MEDIFAST INC - Quarter Report: 2008 June (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended June 30, 2008
OR
|
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 0-23016
MEDIFAST,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
13-3714405
|
|
(State
or other jurisdiction
of
organization)
|
|
(I.R.S.
employer
Identification
no.)
|
11445
Cronhill Drive
Owings
Mills, MD 21117
Telephone
Number (410) 581-8042
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
Accelerated
filer x Non-accelerated
filer 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.
|
Class
|
|
Outstanding at
August 7, 2008
|
|
Common
stock, $.001 par value per share
|
|
13,848,876
shares
|
Index
|
Financial
Information:
|
|
|
Condensed
Consolidated Balance Sheets – June 30, 2008 (unaudited) and December
31, 2007 (audited)
|
3
|
|
Condensed
Consolidated Statements of Income – Three and Six Months Ended June 30,
2008 and 2007 (unaudited)
|
4
|
|
Condensed
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2008 and
2007 (unaudited)
|
5
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
6
|
|
Management
Discussion and Analysis of Financial Condition And Results of
Operations
|
12
|
|
Part
II
|
|
|
Exhibits
|
19
|
|
EX
31.1
|
|
|
EX
32.1
|
2
MEDIFAST,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
June 30, 2008
|
December 31, 2007
|
||||||
|
(Unaudited)
|
(Audited)
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,046,000
|
$
|
2,195,000
|
|||
|
Accounts
receivable-net of allowance for doubtful accounts of
$100,000
|
474,000
|
493,000
|
|||||
|
Inventory
|
11,037,000
|
9,181,000
|
|||||
|
Investment
securities
|
1,407,000
|
1,439,000
|
|||||
|
Deferred
compensation
|
824,000
|
814,000
|
|||||
|
Prepaid
expenses and other current assets
|
3,074,000
|
2,727,000
|
|||||
|
Prepaid
income tax
|
987,000
|
-
|
|||||
|
Note
receivable - current
|
180,000
|
180,000
|
|||||
|
Deferred
tax asset
|
100,000
|
100,000
|
|||||
|
Total
Current Assets
|
20,129,000
|
17,129,000
|
|||||
|
Property,
plant and equipment - net
|
20,260,000
|
17,031,000
|
|||||
|
Trademarks
and intangibles - net
|
6,432,000
|
7,356,000
|
|||||
|
Deferred
tax asset, net of current portion
|
897,000
|
897,000
|
|||||
|
Note
receivable, net of current portion
|
1,147,000
|
1,212,000
|
|||||
|
Other
assets
|
350,000
|
99,000
|
|||||
|
|
|||||||
|
TOTAL
ASSETS
|
$
|
49,215,000
|
$
|
43,724,000
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
6,309,000
|
$
|
4,279,000
|
|||
|
Income
taxes payable
|
-
|
592,000
|
|||||
|
Line
of credit
|
2,702,000
|
1,599,000
|
|||||
|
Current
maturities of long-term debt
|
257,000
|
264,000
|
|||||
|
Total
Current Liabilities
|
9,268,000
|
6,734,000
|
|||||
|
Long-term
debt, net of current portion
|
4,442,000
|
4,570,000
|
|||||
|
Total
Liabilities
|
13,710,000
|
11,304,000
|
|||||
|
Stockholders'
Equity:
|
|||||||
|
Common
stock; par value $.001 per share; 20,000,000 authorized; 13,848,876
and
13,814,098 shares issued and outstanding, respectively
|
14,000
|
14,000
|
|||||
|
Additional
paid-in capital
|
27,273,000
|
26,953,000
|
|||||
|
Accumulated
other comprehensive income
|
159,000
|
321,000
|
|||||
|
Retained
Earnings
|
12,755,000
|
9,818,000
|
|||||
|
40,201,000
|
37,106,000
|
||||||
|
Less:
cost of 286,478 and 270,534 shares of common stock in
treasury
|
(2,013,000
|
)
|
(1,971,000
|
)
|
|||
|
Less:
unearned compensation
|
(2,683,000
|
)
|
(2,715,000
|
)
|
|||
|
Total
Stockholders' Equity
|
35,505,000
|
32,420,000
|
|||||
|
TOTAL
LIABILITIES & STOCKHOLDERS' EQUITY
|
$
|
49,215,000
|
$
|
43,724,000
|
|||
See
accompanying notes to condensed consolidated financial statements.
3
MEDIFAST,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Revenue
|
$
|
27,537,000
|
$
|
22,041,000
|
$
|
52,706,000
|
$
|
42,130,000
|
|||||
|
Cost
of sales
|
6,677,000
|
5,363,000
|
12,777,000
|
10,421,000
|
|||||||||
|
Gross
Profit
|
20,860,000
|
16,678,000
|
39,929,000
|
31,709,000
|
|||||||||
|
Selling,
general, and administration
|
18,451,000
|
15,233,000
|
35,457,000
|
28,350,000
|
|||||||||
|
|
|
|
|
||||||||||
|
Income
from operations
|
2,409,000
|
1,445,000
|
4,472,000
|
3,359,000
|
|||||||||
|
Other
income/(expense)
|
|||||||||||||
|
Interest
expense
|
(87,000
|
)
|
(102,000
|
)
|
(191,000
|
)
|
(197,000
|
)
|
|||||
|
Interest
income
|
43,000
|
39,000
|
82,000
|
72,000
|
|||||||||
|
Other
income/expense
|
(41,000
|
)
|
37,000
|
(6,000
|
)
|
88,000
|
|||||||
|
(85,000
|
)
|
(26,000
|
)
|
(115,000
|
)
|
(37,000
|
)
|
||||||
|
Income
before provision for income taxes
|
2,324,000
|
1,419,000
|
4,357,000
|
3,322,000
|
|||||||||
|
Provision
for income tax (expense)
|
(752,000
|
)
|
(510,000
|
)
|
(1,420,000
|
)
|
(1,040,000
|
)
|
|||||
|
Net
income
|
$
|
1,572,000
|
$
|
909,000
|
$
|
2,937,000
|
$
|
2,282,000
|
|||||
|
Basic
earnings per share
|
$
|
0.12
|
$
|
0.07
|
$
|
0.22
|
$
|
0.18
|
|||||
|
Diluted
earnings per share
|
$
|
0.11
|
$
|
0.07
|
$
|
0.21
|
$
|
0.17
|
|||||
|
Weighted
average shares outstanding -
|
|||||||||||||
|
Basic
|
13,138,202
|
12,933,559
|
13,119,497
|
12,917,400
|
|||||||||
|
Diluted
|
13,791,623
|
13,699,721
|
13,772,918
|
13,683,562
|
|||||||||
See
accompanying notes to condensed consolidated financial statements.
