MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except par value)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
63,532
|
|
|
$
|
52,436
|
|
Accounts receivable-net of allowance for sales returns and doubtful accounts of $456 and $449 at June 30, 2017 and December 31, 2016, respectively
|
|
|
914
|
|
|
|
1,387
|
|
Inventory
|
|
|
18,048
|
|
|
|
18,311
|
|
Investment securities
|
|
|
25,020
|
|
|
|
24,412
|
|
Income taxes, prepaid
|
|
|
-
|
|
|
|
1,249
|
|
Prepaid expenses and other current assets
|
|
|
3,210
|
|
|
|
3,502
|
|
Total current assets
|
|
|
110,724
|
|
|
|
101,297
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment - net
|
|
|
18,505
|
|
|
|
19,753
|
|
Other assets
|
|
|
286
|
|
|
|
162
|
|
Long-term assets of discontinued operations
|
|
|
-
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
129,515
|
|
|
$
|
121,216
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
25,144
|
|
|
$
|
24,300
|
|
Current liabilities of discontinued operations
|
|
|
-
|
|
|
|
121
|
|
Total current liabilities
|
|
|
25,144
|
|
|
|
24,421
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
196
|
|
|
|
779
|
|
Total liabilities
|
|
|
25,340
|
|
|
|
25,200
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
|
|
Common stock; par value $.001 per share; 20,000 shares authorized; 12,124 and 12,027 issued and 11,930 and 11,871 outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
12
|
|
|
|
12
|
|
Additional paid-in capital
|
|
|
4,630
|
|
|
|
2,672
|
|
Accumulated other comprehensive income (loss)
|
|
|
14
|
|
|
|
(165
|
)
|
Retained earnings
|
|
|
99,519
|
|
|
|
93,497
|
|
Total stockholders' equity
|
|
|
104,175
|
|
|
|
96,016
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
129,515
|
|
|
$
|
121,216
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts
& dividend data)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
75,729
|
|
|
$
|
71,144
|
|
|
$
|
146,351
|
|
|
$
|
143,489
|
|
Cost of sales
|
|
|
18,118
|
|
|
|
17,919
|
|
|
|
35,848
|
|
|
|
37,070
|
|
Gross profit
|
|
|
57,611
|
|
|
|
53,225
|
|
|
|
110,503
|
|
|
|
106,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
|
46,301
|
|
|
|
48,201
|
|
|
|
90,584
|
|
|
|
95,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,310
|
|
|
|
5,024
|
|
|
|
19,919
|
|
|
|
11,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income, net
|
|
|
141
|
|
|
|
65
|
|
|
|
204
|
|
|
|
180
|
|
Other income (expense)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
36
|
|
|
|
(21
|
)
|
|
|
|
138
|
|
|
|
68
|
|
|
|
240
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
11,448
|
|
|
|
5,092
|
|
|
|
20,159
|
|
|
|
11,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
3,864
|
|
|
|
1,695
|
|
|
|
6,430
|
|
|
|
3,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,584
|
|
|
$
|
3,397
|
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.64
|
|
|
$
|
0.29
|
|
|
$
|
1.15
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
|
$
|
0.63
|
|
|
$
|
0.29
|
|
|
$
|
1.14
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,929
|
|
|
|
11,811
|
|
|
|
11,915
|
|
|
|
11,817
|
|
Diluted
|
|
|
12,056
|
|
|
|
11,884
|
|
|
|
12,044
|
|
|
|
11,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$
|
0.32
|
|
|
$
|
0.25
|
|
|
$
|
0.64
|
|
|
$
|
0.50
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (UNAUDITED)
(in thousands)
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,584
|
|
|
$
|
3,397
|
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
|
|
14
|
|
Unrealized gains on marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of marketable securities
|
|
|
39
|
|
|
|
36
|
|
|
|
163
|
|
|
|
107
|
|
Adjustment for net losses realized and included in net income
|
|
|
-
|
|
|
|
56
|
|
|
|
10
|
|
|
|
65
|
|
Total change in unrealized gains on marketable securities
|
|
|
39
|
|
|
|
92
|
|
|
|
173
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
43
|
|
|
|
94
|
|
|
|
179
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
7,627
|
|
|
$
|
3,491
|
|
|
$
|
13,908
|
|
|
$
|
7,843
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (UNAUDITED)
(in thousands)
|
|
Six months ended June 30, 2017
|
|
|
|
Number
of Shares
Issued
|
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Retained
Earnings
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
|
12,027
|
|
|
$
|
12
|
|
|
$
|
2,672
|
|
|
$
|
(165
|
)
|
|
$
|
93,497
|
|
|
$
|
96,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,729
|
|
|
|
13,729
|
|
Share-based compensation
|
|
|
95
|
|
|
|
-
|
|
|
|
2,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,215
|
|
Options exercised by executives and directors
