10-Q 1 tv505846_10q.htm 10-Q

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______to_______ .

 

Commission File Number: 001-31573

 

Medifast, Inc. 

(Exact name of registrant as specified in its charter)

 

Delaware 13-3714405
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

100 International Drive

Baltimore, Maryland 21202

Telephone Number: (410) 581-8042 

(Address of Principal Executive Offices, Zip Code and Telephone Number, Including Area Code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  x     No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨  Accelerated filer x  Non-accelerated filer ¨  Smaller reporting company ¨
Emerging growth company¨      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨      No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

The number of shares of the registrant’s common stock outstanding at October 31, 2018 was 11,964,966.

 

 

 

 

 

Medifast, Inc. and subsidiaries

 

Index

 

Part 1 – Financial Information:

 

Item 1 – Financial Statements  
   
Condensed Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended  September 30, 2018 and 2017 3
   
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended  September 30, 2018 and 2017 4
   
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2018 and December 31, 2017 5
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended  September 30, 2018 and 2017 6
   
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2018 7
   
Notes to Condensed Consolidated Financial Statements (unaudited) 8
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk 20
   
Item 4 – Controls and Procedures 20
   
Part II – Other Information:  
   
Item 1 – Legal Proceedings 21
   
Item 1A – Risk Factors 21
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 22
   
Item 6 – Exhibits 22

 

 2 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts & dividend data)

 

   Three months ended September 30,   Nine months ended September 30, 
   2018   2017   2018   2017 
                 
Revenue  $139,239   $77,205   $355,159   $223,556 
Cost of sales   32,038    19,022    84,351    54,870 
Gross profit   107,201    58,183    270,808    168,686 
                     
Selling, general, and administrative   89,734    47,956    221,548    138,540 
                     
Income from operations   17,467    10,227    49,260    30,146 
                     
Other income (expense)                    
Interest income, net   361    148    940    352 
Other income (expense)   -    (4)   178    32 
    361    144    1,118    384 
                     
Income from operations before income taxes   17,828    10,371    50,378    30,530 
                     
Provision for income taxes   4,047    3,685    10,242    10,115 
                     
Net income  $13,781   $6,686   $40,136   $20,415 
                     
Earnings per share - basic  $1.15   $0.56   $3.34   $1.71 
                     
Earnings per share - diluted  $1.14   $0.55   $3.31   $1.69 
                     
Weighted average shares outstanding -                    
Basic   11,954    11,930    12,006    11,920 
Diluted   12,097    12,095    12,112    12,063 
                     
Cash dividends declared per share  $0.48   $0.32   $1.44   $0.96 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

 

   Three months ended September 30,   Nine months ended September 30, 
   2018   2017   2018   2017 
                 
Net income  $13,781   $6,686   $40,136   $20,415 
Other comprehensive income (loss), net of tax:                    
Foreign currency translation   (2)   7    (2)   13 
Unrealized gains (losses) on marketable securities:                    
Change in fair value of marketable securities   (45)   26    (104)   189 
Adjustment for net losses realized and included in net income   -    -    -    10 
Total change in unrealized gains (losses) on marketable securities   (45)   26    (104)   199 
                     
Other comprehensive income (loss)   (47)   33    (106)   212 
                     
Comprehensive income  $13,734   $6,719   $40,030   $20,627 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 4 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except par value)

 

   September 30,   December 31, 
   2018   2017 
         
ASSETS          
Current Assets          
Cash and cash equivalents  $82,307   $75,077 
Accounts receivable-net of doubtful accounts of $405 at September 30, 2018 and allowance for sales returns and doubtful accounts of $597 at December 31, 2017   1,017    576 
Inventory   43,845    19,328 
Investment securities   20,912    23,757 
Income taxes, prepaid   -    2,272 
Prepaid expenses and other current assets   3,851    4,188 
Total current assets   151,932    125,198 
           
Property, plant and equipment - net   18,760    18,611 
Other assets   1,400    2,120 
Deferred tax assets   2,355    - 
           
           
TOTAL ASSETS  $174,447   $145,929 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Accounts payable and accrued expenses  $62,806   $37,140 
Total current liabilities   62,806    37,140 
           
Deferred tax liabilities   -    208 
Total liabilities   62,806    37,348 
           
Stockholders' Equity          
Common stock, par value $.001 per share: 20,000 shares authorized;          
12,145 and 12,103 issued and 11,956 and 11,971 outstanding at September 30, 2018 and December 31, 2017, respectively   12    12 
Additional paid-in capital   8,040    4,967 
Accumulated other comprehensive loss   (266)   (160)
Retained earnings   124,601    103,762 
Less: Treasury stock at cost, 128 shares at September 30, 2018   (20,746)   - 
Total stockholders' equity   111,641    108,581 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $174,447   $145,929 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 5 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