4
MEDIFAST,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Six
Months Ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
(Unaudited)
|
(Unaudited)
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
income
|
$
|
2,937,000
|
$
|
2,282,000
|
|||
|
Adjustments
to reconcile net income to net cash provided by operating activities
from
continuing operations:
|
|||||||
|
Depreciation
and amortization
|
2,243,000
|
1,655,000
|
|||||
|
Realized
loss on investment securities
|
38,000
|
71,000
|
|||||
|
Common
stock issued for services
|
70,000
|
21,000
|
|||||
|
Stock
options vested during period
|
-
|
77,000
|
|||||
|
Stock
options cancelled during period
|
(77,000
|
)
|
-
|
||||
|
|
- |
(30,000
|
)
|
||||
|
Vesting
of unearned compensation
|
296,000
|
328,000
|
|||||
|
Net
change in other comprehensive (loss) income
|
(162,000
|
)
|
52,000
|
||||
|
Deferred
income taxes
|
-
|
(175,000
|
)
|
||||
|
|
|||||||
|
Changes
in assets and liabilities:
|
|||||||
|
Decrease
in accounts receivable
|
18,000
|
32,000
|
|||||
|
(Increase)
in inventory
|
(1,857,000
|
)
|
(228,000
|
)
|
|||
|
(Increase)
in prepaid expenses & other current assets
|
(347,000
|
)
|
(702,000
|
)
|
|||
|
(Increase)
in deferred compensation
|
(11,000
|
)
|
(163,000
|
)
|
|||
|
(Increase)
in prepaid taxes
|
(987,000
|
)
|
-
|
||||
|
(Increase)
in other assets
|
(251,000
|
)
|
(32,000
|
)
|
|||
|
Increase
in accounts payable and accrued expenses
|
2,033,000
|
1,272,000
|
|||||
|
(Decrease)
in income taxes payable
|
(592,000
|
)
|
(535,000
|
)
|
|||
|
Net
cash provided by operating activities
|
3,351,000
|
3,925,000
|
|||||
|
Cash
Flow from Investing Activities:
|
|||||||
|
(Purchase)
of investment securities, net
|
(4,000
|
)
|
(102,000
|
)
|
|||
|
(Purchase)
of property and equipment
|
(4,546,000
|
)
|
(1,856,000
|
)
|
|||
|
(Purchase)
of intangible assets
|
-
|
(283,000
|
)
|
||||
|
Net
cash (used in) investing activities
|
(4,550,000
|
)
|
(2,241,000
|
)
|
|||
|
Cash
Flow from Financing Activities:
|
|||||||
|
Issuance
of common stock, options and warrants
|
17,000
|
24,000
|
|||||
|
(Repayment)
of long-term debt, net
|
(136,000
|
)
|
(314,000
|
)
|
|||
|
Increase
in line of credit
|
1,103,000
|
650,000
|
|||||
|
Decrease
in note receivable
|
66,000
|
73,000
|
|||||
|
Excess
tax benefits from share-based payment arrangements
|
-
|
30,000
|
|||||
|
(Purchase)
of treasury stock
|
-
|
(309,000
|
)
|
||||
|
Net
cash provided by financing activities
|
1,050,000
|
154,000
|
|||||
|
NET
INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS
|
(149,000
|
)
|
1,838,000
|
||||
|
Cash
and cash equivalents - beginning of the period
|
2,195,000
|
1,085,000
|
|||||
|
Cash
and cash equivalents - end of period
|
$
|
2,046,000
|
$
|
2,923,000
|
|||
|
Supplemental
disclosure of cash flow information:
|
|||||||
|
Interest
paid
|
$
|
191,000
|
$
|
197,000
|
|||
|
Income
taxes
|
$
|
3,008,000
|
$
|
1,403,000
|
|||
|
Supplemental
disclosure of non cash activity:
|
|||||||
|
Common
stock issued to Directors over 6-year vesting period
|
$
|
296,000
|
$
|
-
|
|||
|
Options
vested during period
|
$
|
-
|
$
|
77,000
|
|||
|
Options
cancelled during period
|
$
|
(77,000
|
)
|
$
|
-
|
||
|
Common
stock issued for services
|
$
|
70,000
|
$
|
21,000
|
|||
|
Common
shares issued for options or warrants
|
$
|
42,000
|
$
|
-
|
|||
|
Line
of credit converted to long-term debt
|
$
|
-
|
$
|
1,506,000
|
|||
See
accompanying notes to condensed consolidated financial statements.
5
Notes
to Condensed Consolidated Financial Statements
General
1.
Basis
of
Presentation
The
condensed unaudited interim consolidated financial statements included herein
have been prepared, without audit, pursuant to the rules and regulations of
the
Securities and Exchange Commission. The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not
contain information included in the Company’s annual statements and notes.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to
such
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that
these condensed consolidated financial statements be read in conjunction with
the December 31, 2007 audited consolidated financial statements and the
accompanying notes thereto. While management believes the procedures followed
in
preparing these condensed consolidated financial statements are reasonable,
the
accuracy of the amounts are in some respects dependent upon the facts that
will
exist, and procedures that will be accomplished by the Company later in the
year.
These
condensed unaudited consolidated financial statements reflect all adjustments,
including normal recurring adjustments, which, in the opinion of management,
are
necessary to present fairly the operations and cash flows for the period
presented.
2. Presentation
of Financial Statements
The
Company’s condensed consolidated financial statements include the accounts of
Medifast, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
3. Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), which
clarifies the definition of fair value whenever another standard requires or
permits assets or liabilities to be measured at fair value. Specifically, the
standard clarifies that fair value should be based on the assumptions market
participants would use when pricing the asset or liability, and establishes
a
fair value hierarchy that prioritizes the information used to develop those
assumptions. SFAS No. 157 does not expand the use of fair value to any new
circumstances, and must be applied on a prospective basis except in certain
cases. The standard also requires expanded financial statement disclosures
about
fair value measurements, including disclosure of the methods used and the effect
on earnings.
In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective
Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years, for all nonfinancial assets and liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). Examples of items within the scope of FSP
No. 157-2 are nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination (but not measured at fair
value
in subsequent periods), and long-lived assets, such as property, plant and
equipment and intangible assets measured at fair value for an impairment
assessment under SFAS No. 144.
The
partial adoption of SFAS No. 157 on January 1, 2008 with respect to
financial assets and financial liabilities recognized or disclosed at fair
value
in the financial statements on a recurring basis did not have a material impact
on the Company's consolidated financial statements. See Note 12 for the
fair value measurement disclosures for these assets and liabilities. The Company
is in the process of analyzing the potential impact of SFAS No. 157
relating to its planned January 1, 2009 adoption of the remainder of the
standard.
On
January 1, 2008 (the first day of fiscal 2008), the Company adopted SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities, Including an amendment of FASB Statement No. 115" ("SFAS
No. 159"). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, which are not
otherwise currently required to be measured at fair value. Under SFAS
No. 159, the decision to measure items at fair value is made at specified
election dates on an instrument-by-instrument basis and is irrevocable. Entities
electing the fair value option are required to recognize changes in fair value
in earnings and to expense upfront costs and fees associated with the item
for
which the fair value option is elected. The new standard did not impact the
Company's Condensed Consolidated Financial Statements as the Company did not
elect the fair value option for any instruments existing as of the adoption
date. However, the Company will evaluate the fair value measurement election
with respect to financial instruments the Company enters into in the future.
