
|
|
52,436
|
|
|
|
42,037
|
|
Cash and cash equivalents - end of period
|
|
$
|
53,970
|
|
|
$
|
47,316
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,928
|
|
|
$
|
1,659
|
|
Dividends declared included in accounts payable
|
|
$
|
3,991
|
|
|
$
|
3,060
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
General
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation --
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”), for interim information and pursuant to the
rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. 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, 2016 has been derived
from the audited consolidated financial statements at that date but does not include all of the information and footnotes required
by GAAP for complete financial statements.
The results of operations for
the three months ended March 31, 2017 are not necessarily indicative of results that may be expected for the fiscal year ending
December 31, 2017. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the
2016 audited financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2016 (“2016 Form 10-K”).
Presentation of Financial
Statements --
The unaudited condensed consolidated financial statements included herein include the accounts of Medifast, Inc.
(the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
–
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from
those estimates.
Revenue Recognition
-
Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer
of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance
obligations and collection is reasonably assured as the majority of sales are paid prior to shipping.
Accounting Pronouncements
Adopted in 2017 --
ASU 2016-09
Compensation
— Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which changes the accounting
for certain aspects of share-based payments to employees. The new guidance requires, among its other provisions, that excess tax
benefits (which represent the excess of actual tax benefits received at the date of vesting or settlement over the benefits recognized
over the vesting period or upon issuance of share-based payments) and tax deficiencies (which represent the amount by which actual
tax benefits received at the date of vesting or settlement is lower than the benefits recognized over the vesting period or upon
issuance of share-based payments) be recorded in the income statement as an increase or decrease in income taxes when the awards
vest or are settled. This is in comparison to the prior requirement that these excess tax benefits be recognized in additional
paid-in capital and these tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in
the income statement. The new guidance also requires excess tax benefits to be classified along with other income tax cash flows
as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. The new guidance
is effective for the first quarter of our fiscal year ending December 31, 2017.
As a result of this adoption:
·
|
We recognized discrete tax benefits of $309 thousand in the provision for income taxes line item of our condensed consolidated statements of income for the three months ended March 31, 2017 related to excess tax benefits upon vesting or settlement in that period.
|
|
|
·
|
We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our cash flow statement for the three months ended March 31, 2017, where these benefits are classified along with other income tax cash flows as an operating activity.
|
|
|
·
|
We have elected to, account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period, rather than estimating the number of share-based awards expected to vest.
|
|
|
·
|
At this time, we have not changed our policy on statutory withholding requirements and will continue to allow an employee to withhold at the minimum statutory withholding requirements. Amounts paid by us to taxing authorities when directly withholding shares associated with employees’ income tax withholding obligations are classified as a financing activity in our cash flow statement for the three months ended March 31, 2017 and 2016, respectively.
|
|
|
·
|
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three months ended March 31, 2017.
|
Recent Accounting Pronouncements
–
We have considered all new accounting
pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations,
financial condition, or cash flows, based on current information, except for:
ASU 2016-02,
Leases (Topic
842)
requires the rights and obligations of all leased assets with a term greater than 12 months to be presented on the balance
sheet. The pronouncement is effective for fiscal years beginning after December 15, 2018. Management is currently evaluating the
effect that the provisions of ASU 2016-02 will have on the Company’s financial statements.
ASU 2016-01,
Financial Instruments-
Overall (Subtopic 825-10)
: Recognition and Measurement of Financial Assets and Financial Liabilities, most notably requires
the changes in fair value of equity investments to be recognized in net income. The pronouncement also requires the use of the
exit price notion, the separate presentation of financial assets and liabilities by measurement category and form of asset, and
the separate presentation in other comprehensive income of changes in fair value resulting from a change in the instrument-specific
credit risk. The pronouncement is effective for fiscal years beginning after December 15, 2017. Based on the risk level of the
Company’s investment portfolio, Management does not expect the pronouncement to have a material impact on the Company’s
financial statements.