   Nine months ended September 30, 
   2018   2017 
         
Operating Activities          
Net income  $40,136   $20,415 
Adjustments to reconcile net income to cash provided by operating activities          
Depreciation and amortization   3,519    3,204 
Share-based compensation   2,352    3,418 
Loss on sale of disposal of property, plant and equipment   50    93 
Realized loss on investment securities, net   70    73 
Amortization of premium on investment securities   434    547 
Deferred income taxes   (2,028)   (991)
Change in operating assets and liabilities:          
Accounts receivable   116    683 
Inventory   (23,615)   2,287 
Income taxes, prepaid   2,272    807 
Prepaid expenses and other current assets   453    1,098 
Other assets   64    (137)
Accounts payable and accrued expenses   21,655    1,757 
Net cash flow provided by operating activities   45,478    33,254 
           
Investing Activities          
Sale of investment securities   2,245    3,039 
Purchase of investment securities   -    (4,093)
Sale of property and equipment   184    59 
Purchase of property and equipment   (3,246)   (2,379)
Net cash flow used in investing activities   (817)   (3,374)
           
Financing Activities          
Options exercised by executives and directors   220    568 
Net shares repurchased for employee taxes   (249)   (833)
Cash dividends paid to stockholders   (17,404)   (11,511)
Stock repurchases   (19,996)   - 
Net cash flow used in financing activities   (37,429)   (11,776)
           
Foreign currency impact   (2)   13 
           
Increase in cash and cash equivalents   7,230    18,117 
Cash and cash equivalents - beginning of the period   75,077    52,436 
Cash and cash equivalents - end of period  $82,307   $70,553 
           
Supplemental disclosure of cash flow information:          
Income taxes paid  $9,540   $10,083 
Dividends declared included in accounts payable  $5,981   $4,114 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 6 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

(in thousands)

 

   Nine months ended September 30, 2018 
  

Number

of Shares

Issued

  

Common

Stock

  

Additional

Paid-In

Capital

  

Accumulated

other

comprehensive

loss

  

Retained

Earnings

  

Treasury

Stock

   Total 
                             
Balance, January 1, 2018, as reported   12,103   $12   $4,967   $(160)  $103,762   $-   $108,581 
Cumulative effect of adjustments from changes in accounting standards (Notes 1 and 2)   -    -    -    -    (2,018)   -    (2,018)
Balance January 1, 2018, as adjusted   12,103    12    4,967    (160)   101,744    -    106,563 
                                    
Net income   -    -    -    -    40,136    -    40,136 
Share-based compensation   16    -    2,352    -    -    -    2,352 
Options exercised by executives and directors   20    -    220    -    -    -    220 
Net shares repurchased for employee taxes   (3)   -    (249)   -    -    -    (249)
Treasury stock from cashless options   9    -    750    -    -    (750)   - 
Treasury stock from stock repurchases   -    -    -    -    -    (19,996)   (19,996)
Other comprehensive loss   -    -    -    (106)   -    -    (106)
Cash dividends declared to stockholders   -    -    -    -    (17,279)   -    (17,279)
                                    
Balance, September 30, 2018   12,145   $12   $8,040   $(266)  $124,601   $(20,746)  $111,641 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 7 

 

 

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of Medifast, Inc. and its wholly-owned subsidiaries (the “Company,” “we,” “us,” or “our”) included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), for interim reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnotes that are normally required by GAAP have been condensed or omitted. However, in the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included and management believes the disclosures that are made are adequate to make the information presented not misleading. The condensed consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date.

 

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2018. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the 2017 audited consolidated 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, 2017 (“2017 Form 10-K”).

 

Presentation of Financial Statements - The unaudited condensed consolidated financial statements included herein include the accounts of the Medifast, Inc. 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.

 

Accounting Pronouncements Adopted in 2018 –

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue recognition standard 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 receive in exchange for those goods or services. The Company is 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. Companies have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. On January 1, 2018, the Company adopted the new revenue standard on a modified retrospective basis and recorded an after-tax transition adjustment to reduce retained earnings as of January 1, 2018 by $2.0 million. This is comprised of $5.6 million of revenue offset by $3.6 million of inventory costs, deferred shipping expense, credit card fees and income taxes. The results of ASC 606 primarily impact the Company’s timing of revenue recognition for product shipments, as product revenue is recognized upon customer receipt instead of at the time of shipment. The new standard requires more extensive revenue-related disclosures.

 

 8 

 

 

As required by ASC 606, the impact of the adoption of the new revenue standard on our Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets was as follows (in thousands):

 

   Three months ended September 30, 2018   Nine months ended September 30, 2018 
   As Reported  

Balances

without

adoption of

ASC 606

  

Effect of

Change

   As Reported  

Balances

without

adoption of

ASC 606

  

Effect of

Change

 
                         
Revenue  $139,239   $139,582   $(343)  $355,159   $356,442   $(1,283)
Cost of sales   32,038    32,071    33    84,351    84,544    193 
Gross profit   107,201    107,511    (310)   270,808    271,898    (1,090)
                               
Selling, general, and administrative   89,734    89,831    97    221,548    221,908    360 
                               
Income from operations   17,467    17,680    (213)   49,260    49,990    (730)
                               
Other income (expense)                              
Interest income, net   361    361    -    940    940    - 
Other income (expense)   -    -    -    178    178    - 
    361    361    -    1,118    1,118    - 
                               
Income from operations before income taxes   17,828    18,041    (213)   50,378    51,108    (730)
                               