6
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) changes how an
entity accounts for the acquisition of a business. While it retains the
requirement to account for all business combinations using the acquisition
method, the new rule will apply to a wider range of transactions or events
and
requires, in general, acquisition-date fair value measurement of identifiable
assets acquired, liabilities assumed and non-controlling ownership interests
held in the acquire, among other items. The Company is beginning to review
the
provisions of SFAS No. 141(R), which applies prospectively to business
combinations with an acquisition date on or after the beginning of its 2009
fiscal year.
In
December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements: an amendment of ARB No. 51" ("SFAS
No. 160"). SFAS No. 160 replaces the term minority interests with the
newly-defined term of non-controlling interests and establishes this line item
as an element of stockholders' equity, separate from the parent's equity. SFAS
No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its non-controlling interest. The Company is
continuing to review the provisions of SFAS No. 160, which is effective the
first quarter of fiscal 2009, and currently does not expect this new accounting
standard to have a significant impact on the Consolidated Financial Statements.
In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities: an amendment of FASB Statement No. 133"
("SFAS No. 161"). SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. The Company is reviewing the
provisions of SFAS No. 161, which is effective the first quarter of fiscal
2009, and currently does not anticipate that this new accounting standard will
have a significant impact on the Consolidated Financial Statements.
4. Revenue
Recognition
Revenue
is recognized net of discounts, rebates, promotional adjustments, price
adjustments, returns and other potential adjustments upon shipment and passing
of risk to the customer and when estimates of are reasonably determinable,
collection is reasonably assured and the Company has no further performance
obligations.
5.
Inventories
Inventories
consist principally of finished packaged foods, packaging and raw materials
held
in either the Company’s manufacturing facility or distribution warehouse.
Inventories are valued at cost determined using the first-in, first-out (FIFO)
method.
6. Goodwill
and Other Intangible Assets
In
June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 142
“Goodwill and Other Intangible Assets”. This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets
and
supersedes APB Opinion No. 17, “Intangible Assets”. It addresses how intangible
assets that are acquired individually or with a group of other assets (but
not
those acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements.
In
addition, the Company has acquired other intangible assets, which include:
customer lists, non-compete agreements, trademarks, patents, and copyrights.
The
non-compete agreements are fully amortized as of December 31, 2007. The customer
lists are being amortized over a period ranging between 5 and 7 years based
on
management’s best estimate of the expected benefits to be consumed or otherwise
used up. The costs of patents and copyrights are amortized over 5 and 7 years
based on their estimated useful life, while trademarks representing brands
with
an infinite life, and are carried at cost and tested annually for impairment
as
outlined below. Goodwill and other intangible assets are tested annually for
impairment in the fourth quarter, and are tested for impairment more frequently
if events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds
the
asset’s fair value. The Company assesses the recoverability of its goodwill and
other intangible assets by comparing the projected undiscounted net cash flows
associated with the related asset, over their remaining lives, in comparison
to
their respective carrying amounts. Impairment, if any, is based on the excess
of
the carrying amount over the fair value of those assets.
7
|
As
of June 30, 2008
|
As
of December 31, 2007
|
||||||||||||
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
||||||||||
|
Customer
lists
|
$
|
8,332,000
|
$
|
3,869,000
|
$
|
8,332,000
|
$
|
3,065,000
|
|||||
|
Trademarks,
patents, and copyrights
|
|||||||||||||
|
finite
life
|
1,628,000
|
568,000
|
1,626,000
|
446,000
|
|||||||||
|
infinite
life
|
909,000
|
-
|
909,000
|
-
|
|||||||||
|
Total
|
$
|
10,869,000
|
$
|
4,437,000
|
$
|
10,867,000
|
$
|
3,511,000
|
|||||
Amortization
expense for the six months ended June 30, 2008 and 2007 was as
follows:
|
2008
|
2007
|
||||||
|
Customer
lists
|
$
|
804,000
|
$
|
524,000
|
|||
|
Trademarks
and patents
|
122,000
|
117,000
|
|||||
|
Total
Trademarks and Intangibles
|
$
|
926,000
|
$
|
641,000
|
|||
Amortization
expense is included in selling, general and administrative expenses.
7. Fixed
Assets
Fixed
assets are stated at cost. Depreciation is provided using the straight-line
method over the estimated useful lives of the related assets, which are
generally three to seven years. Leasehold improvements and equipment under
capital leases are amortized on a straight-line basis over the lesser of the
estimated useful life of the asset or the related lease terms. Expenditures
for
repairs and maintenance are charged to expense as incurred, while major renewals
and improvements are capitalized.
8.
Note
Receivable
Medifast
realized a $1,503,000 note receivable as a result of the sale of Consumer Choice
Systems on January 17, 2006 to a former board member. The note has a 10-year
term with imputed interest of 4% collateralized by 50,000 shares of Medifast
stock and all the assets of Consumer Choice Systems. The amount of principal
to
be collected over each of the next 5 years is $183,000 per year with the
remaining amount collectible thereafter of $495,000.
9.
Income
Per Common Share
Basic
income per share is calculated by dividing net income by the weighted average
number of outstanding common shares during the year. Basic income per share
excludes any dilutive effects of options, warrants and other stock-based
compensation.
8
10.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
11.
Deferred
Compensation Plans
We
maintain a non-qualified deferred compensation plan for Senior Executive
management. Currently, Bradley MacDonald is the only participant in the plan.
Under the deferred compensation plan that became effective in 2003, executive
officers of the Company may defer a portion of their salary and bonus
(performance-based compensation) annually. A participant may elect to receive
distributions of the accrued deferred compensation in a lump sum or in
installments upon retirement
Each
participating officer may request that the deferred amounts be allocated among
several available investment options established and offered by the Company.
These investment options provide market rates of return and are not subsidized
by the Company. The benefit payable under the plan at any time to a participant
following termination of employment is equal to the applicable deferred amounts,
plus or minus any earnings or losses attributable to the investment of such
deferred amounts. The Company has established a trust for the benefit of
participants in the deferred compensation plan. Pursuant to the terms of the
trust, as soon as possible after any deferred amounts have been withheld from
a
plan participant, the Company will contribute such deferred amounts to the
trust
to be held for the benefit of the participant in accordance with the terms
of
the plan and the trust.
Retirement
payouts under the plan upon an executive officer’s retirement from the Company
are payable either in a lump-sum payment or in annual installments over a period
of up to ten years. Upon death, disability or termination of employment, all
amounts shall be paid in a lump-sum payment as soon as administratively
feasible.
| 12. |
Fair
Value Measurements
|
On
January 1, 2008, the Company adopted SFAS No. 157 “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, provides a consistent
framework for measuring fair value under Generally Accepted Accounting
Principles and expands fair value financial statement disclosure requirements.
SFAS 157’s valuation techniques are based on observable and unobservable inputs.
