Medifast Inc: Form 10-Q for the period ended Jun 30, 2024
Filed with the SEC on Aug 5, 2024 and accepted by EDGAR at Aug 5, 2024, 16:50 ET.
Management's discussion and analysis
As filed, 44,369 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 of Medifast 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®. As a physician-founded company with more than 40 years of history, OPTAVIA's lifestyle plans deliver clinically proven health benefits, utilizing scientifically developed products and a framework for habit creation reinforced by independent Coaches and community support. 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 a leader in the dynamic and changing health and wellness space. As part of this transformation, the Company entered into a collaboration with LifeMD, Inc. (Nasdaq: LFMD) (“LifeMD”) in December of 2023, and launched a significant Company-led marketing effort in May of 2024. Medifast has created a well-capitalized business that has a powerful business model, building a network of approximately 33,900 independent active earning Coaches providing consistent and effective support to customers on their weight loss journeys.
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, Making a Healthy Lifestyle Second Nature™. 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 individuals on their health and wellness journey, Medifast is transforming its business to capitalize on this opportunity. Through the Company’s collaboration with LifeMD, Inc., OPTAVIA customers now have access to all-in-one holistic solutions, whether they are not utilizing medically supported weight loss, are currently using medical weight loss options, transitioning off medications, or looking for further support after stopping taking medications.
This collaboration brings together OPTAVIA’s personalized habit-based, coach-guided approach with medical expertise from board-certified affiliated LifeMD clinicians, allowing access to weight loss medications, including GLP-1 medications, when clinically appropriate. With this collaboration, the Company and LifeMD are developing 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, outlined in further detail below. In addition to lifestyle support and a simple roadmap for habit creation, the integrated offering includes scientifically developed nutritional support solutions including a GLP-1 Nutrition Support product kit designed to help mitigate GLP-1 medication side effects, such as muscle loss. Through LifeMD, customers also have access to a medical provider and blood work, as well as prescription and insurance support.
As the medications for weight loss continue to evolve and grow, Medifast is dedicated to maintaining a relentless focus on the development of additional support products and supplements designed to meet customer needs and to make living a healthy lifestyle second nature.
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. The Coaches have impacted more than 3 million lives to date.
- OPTAVIA Community: A Community of like-minded people provide 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: Lifestyle plans with clinically proven health benefits 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 LifeMD’s board-certified affiliated clinicians and medication, such as GLP-1 medications when clinically appropriate, that support treatment plans for obesity and other health conditions.
Across these offerings, customers are aided in achieving 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 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 BC30™ probiotic 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 lives.
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 activate 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 (formerly known as Twitter), 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 for us to acquire customers. Further, in May 2024, we launched a national marketing campaign designed to drive customer acquisition and elevate brand awareness. Additional information surrounding the marketing campaign can be found in the section below titled, “Recent Initiatives.” These new acquisition channels and investments are intended to evolve the Company’s current single-channel Coach-focused business model to be one that pairs company advertising with relationship-based Coaching and the ability to access weight loss medications through our collaboration with LifeMD. Collectively, we believe these initiatives will significantly broaden OPTAVIA’s reach, advancing its mission to empower individuals on their own health journeys, and fuel positive outcomes and revenue streams. We anticipate this momentum will lay the foundation for improved performance in 2025 and beyond.
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.
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.
Macroeconomic Conditions and Competition
Certain 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.
In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations that are determined to be in the best interests of its employees, OPTAVIA Coaches and customers, such as evaluating our operational footprint or taking incremental pricing actions to offset supply chain costs and inflationary pressures. The supply chain optimization completed in the quarter ended June 30, 2024, as discussed in Item 1. Notes to Condensed Consolidated Financial Statements are examples of such actions.
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. Potential customers seeking to manage their weight have many options and can turn to online diet-oriented sites, self-directed dieting, traditional center-based competitors, and self-administered products such as prescription medications, over-the-counter medications, and supplements as well as medically supervised programs.