|
|
|
21
|
|
|
|
-
|
|
|
|
568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
568
|
|
Net shares repurchased for employee taxes
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(825
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(825
|
)
|
Other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
179
|
|
|
|
-
|
|
|
|
179
|
|
Cash dividends declared to stockholders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,707
|
)
|
|
|
(7,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2017
|
|
|
12,124
|
|
|
$
|
12
|
|
|
$
|
4,630
|
|
|
$
|
14
|
|
|
$
|
99,519
|
|
|
$
|
104,175
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (UNAUDITED)
(in thousands)
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
Adjustments to reconcile net income to cash provided by operating activities - continuing operations
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,116
|
|
|
|
2,996
|
|
Share-based compensation
|
|
|
2,215
|
|
|
|
1,192
|
|
Loss (gain) on sale of disposal of property, plant and equipment
|
|
|
93
|
|
|
|
(88
|
)
|
Realized loss on investment securities, net
|
|
|
57
|
|
|
|
15
|
|
Amortization of premium on investment securities
|
|
|
374
|
|
|
|
62
|
|
Deferred income taxes
|
|
|
(700
|
)
|
|
|
(3,027
|
)
|
Impairment of fixed assets
|
|
|
-
|
|
|
|
6,083
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
477
|
|
|
|
6
|
|
Inventory
|
|
|
263
|
|
|
|
1,971
|
|
Income taxes
|
|
|
1,979
|
|
|
|
2,905
|
|
Prepaid expenses and other current assets
|
|
|
292
|
|
|
|
(587
|
)
|
Other assets
|
|
|
(124
|
)
|
|
|
40
|
|
Accounts payable and accrued expenses
|
|
|
(22
|
)
|
|
|
(229
|
)
|
Net cash flow provided by operating activities- continuing operations
|
|
|
20,749
|
|
|
|
18,996
|
|
Net cash flow used in operating activities- discontinued operations
|
|
|
-
|
|
|
|
(272
|
)
|
Net cash flow provided by operating activities
|
|
|
20,749
|
|
|
|
18,724
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
Sale of investment securities
|
|
|
2,039
|
|
|
|
26,741
|
|
Purchase of investment securities
|
|
|
(2,788
|
)
|
|
|
(22,432
|
)
|
Sale of property and equipment
|
|
|
59
|
|
|
|
655
|
|
Purchase of property and equipment
|
|
|
(1,020
|
)
|
|
|
(753
|
)
|
Net cash flow (used in) provided by investing activities
|
|
|
(1,710
|
)
|
|
|
4,211
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Repayment of capital leases
|
|
|
-
|
|
|
|
(108
|
)
|
Options exercised by executives and directors
|
|
|
568
|
|
|
|
299
|
|
Excess tax benefits from share-based compensation
|
|
|
-
|
|
|
|
105
|
|
Net shares repurchased for employee taxes
|
|
|
(825
|
)
|
|
|
(743
|
)
|
Cash dividends paid to stockholders
|
|
|
(7,692
|
)
|
|
|
(5,929
|
)
|
Net cash flow used in financing activities
|
|
|
(7,949
|
)
|
|
|
(6,376
|
)
|
|
|
|
|
|
|
|
|
|
Foreign currency impact
|
|
|
6
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
11,096
|
|
|
|
16,573
|
|
Cash and cash equivalents - beginning of the period
|
|
|
52,436
|
|
|
|
42,037
|
|
Cash and cash equivalents - end of period
|
|
$
|
63,532
|
|
|
$
|
58,610
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
5,064
|
|
|
$
|
3,661
|
|
Dividends declared included in accounts payable
|
|
$
|
4,052
|
|
|
$
|
3,100
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
General
|
1.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Basis of Presentation —
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with
generally accepted accounting principles in the United States of America (“GAAP”), for interim information and pursuant
to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reporting on Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. However, in the opinion
of management, all adjustments consisting of normal, recurring adjustments considered ne
c
essary 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, 2016 has been
derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes
required by GAAP for complete financial statements.
The results of operations for the
three and six months ended June 30, 2017 are not necessarily indicative of results that may be expected for the fiscal year ending
December 31, 2017. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the
2016 audited financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2016 (“2016 Form 10-K”).
Presentation of Financial Statements
—
The unaudited condensed consolidated financial statements included herein include the accounts of Medifast, Inc. (the
“Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
–
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from
those estimates.