Provision for income taxes   4,047    4,092    45    10,242    10,396    154 
                               
Net income  $13,781   $13,949   $(168)  $40,136   $40,712   $(576)
                               
Earnings per share - basic  $1.15   $1.17   $(0.02)  $3.34   $3.39   $(0.05)
                               
Earnings per share - diluted  $1.14   $1.15   $(0.01)  $3.31   $3.36   $(0.05)
                               
Weighted average shares outstanding -                              
Basic   11,954    11,954         12,006    12,006      
Diluted   12,097    12,097         12,112    12,112      

 

   September 30, 2018 
   As Reported  

Balances without

adoption of ASC 606

   Effect of Change 
             
ASSETS               
Accounts receivable, net  $1,017   $118   $899 
Inventory   43,845    42,793    1,052 
Prepaid expenses and other current assets   3,851    3,711    140 
Deferred tax assets   2,355    1,656    699 
                
LIABILITIES               
Accounts payable and accrued expenses   62,806    57,422    5,384 
                
STOCKHOLDERS' EQUITY               
Retained earnings   124,601    127,195    (2,594)

 

 9 

 

 

The cumulative effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet from the modified retrospective adoption of ASC 606 was as follows (in thousands):

 

   Balance at December 31,
2017
   Adjustments due to ASC
606
   Balance at January 1,
2018
 
             
ASSETS               
Accounts receivable, net  $576   $557   $1,133 
Inventory   19,328    902    20,230 
Prepaid expenses and other current assets   4,188    116    4,304 
Deferred tax assets   -    336    336 
                
LIABILITIES               
Accounts payable and accrued expenses   37,140    4,137    41,277 
Deferred tax liabilities   208    (208)   - 
                
STOCKHOLDERS' EQUITY               
Retained earnings   103,762    (2,018)   101,744 

 

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 new guidance also changes the definition of a lease and requires expanded quantitative and qualitative disclosures for both lessees and lessors. The pronouncement is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We plan to adopt ASU 2016-02 on January 1, 2019. The Company currently expects that upon adoption of ASU 2016-02 right-to-use assets and lease liabilities will be recognized in the Company’s Consolidated Balance Sheet in amounts that will be material. Management is currently evaluating the effect that the provisions of ASU 2016-02 will have on the Company’s financial statements.

 

ASU 2018-02, Income Statement Reporting - Comprehensive Income (Topic 220) allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from tax effects resulting from the Tax Cuts and Jobs Act (TCJA) and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this pronouncement are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We plan to adopt ASU 2018-02 on January 1, 2019. Management is currently evaluating the effect that the provisions of ASU 2018-02 will have on the Company’s financial statements.

 

2.REVENUE

 

Revenue recognition

 

Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight management, and other consumable health and nutritional 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 are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products. 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. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the 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.

 

Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially all of our revenue for the three and nine month periods ended September 30, 2018 and 2017, respectively. Revenue on these contracts is recognized when obligations under the terms of the contract with our customers are satisfied. Generally, this occurs with the transfer of control upon receipt of products by our customers. Any consideration received prior to the fulfillment of the Company performance obligation is deferred and recognized as a liability.

 

 10 

 

 

Sales returns

 

Our return policy allows for customer returns within 30 days of purchase and upon our authorization. We adjust revenues based on our estimated expected returns and a liability is recognized for expected refunds to customers. We estimate expected returns based on historical levels and project this experience into the future.

 

Customer reward programs and sales incentives

 

Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to purchase additional products at a discount come in a variety of 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.

 

Shipping and handling costs

 

Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and recorded in revenue in the accompanying Condensed Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the Company for the delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying Condensed Consolidated Statements of Income.

 

Contract costs

 

We expense sales commissions 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 customers by period end. These costs are recorded in selling, general and administrative expense in the Condensed Consolidated Statements of Income.

 

Disaggregated revenue and entity-wide revenue disclosures

 

The nature, amount, timing, and uncertainty of revenue and cash flows from our revenues amongst contracts, product offerings and customers do not differentiate and are recognized consistently based on the policies discussed above. In addition, effective January 1, 2018, we changed how we internally and externally report our revenues to simplify and better align with changes in how we manage our business, review operating performance and allocate resources as a result of the shift in our primary focus to the OPTAVIA business and the significance this business represents to the overall results of the Company. We considered the following factors in making this decision: the nature of business activities overlapping amongst previous defined sales channels, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, and information presented to the Board of Directors and investors. We previously disclosed entity-wide disclosures for sales by channel: OPTAVIA, Medifast Direct, Franchise Medifast Weight Control Centers and Medifast Wholesale. Due to the interchangeable nature of these customers amongst sale channels, sales migration to OPTAVIA, and realignment of internal operations as discussed, our disclosures as of January 1, 2018 will not include revenues by sales channel.

 

3.INVENTORIES

 

Inventories consist principally of packaged meal replacements held in the Company’s warehouses. Inventory is stated at the lower of cost or net realizable value, 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):

 

   September 30, 2018   December 31, 2017 
         
Raw materials  $13,273   $4,348 
Packaging   1,762    1,185 
Non-food finished goods   2,028    920 
Finished goods   27,480    13,407 
Reserve for obsolete inventory   (698)   (532)
Total  $43,845   $19,328 

 

 11 

 

 

4.EARNING PER SHARE

 

Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of the Company’s common stock outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of the Company’s common stock outstanding adjusted for the effect of dilutive common stock equivalents.