ASU 2015-09,
Revenue from
Contracts with Customers (Topic 606)
, requires the Company to recognize revenue for the transfer of goods or services to customers
for the amount the Company expects to be entitled to in exchange for those goods or services. The Company will be required to identify
the contract, identify the relevant performance obligations, determine the transaction price, allocate the transaction price to
the performance obligations in the contract, and recognize the revenue when the entity satisfies a performance obligation. The
provisions of this ASU are effective for interim and annual periods beginning after December 15, 2017. Management is evaluating
the effect that the provisions of ASU 2015-09 will have on the Company’s financial statements.
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 represent
cash and the available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant
investment category recorded as cash and cash equivalents or investment securities (in thousands):
|
|
March 31, 2017
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Accrued
Interest
|
|
|
Estimated
Fair Value
|
|
|
Cash &
Cash
Equivalents
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,840
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,840
|
|
|
$
|
33,840
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
|
20,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
-
|
|
Money market accounts
|
|
|
130
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
130
|
|
|
|
130
|
|
|
|
-
|
|
Government & agency securities
|
|
|
2,649
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
4
|
|
|
|
2,608
|
|
|
|
-
|
|
|
|
2,608
|
|
|
|
|
22,779
|
|
|
|
-
|
|
|
|
(45
|
)
|
|
|
4
|
|
|
|
22,738
|
|
|
|
20,130
|
|
|
|
2,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
22,233
|
|
|
|
-
|
|
|
|
(125
|
)
|
|
|
273
|
|
|
|
22,381
|
|
|
|
-
|
|
|
|
22,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,852
|
|
|
$
|
-
|
|
|
$
|
(170
|
)
|
|
$
|
277
|
|
|
$
|
78,959
|
|
|
$
|
53,970
|
|
|
$
|
24,989
|
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Accrued
Interest
|
|
|
Estimated
Fair Value
|
|
|
Cash &
Cash
Equivalents
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
52,005
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
52,005
|
|
|
$
|
52,005
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
|
431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
431
|
|
|
|
431
|
|
|
|
-
|
|
Government & agency securities
|
|
|
2,655
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
9
|
|
|
|
2,616
|
|
|
|
-
|
|
|
|
2,616
|
|
|
|
|
3,086
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
9
|
|
|
|
3,047
|
|
|
|
431
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
21,836
|
|
|
|
-
|
|
|
|
(348
|
)
|
|
|
308
|
|
|
|
21,796
|
|
|
|
-
|
|
|
|
21,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,927
|
|
|
$
|
-
|
|
|
$
|
(396
|
)
|
|
$
|
317
|
|
|
$
|
76,848
|
|
|
$
|
52,436
|
|
|
$
|
24,412
|
|
The Company had a realized loss of $254 thousand
and $44 thousand for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and 2016, gross unrealized
losses related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.
The maturities of the Company’s investment securities generally range up to 5 years for municipal bonds and for government
and agency securities.
Inventories consist principally
of packaged meal replacements held in the Company’s warehouses. Inventory is stated at the lower of cost or market, utilizing
the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect
labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventory for unsalable or obsolete inventory.
Inventories consisted of the
following (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Raw materials
|
|
$
|
5,588
|
|
|
$
|
6,015
|
|
Packaging
|
|
|
1,206
|
|
|
|
1,202
|
|
Non-food finished goods
|
|
|
513
|
|
|
|
701
|
|
Finished goods
|
|
|
13,721
|
|
|
|
11,219
|
|
Reserve for obsolete inventory
|
|
|
(1,145
|
)
|
|
|
(826
|
)
|
|
|
$
|
19,883
|
|
|
$
|
18,311
|
|
|
4.
|
SHARE-BASED COMPENSATION
|
Stock Options:
The Company has issued non-qualified
and incentive stock options to employees and nonemployee 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 expected volatility
of the price of the Company’s common stock, dividend yield and the risk-free interest rate. Options outstanding as of March
31, 2017 generally vest over a period of three years with an expiration term of ten years from the date of grant. The exercise
price of these options ranges from $24.26 to $44.73. 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. Due to the Company’s lack of option
exercise history, 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 which most closely corresponds to the expected term of the option. The Company declared its first dividend in December
2015; and therefore, a dividend yield was not utilized in the Black-Scholes calculation for options granted prior to December 2015.