Revenue Recognition
- Revenue
is recognized net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer of
title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance
obligations and collection is reasonably assured as the majority of sales are paid prior to shipping.
Accounting Pronouncements Adopted
in 2017 —
ASU 2016-09
Compensation —
Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which changes the accounting for
certain aspects of share-based payments to employees. The new guidance requires, among its other provisions, that excess tax benefits
(which represent the excess of actual tax benefits received at the date of vesting or settlement over the benefits recognized
over the vesting period or upon issuance of share-based payments) and tax deficiencies (which represent the amount by which actual
tax benefits received at the date of vesting or settlement is lower than the benefits recognized over the vesting period or upon
issuance of share-based payments) be recorded in the income statement as an increase or decrease in income taxes when the awards
vest or are settled. This is in comparison to the prior requirement that these excess tax benefits be recognized in additional
paid-in capital and these tax deficiencies be recognized either as an offset to accumulated excess tax benefits, if any, or in
the income statement. The new guidance also requires excess tax benefits to be classified along with other income tax cash flows
as an operating activity in the statement of cash flows rather than, as previously required, a financing activity. The new guidance
is effective for the first quarter of our fiscal year ending December 31, 2017.
As a result of this adoption:
|
·
|
We recognized
discrete tax benefits of $12 thousand and $321 thousand in the provision for income taxes
line item of our condensed consolidated statements of income for the three and six months
ended June 30, 2017, respectively, related to excess tax benefits upon vesting or settlement
in that period.
|
|
·
|
We elected to
adopt the cash flow presentation of the excess tax benefits prospectively, commencing
with our cash flow statement for the three months ended March 31, 2017, where these benefits
are classified along with other income tax cash flows as an operating activity.
|
|
·
|
We have elected
to, account for forfeitures as they occur to determine the amount of compensation cost
to be recognized in each period, rather than estimating the number of share-based awards
expected to vest.
|
|
·
|
At this time,
we have not changed our policy on statutory withholding requirements and will continue
to allow an employee to withhold at the minimum statutory withholding requirements. Amounts
paid by us to taxing authorities when directly withholding shares associated with employees’
income tax withholding obligations are classified as a financing activity in our cash
flow statement for the three and six months ended June 30, 2017 and 2016.
|
|
·
|
We excluded the
excess tax benefits from the assumed proceeds available to repurchase shares in the computation
of our diluted earnings per share for the three and six months ended June 30, 2017.
|
Recent Accounting Pronouncements
–
We have considered all new accounting
pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations,
financial condition, or cash flows, based on current information, except for:
ASU 2016-02,
Leases (Topic 842)
requires the rights and obligations of all leased assets with a term greater than 12 months to be presented on the balance
sheet. The pronouncement is effective for fiscal years beginning after December 15, 2018. Management is currently evaluating the
effect that the provisions of ASU 2016-02 will have on the Company’s financial statements.
ASU 2016-01,
Financial Instruments-
Overall (Subtopic 825-10)
: Recognition and Measurement of Financial Assets and Financial Liabilities, most notably requires
the changes in fair value of equity investments to be recognized in net income. The pronouncement also requires the use of the
exit price notion, the separate presentation of financial assets and liabilities by measurement category and form of asset, and
the separate presentation in other comprehensive income of changes in fair value resulting from a change in the instrument-specific
credit risk. The pronouncement is effective for fiscal years beginning after December 15, 2017. Based on the risk level of the
Company’s investment portfolio, Management does not expect the pronouncement to have a material impact on the Company’s
financial statements.
ASU 2015-09,
Revenue from Contracts
with Customers (Topic 606)
, requires the Company to recognize revenue for the transfer of goods or services to customers for
the amount the Company expects to be entitled to receive in exchange for those goods or services. The Company will be required
to identify the contract, identify the relevant performance obligations, determine the transaction price, allocate the transaction
price to the performance obligations in the contract, and recognize the revenue when the entity satisfies a performance obligation.
The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2017. Management is evaluating
the effect that the provisions of ASU 2015-09 will have on the Company’s financial statements.
