med-20230930

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, 2023

o 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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

MED

New York Stock Exchange

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 o

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 o

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	☐
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. o

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

Yes o 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 23, 2023 was 10,892,602.

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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 , 2023 and 2022			2

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30 , 2023 and 2022			3

Condensed Consolidated Balance Sheets (unaudited) as of September 30 , 2023 and December 31, 2022			4

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2023 and 2022			5

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2023 and 2022			6

Notes to Condensed Consolidated Financial Statements (unaudited)			8

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			15

Item 3 – Quantitative and Qualitative Disclosures about Market Risk			22

Item 4 – Controls and Procedures			23

Part II – Other Information

Item 1 – Legal Proceedings			24

Item 1A – Risk Factors			24

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			24

Item 6 – Exhibits			25

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(U.S. dollars in thousands, except per share amounts & dividend data)


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022

Revenue	$	235,869	$	390,398	$	881,039	$	1,261,332
Cost of sales	58,492		107,549		246,558		354,515
Gross profit	177,377		282,849		634,481		906,817

Selling, general, and administrative	151,868		234,693		516,755		754,610

Income from operations	25,509		48,156		117,726		152,207

Other income (expense)
Interest income (expense)	1,033		(261)		1,314		(519)
Other income (expense)	7		(17)		(45)		(37)
	1,040		(278)		1,269		(556)

Income from operations before income taxes	26,549		47,878		118,995		151,651

Provision for income taxes	3,418		11,723		25,615		34,601

Net income	$	23,131	$	36,155	$	93,380	$	117,050

Earnings per share - basic	$	2.12	$	3.30	$	8.58	$	10.37

Earnings per share - diluted	$	2.12	$	3.27	$	8.55	$	10.30

Weighted average shares outstanding
Basic	10,892		10,964		10,881		11,290
Diluted	10,933		11,042		10,925		11,369

Cash dividends declared per share	$	1.65	$	1.64	$	4.95	$	4.92

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(U.S. dollars in thousands)


	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022

Net income	$	23,131	$	36,155	$	93,380	$	117,050

Other comprehensive income, net of tax:
Foreign currency translation	27		123		125		300
Unrealized losses on investment securities	(9)		—		(9)		(21)
	18		123		116		279

Comprehensive income	$	23,149	$	36,278	$	93,496	$	117,329

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(U.S. dollars in thousands, except par value)


	September 30, 2023		December 31, 2022

ASSETS
Current Assets
Cash and cash equivalents	$	112,751	$	87,691
Investment securities	45,009		—
Inventories	58,227		118,856

Prepaid expenses and other current assets	8,289		16,237
Total current assets	224,276		222,784

Property, plant and equipment - net of accumulated depreciation	53,484		57,185
Right-of-use assets	15,681		18,460
Other assets	15,753		12,456
Deferred tax assets	10,825		5,328


TOTAL ASSETS	$	320,019	$	316,213

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	103,223	$	134,690
Income taxes payable	1,417		428
Current lease obligations	5,472		5,776
Total current liabilities	110,112		140,894

Lease obligations, net of current lease obligations	16,872		20,275


Total liabilities	126,984		161,169

Stockholders' Equity
Common stock, par value $0.001 per share: 20,000 shares authorized;
10,892 and 10,928 issued and 10,892 and 10,873 outstanding
at September 30, 2023 and December 31, 2022, respectively	11		11
Additional paid-in capital	24,107		21,555
Accumulated other comprehensive income	141		24
Retained earnings	168,776		139,852
Less: treasury stock at cost, 0 and 54 shares at September 30, 2023 and December 31, 2022, respectively	—		(6,398)
Total stockholders' equity	193,035		155,044

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	320,019	$	316,213

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollar in thousands)


	Nine months ended September 30,
	2023		2022

Operating Activities
Net income	$	93,380	$	117,050
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization	9,754		8,026
Non-cash lease expense	3,532		4,740
Share-based compensation	5,795		8,103

Loss on sale or disposal of property, plant and equipment	622		—
Amortization of premium on investment securities	—		14
Deferred income taxes	(5,497)		(1,746)