Observable inputs reflect readily obtainable data from independent sources,
while unobservable inputs reflect our market assumptions. SFAS 157 classifies
these inputs into the following hierarchy:
Level
1
Inputs– Quoted prices for identical instruments in active markets.
Level
2
Inputs– Quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.
Level
3
Inputs– Instruments with primarily unobservable value drivers.
The
following table represents the fair value hierarchy for those financial assets
and liabilities measured at fair value on a recurring basis as of June 30,
2008.
Fair
Value Measurements on a Recurring Basis as of June 30, 2008
|
Assets
|
Level
I
|
Level II
|
Level III
|
Total
|
|||||||||
|
Investment
securities
|
$
|
1,407,000
|
-
|
-
|
$
|
1,407,000
|
|||||||
|
Cash
equivalents
|
2,046,000
|
-
|
-
|
2,046,000
|
|||||||||
|
Total
Assets
|
$
|
3,453,000
|
$
|
-
|
$
|
-
|
$
|
3,453,000
|
|||||
|
Liabilities
|
-
|
-
|
-
|
-
|
|||||||||
|
Total
Liabilities
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
9
| 13. |
Share
Based Payments
|
Stock-Based
Compensation
Effective
December 31, 2005, the Company adopted the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standard (“SFAS”) No. 123(R),
“Share-Based Payments,” which establishes the accounting for employee
stock-based awards. Under the provisions of SFAS No.123(R), stock-based
compensation is measured at the grant date, based on the calculated fair value
of the award, and is recognized as an expense over the requisite employee
service period (generally the vesting period of the grant). The Company adopted
SFAS No. 123(R) using the modified prospective method and, as a result, periods
prior to December 31, 2005 have not been restated. The Company recognized
stock-based compensation for awards issued under the Company’s stock option
plans in other income/expenses included in the Condensed Consolidated Statement
of Operations. Additionally, no modifications were made to outstanding stock
options prior to the adoption of SFAS No. 123(R), and no cumulative adjustments
were recorded in the Company’s financial statements.
Unearned
compensation represents shares issued to executives that will be vested over
a
5-6 year period. These shares will be amortized over the vesting period in
accordance with FASB 123(R). The expense related to the vesting of unearned
compensation was $296,000 and $328,000 at June 30, 2008 and June 30, 2007,
respectively. Expense related to vesting of options under FASB 123R was $0
and
$77,000 at June 30, 2008 and June 30, 2007, respectively.
The
following summarizes the stock option activity for the Six Months ended June
30,
2008:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Contractual
Term
(Years)
|
||||||||
|
Outstanding,
December 31, 2007
|
291,300
|
4.19
|
||||||||
|
Options
granted
|
||||||||||
|
Options
reinstated
|
||||||||||
|
Options
exercised
|
(25,000
|
)
|
0.50
|
|||||||
|
Options
forfeited or expired
|
(119,632
|
)
|
6.39
|
|
||||||
|
Outstanding
June 30, 2008
|
146,668
|
3.02
|
1.84
|
|||||||
|
Options
exercisable, June 30, 2008
|
148,668
|
3.02
|
1.84
|
|||||||
|
Options
available for grant at June 30, 2008
|
1,075,832
|
|||||||||
14.
Reclassifications
Certain
amounts for the quarter ended June 30, 2007 have been reclassified to conform
to
the presentation of the June 30, 2008 amounts. The reclassifications have no
effect on net income for the quarters ended June 30, 2008 and 2007.
15.
Business Segments
Operating
segments are components of an enterprise about which separate financial
information is available that is regularly reviewed by the chief operating
decision maker about how to allocate resources and in assessing performance.
The
Company has two reportable operating segments: Medifast and All Other. The
Medifast reporting segment consists of the following distribution channels:
Medifast Direct, Take Shape for Life, and Doctors. The All Other reporting
segments consist of Hi-Energy and Medifast Weight Control Centers and the
Company’s parent company operations.
10
The
accounting policies of the segments are the same as those of the Company. The
presentation and allocation of assets, liabilities and results of operations
may
not reflect the actual economic costs of the segments as stand-alone businesses.
If a different basis of allocation were utilized, the relative contributions
of
the segments might differ, but management believes that the relative trends
in
segments would likely not be impacted.
The
following tables present segment information for the six months ended June
30,
2008 and 2007:
|
Three Months Ended June 30, 2008
|
|||||||||||||
|
Medifast
|
All
Other
|
Eliminations
|
Consolidated
|
||||||||||
|
Revenues,
net
|
$
|
25,503,000
|
$
|
2,034,000
|
$
|
27,537,000
|
|||||||
|
Cost
of Sales
|
6,297,000
|
380,000
|
6,677,000
|
||||||||||
|
Other
Selling, General and Adminstrative Expenses
|
15,510,000
|
1,820,000
|
17,330,000
|
||||||||||
|
Depreciation
and Amortization
|
915,000
|
247,000
|
1,162,000
|
||||||||||
|
Interest
(net)
|
9,000
|
35,000
|
44,000
|
||||||||||
|
Provision
for income taxes
|
752,000
|
-
|
752,000
|
||||||||||
|
Net
income (loss)
|
$
|
2,020,000
|
($448,000
|
)
|
$
|
1,572,000
|
|||||||
|
Segment
Assets
|
$
|
28,397,000
|
$
|
20,818,000
|
$
|
49,215,000
|
|||||||
|
Three Months Ended June 30, 2007
|
|||||||||||||
|
Medifast
|
All
Other
|
Eliminations
|
Consolidated
|
||||||||||
|
Revenues,
net
|
$
|
20,716,000
|
$
|
1,325,000
|
$
|
22,041,000
|
|||||||
|
Cost
of Sales
|
5,169,000
|
194,000
|
5,363,000
|
||||||||||
|
Other
Selling, General and Adminstrative Expenses
|
13,194,000
|
1,136,000
|
14,330,000
|
||||||||||
|
Depreciation
and Amortization
|
576,000
|
290,000
|
866,000
|
||||||||||
|
Interest
(net)
|
97,000
|
(34,000
|
)
|
63,000
|
|||||||||
|
Provision
for income taxes
|
510,000
|
-
|
510,000
|
||||||||||
|
Net
income (loss)
|
$
|
1,170,000
|
($261,000
|
)
|
$
|
909,000
|
|||||||
|
Segment
Assets
|
$
|
23,341,000
|
$
|
16,885,000
|
$
|
40,226,000
|
|||||||
|
Six Months Ended June 30, 2008
|
|||||||||||||
|
Medifast
|
All
Other
|
Eliminations
|
Consolidated
|
||||||||||
|
Revenues,
net
|
$
|
48,983,000
|
$
|
3,723,000
|
$
|
52,706,000
|
|||||||
|
Cost
of Sales
|
12,024,000
|
753,000
|
12,777,000
|
||||||||||
|
Other
Selling, General and Adminstrative Expenses
|
29,755,000
|
3,467,000
|
33,222,000
|
||||||||||
|
Depreciation
and Amortization
|
1,757,000
|
484,000
|
2,241,000
|
||||||||||
|
Interest
(net)
|
20,000
|
89,000
|
109,000
|
||||||||||
|
Provision
for income taxes
|
1,420,000
|
-
|
1,420,000
|
||||||||||
|
Net
income (loss)
|
$
|
4,007,000
|
($1,070,000
|
)
|
0
|
$
|
2,937,000
|
||||||
|
Segment
Assets
|
$
|
28,397,000
|
$
|
20,818,000
|
$
|
49,215,000
|
|||||||
|
Six Months Ended June 30, 2007
|
|||||||||||||
|
Medifast
|
All
Other
|
Eliminations
|
Consolidated
|
||||||||||
|
Revenues,
net
|
$
|
39,805,000
|
$
|
2,325,000
|
$
|
42,130,000
|
|||||||
|
Cost
of Sales
|
10,065,000
|
356,000
|
10,421,000
|
||||||||||
|
Other
Selling, General and Adminstrative Expenses
|
23,859,000
|
2,748,000
|
26,607,000
|
||||||||||
|
Depreciation
and Amortization
|
1,081,000
|
574,000
|
1,655,000
|
||||||||||
|
Interest
(net)
|
186,000
|
(61,000
|
)
|
125,000
|
|||||||||
|
Provision
for income taxes
|
1,040,000
|
-
|
1,040,000
|
||||||||||
|
Net
income (loss)
|
$
|
3,574,000
|
($1,292,000
|
)
|
$
|
2,282,000
|
|||||||
|
Segment
Assets
|
$
|
23,341,000
|
$
|
16,885,000
|
$
|
40,226,000
|
|||||||
11
Management
Discussion and Analysis of
Financial
Condition and Results of Operations
Except
for the historical information contained herein, this Report on Form 10-Q
contains certain forward-looking statements that involve substantial risks
and
uncertainties. When used in this Report, the words “anticipate,” “believe,”
“estimate,” “expect” and similar expressions, as they relate to Medifast, Inc.