2. FINANCIAL INSTRUMENTS
Certain financial assets and liabilities
are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes
the inputs used to measure fair value:
Level 1 – Quoted prices are
available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions
for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are
other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting
date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 – Pricing inputs include
significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed
methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
The following tables represent
cash and the available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant
investment category recorded as cash and cash equivalents or investment securities (in thousands):
|
|
June 30, 2017
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Accrued
Interest
|
|
|
Estimated
Fair Value
|
|
|
Cash &
Cash
Equivalents
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
33,306
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,306
|
|
|
$
|
33,306
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposit
|
|
|
30,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
30,000
|
|
|
|
-
|
|
Money market accounts
|
|
|
226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
226
|
|
|
|
226
|
|
|
|
-
|
|
Government & agency securities
|
|
|
4,056
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
9
|
|
|
|
4,029
|
|
|
|
-
|
|
|
|
4,029
|
|
|
|
|
34,282
|
|
|
|
-
|
|
|
|
(36
|
)
|
|
|
9
|
|
|
|
34,255
|
|
|
|
30,226
|
|
|
|
4,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
20,784
|
|
|
|
-
|
|
|
|
(71
|
)
|
|
|
278
|
|
|
|
20,991
|
|
|
|
-
|
|
|
|
20,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,372
|
|
|
$
|
-
|
|
|
$
|
(107
|
)
|
|
$
|
287
|
|
|
$
|
88,552
|
|
|
$
|
63,532
|
|
|
$
|
25,020
|
|
|
|
December 31, 2016
|
|
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Accrued
Interest
|
|
|
Estimated
Fair Value
|
|
|
Cash &
Cash
Equivalents
|
|
|
Investment
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
52,005
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
52,005
|
|
|
$
|
52,005
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
|
431
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
431
|
|
|
|
431
|
|
|
|
-
|
|
Government & agency securities
|
|
|
2,655
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
9
|
|
|
|
2,616
|
|
|
|
-
|
|
|
|
2,616
|
|
|
|
|
3,086
|
|
|
|
-
|
|
|
|
(48
|
)
|
|
|
9
|
|
|
|
3,047
|
|
|
|
431
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
21,836
|
|
|
|
-
|
|
|
|
(348
|
)
|
|
|
308
|
|
|
|
21,796
|
|
|
|
-
|
|
|
|
21,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,927
|
|
|
$
|
-
|
|
|
$
|
(396
|
)
|
|
$
|
317
|
|
|
$
|
76,848
|
|
|
$
|
52,436
|
|
|
$
|
24,412
|
|
The Company had a realized gain of $3 thousand and $13
thousand for the three months ended June 30, 2017 and 2016, respectively, and a realized loss of $57 thousand and $15 thousand
for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017 and 2016, gross unrealized losses related to
individual securities that had been in a continuous loss position for 12 months or longer were not significant. The maturities
of the Company’s investment securities generally range up to 5 years for municipal bonds and for government and agency securities.
3. INVENTORIES
Inventories consist principally of packaged meal replacements
held in the Company’s warehouses. Inventory is stated at the lower of cost or market, utilizing the first-in, first-out
method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other
indirect manufacturing costs. On a quarterly basis, management reviews inventory for unsalable or obsolete inventory.
Inventories consisted of the following
(in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
5,115
|
|
|
$
|
6,015
|
|
Packaging
|
|
|
1,067
|
|
|
|
1,202
|
|
Non-food finished goods
|
|
|
597
|
|
|
|
701
|
|
Finished goods
|
|
|
12,131
|
|
|
|
11,219
|
|
Reserve for obsolete inventory
|
|
|
(862
|
)
|
|
|
(826
|
)
|
|
|
$
|
18,048
|
|
|
$
|
18,311
|
|
4. EQUITY
Issuance of Additional Common
Stock
On May 18, 2017, the stockholders
of the Company approved the Medifast, Inc. Amended and Restated 2012 Share Incentive Plan (the “Amended and Restated 2012
Plan”) that increased the number of shares of Common Stock by 600,000, par value $.001 per share, which may be awarded under
the Amended and Restated 2012 Plan. As June 30, 2017, the total number of shares authorized for issuance is 1,600,000.
Stock Repurchase Plan
On June 14, 2017 the Company announced
it had established a repurchase plan under Rule 10b5-1 (the “Company’s 10b5-1 Plan”) of the Securities Exchange
Act of 1934, as amended, to facilitate the continued repurchase of shares of the Company’s common stock under its existing
stock repurchase program. The Company may repurchase up to 850,000 shares of its common stock, which remain available under the
outstanding repurchase authorization as of June 14, 2017. The Company’s 10b5-1 Plan permits repurchases commencing June
14, 2017, unless the plan is terminated earlier in accordance with its terms. There is no guarantee as to the exact number of
shares of the Company’s common stock, if any, that will be purchased under the Company’s 10b5-1 Plan.