The weighted average input assumptions used and resulting fair values were as follows:
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Expected term (in years)
|
|
|
6
|
|
|
|
6
|
|
Risk-free interest rate
|
|
|
2.05
|
%
|
|
|
1.11
|
%
|
Expected volatility
|
|
|
38.33
|
%
|
|
|
40.27
|
%
|
Dividend yield
|
|
|
2.40
|
%
|
|
|
3.56
|
%
|
The following table is a summary of our stock option
activity:
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
(shares in thousands)
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
Outstanding at beginning of period
|
|
|
129
|
|
|
$
|
28.22
|
|
|
|
98
|
|
|
$
|
28.17
|
|
Granted
|
|
|
38
|
|
|
|
44.73
|
|
|
|
50
|
|
|
|
27.99
|
|
Exercised
|
|
|
(21
|
)
|
|
|
27.38
|
|
|
|
(1
|
)
|
|
|
26.52
|
|
Forfeited
|
|
|
(9
|
)
|
|
|
38.18
|
|
|
|
(6
|
)
|
|
|
29.87
|
|
Outstanding at end of the period
|
|
|
137
|
|
|
$
|
32.20
|
|
|
|
141
|
|
|
$
|
28.05
|
|
Exercisable at end of the period
|
|
|
63
|
|
|
$
|
28.15
|
|
|
|
61
|
|
|
$
|
27.20
|
|
As of March 31, 2017, the weighted-average
remaining contractual life was 8.50 years with an aggregate intrinsic value of $1.7 million for outstanding stock options and the
weighted-average remaining contractual life was 7.68 years with an aggregate intrinsic value of $1.0 million for exercisable options.
The weighted-average grant date
fair value of options granted during the three months ended March 31, 2017 and 2016 was $13.73 and $7.47, respectively. The unrecognized
compensation expense calculated under the fair value method for shares expected to vest as of March 31, 2017 was $797 thousand
and is expected to be recognized over a weighted average period of 2.23 years. The Company received $568 thousand and $26 thousand
in cash proceeds from the exercise of stock options during the three months ended March 31, 2017 and 2016. The total intrinsic
value for options exercised during the three months ended March 31, 2017 and 2016 was $325 thousand and $2 thousand, respectively.
Restricted Stock:
The Company has issued restricted
stock to employees and nonemployee directors generally with vesting terms up to five years after the date of grant. The fair value
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 the restricted stock activity:
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
(shares in thousands)
|
|
Shares
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding at beginning of period
|
|
|
215
|
|
|
$
|
27.69
|
|
|
|
264
|
|
|
$
|
26.38
|
|
Granted
|
|
|
44
|
|
|
|
44.73
|
|
|
|
15
|
|
|
|
27.68
|
|
Vested
|
|
|
(55
|
)
|
|
|
25.94
|
|
|
|
(62
|
)
|
|
|
25.19
|
|
Forfeited
|
|
|
(6
|
)
|
|
|
32.80
|
|
|
|
(1
|
)
|
|
|
26.85
|
|
Outstanding at end of the period
|
|
|
198
|
|
|
$
|
31.79
|
|
|
|
216
|
|
|
$
|
26.82
|
|
The total fair value of restricted
stock awards vested during the three months ended March 31, 2017 and 2016 was $2.4 million and $1.9 million, respectively.
The total costs of the options
and restricted stock awards charged against income during the three months ended March 31, 2017 and 2016 were $733 thousand and
$524 thousand, respectively. Also included for the three months ended March 31, 2017 was $224 thousand in expense for 332,325 shares
that will vest based on certain market and performance conditions. Included in share-based compensation for the three months ended
March 31, 2016 is $228 thousand for 59,375 shares of performance awards issuable to certain key employees based on achieving the
2016 financial plan that will vest on December 31, 2017.
The total income tax benefit
recognized in the condensed consolidated statements of income for restricted stock awards was $640 thousand and $251 thousand for
the three months ended March 31, 2017 and 2016, respectively. The total tax benefit recognized in additional paid-in capital upon
vesting of restricted stock awards and exercise of stock options for the three months ended March 31, 2016 was $96 thousand.