 

The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):

 

   Three months ended September 30,   Nine months ended September 30, 
   2018   2017   2018   2017 
                 
Numerator:                    
Net income  $13,781   $6,686   $40,136   $20,415 
                     
Denominator:                    
Weighted average shares of common stock outstanding   11,954    11,930    12,006    11,920 
Effect of dilutive common stock equivalents   143    165    106    143 
Weighted average shares of common stock outstanding   12,097    12,095    12,112    12,063 
                     
Earnings per share - basic  $1.15   $0.56   $3.34   $1.71 
                     
Earnings per share - diluted  $1.14   $0.55   $3.31   $1.69 

 

The calculation of diluted EPS excluded 0 and 3,813 antidilutive options outstanding for the three months ended September 30, 2018 and 2017, respectively, and 214 and 6,780 antidilutive options outstanding for the nine months ended September 30, 2018 and 2017, respectively. The calculation for diluted EPS for the three and nine months ended, September 30, 2018 also excluded 43 and 297 antidilutive restricted stock awards, 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.

 

5.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 risk-free interest rate, the expected volatility of the price of the Company’s common stock, and dividend yield. Options outstanding as of September 30, 2018 generally vest over a period of three years and expire ten years from the date of grant. The exercise price of these options ranges from $26.52 to $157.30. 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 that most closely corresponds to the expected term of the option. The expected volatility is based on the historical volatility of the Company’s common stock over the period of time equivalent to the expected term for each award. The weighted average input assumptions used were as follows:

 

   Nine months ended September 30, 
   2018   2017 
Expected term (in years)   6.4    6.0 
Risk-free interest rate   2.64%   2.05%
Expected volatility   33.30%   38.33%
Dividend yield   2.87%   2.40%

 

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The following table is a summary of our stock option activity:

 

   Nine months ended September 30, 
   2018   2017 
   Shares  

Weighted-Average
Exercise Price

   Shares  

Weighted-Average
Exercise Price

 
(shares in thousands)                
Outstanding at beginning of period   106   $31.18    129   $28.22 
Granted   51    67.50    38    44.73 
Exercised   (23)   28.87    (21)   27.38 
Forfeited   (8)   31.09    (17)   37.09 
Expired   -    -    (1)   28.59 
Outstanding at end of the period   126   $46.51    128   $32.00 
Exercisable at end of the period   54   $30.21    62   $28.14 

 

As of September 30, 2018, the weighted-average remaining contractual life was 8.07 years with an aggregate intrinsic value of $22.1 million for outstanding stock options and the weighted-average remaining contractual life was 6.91 years with an aggregate intrinsic value of $10.4 million for exercisable options. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2018 and 2017 was $18.08 and $13.73, respectively. The unrecognized compensation expense calculated under the fair value method for shares expected to vest as of September 30, 2018 was $0.9 million and is expected to be recognized over a weighted average period of 3.46 years. The Company received $220 thousand and $568 thousand in cash proceeds from the exercise of stock options during the nine months ended September 30, 2018 and 2017, respectively. Upon exercising of options, the Company withheld shares for employee taxes of 3 thousand and 19 thousand for the nine months ended September 30, 2018 and 2017, respectively. The total intrinsic value for stock options exercised during the nine months ended September 30, 2018 and 2017 was $1.4 million and $325 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 of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes our restricted stock activity:

 

   Nine months ended September 30, 
   2018   2017 
   Shares  

Weighted-Average
Grant Date

Fair Value

   Shares  

Weighted-Average
Grant Date

Fair Value

 
(shares in thousands)                
Outstanding at beginning of period   129   $32.15    215   $27.69 
Granted   18    79.80    44    44.73 
Vested   (86)   31.61    (58)   26.09 
Forfeited   -    -    (8)   36.37 
Outstanding at end of the period   61   $46.90    193   $31.65 

 

The total fair value of restricted stock awards vested during the nine months ended September 30, 2018 and 2017 was $7.5 million and $2.5 million, respectively.

 

The total share-based compensation charged against income was $717 thousand and $1.2 million during the three months ended September 30, 2018 and 2017, respectively, and $2.4 million and $3.4 million during the nine months ended September 30, 2018 and 2017, respectively. The total costs of the options and restricted stock awards charged against income was $488 thousand and $912 thousand during the three months ended September 30, 2018 and 2017, respectively, and $1.7 million and $2.6 million during the nine months ended September 30, 2018 and 2017, respectively. Also included for the three and nine months ended September 30, 2018 was $77 thousand and $229 thousand, respectively, for 63,300 performance-based deferred shares and for the three and nine months ended September 30, 2017 was $139 thousand and $357 thousand, respectively, for 113,395 performance-based deferred shares in expense for certain key executives. Included for the three and nine months ended September 30, 2018 and 2017 was $152 thousand and $455 thousand, respectively, in expense for 210,000 performance-based deferred shares granted to our CEO that will vest based on the achievement of certain Company performance targets.