Change in operating assets and liabilities:
Inventories	60,629		34,764

Prepaid expenses and other current assets	7,948		1,889
Other assets	(4,674)		(8,545)
Accounts payable and accrued expenses	(35,343)		(22,259)
Income taxes payable	989		795
Net cash flow provided by operating activities	137,135		142,831

Investing Activities
Sale and maturities of investment securities	—		5,267
Purchase of investment securities	(44,779)		—
Purchase of property and equipment	(5,537)		(7,617)
Net cash flow used in investing activities	(50,316)		(2,350)

Financing Activities


Options exercised by directors	105		—
Net shares repurchased for employee taxes	(3,348)		(1,504)
Cash dividends paid to stockholders	(55,039)		(53,698)
Stock repurchases	(3,602)		(120,048)
Net cash flow used in financing activities	(61,884)		(175,250)

Foreign currency impact	125		296

Increase (Decrease) in cash and cash equivalents	25,060		(34,473)
Cash and cash equivalents - beginning of the period	87,691		104,183
Cash and cash equivalents - end of period	$	112,751	$	69,710

Supplemental disclosure of cash flow information:
Income taxes paid	$	30,169	$	33,906
Dividends declared included in accounts payable	$	19,184	$	19,395

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

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MEDIFAST, INC. AND SUBSIDIARIES

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

(U.S. dollars in thousands)


	Nine months ended September 30, 2023
	Number of Shares Issued	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock		Total

Balance, December 31, 2022	10,928	$	11	$	21,555	$	24	$	139,852	$	(6,398)	$	155,044
Net income	—	—		—		—		39,968		—		39,968
Share-based compensation	69	—		606		—		—		—		606
Options exercised by directors	4	—		105		—		—		—		105
Net shares repurchased for employee taxes	(30)	—		(3,236)		—		—		—		(3,236)
Treasury stock from stock repurchases	—	—		—		—		—		(3,602)		(3,602)
Treasury stock retired from stock repurchases	(84)	—		—		—		(10,000)		10,000		—
Other comprehensive income	—	—		—		9		—		—		9
Cash dividends declared to stockholders	—	—		—		—		(17,994)		—		(17,994)

Balance, March 31, 2023	10,887	$	11	$	19,030	$	33	$	151,826	$	—	$	170,900
Net income	—	—		—		—		30,280		—		30,280
Share-based compensation	2	—		2,514		—		—		—		2,514
Net shares repurchased for employee taxes	—	—		(2)		—		—		—		(2)
Other comprehensive income	—	—		—		90		—		—		90
Cash dividends declared to stockholders	—	—		—		—		(18,221)		—		(18,221)

Balance, June 30, 2023	10,889	$	11	$	21,542	$	123	$	163,885	$	—	$	185,561
Net income	—	—		—		—		23,131		—		23,131
Share-based compensation	4	—		2,675		—		—		—		2,675
Net shares repurchased for employee taxes	(1)	—		(110)		—		—		—		(110)
Other comprehensive income	—	—		—		18		—		—		18
Cash dividends declared to stockholders	—	—		—		—		(18,240)		—		(18,240)

Balance, September 30, 2023	10,892	$	11	$	24,107	$	141	$	168,776	$	—	$	193,035

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

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	Nine months ended September 30, 2022
	Number of Shares Issued	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock		Total

Balance, December 31, 2021	11,594	$	12	$	12,018	$	111	$	190,333	$	—	$	202,474
Net income	—	—		—		—		41,781		—		41,781
Share-based compensation	18	—		2,275		—		—		—		2,275
Net shares repurchased for employee taxes	(8)	—		(1,459)		—		—		—		(1,459)
Treasury stock from stock repurchases	—	—		—		—		—		(10,000)		(10,000)
Treasury stock retired from stock repurchases	(51)	—		—		—		(10,000)		10,000		—
Other comprehensive income	—	—		—		16		—		—		16
Cash dividends declared to stockholders	—	—		—		—		(19,063)		—		(19,063)