Beginning in Q3 2022, we began to see a downward trend in the number of active earning Coaches, driven by a decline in customers and attributable to changing social media algorithms and inflationary pressures on consumer spending. Additionally, the downward trend’s decline became sharper beginning in Q2 2023 due to the increase prevalence and adoption of GLP-1 medications and increased pressures on customer acquisition. We believe that, with continued pressures on customer acquisition, this downward trend in the number of active earning Coaches will continue in the short-term.
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 serves as another major competing factor, 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 with lifestyle changes, such as through a structured program like OPTAVIA, that include a reduced calorie diet and increased physical activity. As a result, under Medifast’s offering, access to weight loss medications becomes one important element in an overall tailored lifestyle plan that also includes Coaching, community support, nutritionally balanced meals, and exercise.
Our research shows that most of those who are interested in weight loss medications 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 nutrition and lifestyle changes.
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 continued the development of nutrition and weight-management products since our founding.
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. 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 transformation 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 include executing our new marketing campaign as well as cultivating new customers through the Company’s collaboration with LifeMD.
Through an expected investment of approximately $25 million in Company-led marketing efforts in 2024, we are committed to driving growth and enhancing brand visibility while highlighting our holistic offer. This high-profile national campaign aims to elevate OPTAVIA brand awareness, foster engagement and drive customer conversion. With a multi-phase, omnichannel approach, the campaign will introduce new consumer and Coach-facing branding and visuals, and elevate the website, social and digital experience.
We plan to ramp up our investment in the second half of 2024 and form the foundation of the Company’s strategy to return to growth, broadening and deepening our acquisition channels. This aligns with our three strategic growth pillars – robust marketing initiatives, coaching network expansion and strategic collaboration with LifeMD – to empower individuals on their journey to optimal health and wellbeing.
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 six 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 97% of our revenues for each of the three months ended June 30, 2024 and 2023.
The following tables reflect our income statements (in thousands, except percentages):
| Three months ended June 30, 2024 | 2023 | $ Change | % Change | |
|---|---|---|---|---|
| Revenue | $168,558 | $296,188 | $(127,630) | (43.1)% |
| Cost of sales | 45,120 | 85,473 | (40,353) | (47.2)% |
| Gross profit | 123,438 | 210,715 | (87,277) | (41.4)% |
| Selling, general, and administrative | 131,314 | 172,009 | (40,695) | (23.7)% |
| Income (loss) from operations | (7,876) | 38,706 | (46,582) | (120.3)% |
| Other income (expense) | ||||
| Interest income | 1,296 | 462 | 834 | 180.5% |
| Other expense | (4,070) | (51) | (4,019) | (7880.4)% |
| (2,774) | 411 | (3,185) | (774.9)% | |
| Income (loss) from operations before income taxes | (10,650) | 39,117 | (49,767) | (127.2)% |
| Provision (benefit) for income taxes | (2,496) | 8,837 | (11,333) | (128.2)% |
| Net income (loss) | $(8,154) | $30,280 | $(38,434) | (126.9)% |
| % of revenue | ||||
| Gross profit | 73.2% | 71.1% | ||
| Selling, general, and administrative costs | 77.9% | 58.1% | ||
| Income (loss) from operations | (4.7)% | 13.1% |
20
| Six months ended June 30, 2024 | 2023 | $ Change | % Change | |
|---|---|---|---|---|
| Revenue | $343,297 | $645,170 | (301,873) | (46.8)% |
| Cost of sales | 92,567 | 188,065 | (95,498) | (50.8)% |
| Gross profit | 250,730 | 457,105 | (206,375) | (45.1)% |
| Selling, general, and administrative | 250,666 | 364,887 | (114,221) | (31.3)% |
| Income from operations | 64 | 92,218 | (92,154) | (99.9)% |
| Other income | ||||
