Medifast Inc: Form 10-Q for the period ended Mar 31, 2024

Note Regarding Forward-Looking Statements

Certain information in this report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Act”). Forward-looking statements generally can be identified by use of phrases or terminology such as “intend,” “anticipate,” “expect” or other similar words or the negative of such terminology. Similarly, descriptions of Medifast's objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of our management and are subject to certain events, risks, uncertainties, and other factors. These risks and uncertainties include, but are not limited to, those described in our 2023 Form 10-K and those described from time to time in our future reports filed with the SEC. Although Medifast believes that the expectations, statements, and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this report. All of the forward-looking statements contained herein speak only as of the date of this report. We undertake no obligation to update any information contained in this report or to publicly release the results of any revisions to forward-looking statements to reflect events or circumstances of which we may become aware after the date of this report.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

Overview

Medifast is the health and wellness company known for its habit-based and Coach-guided lifestyle solution OPTAVIA®. The Company has initiated its business transformation to build a set of differentiated capabilities, reflecting its commitment to providing comprehensive health and wellness solutions to customers as both their needs and the industry evolve, that are expected to position Medifast to be leader in the dynamic and changing health and wellness space. As part of this transformation the Company is expanding its product offerings to include sports nutrition products and targeting individuals in the medically supported weight loss market.

Medifast has created a well-capitalized business that has a powerful business model, building a network of approximately 37,800 independent active earning Coaches providing consistent and effective support to people on their weight loss journey and impacting more than 3 million lives to date. Medifast was recognized in 2023 by Financial Times as one of The Americas' Fastest Growing Companies and in 2022 as one of America's Best Mid-Sized Companies by Forbes.

As a physician-founded company with more than 40 years of history, Medifast is a leader in the U.S. weight management industry. OPTAVIA's lifestyle plans deliver clinically proven health benefits as well as evidence-based tools, including scientifically developed products and a framework for habit creation reinforced by independent Coaches and community support.

In a rapidly changing health and wellness landscape, Medifast is committed to innovating and building upon its scientific and clinical heritage to deliver on its mission of offering the world Lifelong Transformation, One Healthy Habit at a Time®. With the growing interest in medically supported weight loss and GLP-1 medications powering the emergence of an important new market for products and services to support patients on their health and wellness journey, Medifast is transforming its business to capitalize on this opportunity. Through a collaboration with LifeMD, Inc. (Nasdaq: LFMD) (“LifeMD”), a national virtual primary care provider, our customers now can access all-in-one holistic solutions that help make a healthy lifestyle second nature, whether individuals are currently using medical weight loss options, are looking for further support after they stop taking medication, or as they transition off medications. In addition to lifestyle support and a simple roadmap for habit creation, the integrated offering includes scientifically developed nutritional support solutions such as product kits designed to help mitigate GLP-1 medication side effects, including muscle loss. As the medications for weight loss continue to evolve and grow,

Medifast is dedicated to maintaining a relentless focus on the development of additional products and supplements designed to meet customer needs.

OPTAVIA’s holistic lifestyle solution is built around four key components:

• Independent OPTAVIA Coaches: Independent OPTAVIA Coaches provide individualized support and guidance to customers on the path to optimal health and wellbeing.
• OPTAVIA Community: A Community of like-hearted people providing each other with real-time connection and support.
• The Habits of Health® Transformational System: A proprietary system that offers easy steps to a sustainable healthy lifestyle.
• Products & Plans: Clinically proven plans and scientifically developed products, backed by dietitians, scientists, and physicians.

OPTAVIA's collaboration with LifeMD offers access to an additional resource for eligible customers:

• Clinicians as Partners: Through the collaboration with LifeMD, OPTAVIA customers have access to board-certified affiliated clinicians and medication, such as GLP-1 medications, that support treatment plans for obesity and other health conditions.