5. SHARE-BASED COMPENSATION
Stock Options:
The Company has issued non-qualified
and incentive stock options to employees and nonemployee directors. The fair value of these options are estimated on the date
of grant using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the risk-free
interest rate, the expected volatility of the price of the Company’s common stock, and dividend yield. Options outstanding
as of June 30, 2017 generally vest over a period of three years with an expiration term of ten years from the date of grant. The
exercise price of these options ranges from $24.26 to $44.73. Due to the Company’s lack of option exercise history, the
expected term is calculated using the simplified method defined as the midpoint between the vesting period and the contractual
term of each option. The risk free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant which
most closely corresponds to the expected term of the option. The expected volatility is based on the historical volatility of
the Company’s common stock over the period of time equivalent to the expected term for each award. The weighted average
input assumptions used were as follows:
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Expected term (in years)
|
|
|
6
|
|
|
|
6
|
|
Risk-free interest rate
|
|
|
2.05
|
%
|
|
|
1.11
|
%
|
Expected volatility
|
|
|
38.33
|
%
|
|
|
42.22
|
%
|
Dividend yield
|
|
|
2.40
|
%
|
|
|
3.56
|
%
|
The following table is a summary of our stock option
activity:
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
(shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
129
|
|
|
$
|
28.22
|
|
|
|
98
|
|
|
$
|
28.17
|
|
Granted
|
|
|
38
|
|
|
|
44.73
|
|
|
|
50
|
|
|
|
27.99
|
|
Exercised
|
|
|
(21
|
)
|
|
|
27.38
|
|
|
|
(12
|
)
|
|
|
25.64
|
|
Forfeited
|
|
|
(16
|
)
|
|
|
36.48
|
|
|
|
(6
|
)
|
|
|
29.87
|
|
Outstanding at end of the period
|
|
|
130
|
|
|
$
|
32.10
|
|
|
|
130
|
|
|
$
|
28.22
|
|
Exercisable at end of the period
|
|
|
63
|
|
|
$
|
28.15
|
|
|
|
49
|
|
|
$
|
27.45
|
|
As of June 30, 2017, the weighted-average
remaining contractual life was 8.22 years with an aggregate intrinsic value of $1.3 million for outstanding stock options and
the weighted-average remaining contractual life was 7.43 years with an aggregate intrinsic value of $837 thousand for exercisable
options.
The weighted-average grant date
fair value of options granted during the six months ended June 30, 2017 and 2016 was $13.73 and $7.91, respectively. The unrecognized
compensation expense calculated under the fair value method for shares expected to vest as of June 30, 2017 was $631 thousand
and is expected to be recognized over a weighted average period of 2.04 years. The Company received $568 thousand and $299 thousand
in cash proceeds from the exercise of stock options during the six months ended June 30, 2017 and 2016, respectively. The total
intrinsic value for options exercised during the six months ended June 30, 2017 and 2016 was $325 thousand and $69 thousand, respectively.
Restricted Stock:
The Company has issued restricted
stock to employees and nonemployee directors generally with vesting terms up to five years after the date of grant. The fair value
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 the restricted stock activity:
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
|
Shares
|
|
|
Weighted-Average
Grant Date Fair Value
|
|
(shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
215
|
|
|
$
|
27.69
|
|
|
|
264
|
|
|
$
|
26.38
|
|
Granted
|
|
|
44
|
|
|
|
44.73
|
|
|
|
15
|
|
|
|
27.68
|
|
Vested
|
|
|
(58
|
)
|
|
|
26.35
|
|
|
|
(65
|
)
|
|
|
25.14
|
|
Forfeited
|
|
|
(8
|
)
|
|
|
35.23
|
|
|
|
(39
|
)
|
|
|
26.43
|
|
Outstanding at end of the period
|
|
|
193
|
|
|
$
|
31.66
|
|
|
|
175
|
|
|
$
|
26.95
|
|
The total fair value of restricted
stock awards vested during the six months ended June 30, 2017 and 2016 was $2.5 million and $1.9 million, respectively.
The total costs of the options
and restricted stock awards charged against income during the three ended June 30, 2017 and 2016 was $961 thousand and $668 thousand,
respectively, and $1.7 million and $1.2 million during the six months ended June 30, 2017 and 2016, respectively. Also included
for the three and six months ended June 30, 2017 was $297 thousand and $519 thousand in expense for 323,925 shares that will vest
based on certain market and performance conditions. Included in share-based compensation for the three and six months ended June
30, 2016 is $137 thousand and $365 thousand for 59,375 shares of performance awards issuable to certain key employees based on
achieving the 2016 financial plan that will vest on December 31, 2017.
The total income tax benefit recognized
in the condensed consolidated statements of income for restricted stock awards was $449 thousand and $273 thousand for the three
months ended June 30, 2017 and 2016, respectively, and $1.1 million and $524 thousand for the six months ended June 30, 2017 and
2016, respectively. The total tax benefit recognized in additional paid-in capital upon vesting of restricted stock awards and
exercise of stock options for the three months ended June 30, 2016 was $9 thousand and $105 thousand for the six months ended
June 30, 2016.