There was $4.7 million of total
unrecognized compensation cost related to restricted stock awards as of March 31, 2017 and is expected to be recognized over a
weighted-average period of 1.81 years. There was $3.3 million of unrecognized compensation cost related to the 332,325 market and
performance award shares discussed above as of March 31, 2017 and is expected to be recognized over a weighted-average period of
2.75 years.
Operating segments are components
of an enterprise about which separate financial information is available that is regularly reviewed by the chief operating decision
maker about how to allocate resources and in assessing performance. The consolidated operating profit of the Company is reviewed
by the chief operating decision maker as a single segment and sales are reviewed at the business unit level.
The following table presents
sales by business segment (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Take Shape For Life®
|
|
$
|
57,955
|
|
|
$
|
56,674
|
|
Medifast Direct
|
|
|
8,948
|
|
|
|
10,927
|
|
MWCC- Franchise
|
|
|
3,458
|
|
|
|
4,247
|
|
Medifast Wholesale
|
|
|
261
|
|
|
|
497
|
|
Revenue
|
|
$
|
70,622
|
|
|
$
|
72,345
|
|
Basic earnings per share (“EPS”)
computations are calculated utilizing the weighted average number of shares of common stock outstanding during the periods presented.
Diluted EPS is calculated utilizing the weighted average number of shares of 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 March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
11,901
|
|
|
|
11,862
|
|
Effect of dilutive common stock equivalents
|
|
|
108
|
|
|
|
60
|
|
Weighted average shares of common stock outstanding
|
|
|
12,009
|
|
|
|
11,922
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.52
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
|
$
|
0.51
|
|
|
$
|
0.36
|
|
The calculation of diluted earnings
per share excluded 4,531 and 103,997 antidilutive options outstanding for the three months ended March 31, 2017 and 2016, respectively.
EPS is computed independently for each of the quarters presented; accordingly, the sum of the quarterly earnings per common share
may not equal the year-to-date total computed.
|
7.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
The following table sets forth
the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Foreign currency translation
|
|
$
|
73
|
|
|
$
|
71
|
|
Unrealized gains / (losses) on marketable securities
|
|
|
(102
|
)
|
|
|
(236
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(29
|
)
|
|
$
|
(165
|
)
|
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Note Regarding Forward-Looking Statements
This report contains information that may
constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Act of 1934. Generally, the words “believe,” “expect,” “intend,” “estimate,”
“anticipate,” “project,” “will,” and similar expressions identify forward-looking statements,
which generally are not historical in nature. However, the absence of these words or expressions does not mean that a statement
is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate
will occur in the future – including statements relating to future operating results are forward-looking statements. Management
believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue
reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from our historical experience and our present expectations or projections. These risks and
uncertainties include, but are not limited to, those described in the 2016 Form 10-K, and those described from time to time in
our future reports filed with the Securities and Exchange Commission.
The following discussion should be read
in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
Overview
Medifast, Inc. (together with its consolidated
subsidiaries, “we,” “us,” “our,” the “Company,” or “Medifast”) is engaged
in the production, distribution, and sale of weight loss, weight management, and healthy living products and other consumable health
and other consumable health and nutritional products. The Company’s product lines include weight loss, weight management,
and healthy living meal replacements, snacks, hydration products, and vitamins. Our product sales accounted for 97% of our revenues
for the three months ended March 31, 2017 and 2016, respectively. The Company’s business units are Take Shape For Life®,
Medifast Direct, Franchise Medifast Weight Control Centers (“MWCC”) and Medifast Wholesale. For the three months ended
March 31, 2017, total revenue was $70.6 million as compared to $72.3 million for the three months ended March 31, 2016, a decrease
of $1.7 million, or 2.4%. This was driven by decreased revenues for the Medifast Direct, MWCC, and Medifast Wholesale business
units offset by increased revenue in the Take Shape For Life® business unit, which was primarily the result of a price increase
for the Take Shape For Life® business unit which became effective in April 2016. These revenue changes are further described
in the “Overview of Results of Operations” section.