 

The total income tax benefit recognized in the condensed consolidated statements of income for restricted stock awards was $167 thousand and $451 thousand for the three months ended September 30, 2018 and 2017, respectively, and $1.6 million and $1.5 million for the nine months ended September 30, 2018 and 2017, respectively.

 

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There was $2.1 million of total unrecognized compensation cost related to restricted stock awards as of September 30, 2018, which is expected to be recognized over a weighted-average period of 1.88 years. There was $1.1 million of unrecognized compensation cost related to the 273,300 performance based deferred shares discussed above as of September 30, 2018, which is expected to be recognized over a weighted-average period of 1.25 years.

 

6.ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):

 

   September 30, 2018   December 31, 2017 
         
Foreign currency translation  $(2)  $- 
Unrealized losses on marketable securities   (264)   (160)
Accumulated other comprehensive loss  $(266)  $(160)

 

7.FINANCIAL INSTRUMENTS

 

Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.

 

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.

 

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The following tables represent cash and the available-for-sale securities adjusted cost, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or investment securities (in thousands):

 

   September 30, 2018 
   Cost  

Unrealized

Losses

  

Accrued

Interest

  

Estimated

Fair Value

  

Cash &

Cash

Equivalents

  

Investment

Securities

 
                         
Cash  $22,841   $-   $-   $22,841   $22,841   $- 
                               
Level 1:                              
Certificate of deposit   55,000    -    -    55,000    55,000    - 
Money market accounts   4,466    -    -    4,466    4,466    - 
Government & agency securities   4,135    (116)   24    4,043    -    4,043 
    63,601    (116)   24    63,509    59,466    4,043 
                               
Level 2:                              
Municipal bonds   16,932    (248)   185    16,869    -    16,869 
                               
Total  $103,374   $(364)  $209   $103,219   $82,307   $20,912 

 

   December 31, 2017 
   Cost  

Unrealized

Losses

  

Accrued

Interest

  

Estimated

Fair Value

  

Cash &

Cash

Equivalents

  

Investment

Securities

 
                         
Cash  $28,630   $-   $-   $28,630   $28,630   $- 
                               
Level 1:                              
Certificate of deposit   45,000    -    -    45,000    45,000    - 
Money market accounts   1,447    -    -    1,447    1,447    - 
Government & agency securities   5,342    (67)   13    5,288    -    5,288 
    51,789    (67)   13    51,735    46,447    5,288 
                               
Level 2:                              
Municipal bonds   18,404    (201)   266    18,469    -    18,469 
                               
Total  $98,823   $(268)  $279   $98,834   $75,077   $23,757 

 

The Company had a realized loss of $91 and $16 thousand for the three months ended September 30, 2018 and 2017, respectively, and a realized loss of $70 and $73 thousand for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018 and 2017, 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.

 

8.INCOME TAXES

 

The Company reflected the effects of the TCJA in its 2017 financial statements, including the effects of the change in the U.S. Corporate tax rate from 35% to 21% on deferred tax assets and liabilities.  The Company’s tax expense for the three and nine month periods ended September 30, 2018 was $4.0 million and $10.2 million, respectively. This includes the reduction in the U.S. federal tax rate from 35% to 21%, effective for the Company’s 2018 tax year.

 

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The Company recognized the income tax effects of the TCJA in the financial statements included in its 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. During the three months ended September 30, 2018, the Company finalized its accounting for the income tax effects of the TCJA. There were no material adjustments to the provisional amounts recorded in the Company’s financial statements included in its 2017 Annual Report on Form 10-K.

 

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, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” and similar expressions, which are not historical in nature, identify forward-looking statements. However, the absence of these words or expressions does not necessarily 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Annual Report”), and those described from time to time in our future reports filed with the SEC.

 

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 a leading manufacturer and distributor of clinically proven healthy living products and programs. We produce, distribute and sell a variety of weight loss, weight management, 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 98% and 97% of our revenues for the nine months ended September 30, 2018 and 2017, respectively.

 

The nature, amount, timing, and uncertainty of revenue and cash flows from our revenues amongst contracts, product offerings and customers do not differentiate and are recognized consistently based on our policies. In addition, effective January 1, 2018, we changed how we internally and externally report our revenues to simplify and better align with changes in how we manage our business, review operating performance and allocate resources as a result of the shift in our primary focus to the OPTAVIA business and the significance this business represents to the overall results of the Company. We considered the following factors in making this decision: the nature of business activities overlapping amongst previous defined sales channels, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, and information presented to the Board of Directors and investors. We previously disclosed entity-wide disclosures for sales by channel: OPTAVIA, Medifast Direct, Franchise Medifast Weight Control Centers and Medifast Wholesale. Due to the interchangeable nature of these customers amongst sale channels, sales migration to OPTAVIA, and realignment of internal operations as discussed, our disclosure as of January 1, 2018 will not include revenues by sales channel.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). Our significant accounting policies are described in Note 1 and Note 2 to the condensed consolidated financial statements included in this report.