There was $3.8 million of total
unrecognized compensation cost related to restricted stock awards as of June 30, 2017 and is expected to be recognized over a
weighted-average period of 1.66 years. There was $2.9 million of unrecognized compensation cost related to the 323,925 market
and performance award shares discussed above as of June 30, 2017 and is expected to be recognized over a weighted-average period
of 2.50 years.
6. BUSINESS SEGMENTS
Operating segments are components
of an enterprise for which separate financial information is available that is regularly reviewed by the chief operating decision
maker in determining how to allocate resources and in assessing performance. The consolidated operating profit of the Company
is reviewed by the chief operating decision maker as a single segment and sales are reviewed at the business unit level. In July
2017, the Take Shape For Life® business was rebranded to OPTAVIA
TM
(“Optavia”).
The following table presents sales
by business segment (in thousands):
|
|
Three months ended June 30,
|
|
|
Six months ended June,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optavia
|
|
$
|
63,546
|
|
|
$
|
57,411
|
|
|
$
|
121,501
|
|
|
$
|
114,085
|
|
Medifast Direct
|
|
|
8,575
|
|
|
|
9,324
|
|
|
|
17,523
|
|
|
|
20,251
|
|
MWCC- Franchise
|
|
|
3,378
|
|
|
|
4,109
|
|
|
|
6,836
|
|
|
|
8,355
|
|
Medifast Wholesale
|
|
|
230
|
|
|
|
300
|
|
|
|
491
|
|
|
|
798
|
|
Revenue
|
|
$
|
75,729
|
|
|
$
|
71,144
|
|
|
$
|
146,351
|
|
|
$
|
143,489
|
|
7. EARNING PER SHARE
Basic earnings per share (“EPS”)
computations are calculated utilizing the weighted average number of shares of common stock outstanding during the periods presented.
Diluted EPS is calculated utilizing the weighted average number of shares of 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 June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,584
|
|
|
$
|
3,397
|
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
|
|
11,929
|
|
|
|
11,811
|
|
|
|
11,915
|
|
|
|
11,817
|
|
Effect of dilutive common stock equivalents
|
|
|
127
|
|
|
|
73
|
|
|
|
129
|
|
|
|
74
|
|
Weighted average shares of common stock outstanding
|
|
|
12,056
|
|
|
|
11,884
|
|
|
|
12,044
|
|
|
|
11,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic
|
|
$
|
0.64
|
|
|
$
|
0.29
|
|
|
$
|
1.15
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted
|
|
$
|
0.63
|
|
|
$
|
0.29
|
|
|
$
|
1.14
|
|
|
$
|
0.64
|
|
The calculation of diluted earnings
per share excluded 10,080 and 87,986 antidilutive options outstanding for the three months ended June 30, 2017 and 2016, respectively,
and 8,278 and 98,000 antidilutive options outstanding for the six months ended June 30, 2017 and 2016, respectively. EPS is computed
independently for each of the quarters presented; accordingly, the sum of the quarterly earnings per common share may not equal
the year-to-date total computed.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table sets forth
the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
$
|
77
|
|
|
$
|
71
|
|
Unrealized losses on marketable securities
|
|
|
(63
|
)
|
|
|
(236
|
)
|
Accumulated other comprehensive income (loss)
|
|
$
|
14
|
|
|
$
|
(165
|
)
|
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Note Regarding Forward-Looking Statements
This report contains information that may
constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “believe,” “expect,”
“intend,” “estimate,” “anticipate,” “project,” “will,” and similar
expressions, which are not historical in nature, identify forward-looking statements. However, the absence of these words or expressions
does not necessarily mean that a statement is not forward-looking. All statements that address operating performance, events or
developments that we expect or anticipate will occur in the future, including statements relating to future operating results,
are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However,
caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only
as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience
and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report”), and those described
from time to time in our future reports filed with the Securities and Exchange Commission.
The following discussion should be read in
conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
Overview
Medifast, Inc. (together with its consolidated
subsidiaries, “we,” “us,” “our,” the “Company,” or “Medifast”) is
a leading provider of clinically studied healthy living products and programs. We produce, distribute and sell weight loss, weight
management, and healthy living products, and other consumable health and nutritional products. The Company’s product lines
include weight loss, weight management, and healthy living meal replacements, snacks, hydration products, and vitamins. Our product
sales accounted for 97% of our revenues for the six months ended June 30, 2017 and 2016, respectively. In July 2017, the Take
Shape For Life® business was rebranded to OPTAVIA
TM
(“Optavia”) which stands for optimal health and
wellbeing. The brand transition included the launch of over 20 OPTAVIA
Essential Fuelings
TM
and OPTAVIA
snacks. Health coaches in the Optavia business unit (“Optavia Coaches”) and clients can choose from more than 60 delicious,
convenient, interchangeable, scientifically-designed Fuelings.