or its management, are intended to identify such forward-looking statements.
The
Company’s actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Accordingly, there is no assurance that the results in the forward-looking
statements will be achieved.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles. Our significant accounting policies are
described in Note 2 of the consolidated financial statements.
The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Management develops, and changes periodically, these estimates
and assumptions based on historical experience and on various other factors
that
are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. Management
considers the following accounting estimates to be the most critical in
preparing our consolidated financial statements. These critical accounting
estimates have been discussed with our audit committee.
Revenue
Recognition. Revenue is recognized net of discounts, rebates, promotional
adjustments, price adjustments, returns and other potential adjustments upon
shipment and passing of risk to the customer and when estimates of are
reasonably determinable, collection is reasonably assured and the Company has
no
further performance obligations.
Impairment
of Fixed Assets and Intangible Assets. We
continually assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value of the assets may
not
be recoverable. Judgments regarding the existence of impairment indicators
are
based on legal factors, market conditions and our operating performance. Future
events could cause us to conclude that impairment indicators exist and the
carrying values of fixed and intangible assets may be impaired. Any resulting
impairment loss would be limited to the value of net fixed and intangible
assets.
Income
Taxes.
In the
preparation of consolidated financial statements, the Company estimates income
taxes based on diverse legislative and regulatory structures that exist in
jurisdictions where the company conducts business. Deferred income tax assets
and liabilities represent tax benefits or obligations that arise from temporary
differences due to differing treatment of certain items for accounting and
income tax purposes. The Company evaluates deferred tax assets each period
to
ensure that estimated future taxable income will be sufficient in character
amount and timing to result in their recovery. A valuation allowance is
established when management determines that it is more likely than not that
a
deferred tax asset will not be realized to reduce the assets to their realizable
value. Considerable judgments are required in establishing deferred tax
valuation allowances and in assessing probable exposures related to tax matters.
The Company’s tax returns are subject to audit and local taxing authorities that
could challenge the company’s tax positions. The Company believes it records
and/or discloses such potential tax liabilities as appropriate and has
reasonably estimated its income tax liabilities and recoverable tax
assets.
Allowance
for doubtful accounts.
In
determining the adequacy of the allowance for doubtful accounts, we consider
a
number of factors including the aging of the receivable portfolio, customer
payment trends, and financial condition of the customer, industry conditions
and
overall credibility of the customer. Actual amounts could differ significantly
from our estimates.
12
General
Six
Months Ended June 30, 2008 and June 30, 2007
Revenue:
Revenue increased to $52.7 million for the first six months of 2008 compared
to
$42.1 million for the first six months of 2007, an increase of $10.6 million
or
25%. The direct marketing sales channel accounted for 48% of total revenue,
Take
Shape for Life 41%, doctors 3%, and brick and mortar clinics 7%. As compared
to
the first six months of 2007, the direct marketing sales channel, which is
fueled primarily by consumer advertising, increased revenues by approximately
5%
year-over year. Take Shape for Life sales, which are fueled by person-to-person
recruiting and support increased by 72% compared to the first six months of
2007. The Company’s doctor’s sales decreased by 23% and The Medifast Weight
Control Centers increased sales by 62% as compared to the first six months
of
2007.
The
Take
Shape for Life division grew 72% year-over-year. This growth can largely be
attributed to the tools and training that led to an increase in the ability
of
the division to both promote growth in recruiting of health coaches, as well
as
better supporting this growth as it occurs. This continued investment proved
to
be a large part of the current growth trends in Take Shape for Life sales,
as
well as the number of active health coaches. The growth in this segment
correlates directly to the increase in health coaches, which began to accelerate
following our National Convention in July 2007. The number of active health
coaches grew 87% to 2,800 at the end of the second quarter of 2008 as compared
to 1,500 for the same time period in 2007, and up from 2,200 at the end of
the
first quarter of 2008. The Company recently completed our 2008 National
Convention in Orlando, FL on July 26th,
2008
where approximately 750 health coaches participated, an increase of nearly
88%
from prior year. The individuals that attended the event attended workshops
and
heard lectures by accredited individuals in the areas of recruiting, product
and
nutrition knowledge, and business skills.
The
Medifast Weight Control Centers, which represent approximately 7% of the
Company’s overall revenues, are currently operating in 17 locations in Dallas,
Houston, and Orlando. In the first six months of 2008, the Company experienced
revenue growth of 62% versus the same time period last year. The average monthly
revenue per clinic also witnessed growth of 18%, averaging $40,000 per clinic
in
the first six month of 2008 as compared to $34,000 in the first six months
of
2007. In the expanding Dallas, TX market, the average monthly revenue per clinic
is approximately $50,000. In the estimated $40 billion weight loss and health
living industry, the brick and mortar clinic model has always made up a
significant portion of overall sales. The recent growth in the Medifast Weight
Control Centers has proven that the model is in high demand from a select
portion of the weight loss consumers. Throughout 2007, the Company invested
in
the infrastructure of its clinic model. The major aspects of the investment
in
this division included an expanded executive team, the creation of a point
of
sale system, a robust customer data tracking system, and finalizing the
franchise opportunity documentation. During the first six months of 2008, the
Company opened six additional corporately owned clinics in the Houston, TX
market and one additional center in the Dallas, TX market. The Company plans
on
opening three additional corporately owned clinics in the Houston market and
one
in the Dallas market by the end of 2008.