Balance, March 31, 2022	11,553	$	12	$	12,834	$	127	$	203,051	$	—	$	216,024
Net income	—	—		—		—		39,113		—		39,113
Share-based compensation	1	—		2,865		—		—		—		2,865
Net shares repurchased for employee taxes	—	—		(20)		—		—		—		(20)
Treasury stock from stock repurchases	—	—		—		—		—		(90,038)		(90,038)
Treasury stock retired from stock repurchases	(535)	(1)		—		—		(90,038)		90,038		(1)
Stock Repurchases, not yet settled	—	—		(15,679)		—		(4,331)		—		(20,010)
Other comprehensive income	—	—		—		141		—		—		141
Cash dividends declared to stockholders	—	—		—		—		(18,598)		—		(18,598)

Balance, June 30, 2022	11,019	$	11	$	—	$	268	$	129,197	$	—	$	129,476
Net income	—	—		—		—		36,155		—		36,155
Share-based compensation	1	—		2,963		—		—		—		2,963
Net shares repurchased for employee taxes	—	—		(25)		—		—		—		(25)
Treasury stock from stock repurchases	—	—		—		—		—		(20,010)		(20,010)
Treasury stock retired from stock repurchases	(91)	—		—		—		(20,010)		20,010		—
Settlement of accelerated share repurchase agreement	—	—		15,679		—		4,331		—		20,010
Other comprehensive income	—	—		—		123		—		—		123
Cash dividends declared to stockholders	—	—		—		—		(18,170)		—		(18,170)

Balance, September 30, 2022	10,929	$	11	$	18,617	$	391	$	131,503	$	—	$	150,522

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

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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 (“Medifast,” 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 notes 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, 2022 has been derived from the 2022 audited consolidated financial statements at that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”).

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2023. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the 2022 Form 10-K.

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

Recently Issued Accounting Pronouncements - The Company has not adopted any new accounting standards during the nine months ended September 30, 2023. There are no recently issued accounting pronouncements that are expected to have a material effect on the Company’s financial position, results of operations, cash flows, or disclosures.

2. INVENTORIES

Inventories consist principally of raw materials, packaging, non-food finished goods and finished packaged meal replacements held in the Company’s warehouses and outsourced distribution centers. Inventories are 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 inventories for unsalable or obsolete inventories.

Inventories consisted of the following (in thousands):


	September 30, 2023		December 31, 2022

Raw materials	$	8,491	$	12,670
Packaging	2,269		3,611
Non-food finished goods	4,426		8,738
Finished goods	49,558		97,675
Reserve for obsolete inventory	(6,517)		(3,838)
Total	$	58,227	$	118,856

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3. EARNINGS 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,
	2023		2022		2023		2022

Numerator:
Net income	$	23,131	$	36,155	$	93,380	$	117,050

Denominator:
Weighted average shares of common stock outstanding	10,892		10,964		10,881		11,290
Effect of dilutive common stock equivalents	41		78		44		79
Weighted average shares of common stock outstanding	10,933		11,042		10,925		11,369

Earnings per share - basic	$	2.12	$	3.30	$	8.58	$	10.37

Earnings per share - diluted	$	2.12	$	3.27	$	8.55	$	10.30

The calculation of diluted EPS excluded 13 thousand and 10 thousand antidilutive restricted stock awards for the three months ended September 30, 2023 and 2022, respectively, and 15 thousand and 3 thousand antidilutive restricted stock awards for the nine months ended September 30, 2023 and 2022, respectively. EPS is computed independently for each of the periods presented above, and accordingly, the sum of the quarterly earnings per common share may not equal the year-to-date total computed.

4. SHARE-BASED COMPENSATION

Stock Options

The Company has issued non-qualified and incentive stock options to employees and non-employee 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, 2023 generally vested over a period of 3 years and expire 10 years from the date of grant. The exercise price of these options ranges from $26.52 to $66.68. Due to the Company’s lack of option exercise history on the date of grant, 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 dividend yield is computed as the annualized dividend rate at the grant date divided by the strike price of the stock option. For the nine months ended September 30, 2023 and 2022, the Company did not grant stock options.