The Company’s business units are Optavia,
Medifast Direct, Franchise Medifast Weight Control Centers (“MWCC”) and Medifast Wholesale. For the three months ended
June 30, 2017, total revenue was $75.7 million as compared to $71.1 million for the three months ended June 30, 2016, an increase
of $4.6 million, or 6.4%. For the six months ended June 30, 2017, total revenue was $146.4 million as compared to $143.5 million
for the six months ended June 30, 2016, an increase of $2.9 million, or 2.0%. The increase for both the three and six months ended
June 30, 2017 resulted from an increase in revenue in the Optavia business unit resulting from an improved mix with higher selling
prices offset by decreased revenues for the remaining business units. These revenue changes are further described in the “Overview
of Results of Operations” section.
For the six months ended June 30, 2017, the
percentage of total revenue by each business unit was as follows:
Optavia
|
|
|
83.0
|
%
|
Medifast Direct
|
|
|
12.0
|
%
|
MWCC
|
|
|
4.7
|
%
|
Medifast Wholesale
|
|
|
0.3
|
%
|
See Note 5, “Business Segments”
of the notes to the condensed consolidated financial statements for a breakout of revenues of the Company’s business segments
for the three months ended June 30, 2017 and 2016 and the six months ended June 30, 2017 and 2016.
We review and analyze a number of key operating
and financial metrics to manage our business, including revenue to advertising spend, number of active Optavia Coaches, and average
quarterly revenue generated per Optavia Coach.
Distribution Business Units
Optavia
– Optavia is the personal coaching division
of Medifast. This coaching network consists of Optavia Coaches, who are independent contractors and trained to provide coaching
and support to clients utilizing the Optavia platform. The role of the Optavia Coach is to provide support and personal encouragement
to help clients effectively reach and sustain a healthy weight, and adopt habits for a lifetime of health. Within our Trilogy
of Optimal Health, the Company offers individuals an opportunity to create sustainable health in all areas of their lives - building
a healthy body, developing a healthy mind, and generating healthy finances. In addition to the encouragement and support of our
Optavia Coaches, clients of Optavia are offered online product and program information, tools and support, and access to our registered
dieticians. Clients of our Optavia Coaches order our products through either the Company’s website, their Optavia Coach’s
replicated website or our in-house call center. In addition to the full line of Medifast branded products and programs, Optavia
also offers an exclusive product line under the lifestyle brand OPTAVIA
TM
. Our Optavia Coaches provide coaching and
support to their clients throughout the weight-loss and weight-maintenance process. Most new Optavia Coaches are introduced to
the opportunity by an existing Optavia Coach. The vast majority of new Optavia Coaches started as weight-loss clients of an Optavia
Coach, had success on the Optavia program, and became an Optavia Coach to help others through the weight-loss process.
Optavia is a member of the Direct Selling
Association (the “DSA”), a national trade association representing over 200 direct selling companies doing business
in the United States. To become a member of the DSA, Optavia, like other active DSA member companies, underwent a comprehensive
and rigorous one-year company review by DSA that included a detailed analysis of its company business-plan materials. This review
is designed to ensure that a company’s business practices do not contravene DSA’s Code of Ethics. In addition to its
DSA membership, Optavia is also a voluntary DSA Code of Ethics participant, which sets higher standards for ensuring compliance.
Compliance with the Code of Ethics is paramount to becoming and remaining a member in good standing of the DSA. Accordingly, we
believe membership in the DSA by Optavia demonstrates its commitment to the highest standards of ethics and a pledge not to engage
in any deceptive, unlawful, or unethical business practices, such as pyramid and other similar schemes. Moreover, Optavia, like
other DSA member companies in good standing, has pledged to provide consumers with accurate and truthful information regarding
the price, grade, quality, and performance of the products Optavia markets.
Medifast Direct –
Through Medifast
Direct, our direct-to-consumer business unit, customers order Medifast products directly through the Company’s website,
www.medifastnow.com or our in-house call center. This business is driven by a multi-media customer acquisition and retention strategy
that includes television, digital advertising, direct mail, email, public relations, word of mouth referrals, social media initiatives,
and other means as deemed appropriate. Medifast Direct provides support through its social communities, in-house call center,
and nutrition support team of registered dietitians to better serve its customers.