| Interest income | 2,519 | 281 | 2,238 | 796.4% |
| Other expense | (1,647) | (53) | (1,594) | (3007.5)% |
| 872 | 228 | 644 | 282.5% | |
| Income from operations before income taxes | 936 | 92,446 | (91,510) | (99.0)% |
| Provision for income taxes | 773 | 22,198 | (21,425) | (96.5)% |
| Net income | $163 | $70,248 | $(70,085) | (99.8)% |
| % of revenue | ||||
| Gross profit | 73.0% | 70.9% | ||
| Selling, general, and administrative costs | 73.0% | 56.6% | ||
| Income from operations | —% | 14.3% |
Revenue: Revenue decreased $127.6 million, or 43.1%, to $168.6 million for the three months ended June 30, 2024 from $296.2 million for the three months ended June 30, 2023. The decline in revenue for the three months ended June 30, 2024 was primarily driven by a decrease in the number of active earning OPTAVIA Coaches to 33,900 as of June 30, 2024, a 36.2% decrease from 53,100 as of June 30, 2023 and the decline in the productivity per active earning OPTAVIA Coach. The average revenue per active earning OPTAVIA Coach was $4,972 for the three months ended June 30, 2024, a 10.9% decrease compared to $5,578 for the three months ended June 30, 2023. Revenue decreased $301.9 million, or 46.8%, to $343.3 million for the six months ended June 30, 2024 from $645.2 million for the six months ended June 30, 2023. The decline in revenue for the six months ended June 30, 2024 was driven by a decrease in the number of active earning OPTAVIA Coaches, the decline in productivity per active earnings 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 average revenue per active earning OPTAVIA Coach was $4,788 for the six months ended June 30, 2024, a 17.0% decrease compared to $5,771 for the six months ended June 30, 2023. The decrease in productivity per active earning OPTAVIA Coach for the three months ended June 30, 2024 and six months ended June 30, 2024 was driven by continued pressure on customer acquisition.
Cost of sales: Cost of sales decreased $40.4 million, or 47.2%, to $45.1 million from $85.5 million for the three months ended June 30, 2024 from the corresponding period in 2023. Cost of sales decreased $95.5 million, or 50.8%, to $92.6 million from $188.1 million for the six months ended June 30, 2024. The decrease in cost of sales for the three months ended June 30, 2024 and the six months ended June 30, 2024 was primarily driven by decreased volumes, cost savings from our Fuel for the Future initiatives, and efficiencies in inventory management.
Non-GAAP adjusted cost of sales were $42.5 million for the three months ended June 30, 2024, a decrease of $42.9 million, or 50.2%, as compared to $85.5 million from the corresponding period in 2023. Non-GAAP adjusted cost of sales were $90.0 million for the six months ended June 30, 2024, a decrease of $98.1 million, or 52.2%, as compared to $188.1 million for the corresponding period in 2023. Non-GAAP adjusted cost of sales excludes expenses in connection with the Company’s restructuring of external manufacturing agreements. Refer to the “Non-GAAP Financial Measures” section below for a reconciliation of each of non-GAAP financial measure to its most comparable GAAP financial measure.
Gross profit: Gross profit decreased $87.3 million, or 41.4%, to $123.4 million from $210.7 million for the three months ended June 30, 2024 from the corresponding period in 2023. The decrease in gross profit for the three months ended June 30, 2024 was due to lower revenue. As a percentage of revenue, gross profit increased 210 basis points to 73.2% for the three months ended June 30, 2024 from 71.1% for the corresponding period in 2023. Gross profit as a percentage of revenue was positively impacted by cost savings from our Fuel for the Future initiatives and efficiencies in inventory management. For the six months ended June 30, 2024, gross profit decreased $206.4 million, or 45.1%, to $250.7 million from $457.1 million for the six months ended June 30, 2023. The decrease in gross profit for the six months ended June 30, 2024 was due to lower revenue. As a percentage of revenue, gross profit increased 210 basis points to 73.0% for the six months ended June 30, 2024 from 70.9% for the corresponding period in 2023. Gross profit as a percentage of revenue was positively impacted by cost savings from our Fuel for the Future initiatives and efficiencies in inventory management.