 

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

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Overview of Results of Operations

 

The following tables reflect our income statements (in thousands, except percentages):

 

   Three months ended September 30,         
   2018   2017   $ Change   % Change 
                 
Revenue  $139,239   $77,205   $62,034    80.3%
Cost of sales   32,038    19,022    (13,016)   -68.4%
Gross profit   107,201    58,183    49,018    84.2%
                     
Selling, general, and administrative   89,734    47,956    (41,778)   -87.1%
                     
Income from operations   17,467    10,227    7,240    70.8%
                     
Other income (expense)                    
     Interest income, net   361    148    213    143.9%
     Other income (expense)   -    (4)   4    -100.0%
    361    144    217    150.7%
                     
Income from operations before income taxes   17,828    10,371    7,457    71.9%
                     
Provision for income tax   4,047    3,685    (362)   -9.8%
                     
Net income  $13,781   $6,686   $7,095    106.1%
                     
% of revenue                    
Gross profit   77.0%   75.4%          
Selling, general, and administrative costs   64.4%   62.1%          
Income from operations   12.5%   13.2%          

 

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   Nine months ended September 30,     
   2018   2017   $ Change   % Change 
                 
Revenue  $355,159   $223,556   $131,603    58.9%
Cost of sales   84,351    54,870    (29,481)   -53.7%
Gross Profit   270,808    168,686    102,122    60.5%
                     
Selling, general, and administrative   221,548    138,540    (83,008)   -59.9%
                     
Income from operations   49,260    30,146    19,114    63.4%
                     
Other income (expense)                    
     Interest income, net   940    352    588    167.0%
     Other income (expense)   178    32    146    456.3%
    1,118    384    734    191.1%
                     
Income from operations before income taxes   50,378    30,530    19,848    65.0%
                     
Provision for income tax expense   10,242    10,115    (127)   -1.3%
                     
Net income  $40,136   $20,415   $19,721    96.6%
                     
% of revenue                    
Gross Profit   76.2%   75.5%          
Selling, general, and administrative costs   62.4%   62.0%          
Income from Operations   13.9%   13.5%          

 

Revenue: Revenue increased $62.0 million, or 80.3%, to $139.2 million for the three months ended September 30, 2018 from $77.2 million for the three months ended September 30, 2017. This is the sixth consecutive quarter of year-over-year growth and the seventh consecutive quarter of sequential revenue improvement. The number of active earning OPTAVIA Coaches for the three months ended September 30, 2018 increased to 22,600 from 14,200 for the corresponding period in 2017, an increase of 59.2%. The quarterly revenue per OPTAVIA Coach increased 23.2% to $5,781 for the three months ended September 30, 2018 from $4,693 for the three months ended September 30, 2017. This growth in revenue resulted in part from business initiatives accelerating new OPTAVIA Coach conversions, increased OPTAVIA client acquisition rates and the transition of clients to higher priced OPTAVIA branded products. Total advertising spend, inclusive of broker fees, was $1.3 million for the three months ended September 30, 2018 as compared to $1.7 million for the corresponding period in 2017. Revenue increased $131.6 million, or 58.9%, to $355.2 million for the nine months ended September 30, 2018 from $223.6 million for the nine months ended September 30, 2017. Total advertising spend, inclusive of broker fees, was $4.9 million for the nine months ended September 30, 2018 as compared to $6.1 million for the corresponding period in 2017.

 

Costs of sales: Cost of sales increased $13.0 million, or 68.4%, to $32.0 million for the three months ended September 30, 2018 from the corresponding period in 2017 and increased $29.5 million, or 53.7%, to $84.4 million for the nine months ended September 30, 2018 from the corresponding period in 2017. The increase in cost of sales for the three and nine months ended September 30, 2018 was primarily driven by increased product sales.

 

Gross profit: For the three months ended September 30, 2018, gross profit increased $49.0 million, or 84.2%, to $107.2 million from the corresponding period in 2017. As a percentage of sales, gross margin increased 160 basis points to 77.0% for the three months ended September 30, 2018 from 75.4% for the corresponding period in 2017. For the nine months ended September 30, 2018, gross profit increased $102.1 million, or 60.5%, to $270.8 million from the corresponding period in 2017. As a percentage of sales, gross margin increased 70 basis points to 76.2% for the nine months ended September 30, 2018 from 75.5% for the corresponding period in 2017. The increase in gross margin percentage for the quarter and year-to-date periods was driven by higher production volumes yielding favorable manufacturing absorption as the Company increased inventory to meet expected consumer demand. The Company anticipates this absorption benefit to be temporary as inventory levels normalize. In addition, the increase in the gross margin percentage resulted from reduced inventory obsolescence and lower shipping expense.

 

Selling, general and administrative: Selling, general and administrative (“SG&A”) expenses were $89.7 million for the three months ended September 30, 2018, an increase of $41.7 million, or 87.1%, as compared to $48.0 million from the corresponding period in 2017. As a percentage of sales, SG&A expenses were 64.4% as compared to 62.1% for the three months ended September 30, 2018 and 2017, respectively. This increase was primarily the result of higher OPTAVIA commissions paid as a result of increased product sales. As OPTAVIA revenue increased as a portion of the Company’s total sales mix, the commission rate as a percentage of revenue increased 470 basis points to 40.5% for the third quarter of 2018 compared to 35.8% for the third quarter last year. This is an outcome of the success we are experiencing with our OPTAVIA integrated Coach Model. SG&A expenses included research and development costs of $621 thousand and $343 thousand for the three months ended September 30, 2018 and 2017, respectively.