Across our offerings, we help customers achieve their health goals through a network of OPTAVIA Coaches, about 90% of whom were customers first. OPTAVIA Coaches introduce customers to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive OPTAVIA-branded products, including Fuelings as well as OPTAVIA ACTIVE®, a new line of essential amino acid supplements and protein powders. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable, and simple to use. They are formulated with high-quality ingredients and contain probiotic BC30™ cultures, which help support digestive health, as part of a balanced diet and healthy lifestyle, vitamins and minerals, as well as other nutrients essential for good health. Our products are used as tools and support the process of integrating healthy habits into our customers' daily life.

The OPTAVIA coaching model is customer-centric and boasts an energized health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. OPTAVIA Coaches provide personalized support to customers and motivate them by sharing their passion for healthy living and lifestyle transformation.

The entrepreneurial spirit of our OPTAVIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new customers, many of whom go on to become OPTAVIA Coaches. We offer economic incentives designed to support each OPTAVIA Coach’s long-term success, which we believe plays an important role in their financial wellness, providing the opportunity to improve their finances while changing the health trajectory of families, communities, and generations.1

OPTAVIA Coaches are independent contractors, not employees, who support customers and market our products and services primarily through word of mouth, email, and social media channels such as Facebook, Instagram, X, and video conferencing platforms. As entrepreneurs, OPTAVIA Coaches market our products to friends, family, and other acquaintances. OPTAVIA products are shipped directly to customers who are working with an OPTAVIA Coach. OPTAVIA Coaches do not handle inventory or deliver merchandise to customers. This arrangement frees our OPTAVIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.

With the expansion of our business to include GLP-1 support tools, we are leveraging multiple channels to enhance customer acquisition and spur meaningful growth. OPTAVIA Coaches remain a fundamental component of our business, and their outreach around our integrated wellness offering is one channel to drive customer acquisition. Additionally, we are collaborating with LifeMD to activate their patient base as another channel to acquire customers. Further, we are investing in a high-impact national marketing campaign designed to drive customer acquisition, elevate brand awareness, and foster deep

1 OPTAVIA makes no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership. Please see the OPTAVIA Income Disclosure Statement (http://bit.ly/ids**OPTA**VIA) for statistics on actual earnings of Coaches.

engagement. With these efforts, we are actively evolving the Company’s historic single channel Coach-focused business model to pair Company advertising with relationship-based Coaching, exponentially broadening our reach and contributing to our business transformation focused on sustainable growth.

Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD, and OPTAVIA Health Consultation (Shanghai) Co., Ltd.

Competition and Macroeconomic Conditions

Certain global economic challenges including the impact of inflation have caused macroeconomic uncertainty and volatility in markets where we, our suppliers and our OPTAVIA Coaches operate.

We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and has put pressure on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could also adversely impact our business, financial condition, or results of operations. Our variable cost structure can be utilized to adapt to changing market conditions with potential actions including adjustments to our manufacturing, distribution, and customer support infrastructure. As a response, we may periodically take incremental pricing actions to offset supply chain costs and inflationary pressures.

In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of its employees, stockholders, OPTAVIA Coaches and customers.

These macroeconomic uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue to actively monitor the impact of these developments on our business and will update our practices accordingly.

The weight loss industry is very competitive and encompasses a diverse array of weight loss products and programs. These include a wide variety of commercial weight loss programs, pharmaceutical products, surgical interventions, books, self-help diets, dietary meal replacements, and appetite suppressants as well as digital tools, app-based health and wellness monitoring solutions, and wearable trackers. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, online diet-oriented sites, self-directed dieting, and self-administered products such as prescription medications, over-the-counter medications, and supplements as well as medically supervised programs.

Medical weight loss solutions, such as GLP-1 medications, have become an increasingly key component of the overall health and wellness ecosystem, and the recent surging awareness and popularity of these weight loss medications serve as another major competitor, as these products have prompted a huge change in the way that consumers think about weight loss and lifestyle modification solutions in general. We recognize that these weight loss medications have attracted significant attention from the market and pose a threat to our interactions with our customer base. Importantly, the efficacy claims of GLP-1 medications for weight loss are based specifically on their incorporation of lifestyle changes that include a reduced calorie diet and increased physical activity. As a result, under Medifast’s offering, weight loss medications become one important element in an overall tailored lifestyle plan that also includes Coaching, community support, nutritionally balanced meals, and exercise.