Non-GAAP adjusted gross profit was $126.0 million for the three months ended June 30, 2024, a decrease of $84.7 million, or 40.2%, as compared to $210.7 million from the corresponding period in 2023. Non-GAAP adjusted gross profit margin increased 370 basis points to 74.8% from 71.1% for the corresponding period in 2023. Non-GAAP adjusted gross profit was $253.3 million for the six months ended June 30, 2024, a decrease of $203.8 million, or 44.6%, as compared to $457.1 million for the corresponding period in 2023. Non-GAAP adjusted gross profit margin increased 290 basis points to 73.8% for the six months ended June 30, 2024 from 70.9% for the corresponding period in 2023. Refer to the “Non-GAAP Financial Measures” section below for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.
Selling, general, and administrative: SG&A expenses were $131.3 million for the three months ended June 30, 2024, a decrease of $40.7 million, or 23.7%, as compared to $172.0 million from the corresponding period in 2023. SG&A expenses decreased for the three months ended June 30, 2024 primarily due to decreased Coach compensation on fewer active earning Coaches and lower sales volumes, partially offset by the loss of leverage on fixed costs due to lower sales volumes and supply chain optimization costs. The Company also incurred market research and investment costs related to medically supported weight loss, costs to exit hotel commitments for our annual OPTAVIA convention in future years, reflecting a change in strategy, and costs for our Company-led customer acquisition initiatives. As a percentage of revenue, SG&A expenses were 77.9% for the three months ended June 30, 2024 as compared to 58.1% for the corresponding period in 2023. SG&A expenses as a percentage of revenue increased for the three months ended June 30, 2024 primarily reflecting the loss of leverage on fixed costs due to lower sales volumes and supply chain optimization costs. SG&A expenses included research and development costs of $1.1 million and $1.1 million for the three months ended June 30, 2024 and 2023, respectively, in connection with the development of new products and plans, and clinical research activities. SG&A expenses were $250.7 million for the six months ended June 30, 2024, a decrease of $114.2 million, or 31.3%, as compared to $364.9 million from the corresponding period in 2023. SG&A expenses decreased for the six months ended June 30, 2024 primarily due to decreased Coach compensation on fewer active earning Coaches and lower sales volumes, partially offset by the loss of leverage on fixed costs due to lower sales volumes and supply chain optimization costs. The Company also incurred costs for our Company-led customer acquisition initiatives, and market research and investment costs related to medically supported weight loss. As a percentage of revenue, SG&A expenses were 73.0% for the six months ended June 30, 2024 as compared to 56.6% for the corresponding period in 2023 primarily reflecting the loss of leverage on fixed costs due to lower sales volumes and supply chain optimization costs. SG&A expenses included research and development costs of $2.1 million and $2.1 million for the six months ended June 30, 2024 and 2023, respectively, in connection with the development of new products and plans, and clinical research activities.
Non-GAAP adjusted SG&A expenses were $113.8 million for the three months ended June 30, 2024, a decrease of $58.2 million, or 33.8%, as compared to $172.0 million from the corresponding period in 2023. Non-GAAP adjusted SG&A expenses were $231.8 million for the six months ended June 30, 2024, a decrease of $133.1 million, or 36.5%, as compared to $364.9 million from the corresponding period in 2023. Non-GAAP adjusted SG&A excludes expenses related to the Company’s supply chain optimization costs, costs to exit hotel commitments for our annual OPTAVIA convention in future years, reflecting a change in strategy, and costs for its collaboration with LifeMD. Refer to “Non-GAAP Financial Measures” section below for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.
Income (loss) from operations: For the three months ended June 30, 2024, the Company’s loss from operations was $7.9 million, a $46.6 million decrease from the $38.7 million income from operations for the corresponding period in 2023 primarily as a result of decreased gross profit partially offset by decreased SG&A expenses. For the three months ended June 30, 2024 the Company’s loss from operations as a percentage of revenue was 4.7% as compared to the Company’s income from operations as a percentage of revenue of 13.1% for the corresponding period in 2023, due to the factors described above impacting SG&A expenses, partially offset by the factors impacting gross profit. For the six months ended June 30, 2024, income from operations decreased $92.2 million to less than $0.1 million from $92.2 million for the corresponding period in 2023 primarily as a result of the factors described above impacting SG&A expenses, partially offset by the factors impacting gross profit. Income from operations as a percentage of revenue decreased to less than 0.1% for the six months ended June 30, 2024 from 14.3% for the corresponding period in 2023 due to the factors above impacting SG&A expenses, partially offset by the factors impacting gross profit.