For the three months ended March 31, 2017,
the percentage of total revenue made up by each business unit was as follows:
|
|
|
Take Shape For Life ®
|
|
82.0%
|
Medifast Direct
|
|
12.7%
|
MWCC
|
|
4.9%
|
Medifast Wholesale
|
|
0.4%
|
See Note 5, “Business Segments”
of the notes to the financial statements for a detailed breakout of revenues of the Company’s business segments.
We review and analyze a number of key operating
and financial metrics to manage our business, including revenue to advertising spend, number of active Health Coaches, and average
quarterly revenue generated per Health Coach in the Take Shape For Life® business unit.
Distribution Business Units
Take Shape For Life®
– Take Shape For Life®
is the personal coaching division of Medifast. This coaching network consists of health coaches (“Health Coaches”),
who are independent contractors and trained to provide coaching and support to clients utilizing the Take Shape For Life® platform.
The role of the Health Coach is to provide support and personal encouragement to help clients effectively reach and sustain a healthy
weight, and adopt habits for a lifetime of health. Within our Trilogy of Optimal Health, the Company offers individuals an opportunity
to create sustainable health in all areas of their lives - building a healthy body, developing a healthy mind, and generating healthy
finances. In addition to the encouragement and support of a Health Coach, clients of Take Shape For Life® are offered online
product and program information, tools and support, and access to our registered dieticians. Clients of our Health Coaches order
our products through either the Company’s or their Health Coach’s replicated website or our in-house call center. In
addition to the full line of Medifast branded products and programs currently offered, Take Shape For Life® also introduced
an exclusive product line under the lifestyle brand OPTAVIA
TM
in July 2016.
Our Health Coaches provide coaching and support to their clients
throughout the weight-loss and weight-maintenance process. Most new Health Coaches are introduced to the opportunity by an existing
Health Coach. The vast majority of new Health Coaches started as weight-loss clients of a Health Coach, had success on the Take
Shape For Life® program, and became a Health Coach to help others through the weight-loss process.
Take Shape For Life® is a member of
the Direct Selling Association (the “DSA”), a national trade association representing over 200 direct selling companies
doing business in the United States. To become a member of the DSA, Take Shape For Life®, like other active DSA member companies,
underwent a comprehensive and rigorous one-year company review by DSA that included a detailed analysis of its company business-plan
materials. This review is designed to ensure that a company’s business practices do not contravene DSA’s Code of Ethics.
In addition to its DSA membership, Take Shape For Life® is also a voluntary DSA Code of Ethics participant, which sets higher
standards for ensuring compliance. Compliance with the requirements of the Code of Ethics is paramount to becoming and remaining
a member in good standing of the DSA. Accordingly, we believe membership in the DSA by Take Shape For Life® demonstrates its
commitment to the highest standards of ethics and a pledge not to engage in any deceptive, unlawful, or unethical business practices,
such as pyramid and other similar schemes. Moreover, Take Shape For Life®, like other DSA member companies in good standing,
has pledged to provide consumers with accurate and truthful information regarding the price, grade, quality, and performance of
the products Take Shape For Life® markets.
Medifast Direct –
Through
Medifast Direct, our direct-to-consumer business unit, customers order Medifast products directly through the Company’s website,
www.medifastnow.com or our in-house call center. This business is driven by a multi-media customer acquisition and retention strategy
that includes television, digital advertising, direct mail, email, public relations, word of mouth referrals, social media initiatives,
and other means as deemed appropriate. Medifast Direct provides support through its social communities, in-house call center, and
nutrition support team of registered dietitians to better serve its customers.
Franchise Medifast Weight Control Centers
– The MWCC business unit sells product through franchise and reseller locations. These locations offer structured programs
and a team of professionals to help customers achieve weight-loss and weight-management success at center locations. Counselors
at each location work with members to provide nutritional and behavioral support based on the member’s personal needs. As
of March 31, 2017, Medifast Franchise Systems had 37 franchised centers located in Arizona, California, Louisiana, Minnesota, Maryland,
and Wisconsin and 19 reseller locations in Maryland, Pennsylvania, and Texas as compared to a total of 58 centers as of March 31,
2016.
In 2016, Medifast entered into distribution
and licensing agreements with nineteen weight control centers previously operating as franchise locations. Under the terms of these
agreements, the locations have been rebranded and offer products and services not otherwise available at a MWCC. These offerings
complement the Medifast products and plans, which are still utilized as the exclusive weight management program at these locations.