On
February 18, 2008, the Company announced that it has sold its first franchise
of
Medifast Weight Control Centers. The Company sold the rights to open four
clinics in the Greater Baltimore Metropolitan Area. The franchisee also has
the
rights to open four additional Medifast Weight Control Centers in the Baltimore
area over the next two years, bringing the total to eight locations. On June
3,
2008 the Company announced that it sold the rights to open four Medifast Weight
Control Centers in Southern California and three Medifast Weight Control Centers
in Central California to two different local business operators. The Company
anticipates the opening of our first franchise centers in Baltimore and Southern
California in the next 45 days.
Overall,
selling, general and administrative expenses increased by $7.1 million as
compared to the first six months of 2007. Advertising expense for the first
six
months of 2008 was approximately $10.4 million compared to approximately $10
million for the same period last year, an increase of $400,000. Salaries and
benefits increased by approximately $900,000 in the first six months of 2008.
The increase includes the hiring of additional expertise in critical areas
such
as Take Shape for Life and the Medifast Weight Control Centers in the second
half of 2007 which have greatly impacted the revenue growth in the first six
months of 2008. Additional personnel were hired in the call center during the
first quarter of 2008 as the Company brought the outsourced Take Shape for
Life
call center in-house early in the second quarter of 2008. Going forward, savings
will be realized on communication expense as a result of bringing the call
center in-house. The opening of six new corporately owned clinics in the
Houston, TX market and one in the Dallas, TX market also required the hiring
of
additional center managers and support staff. Take Shape for Life commission
expense, which is completely variable based upon revenue, increased by
approximately $4,500,000 as the Company showed sales growth of 72% as compared
to the first six months of 2007. Communication expense decreased by $150,000
as
a result of the Take Shape for Life call center moving in-house during the
second quarter of 2008. Other expenses increased by $1.1 million which included
items such as depreciation, amortization, credit card processing fees,
charitable contributions, and property taxes. Operating expenses increased
by
$400,000 which primarily resulted from additional printing expense for our
direct to consumer postcard mailings as well as maintenance, repairs, and
supplies for our manufacturing and distribution facilities.
Costs
and
Expenses: Cost of revenue increased $2.4 million to $12.8 million in the first
six months of 2008 from $10.4 million for the first six months of 2007. As
a
percentage of sales, gross margin increased to 75.8% from 75.3% for the first
six months of 2008. The margin improved due to efficiencies gained from new
machinery purchases in prior year as well as new shipping rules that resulted
in
additional shipping revenue from customers netting against shipping
expense.
13
Income
taxes: For
the
first six months of 2008 the Company recorded $1,420,000 in income tax expense,
which represents an annual effective rate of 32.6%. For the first six months
of
2007, we recorded income tax expense of $1,040,000 which reflected an estimated
annual effective tax rate of 31.3%. The Company anticipates a tax rate of
approximately 32-34% in 2008.
Net
income: Net income was $2.9 million for the first six months of 2008 as compared
to $2.3 million for the first six months of 2007, an increase of 29%. The
improved profitability during the first six months of 2008 is due to sales
growth in the Take Shape for Life division and Medifast Weight Control Centers
as well as improved advertising effectiveness in the Medifast Direct Marketing
sales channel.
Three
Months Ended June 30, 2008 and June 30, 2007
Revenue:
Revenue increased to $27.5 million in the second quarter of 2008 compared to
$22
million in the second quarter of 2007, an increase of $5.5 million or 25%.
The
direct marketing sales channel accounted for 45% of total revenue, Take Shape
for Life 44%, doctors 4%, and brick and mortar clinics 7%. As compared to the
second quarter of 2007, the direct marketing sales channel, which is fueled
primarily by consumer advertising, decreased revenues by approximately 1%
year-over year, however, the advertising dollars spent to achieve nearly the
same amount of sales were 9% less than the second quarter of 2007 as the Company
continues to focus on more effective advertising spend. Take Shape for Life
sales, which are fueled by person-to-person recruiting and support increased
by
79% compared to the second quarter of 2007. The Company’s doctor’s sales
decreased by 17% and The Medifast Weight Control Centers increased sales by
61%
as compared to the second quarter of 2007.
The
Take
Shape for Life division grew 79% year-over-year. This growth can largely be
attributed to the tools and training that led to an increase in the ability
of
the division to both promote growth in recruiting of health coaches, as well
as
better supporting this growth as it occurs. This continued investment proved
to
be a large part of the current growth trends in Take Shape for Life sales,
as
well as the number of active health coaches. The growth in this segment
correlates directly to the increase in health coaches, which began to accelerate
following our National Convention in July 2007. The number of active health
coaches grew 87% to 2,800 at the end of the second quarter of 2008 as compared
to 1,500 for the same time period in 2007, and up from 2,200 at the end of
the
first quarter of 2008. The Company recently completed our 2008 National
Convention in Orlando, FL on July 26th,
2008
where approximately 750 health coaches participated, an increase of nearly
88%
from prior year. The individuals that attended the event attended workshops
and
heard lectures by accredited individuals in the areas of recruiting, product
and
nutrition knowledge, and business skills.
The
Medifast Weight Control Centers, which represent approximately 7% of the
Company’s overall revenues, are currently operating in 17 locations in Dallas,
Houston, and Orlando. In the second quarter of 2008, the Company experienced
revenue growth of 61% versus the same time period last year. The average monthly
revenue per clinic also witnessed growth of 5%, averaging $41,000 per clinic
in
the second quarter of 2008 as compared to $39,000 in the second quarter of
2007.
The average monthly clinic sale in the second quarter of 2008 was weighted
downward due to the six new start-up clinics in the Houston, TX market. In
the
expanding Dallas, TX market, the average monthly revenue per clinic is
approximately $50,000. During the second quarter of 2008, the Company opened
two
additional corporately owned clinics in the Houston, TX market and one
additional clinic in the Dallas, TX market. The Company plans on opening three
additional corporately owned clinics in the Houston market and one additional
center in the Dallas, TX market by the end of 2008.