We believe our scientific and clinical heritage combined with our commitment to evaluating programs, plans and products through clinical research are primary differentiators that allow us to compete in these markets. Our scientifically designed products were originally developed by a physician, and we have been on the cutting edge in the development of nutrition and weight-management products since our founding.

Medifast has perfected our model over the last 40 plus years, with habits, Coaches, and community at the core, and we will continue to innovate as the industry evolves.

Recent Initiatives

In response to the current competitive landscape, in which acquiring customers has become more difficult due to competitive pressures from GLP-1 medications being sought after by our potential customers, the Company is focusing on a number of initiatives to aid in increasing revenue and profit growth in the years ahead. At the core of the Company’s initiatives is its desire to grow its business by broadening its customer base through increased brand visibility and recognition, and by significantly expanding its total addressable market.

Areas of investment anticipated for the year include instituting a new marketing campaign and upgrading customers’ digital experience to increase brand awareness and drive customer adoption, as well as cultivating new customers through the Company’s collaboration with LifeMD.

In December of 2023, the Company entered into a collaboration agreement with LifeMD, a leading provider of virtual primary care. This collaboration brings together OPTAVIA’s personalized habit-based, coach-guided approach with medical expertise from board-certified affiliated LifeMD clinicians and access to weight loss medications, including GLP-1s. With this collaboration, the Company and LifeMD intent to develop an integrated offering with the goal of creating a comprehensive and seamless solution for customers who desire to use medications and OPTAVIA’s lifestyle enhancement program. In the second quarter of 2024, we expect to take a key interim step, as we begin offering a lifestyle program with a dedicated OPTAVIA coach, balanced nutrition options with our GLP-1 Nutrition Support Kit, and, through LifeMD, access to a medical provider and blood work, as well as prescription and insurance support.

GLP-1 medications that meet the FDA weight loss mandate are prescribed along with the recommendation to make lifestyle modifications, such as through a structured program like OPTAVIA, that encourages a reduced-calorie diet and increased physical activity. Our research shows that most of those who are interested in weight loss medication are also looking for support beyond a prescription, including clarity on how to incorporate healthy eating and exercise into their lifestyles while using these medical solutions. While medically supported weight loss can be effective, long-term success is dependent on the nutrition and lifestyle changes individuals make in combination with taking medication.

We believe by significantly broadening our customer acquisition activities, through launching our new marketing campaign, upgrading customers' digital experience, and leaning into the medically supported weight loss market through our collaboration with LifeMD, we will be positioned for future success.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes in our critical estimates during the first three months of 2024.

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in Note 2 to the audited consolidated financial statements included in the 2023 Form 10-K. We consider all of our significant accounting policies and estimates to be critical.

Overview of Results of Operations

Our product sales accounted for approximately 98% of our revenues for each of the three months ended March 31, 2024 and 2023.

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

Revenue: Revenue decreased $174.2 million, or 49.9%, to $174.7 million for the three months ended March 31, 2024 from $349.0 million for the three months ended March 31, 2023. The average revenue per active earning OPTAVIA Coach was $4,623 for the three months ended March 31, 2024 compared to $5,945 for the three months ended March 31, 2023. The decline in revenue for the three months ended March 31, 2024 was primarily driven by a decrease in the number of active earning OPTAVIA Coaches to 37,800 as of March 31, 2024 from 58,700 as of March 31, 2023, the decline in the productivity per active earning OPTAVIA Coach, and a $9.1 million impact from a timing difference related to changes in the Company’s sales order terms and conditions with its customers realized in the first quarter of 2023. The decrease in productivity per active earning OPTAVIA Coach for the quarter was driven by continued pressure on customer acquisition.