These resellers may use Medifast’s trademarks in their marketing and advertising efforts and continue to purchase Medifast-branded
products at wholesale directly from the Company.
Medifast Wholesale
– Medifast
medical provider practices carry an inventory of wholesale products and resell them to patients while providing appropriate support
to help ensure healthy weight loss and weight management.
The Company offers resources to assist
the medical providers, their staff and their patients in achieving success with their Medifast program. These medical providers
have access to our nutrition support team, marketing assets and training modules to help grow their program and enable patients
to achieve their weight loss and associated health goals. Medifast’s nutrition support team includes registered dietitians
and a behavioral specialist who provide program support and advice via phone and email.
In 2012, amended in 2013, the Company entered
into a strategic partnership agreement with Medix, a leader in pharmaceutical obesity products in Mexico. The agreement granted
Medix an exclusive license to distribute Medifast products and programs through physicians and weight control centers in Mexico,
Central America and South America under the Medifast brand. During the first quarter of 2017, the Company terminated the licensing
agreement with Medix. The termination of the contract allows the Company to refocus on our core businesses.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements
are prepared in accordance with GAAP. Our significant accounting policies are described in Note 2 of the consolidated financial
statements included in the 2016 Form 10-K. Other than the accounting change for ASU 2016-09
Compensation — Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting
, we did not make any other material changes to our critical
accounting policies during the three months ended March 31, 2017.
The preparation of these 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 it believes to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. The accounting estimates we consider critical include revenue recognition,
impairment of fixed assets and intangible assets, income taxes, reserves for returns, operating leases and clinic closure costs.
Overview of Results of Operations
The following table reflects our income
statements (in thousands, except percentages):
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
70,622
|
|
|
$
|
72,345
|
|
|
$
|
(1,723
|
)
|
|
|
-2
|
%
|
Cost of sales
|
|
|
17,730
|
|
|
|
19,151
|
|
|
|
(1,421
|
)
|
|
|
-7
|
%
|
Gross Profit
|
|
|
52,892
|
|
|
|
53,194
|
|
|
|
(302
|
)
|
|
|
-1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
44,283
|
|
|
|
46,926
|
|
|
|
(2,643
|
)
|
|
|
-6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8,609
|
|
|
|
6,268
|
|
|
|
2,341
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
63
|
|
|
|
115
|
|
|
|
(52
|
)
|
|
|
-45
|
%
|
Other income (expense)
|
|
|
39
|
|
|
|
(24
|
)
|
|
|
63
|
|
|
|
-263
|
%
|
|
|
|
102
|
|
|
|
91
|
|
|
|
11
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
8,711
|
|
|
|
6,359
|
|
|
|
2,352
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
|
2,566
|
|
|
|
2,099
|
|
|
|
467
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
|
$
|
1,885
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
74.9
|
%
|
|
|
73.5
|
%
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
62.7
|
%
|
|
|
64.9
|
%
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
12.2
|
%
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
Revenue:
Revenue decreased 2.4%
to $70.6 million for the three months ended March 31, 2017 as compared to $72.3 million for the three months ended March 31, 2016.
The revenue to total advertising spend for the three months ended March 31, 2017 was 29.5-to-1 as compared to 17.5-to-1 for the
corresponding period in 2016. Total advertising spend, inclusive of broker fees was $2.4 million for the three months ended March
31, 2017 as compared to $4.1 million for the corresponding period in 2016.
For the three months ended March 31, 2017,
Take Shape For Life® revenue was $58.0 million as compared to $56.7 million for the corresponding period in 2016. This is the
sixth consecutive quarter over quarter of revenue growth for Take Shape For Life®. The number of active earning Health Coaches
for the three months ended March 31, 2017 increased to 13,000 as compared to 12,600 during the corresponding period in 2016, an
increase of 3.2%. The quarterly revenue per Health Coach decreased 0.6% to $4,463 for the three months ended March 31, 2017 as
compared to $4,490 for the three months ended March 31, 2016.
Medifast Direct revenue decreased 18.3%
to $8.9 million for the three months ended March 31, 2017 as compared to $10.9 million for the three months ended March 31, 2016.