Overall,
selling, general and administrative expenses increased by $3.2 million as
compared to the second quarter of 2007. Advertising expense for the second
quarter of 2008 was approximately $5.2 million compared to approximately $5.7
million for the same period last year, a decrease of $500,000 or 9%. Salaries
and benefits increased by approximately $500,000 in the second quarter of 2008
as compared to last year. The increase includes the hiring of additional
expertise in critical areas such as Take Shape for Life and the Medifast Weight
Control Centers in the second half of 2007 which have greatly impacted the
revenue growth in the first six months of 2008. Additional personnel were hired
in the call center during the first and second quarter of 2008 as the Company
brought the outsourced Take Shape for Life call center in-house early in the
second quarter of 2008. The opening of six new corporately owned clinics in
the
Houston, TX market and one in the Dallas, TX market also required the hiring
of
additional center managers and support staff. Take Shape for Life commission
expense, which is completely variable based upon revenue, increased by
approximately $2,600,000 as the Company showed sales growth of 77% as compared
to the second quarter of 2007. Communication expense, decreased by $200,000
as
the outsourced Take Shape for Life call center was brought in-house early in
the
second quarter of 2008. Other expenses increased by $550,000 which included
items such as depreciation, amortization, credit card processing fees,
charitable contributions, and property taxes. Operating expenses increased
by
$200,000 which primarily resulted from additional printing expense for our
direct to consumer postcard mailings as well as maintenance, repairs, and
supplies for our manufacturing and distribution facilities.
Costs
and
Expenses: Cost of revenue increased $1.3 million to $6.7 million in the second
quarter of 2008 from $5.4 million in the second quarter of 2007. As a percentage
of sales, gross margin increased to 75.8% from 75.7% in the second quarter
of
2007.
14
Income
taxes: In
the
second quarter of 2008, the Company recorded $752,000 in income tax expense,
which represents an annual effective rate of 32.3%. In the second quarter of
2007, we recorded income tax expense of $510,000 which reflected an estimated
annual effective tax rate of 35.9%. The Company anticipates a tax rate of
approximately 32-34% in 2008.
Net
income: Net income was $1.6 million in the second quarter of 2008 as compared
to
$900,000 in the second quarter of 2007, an increase of 73%. The improved
profitability in the second quarter of 2008 is due to sales growth in the Take
Shape for Life division and Medifast Weight Control Centers as well as improved
advertising effectiveness in the Medifast Direct Marketing sales channel.
SEGMENT
RESULTS OF OPERATIONS
|
Net
Sales by Segment for the Three Months Ended June
30,
|
|||||||||||||
|
2008
|
2007
|
||||||||||||
|
Segments
|
Sales
|
%
of Total
|
Sales
|
%
of Total
|
|||||||||
|
Medifast
|
$
|
25,503,000
|
93
|
%
|
$
|
20,716,000
|
94
|
%
|
|||||
|
All
Other
|
2,034,000
|
7
|
%
|
1,325,000
|
6
|
%
|
|||||||
|
Total
Sales
|
$
|
27,537,000
|
100
|
%
|
$
|
22,041,000
|
100
|
%
|
|||||
|
Net
Sales by Segment for the Six Months Ended June
30,
|
|||||||||||||
|
2008
|
2007
|
||||||||||||
|
Segments
|
Sales
|
%
of Total
|
Sales
|
%
of Total
|
|||||||||
|
Medifast
|
$
|
48,983,000
|
93
|
%
|
$
|
39,805,000
|
94
|
%
|
|||||
|
All
Other
|
3,723,000
|
7
|
%
|
2,325,000
|
6
|
%
|
|||||||
|
Total
Sales
|
$
|
52,706,000
|
100
|
%
|
$
|
42,130,000
|
100
|
%
|
|||||
Three
Months Ended June 30, 2008 and June 30, 2007
Medifast
Segment: The Medifast reporting segment consists of the sales of Medifast
Direct, Take Shape for Life, and Doctors. As this represents the majority of
our
business this is referenced to the “Condensed Consolidated Results of
Operations” management discussion for the three months ended June 30, 2008 and
2007 above.
All
Other
Segment: The All Other reporting segment consists of the sales of Hi-Energy
and
Medifast Weight Control Centers. Sales increased by $709,000 year-over year
in
the Hi-Energy and Medifast Weight Control Centers sales due to opening two
new
centers in the Houston market and one new center in the Dallas, TX market in
the
second quarter of 2008, increased sales in the of the four new clinics opened
in
the first quarter of 2008, as well as improvements in same store sales for
clinics in operation in the same period of prior year. As compared to the second
quarter of 2007, the clinics have improved advertising effectiveness, improved
closing rates on walk-in sales, as well as the hiring of more experienced clinic
operators to manage the clinics. The Company now has seventeen corporately
owned
clinics, compared to nine clinics in operation at the end of the second quarter
of 2007.
Six
Months Ended June 30, 2008 and June 30, 2007
Medifast
Segment: The Medifast reporting segment consists of the sales of Medifast
Direct, Take Shape for Life, and Doctors. As this represents the majority of
our
business this is referenced to the “Condensed Consolidated Results of
Operations” management discussion for the six months ended June 30, 2008 and
2007 above.
All
Other
Segment: The All Other reporting segment consists of the sales of Hi-Energy
and
Medifast Weight Control Centers. Sales increased by $1,398,000 year-over year
in
the Hi-Energy and Medifast Weight Control Centers sales due to opening six
new
centers in the Houston market and one new center in the Dallas, TX market in
the
first six months of 2008, increased sales in the four new clinics opened in
the
first quarter of 2008, as well as improvements in same store sales for clinics
in operation in the same period of prior year. As compared to the first six
months of 2007, the clinics have improved advertising effectiveness, improved
closing rates on walk-in sales, as well as the hiring of more experienced clinic
operators to manage the clinics. The Company now has seventeen corporately
owned
clinics, compared to nine clinics in operation at the end of the second quarter
of 2007.
15
|
Net
Profit by Segment for the Three Months Ended June 30,
|
|||||||||||||
|
2008
|
2007
|
||||||||||||
|
Segments
|
Profit
|
%
of Total
|
Profit
|
%
of Total
|
|||||||||
|
Medifast
|
$
|
2,020,000
|
128
|
%
|
$
|
1,170,000
|
129
|
%
|
|||||
|
All
Other
|
(448,000
|
)
|
-28
|
%
|
(261,000
|
)
|
-29
|
%
|
|||||
|
Total
Net Profit
|
$
|
1,572,000
|
100
|
%
|
$
|
909,000
|
100
|
%
|
|||||
|
Net
Profit by Segment for the Six Months Ended June 30,
|
|||||||||||||
|
2008
|
2007
|
||||||||||||
|
Segments
|
Profit
|
%
of Total
|
Profit
|
%
of Total
|
|||||||||
|
Medifast
|
$
|
4,007,000
|
136
|
%
|
$
|
3,574,000
|
157
|
%
|
|||||
|
All
Other
|
(1,070,000
|
)
|
-36
|
%
|
(1,292,000
|
)
|
-57
|
%
|
|||||
|
Total
Net Profit
|
$
|
2,937,000
|
100
|
%
|
$
|
2,282,000
|
100
|
%
|
|||||
Three
Months Ended June 30, 2008 and June 30, 2007
Medifast
Segment: The Medifast reporting segment consists of the profits of Medifast
Direct, Take Shape for Life, and Doctors. As this represents the majority of
our
business this is referenced to the “Condensed Consolidated Results of
Operations” management discussion for the three months ended June 30, 2008 and
2007 above. See footnote 15, “Business Segments” for a detailed breakout of
expenses.