Cost of sales: Cost of sales decreased $55.1 million, or 53.8%, to $47.4 million from $102.6 million for the three months ended March 31, 2024 from the corresponding period in 2023. The decrease in cost of sales for the three months ended March 31, 2024 was primarily driven by decreased volumes, efficiencies in inventory management, and cost savings from our Fuel for the Future initiatives.

Gross profit: For the three months ended March 31, 2024, gross profit decreased $119.1 million, or 48.3%, to $127.3 million from $246.4 million for the three months ended March 31, 2023. The decrease in gross profit for the three months ended March 31, 2024 was due to lower revenue, partially offset by efficiencies in inventory management and cost savings from our Fuel for the Future initiatives. As a percentage of revenue, gross profit increased 220 basis points to 72.8% for the three months ended March 31, 2024 from 70.6% for the corresponding period in 2023. The increase in gross margin percentage was primarily due to efficiencies in inventory management and cost savings from Fuel for the Future initiatives, partially offset by increased shipping costs.

Selling, general, and administrative: SG&A expenses were $119.4 million for the three months ended March 31, 2024, a decrease of $73.5 million, or 38.1%, as compared to $192.9 million from the corresponding period in 2023. The decrease in

SG&A expenses for the three months ended March 31, 2024 was primarily due to decreased Coach compensation due to lower volumes and fewer active earning Coaches, partially offset by market research and investment costs related to medically supported weight loss and costs for our Company-led acquisition initiatives. As a percentage of revenue, SG&A expenses were 68.3% for the three months ended March 31, 2024 as compared to 55.3% for the corresponding period in 2023. SG&A expenses included research and development costs of $1.0 million for both the three months ended March 31, 2024 and 2023, in connection with the development of new products, programs and clinical research activities. The increase in SG&A expenses as a percentage of revenue for the three months ended March 31, 2024 was primarily due to market research and investment costs related to medically supported weight loss activities, the loss of leverage on fixed costs due to lower sales volumes when compared to the first quarter of 2023, and costs for our company led acquisition initiatives.

Non-GAAP adjusted SG&A expenses were $118.0 million for the three months ended March 31, 2024, a decrease of $74.9 million, or 38.8%, as compared to $192.9 million from the corresponding period in 2023. Non-GAAP adjusted SG&A excludes costs for the collaboration with LifeMD of $1.3 million for the three months ended March 31, 2024. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of non-GAAP financial measures to its most comparable GAAP financial measure.

Income from operations: For the three months ended March 31, 2024, income from operations decreased $45.6 million to $7.9 million from $53.5 million for the corresponding period in 2023 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. Income from operations as a percentage of revenue decreased to 4.5% for the three months ended March 31, 2024 from 15.3% for the corresponding period in 2023 due to the factors described above impacting revenue and SG&A expenses.

Non-GAAP adjusted income from operations was $9.3 million for the three months ended March 31, 2024, a decrease of $44.2 million, or 82.7%, as compared to $53.5 million from the corresponding period in 2023. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of non-GAAP financial measures to its most comparable GAAP financial measure.

Provision for income taxes: For the three months ended March 31, 2024, the Company recorded $3.3 million in income tax expense, an effective tax rate of 28.2%, as compared to $13.4 million in income tax expense, an effective tax rate of 25.1%, for the three months ended March 31, 2023. The increase in the effective tax rate for the three months ended March 31, 2024 was primarily driven by an increase in the tax shortfall for stock compensation and the rate impact of research and development tax credits, partially offset by the decrease in the limitation for executive compensation and various other miscellaneous items.

Non-GAAP adjusted income tax provision was $2.9 million for the three months ended March 31, 2024, an effective tax rate of 28.7% as compared to 25.1% for the corresponding period in 2023. “Non-GAAP Financial Measures” below for a reconciliation of each of non-GAAP financial measures to its most comparable GAAP financial measure.