Revenues in this business unit are driven primarily by targeted customer marketing and advertising as well as the direct response
initiatives in place. Sales for the period were down in comparison to the corresponding period in 2016 as new customer acquisition
continued to be challenging, partially offset by a price increase effective April 2016. Medifast Direct advertising during the
three months ended March 31, 2017 was down 43.9% to $2.3 million as compared to $4.1 million for the three months ended March 31,
2016. The Company reduced advertising spending and only invested in initiatives that met distinct criteria in an effort to focus
on determining the ideal media mix to optimize profitability.
MWCC revenue decreased 16.7%, with revenue
of $3.5 million for the three months ended March 31, 2017 as compared to $4.2 million for the corresponding period in 2016. The
decrease in revenue was primarily driven by fewer franchise centers in operation during the period combined with a decline in activity
within the centers. The Company ended the three months ended March 31, 2017 with 37 franchise centers and 19 reseller locations
in operation compared to 58 franchise centers at the end of the same period last year.
Medifast Wholesale revenue decreased $236
thousand to $261 thousand for the three months ended March 31, 2017 as compared to $497 thousand for the three months ended March
31, 2016. The decrease for the periods was due to the loss of certain accounts resulting from Medifast’s enforcement of business
partner compliance distribution requirements.
Costs of Sales:
Cost of sales decreased
$1.5 million to $17.7 million for the three months ended March 31, 2017 as compared to $19.2 million for the corresponding period
in 2016. The decrease in cost of sales for the three months ended March 31, 2017 was primarily driven by the decrease in quarter
over quarter sales coupled with decreased shipping costs as compared to the corresponding period in 2016. As a percentage of sales,
gross margin increased 140 basis points to 74.9% for the three months ended March 31, 2017 from 73.5% for the three months ended
March 31, 2016. The gross margin improvement for the quarter-to-date was primarily driven by the price increase implemented in
April 2016 as well as efficiencies in the Company’s supply chain operations as compared to the corresponding period in 2016.
Selling, General and Administrative
Expenses:
Selling, general and administrative (“SG&A”) expenses were $44.3 million for the three months ended
March 31, 2017, a decrease of $2.6 million, as compared to $46.9 million for the corresponding period in 2016. SG&A expenses
include $385 thousand and $312 thousand in research and development costs for the three months ended March 31, 2017 and 2016, respectively.
As a percentage of sales, SG&A expenses decreased 220 basis points to 62.7% for the three months ended March 31, 2017 as compared
to 64.9% for the corresponding period in 2016. The decrease in SG&A was primarily a result of reduced and more effective advertising
spend in Medifast Direct. In addition, the three months ended March 31, 2016 includes $1.2 million in restructuring costs. Excluding
restructuring costs, SG&A expenses decreased $1.5 million to $44.3 million for the three months ended March 31, 2017 as compared
to $45.8 for the corresponding period in 2016. Adjusted SG&A expenses as a percentage of sales were 62.7% and 63.3% for the
three months ended March 31, 2017 and 2016, respectively.
Take Shape For Life® commission expense,
which is variable based upon product sales, increased by $519 thousand, or 2.2%, for the three months ended March 31, 2017 as compared
to the corresponding period in 2016, which is in line with the sales growth of 2.3% Take Shape For Life® experienced as compared
to the corresponding period in 2016.
Salaries and benefits decreased $431 thousand
quarter over quarter for the three months ended March 31, 2017 primarily as a result of a onetime severance expense incurred during
the three months ended March 31, 2016 offset by higher employee benefits along with an increase in share based compensation.
Sales and marketing expenses decreased
$1.4 million during the three months ended March 31, 2017 as compared to the corresponding period in 2016. This decrease was primarily
driven by reduced advertising spend, particularly for Medifast Direct.
General expenses decreased $930 thousand
for the three months ended March 31, 2017 as compared to the corresponding period in 2016. This decrease is primarily due to reduced
depreciation expense and licenses fees.