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The following table is a summary of our stock option activity (in thousands, except per share data):


	Nine months ended September 30,
	2023			2022
	Awards	Weighted-Average Exercise Price		Awards	Weighted-Average Exercise Price

Outstanding at beginning of period	33	$	54.98	33	$	54.98
Exercised	(4)	27.18		—	—
Outstanding at end of the period	29	$	58.65	33	$	54.98
Exercisable at end of the period	29	$	58.65	28	$	52.76

As of September 30, 2023, the weighted-average remaining contractual life for both the outstanding stock options and exercisable stock options was 3.8 years with an aggregate intrinsic value of $0.5 million. The compensation expense calculated under the fair value method for the nine months ended September 30, 2023 was less than $0.1 million and was fully recognized during the period. For the nine months ended September 30, 2023, the Company received $0.1 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the nine months ended September 30, 2023 was $0.3 million.

Restricted Stock

The Company has issued restricted stock to employees and non-employee directors generally with vesting terms up to 5 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 (in thousands, except per share data):


	Nine months ended September 30,
	2023			2022
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value

Outstanding at beginning of period	60	$	188.11	44	$	183.51
Granted	86	97.96		38	176.60
Vested	(25)	169.46		(19)	156.16
Forfeited	(5)	142.11		(1)	186.53
Outstanding at end of the period	116	$	127.57	62	$	187.83

The Company withheld approximately 10 thousand shares and 8 thousand shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock for the nine months ended September 30, 2023 and 2022, respectively. The total fair value of restricted stock awards vested during the nine months ended September 30, 2023 and 2022 was $2.6 million and $3.4 million, respectively.

Market and Performance-based Share Awards

The Company has issued market and performance-based share awards to certain key executives who were granted deferred shares and may earn between 0% and 250% of the target number depending upon both the Company’s total stockholder return (“TSR”) and the Company’s performance against predetermined performance goals over a three-year performance period. Market and performance-based share awards that are tied to the Company’s TSR are valued using the Monte Carlo method and are recognized ratably as expense over the award’s performance period. The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date of grant adjusted by expected level of achievement over the performance period. Expense for performance-based share awards is amortized ratably over the performance period. In the event that management determines that the Company will not reach the lower threshold of the predetermined performance goals established in the grant agreement, any previously recognized expense is reversed in the period in which such a determination is made. Management determined that the market and performance-based share awards granted in 2022 would

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not reach the lower threshold of the predetermined performance goal resulting in a $1.4 million decrease in the Company’s share-based compensation expense for the nine months ended September 30, 2023.

The Company withheld approximately 22 thousand shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the issuance of shares of market and performance-based share awards for the nine months ended September 30, 2023. No market and performance-based share awards vested and no shares were withheld to cover minimum tax liability withholding obligations for the nine months ended September 30, 2022. The total fair value of market and performance-based share awards issued during the nine months ended September 30, 2023 and 2022 was $5.7 million and $0, respectively.

Share-based compensation expense for all types of awards granted is recorded in selling, general, and administrative expense in the accompanying Condensed Consolidated Statements of Income. The total expense during the three months ended September 30, 2023 and 2022 as follows (in thousands):


	Three months ended September 30,
	2023			2022
	Shares	Share-Based Compensation Expense		Shares	Share-Based Compensation Expense
Options and restricted stock	145	$	1,558	90	$	1,392
Market and performance-based share awards granted in 2023	47	487		—	—
Market and performance-based share awards granted in 2022	24	—		25	438
Performance-based share awards granted in 2021	14	620		15	654
Performance-based share awards granted in 2020	28	10		26	479
Total share-based compensation	258	$	2,675	156	$	2,963

The total expense during the nine months ended September 30, 2023 and 2022 as follows (in thousands):


	Nine months ended September 30,
	2023			2022
	Shares	Share-Based Compensation Expense		Shares	Share-Based Compensation Expense
Options and restricted stock	145	$	4,426	90	$	3,789

SEC Form 10-Q filed by MEDIFAST INC