 

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For the nine months ended September 30, 2018, SG&A expenses increased $83.0 million, or 59.9%, to $221.5 million from $138.5 million for the corresponding period in 2017. As a percentage of sales, SG&A expenses was 62.4% for the nine months ended September 30, 2018 as compared to 62.0% for the corresponding period in 2017. SG&A expenses included $1.6 million and $1.1 million in research and development costs for the nine months ended September 30, 2018 and 2017, respectively.

 

OPTAVIA commission expense, which is variable based upon product sales, increased $28.8 million, or more than 100.0%, for the three months ended September 30, 2018 from the corresponding period in 2017 and increased $62.0 million, or 79.2%, for the nine months ended September 30, 2018 from the corresponding period in 2017.

 

Coach event and incentive program costs increased $6.0 million and $6.7 million during the three and nine months ended September 30, 2018, respectively, from the corresponding periods in 2017 due to higher annual convention costs as more coaches attended this event and increased incentive program costs related to coaches who qualified during 2018 for our 2019 International Leadership Advancement Trip, an event designed to recognize and provide training to rising leaders and those who mentor them.

 

General and administrative expenses increased $4.8 million and $11.1 million during the three and nine months ended September 30, 2018, respectively, from the corresponding periods in 2017 primarily as a result of startup costs associated with the move of our distribution center from Texas to Nevada, as well as consulting costs related to information technology projects, and increased credit card fees resulting from higher sales.

 

Salaries and benefits increased $2.3 million and $4.2 million during the three and nine months ended September 30, 2018, respectively, from the corresponding periods in 2017 primarily as a result of higher contract labor costs related to the winding down of our internal call center and increased compensation costs.

 

Income from operations: For the three months ended September 30, 2018, income from operations increased $7.3 million to $17.5 million from $10.2 million for the corresponding period in 2017 primarily as a result of increased gross profits partially offset by increased SG&A expenses. For the nine months ended September 30, 2018, income from operations increased $19.2 million to $49.3 million from $30.1 million for the corresponding period in 2017 primarily as a result of increased gross profits partially offset by increased SG&A expenses.

 

Interest income, net: For the three and nine months ended September 30, 2018, interest income was $361 thousand and $940 thousand, respectively, and for the three and nine months ended September 30, 2017, interest income was $148 thousand and $352 thousand, respectively.

 

Other income (expense): For the three months ended September 30, 2018 and 2017, other income (expense) was $0 and an expense of $4 thousand, respectively. For the nine months ended September 30, 2018 and 2017, other income (expense) was income of $178 thousand and $32 thousand, respectively.

 

Income from operations before income taxes: Income from operations before income taxes was $17.8 million for the three months ended September 30, 2018 as compared to $10.4 million for the three months ended September 30, 2017, an increase of $7.4 million. Pre-tax profit as a percentage of sales decreased to 12.8% for the three months ended September 30, 2018 from 13.4% for the three months ended September 30, 2017. Income from operations before income taxes was $50.4 million for the nine months ended September 30, 2018 as compared to $30.5 million for the nine months ended September 30, 2017, an increase of $19.9 million. Pre-tax profit as a percentage of sales increased to 14.2% for the nine months ended September 30, 2018 from 13.7% for the nine months ended September 30, 2017.

 

Provision for income tax: For the three months ended September 30, 2018, the Company recorded $4.0 million in income tax expense, an effective rate of 22.7%, as compared to $3.7 million in income tax expense, an effective rate of 35.5%, for the three months ended September 30, 2017. The decrease in the effective tax rate for the three month ended September 30, 2018 as compared to the three months ended September 30, 2017 was driven by a decrease in the Federal statutory rate of 14.0% pursuant to the TCJA, a decrease in the state rate of 1.7% and a rate reduction of 0.4% attributable to the discrete accounting for taxes associated with share-based compensation. The total decrease in the effective tax rate was offset by a 2.1% increase to our effective tax rate resulting from to the elimination of the Domestic Manufacturer Deduction and a 1.2% increase to our effective tax rate resulting from changes to the limitations imposed by Section 162(m) of the Internal Revenue Code pursuant to TCJA. For the nine months ended September 30, 2018, the Company recorded $10.2 million in income tax expense, an effective rate of 20.3%, as compared to $10.1 million in income tax expense, an effective rate of 33.1%, for the nine months ended September 30, 2017. The decrease in the effective tax rate for the nine month ended September 30, 2018 as compared to the nine months ended September 30, 2017 was driven by a decrease in the Federal statutory rate of 14.0% pursuant to the TCJA, a rate reduction of 1.1% attributable to the discrete accounting for taxes associated with share-based compensation and a decrease in the state rate of 0.4%. The total decrease in the effective tax rate was offset by a 2.2% increase to our effective tax rate resulting from the elimination of the Domestic Manufacturer Deduction and a 0.5% increase to our effective tax rate primarily resulting from changes to the limitations imposed by Section 162(m) of the Internal Revenue Code pursuant to the TCJA. The Company anticipates a full year tax rate of 21% to 23% in 2018.