Non-GAAP adjusted income from operations was $12.2 million for the three months ended June 30, 2024, a decrease of $26.5 million, or 68.4%, as compared to $38.7 million from the corresponding period in 2023. Non-GAAP adjusted income from operations as a percentage of revenue was 7.3% for the three months ended June 30, 2024, a decrease of 580 basis points from 13.1% for the corresponding period in the prior year Non-GAAP adjusted income from operations was $21.5 million for the six months ended June 30, 2024, a decrease of $70.7 million, or 76.7%, as compared to $92.2 million from the corresponding period in 2023. Non-GAAP adjusted income from operations as a percentage of revenue was 6.3% for the six months ended June 30, 2024, a decrease of 800 basis points from 14.3% for the corresponding period in the prior year. Refer to “Non-GAAP Financial Measures” section below for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.
Provision (benefit) for income taxes: For the three months ended June 30, 2024, the Company recorded $2.5 million in income tax benefit, an effective tax rate of 23.4%, as compared to $8.8 million in income tax expense, an effective tax rate of 22.6%, for the three months ended June 30, 2023. The change in the effective tax rate for the three months ended June 30, 2024 was primarily driven by the net loss position in 2024 and the corresponding rate impact from the tax benefit for research and development tax credits, partially offset by the rate impact from the limitation for executive compensation. For the six months ended June 30, 2024, the Company recorded $0.8 million in income tax expense, an effective tax rate of 82.6%, as compared to $22.2 million in income tax expense, an effective tax rate of 24.0%, for the six months ended June 30, 2023. The increase in the effective tax rate for the six months ended June 30, 2024 was primarily driven by the impact of the tax shortfall for stock compensation, which was magnified by the near break-even pre-tax income position.
Non-GAAP adjusted income tax provision was $3.6 million for the three months ended June 30, 2024, an effective tax rate of 26.2% as compared to 22.6% for the corresponding period in 2023. Non-GAAP adjusted income tax provision was $6.6 million for the six months ended June 30, 2024, an effective tax rate of 27.2%, as compared to 24.0% for the corresponding period in 2023. Refer to “Non-GAAP Financial Measures” section below for a reconciliation of each non-GAAP financial measure to its most comparable GAAP financial measure.
Net income (loss): Net loss was $8.2 million, or $0.75 per diluted share for the three months ended June 30, 2024 as compared to net income of $30.3 million, or $2.77 per diluted share, for the three months ended June 30, 2023. Net income was $0.2 million, or $0.01 per diluted share for the six months ended June 30, 2024, as compared to $70.2 million, or $6.43 per diluted share for the six months ended June 30, 2023. The period-over-period changes were driven by the factors described above.