Income from operations before income
taxes:
Income from operations before income taxes was $8.7 million for the three months ended March 31, 2017 as compared to
$6.4 million for the three months ended March 31, 2016, an increase of $2.3 million. Pre-tax profit as a percentage of sales increased
to 12.3% for the three months ended March 31, 2017 as compared to 8.8% for the three months ended March 31, 2016.
Income taxes:
For the three months ended March 31, 2017,
the Company recorded $2.6 million in income tax expense, an effective rate of 29.5%, as compared to $2.1 million in income tax
expense, an effective rate of 33.0%, for the three months ended March 31, 2016. The decrease in the effective tax rate for the
three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to the 3.6% rate reduction
related to the discrete change in accounting for taxes associated with share based compensation. The Company anticipates a full
year tax rate of 33% to 34% in 2017.
Net income:
Net income was $6.1
million, or $0.51 per diluted share, for the three months ended March 31, 2017 as compared to $4.3 million, or $0.36 per diluted
share, for the three months ended March 31, 2016, respectively. Excluding restructuring, net income for the three months ended
March 31, 2016 would have been $5.0 million, or $0.42 per diluted share. The period-over-period changes were driven by the factors
described above in the explanations from operations.
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 our quarterly
earnings press release and other public disclosures. Each of these financial measures excludes the impact of certain amounts 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, and 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 it provides 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 non-GAAP
financial measures (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
44,283
|
|
|
$
|
46,926
|
|
Adjustments
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
-
|
|
|
|
1,166
|
|
Adjusted selling, general, and administrative
|
|
$
|
44,283
|
|
|
$
|
45,760
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
8,609
|
|
|
$
|
6,268
|
|
Adjustments
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
-
|
|
|
|
1,166
|
|
Adjusted income from operations
|
|
$
|
8,609
|
|
|
$
|
7,434
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,145
|
|
|
$
|
4,260
|
|
Adjustments
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
-
|
|
|
|
781
|
|
Adjusted net income
|
|
$
|
6,145
|
|
|
$
|
5,041
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (1)
|
|
$
|
0.51
|
|
|
$
|
0.36
|
|
Impact for adjustments (1)
|
|
|
-
|
|
|
|
0.06
|
|
Adjusted diluted earnings per share (1)
|
|
$
|
0.51
|
|
|
$
|
0.42
|
|
(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 $99.2 million and working capital of $80.5 million at March 31, 2017 as compared with $96.0 million and $76.9 million at December
31, 2016, respectively. The $3.2 million net increase in stockholder’s equity reflects $6.1 million in net income for the
three months ended March 31, 2017 offset by $2.9 million used to declare dividends to stockholders as well as other equity transactions
as outlined in the “Condensed Consolidated Statement of Changes in Stockholders’ Equity” included in our condensed
consolidated financial statements. The Company declared a dividend of $3.9 million, or $0.32 per share, to common stockholders
as of March 7, 2017 that will be paid in the second quarter of 2017. 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 $76.8 million at December 31,
2016 to $79.0 million at March 31, 2017.
Net cash provided by continuing operating
activities decreased $0.9 million to $6.7 million for three months ended March 31, 2017 as compared to $7.6 million for the three
months ended March 31, 2016. This decrease is due to a change from cash provided by working capital primarily resulting from reductions
in accounts receivable, prepaid taxes and prepaid expenses to cash used in working capital driven by higher inventories and lower
accounts payable and accrued expenses. This change in working capital was offset by increased net income and reduced deferred income
taxes.
Net cash provided by discontinued operating
activities was $25 thousand for the three months ended March 31, 2016.
Net cash used in investing activities was
$1.0 million for the three months ended March 31, 2017 as compared to net cash provided by investing activities of $1.2 million
for the three months ended March 31, 2016. This change resulted from cash used in net investment securities for the three months
ended March 31, 2017 as compared to cash provided by net investment securities for the corresponding period in 2016. Also, cash
generated from the sale of property, plant and equipment decreased and cash used in capital expenditures increased for the three
months ended March 31, 2017 as compared to the corresponding period in 2016.
Net cash used in financing activities increased
$0.5 million to $4.1 million for three months ended March 31, 2017 as compared to $3.6 million for the three months ended March
31, 2016. This increase was primarily due to an increase in cash dividends paid.
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 as presented.