All
Other
Segment: The All Other reporting segment consists of the profit or loss of
Hi-Energy and Medifast Weight Control Centers, and corporate expenses related
to
the parent company operations. Year-over-year, the loss in the All Other segment
increased by $187,000. The Hi-Energy and Medifast Weight Control Centers showed
a decrease in net profitability year-over-year of $72,000. The decrease in
profitability was due to the start-up expenses opening two new centers in the
Houston market and one new center in the Dallas, TX market in the second quarter
of 2008. The increase in the total number of clinics led to additional salaries,
rent, and advertising expense during the start-up phase with lower sales volume
during the first few months of operation. Corporate expenses increased by
$169,000 year-over-year. Corporate expenses include items such as auditors’
fees, attorney’s fees, Board of Director expenses, investor relations, corporate
consulting, and corporate outings. See footnote 15, “Business Segments” for a
detailed breakout of expenses.
Six
Months Ended June 30, 2008 and June 30, 2007
Medifast
Segment: The Medifast reporting segment consists of the profits of Medifast
Direct, Take Shape for Life, and Doctors. As this represents the majority of
our
business this is referenced to the “Condensed Consolidated Results of
Operations” management discussion for the three months ended June 30, 2008 and
2007 above. See footnote 15, “Business Segments” for a detailed breakout of
expenses.
All
Other
Segment: The All Other reporting segment consists of the profit or loss of
Hi-Energy and Medifast Weight Control Centers, and corporate expenses related
to
the parent company operations. Year-over-year, the loss in the All Other segment
decreased by $222,000. The Hi-Energy and Medifast Weight Control Centers showed
a decrease in net profitability year-over-year of $85,000. The decrease for
the
Medifast Weight control centers was due to the opening of six new centers in
the
Houston market and one new center in the Dallas, TX market in the first six
months of 2008. The increase in the number of clinics led to additional
salaries, rent, and advertising expense during the start-up phase with lower
sales volume during the start-up phase. Corporate expenses increased by $189,000
year-over-year. Corporate expenses include items such as auditors’ fees,
attorney’s fees, Board of Director expenses, investor relations, corporate
consulting, and corporate outings. See footnote 15, “Business Segments” for a
detailed breakout of expenses.
16
Seasonality
The
Company's weight management products and programs have historically been subject
to seasonality. Traditionally the holiday season in November/December of each
year is considered poor for diet control products and services. January and
February generally show increases in sales, as these months are considered
the
commencement of the “diet season.” In 2008, seasonality has not been a
significant factor. This is largely due to the increase in the consumer’s
awareness of the overall health and nutritional benefits accompanied with the
use of the Company’s product line. As consumers continue to increase their
association of nutritional weight loss programs with overall health, seasonality
will continue to decrease.
Inflation
Inflation
generally affects us by increasing the costs of labor, overhead, and raw
material and packaging costs. The impact of inflation on our financial position
and results of operations was minimal during the second quarter of 2007, however
in 2008 the Company is continuing to be negatively impacted by increasing raw
material costs.
Item
5. Other Information
Litigation:
Leonard
Z. Sotomeyer, on December 30, 2003, filed an action in the Supreme Court of
the
State of New York, County of New York, against his former business partner,
David Scheffler, and T-1 Holdings, LLC, and included Medifast, Inc., formerly
Heathrite, Inc., as a Defendant, Case 604076-03, seeking monetary damages for
failure of his former business partner to compensate him under several
consulting agreements with Medifast, Inc. made with H-T Capital, Inc. and
derivatively on behalf of T-1Holdings, LLC. The Court dismissed on Defendants’
motions Sotomeyer’s Complaint in its entirety by Order of September 30, 2004.
Following an appeal, the Appellate Division, First Department, reinstated the
first and second causes of action while affirming the dismissal of Plaintiff’s
remaining derivative claims by its decision April 13, 2006. The matter is now,
again, before the New York Supreme Court for the specific purpose of litigating
plaintiff’s first and second causes of action only. Plaintiff recently filed a
pending Motion to amend his Complaint. Medifast continues to deny any
wrongdoings and discovery is underway. Medifast believes it continues to have
a
meritorious defense to the counts alleged and that any decision rendered would
not materially impact the ongoing operations of Medifast, Inc.
Earnings
per Share:
The
Company follows the provisions of Statement of Financial Accounting Standards
No. 128, “Earnings per Share.” The calculation of basic and diluted earnings per
share (“EPS”) is reflected on the accompanying Consolidated Statement of
Operations.
Code
of Ethics:
In
August of 2006, the Company updated its Code of Ethics by which directors,
officers and employees commit and undertake to personal and corporate growth,
dedicate themselves to excellence, integrity and responsiveness to the
marketplace, and work together to enhance the value of the Company for the
shareholders, vendors, and customers.
Trading
Policy:
In March
2003, the Company implemented a Trading Policy whereby if a director, officer
or
employee has material non-public information relating to the Company, neither
that person nor any related person may buy or sell securities of the Company
or
engage in any other action to take advantage of, or pass on to others, that
information. Additionally, on October 16, 2006 the Board of Directors approved
an updated trading policy in which insiders may purchase or sell MED securities
if such purchase or sale is made 7 days after or 14 days before an earnings
announcement to include the 10-K
or
10-Q in
order
to insure that investors have available the same information necessary to make
investment decisions as insiders.
Evaluation
of Disclosure Controls and Procedures:
The
Securities and Exchange Commission defines the term “disclosure controls and
procedures” to mean a company’s controls and other procedures that are designed
to ensure that information required to be disclosed in the reports that it
files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms. Based on the evaluation of the
effectiveness of our disclosure controls and procedures by our management,
with
the participation of our Chief Executive Officer and our Chief Financial
Officer, as of the end of the period covered by this report, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures at the end of the period covered by this report were
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is
(i) recorded, processed, summarized and reported, within the time periods
specified in the Commission’s rules and forms, and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure.
17
Changes
in Internal Control over Financial Reporting:
No
change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Forward
Looking Statements:
Some of
the information presented in this quarterly report constitutes forward-looking
statements within the meaning of the private Securities Litigation Reform Act
of
1995. Statements that are not historical facts, including statements about
management’s expectations for fiscal year 2003 and beyond, are forward-looking
statements and involve various risks and uncertainties. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its knowledge, there can be no assurance that actual results will
not
differ materially from the Company’s expectations. The Company cautions
investors not to place undue reliance on forward-looking statements which speak
only to management’s experience on this data.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Medifast,
Inc.
|
||||
|
BY:
|
|
/S/
MICHAEL S. MCDEVITT
|
|
August
8, 2008
|
|
|
|
Michael
S. McDevitt
|
|
|
|
|
|
Chief Executive Officer and Chief Financial Officer
|
|
|
|
|
|
(principal executive officer and principal financial officer)
|
|
|
18
Index
to
Exhibits
|
Description
of Exhibit
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation
S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation
S-K,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
19