Non-GAAP adjusted net income was $10.1 million or $0.92 per diluted share for the three months ended June 30, 2024 as compared to $2.77 per diluted share for the corresponding period in 2023. Non-GAAP adjusted net income was $17.5 million or $1.60 per diluted share for the six months ended June 30, 2024 as compared to $6.43 per diluted share for the corresponding period in 2023. Refer to “Non-GAAP Financial Measures” section below for a reconciliation of each non-GAAP financial measure 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: Cost of sales, Gross profit, SG&A expenses, income (loss) from operations, other income (expense), provision (benefit) for income taxes, net income (loss), and diluted earnings (loss) per share. Each of these as-adjusted financial measures excludes the impact of certain amounts related to supply chain optimization and restructuring of external manufacturing agreements, costs to exit hotel commitments for our OPTAVIA convention in future years, unrealized gains or losses on our investment in LifeMD common stock, and the LifeMD collaboration 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):
| Three Months Ended June 30, 2024 GAAP(1) | Supply Chain Optimization and Restructuring of External Manufacturing Agreements(2) | OPTAVIA Convention Cancellation(2) | Unrealized Loss on Investment in LifeMD Common Stock(2) | LifeMD Prepaid Services Amortization(2) | Non-GAAP(2) | |
|---|---|---|---|---|---|---|
| Cost of sales | $45,120 | $(2,579) | $— | $— | $— | $42,541 |
| Gross profit | 123,438 | 2,579 | — | — | — | 126,017 |
| Selling, general, and administrative | 131,314 | (12,502) | (3,000) | — | (2,021) | 113,791 |
| Income (loss) from operations | (7,876) | 15,081 | 3,000 | — | 2,021 | 12,226 |
| Other income (expense) | (2,774) | — | — | 4,188 | — | 1,414 |
| Provision (benefit) for income taxes | (2,496) | 3,770 | 750 | 1,047 | 505 | 3,576 |
| Net income (loss) | (8,154) | 11,311 | 2,250 | 3,141 | 1,516 | 10,064 |
| Diluted earnings (loss) per share | (0.75) | 1.03 | 0.21 | 0.29 | 0.14 | 0.92 |
(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.
(2) The weighted-average diluted shares outstanding used in the calculation of these non-GAAP financial measures uses 10,962 thousand shares under the treasury stock method.
| Three Months Ended June 30, 2023 GAAP | Supply Chain Optimization and Restructuring of External Manufacturing Agreements | OPTAVIA Convention Cancellation | Unrealized Loss on Investment in LifeMD Common Stock | LifeMD Prepaid Services Amortization | Non-GAAP | |
|---|---|---|---|---|---|---|
| Cost of sales | $85,473 | $— | $— | $— | $— | $85,473 |
| Gross profit | 210,715 | — | — | — | — | 210,715 |
| Selling, general, and administrative | 172,009 | — | — | — | — | 172,009 |
| Income from operations | 38,706 | — | — | — | — | 38,706 |
| Other income | 411 | — | — | — | — | 411 |
| Provision for income taxes | 8,837 | — | — | — | — | 8,837 |
| Net income | 30,280 | — | — | — | — | 30,280 |
| Diluted earnings per share(1) | 2.77 | — | — | — | — | 2.77 |
(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.
| Six Months Ended June 30, 2024 GAAP | Supply Chain Optimization and Restructuring of External Manufacturing Agreements | OPTAVIA Convention Cancellation | Unrealized Loss on Investment in LifeMD Common Stock | LifeMD Prepaid Services Amortization | Non-GAAP | |
|---|---|---|---|---|---|---|
| Cost of sales | $92,567 | $(2,579) | $— | $— | $— | $89,988 |
| Gross profit | 250,730 | 2,579 | — | — | — | 253,309 |
| Selling, general, and administrative | 250,666 | (12,502) | (3,000) | (3,348) | 231,816 | |
| Income from operations | 64 | 15,081 | 3,000 | — | 3,348 | 21,493 |
| Other income | 872 | — | — | 1,751 | — | 2,623 |
| Provision for income taxes | 773 | 3,770 | 750 | 438 | 837 | 6,568 |
| Net income | 163 | 11,311 | 2,250 | 1,313 | 2,511 | 17,548 |
| Diluted earnings per share(1) | 0.01 | 1.03 | 0.21 | 0.12 | 0.23 | 1.60 |
(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.