 

Net income: Net income was $13.8 million and $40.1 million, or $1.14 and $3.31 per diluted share, for the three and nine months ended September 30, 2018 as compared to $6.7 million and $20.4 million, or $0.55 and $1.69 per diluted share, for the three months and nine months ended September 30, 2017. The period-over-period changes were driven by the factors described above.

 

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Liquidity and Capital Resources

 

The Company had stockholders’ equity of $111.6 million and working capital of $89.1 million at September 30, 2018 as compared with $108.6 million and $88.1 million at December 31, 2017, respectively. The $3.0 million net increase in stockholder’s equity reflects $40.1 million in net income for the nine months ended September 30, 2018 offset by $20.0 million spent on repurchases of common stock, and $17.3 million for declared dividends paid to our common stock holders as well as the other equity transactions described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in our condensed consolidated financial statements included in this report. The Company declared a dividend of $6.0 million, or $0.48 per share, to common stockholders as of September 21, 2018 that will be paid in the fourth quarter of 2018. While we intend to continue the dividend program and believe we will have sufficient liquidity to do so, we can provide no assurance that we will be able to continue to declare and pay dividends. The Company’s cash, cash equivalents, and investment securities increased from $98.8 million at December 31, 2017 to $103.2 million at September 30, 2018.

 

Net cash provided by operating activities increased $12.2 million to $45.5 million for the nine months ended September 30, 2018 from $33.3 million for the nine months ended September 30, 2017 primarily as a result of increased net income partially offset by an increase in working capital.

 

Net cash used in investing activities was $817 thousand for the nine months ended September 30, 2018 as compared to $3.4 million for the nine months ended September 30, 2017. This change resulted primarily from cash provided by net investment securities for the nine months ended September 30, 2018 as compared to cash used in net investment securities for the corresponding period in 2017. This was partially offset by an increase in cash used in capital expenditures for the nine months ended September 30, 2018 from the corresponding period in 2017.

 

Net cash used in financing activities increased $25.6 million to $37.4 million for the nine months ended September 30, 2018 from $11.8 million for the nine months ended September 30, 2017. This increase was primarily due to stock repurchases and an 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, if any, to be funded from operating cash flow and financing activities.

 

The Company evaluates acquisitions from time to time as presented.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.

 

The Company is exposed to market risk related to changes in interest rates and market pricing impacting our investment portfolio. Its current investment policy is to maintain an investment portfolio consisting of municipal bonds, U.S. money market securities, and high-grade corporate securities, directly or through managed funds. Its cash is deposited in and invested through highly rated financial institutions in North America. Its marketable securities are subject to interest rate risk and market pricing risk and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at September 30, 2018, the Company estimates that the fair value of its investment portfolio would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments.

 

There have been no material changes to our market risk exposure since December 31, 2017.

 

Item 4.Controls and Procedures

 

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2018. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting:

 

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented additional internal controls to ensure we properly assessed and accounted for the impact of the new accounting standard related to revenue recognition on our financial statements which became effective on January 1, 2018. There were no significant changes to our internal control over financial reporting related to the adoption of the new standard.

 

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Part II Other Information

 

Item 1.Legal Proceedings

 

The Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business.  Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its results of operations, financial position or liquidity.

 

Item 1A. Risk Factors

 

There have been no material changes to the risk factors set forth in Part I, Item 1A of the 2017 Annual Report.

 

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

2018  Total Number of Shares
Purchased
   Average Price Paid per
Share
  

Total Number of Shares
Purchased as Part of a
Publicly Announced Plan

or Program

   Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 
July 1 - July 31   -   $-    -    728,881 
August 1 - August 31   200    169.47    -    728,881 
September 1 - September 30   -    -    -    728,881 

 

The Company, in accordance with, and as part of, the repurchase program adopted in September 2014 (the “Stock Repurchase Program”) implemented a Rule 10b5-1 repurchase plan to facilitate repurchases of the Company’s common stock under the Stock Repurchase Program. As of September 30, 2018, there were 728,881 shares of the Company’s common stock eligible for repurchase under the Stock Repurchase Program. There is no guarantee as to the exact number of shares of the Company’s common stock, if any, that will be purchased under the Stock Repurchase Plan.

 

Item 6. Exhibits

 

Exhibit Number   Description of Exhibit
     
3.1   Restated and Amended Certificate of Incorporation of Medifast, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 001-31573) filed February 27, 2015).
     
3.2   Amended and Restated Bylaws of Medifast, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 001-31573) filed on April 6, 2015).
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   The following financial statements from Medifast, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed November 7, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity, and (vi) Notes to the Condensed Consolidated Financial Statements (filed herewith).

 

In accordance with SEC Release No. 33-8238, Exhibit 32.1 is being furnished and not filed.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Medifast, Inc.

 

By: /s/ DANIEL R. CHARD  
  Daniel R. Chard  
  Chief Executive Officer  
  (Principal Executive Officer)  
     
Dated: November 7, 2018  
     
  /s/ TIMOTHY G. ROBINSON  
  Timothy G. Robinson  
  Chief Financial Officer  
  (Principal Financial and Accounting Officer)  
     
Dated: November 7, 2018  

 

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