Net income: Net income was $8.3 million, or $0.76 per diluted share for the three months ended March 31, 2024 as compared to $40.0 million, or $3.67 per diluted share, for the three months ended March 31, 2023. The period-over-period changes were driven by the factors described above in the section titled “Income from operations.”

Non-GAAP adjusted net income was $7.2 million or $0.66 per diluted share for the three months ended March 31, 2024 as compared to $40.0 million, or $3.67 per diluted share, for the corresponding period in 2023. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of non-GAAP financial measures to its most comparable GAAP financial measure.

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various non-GAAP financial measures in this quarterly report, our quarterly earnings press release, and other public disclosures. The following GAAP financial measures have been presented on an as-adjusted basis: SG&A expenses, income from operations, other income (expense), provision for income taxes, net income, and diluted earnings per share. Each of these as-adjusted financial measures excludes the impact of certain amounts related to the LifeMD collaboration and unrealized gains on our investment in LifeMD common stock as further identified below and have not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure is included below. These non-GAAP financial measures are not intended to replace GAAP financial measures.

We use these non-GAAP financial measures internally to evaluate and manage the Company’s operations because we believe they provide useful supplemental information regarding the Company’s on-going economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.

The following tables reconcile the non-GAAP financial measures included in this report (in thousands, except per share amounts):

(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 $211.0 million and working capital of $142.4 million at March 31, 2024 as compared with $201.5 million and $131.7 million at December 31, 2023, respectively. The $9.5 million net increase in stockholders’ equity was primarily driven by net income for the three months ended March 31, 2024 of $8.3 million. The Company’s cash, cash equivalents, and investments increased from $150.0 million at December 31, 2023 to $156.4 million at March 31, 2024.

Net cash provided by operating activities decreased by $56.8 million to $7.3 million for the three months ended March 31, 2024 from $64.1 million for the three months ended March 31, 2023 primarily driven by a $31.7 million decrease in net income, a $13.6 million decrease related to changes in inventory balances, a $9.3 million decrease in income taxes, a $7.3 million decrease in prepaid expenses and other current assets, partially offset by a $6.0 million increase in accounts payable and accrued expenses We decreased our inventory purchases during the period ended March 31, 2024 to align with sales demand.

Net cash used in investing activities was $2.8 million for the three months ended March 31, 2024 as compared to $2.1 million for the three months ended March 31, 2023.

Net cash used in financing activities decreased by $24.4 million to $1.5 million for the three months ended March 31, 2024 from $25.9 million for the three months ended March 31, 2023. This decrease was primarily due to an $18.5 million decrease in cash dividends paid to stockholders, a $3.6 million decrease in repurchases of the Company's common stock, and a $2.4 million decrease in net shares repurchased for employee taxes.

In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash requirements, if any, to be funded from operating cash flow and financing activities.

From time to time the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity or debt. We have no present understandings, commitments, or agreements with respect to any material acquisitions.

On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on SOFR, from LIBOR (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $225.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to credit facilities. As of March 31, 2024, the Company had no borrowings under the credit facility or letter of credit sublimit, and was in compliance with all of its debt covenants.

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 other than strategic investments.

The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility and investment in money market securities, government and agency securities, and corporate bonds. Other than for strategic investments, its current investment policy is to maintain an investment portfolio consisting of corporate bonds and U.S. money market securities directly or through managed funds. Its cash is deposited in and invested through highly rated financial institutions in North America. Its marketable securities, purchased during 2023, 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 March 31, 2024, 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.

The Company is exposed to market risk related to price fluctuations in equity markets related to its investment in LifeMD common stock, purchased in December of 2023. If equity prices were to decrease immediately and uniformly by 10% from levels at March 31, 2024, the Company estimates that the fair value of the Company investment would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected by any significant degree by the effect of a change in market conditions on our investment.

There have been no material changes to our market risk exposure since December 31, 2023.

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 Act, as of March 31, 2024. 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 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.