| Six Months Ended June 30, 2023 GAAP | Supply Chain Optimization and Restructuring of External Manufacturing Agreements | OPTAVIA Convention Cancellation | Unrealized Loss on Investment in LifeMD Common Stock | LifeMD Prepaid Services Amortization | Non-GAAP | |
|---|---|---|---|---|---|---|
| Cost of sales | $188,065 | $— | $— | $— | $— | $188,065 |
| Gross profit | 457,105 | — | — | — | — | 457,105 |
| Selling, general, and administrative | 364,887 | — | — | — | — | 364,887 |
| Income from operations | 92,218 | — | — | — | — | 92,218 |
| Other income | 228 | — | — | — | — | 228 |
| Provision for income taxes | 22,198 | — | — | — | — | 22,198 |
| Net income | 70,248 | — | — | — | — | 70,248 |
| Diluted earnings per share(1) | 6.43 | — | — | — | — | 6.43 |
(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 $205.3 million and working capital of $149.1 million at June 30, 2024 as compared with $201.5 million and $131.7 million at December 31, 2023, respectively. The $3.8 million net increase in stockholders’ equity was primarily driven by a $4.6 million increase in share-based compensation partially offset by $0.8 million in net shares repurchased for employee taxes. The Company’s cash, cash equivalents and investment securities increased from $150.0 million at December 31, 2023 to $163.5 million at June 30, 2024.
Net cash provided by operating activities decreased by $86.9 million to $20.4 million for the six months ended June 30, 2024 from $107.2 million for the six months ended June 30, 2023. This was primarily driven by a $57.2 million decrease in net income excluding non-cash charges, a $35.0 million decrease related to a smaller inventory reduction in the period ending June 30, 2024 to align with sales demand, and a $5.5 million decrease resulting from higher prepaid expenses and other current assets, partially offset by a $12.4 million increase resulting from a smaller reduction in accounts payable and accrued expenses during the period.
Net cash used in investing activities was $5.3 million for the six months ended June 30, 2024 as compared to $3.9 million for the six months ended June 30, 2023. The increase was primarily driven by a $1.5 million increase of net purchases of investment securities during the six months ended June 30, 2024.
Net cash used in financing activities decreased by $42.2 million to $1.5 million for the six months ended June 30, 2024 from $43.7 million for the six months ended June 30, 2023. This decrease was primarily due to a $36.3 million decrease in cash dividends paid to stockholders, a $3.6 million decrease in stock repurchases, 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 in both the short term and the long term, 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 June 30, 2024, the Company had no borrowings under the credit facility and was in compliance with all of its debt covenants.
Market risk
As filed, 2,094 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 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 June 30, 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. Additionally, 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 June 30, 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.
Controls and procedures
As filed, 1,293 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
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 amended, as of June 30, 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 June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2024-06-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2024-04-01 to 2024-06-30 | $168.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months2024-01-01 to 2024-06-30 | $343.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months2024-04-01 to 2024-06-30 | $45.1m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months2024-01-01 to 2024-06-30 | $92.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months2024-04-01 to 2024-06-30 | $123.4m | us-gaap:GrossProfit |
| Gross profit | 6 months2024-01-01 to 2024-06-30 | $250.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months2024-04-01 to 2024-06-30 | $131.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months2024-01-01 to 2024-06-30 | $250.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months2024-04-01 to 2024-06-30 | −$7.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months2024-01-01 to 2024-06-30 | $64.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months2024-04-01 to 2024-06-30 | −$2.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months2024-01-01 to 2024-06-30 | $773.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2024-04-01 to 2024-06-30 | −$8.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months2024-01-01 to 2024-06-30 | $163.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months2024-04-01 to 2024-06-30 | −$0.75 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months2024-01-01 to 2024-06-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months2024-04-01 to 2024-06-30 | −$0.75 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months2024-01-01 to 2024-06-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months2024-04-01 to 2024-06-30 | 10,937,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months2024-01-01 to 2024-06-30 | 10,967,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months2024-01-01 to 2024-06-30 | $20.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months2024-01-01 to 2024-06-30 | $3.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months2024-01-01 to 2024-06-30 | $714.0k | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months2024-01-01 to 2024-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2024-06-30 | $108.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2024-06-30 | $224.3m | us-gaap:AssetsCurrent |
| Total assets | At period end2024-06-30 | $293.5m | us-gaap:Assets |
| Current liabilities | At period end2024-06-30 | $75.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2024-06-30 | $88.2m | us-gaap:Liabilities |
| Shareholders' equity | At period end2024-06-30 | $205.3m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001628280-24-034791. Last ingested by Listed: Oct 31, 2026, 14:35 ET. Listed shows no prices and gives no investment advice.