Franchise Medifast Weight Control Centers
– The MWCC business unit sells product through franchise and reseller locations. These locations offer structured programs
and a team of professionals to help customers achieve weight-loss and weight-management success at center locations. Counselors
at each location work with members to provide nutritional and behavioral support based on the member’s personal needs. As
of June 30, 2017, MWCC had 36 franchised centers located in Arizona, California, Louisiana, Minnesota, Maryland, and Wisconsin
and two reseller locations in Maryland and Pennsylvania as compared to a total of 57 centers as of June 30, 2016.
In 2016, Medifast entered into a distribution
and licensing agreements with 19 weight control centers previously operating as franchise locations. Under the terms of these
agreements, the locations have been rebranded and offer products and services not otherwise available at a MWCC. These offerings
complement the Medifast products and plans, which are still utilized as the exclusive weight management program at these locations.
These resellers may use Medifast’s trademarks in their marketing and advertising efforts and continue to purchase Medifast-branded
products at wholesale directly from the Company.
Medifast Wholesale
– Medifast
medical provider practices carry an inventory of wholesale products and resell them to patients while providing appropriate support
to help ensure healthy weight loss and weight management.
The Company offers resources to assist the
medical providers, their staff and their patients in achieving success with their Medifast program. These medical providers have
access to our nutrition support team, marketing assets and training modules to help grow their program and enable patients to
achieve their weight loss and associated health goals. Medifast’s nutrition support team includes registered dietitians
and a behavioral specialist who provide program support and advice via phone and email.
In 2012, the Company entered into a strategic
partnership agreement with Medix, a leader in pharmaceutical obesity products in Mexico. The agreement, which was amended in 2013,
granted Medix an exclusive license to distribute Medifast products and programs through physicians and weight control centers
in Mexico, Central America and South America under the Medifast brand. During the first quarter of 2017, the Company terminated
the licensing agreement with Medix. The termination of the contract allows the Company to refocus on our core businesses. During
the second quarter of 2017, Medix closed its center locations.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements
are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).
Our significant accounting policies are described in Note 2 of the consolidated financial statements included in the 2016 Annual
Report. Other than the accounting change for ASU 2016-09
Compensation — Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting
, we did not make any other material changes to our critical accounting policies
during the six months ended June 30, 2017.
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 it believes to be reasonable under the circumstances. Actual results may differ from
these estimates under different assumptions or conditions. The accounting estimates we consider critical include revenue recognition,
impairment of fixed assets and intangible assets, income taxes, reserves for returns, operating leases and clinic closure costs.
Overview of Results of Operations
The following table reflects our income statements
(in thousands, except percentages):
|
|
Three months ended June 30,
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
75,729
|
|
|
$
|
71,144
|
|
|
$
|
4,585
|
|
|
|
6.4
|
%
|
Cost of sales
|
|
|
18,118
|
|
|
|
17,919
|
|
|
|
(199
|
)
|
|
|
-1.1
|
%
|
Gross Profit
|
|
|
57,611
|
|
|
|
53,225
|
|
|
|
4,386
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
46,301
|
|
|
|
48,201
|
|
|
|
1,900
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,310
|
|
|
|
5,024
|
|
|
|
6,286
|
|
|
|
125.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
141
|
|
|
|
65
|
|
|
|
76
|
|
|
|
116.9
|
%
|
Other income (expense)
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
(6
|
)
|
|
|
-200.0
|
%
|
|
|
|
138
|
|
|
|
68
|
|
|
|
70
|
|
|
|
102.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
11,448
|
|
|
|
5,092
|
|
|
|
6,356
|
|
|
|
124.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
|
3,864
|
|
|
|
1,695
|
|
|
|
(2,169
|
)
|
|
|
-128.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,584
|
|
|
$
|
3,397
|
|
|
$
|
4,187
|
|
|
|
123.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
76.1
|
%
|
|
|
74.8
|
%
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
61.1
|
%
|
|
|
67.8
|
%
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
14.9
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
146,351
|
|
|
$
|
143,489
|
|
|
$
|
2,862
|
|
|
|
2.0
|
%
|
Cost of sales
|
|
|
35,848
|
|
|
|
37,070
|
|
|
|
1,222
|
|
|
|
3.3
|
%
|
Gross Profit
|
|
|
110,503
|
|
|
|
106,419
|
|
|
|
4,084
|
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
90,584
|
|
|
|
95,127
|
|
|
|
4,543
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,919
|
|
|
|
11,292
|
|
|
|
8,627
|
|
|
|
76.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
|
204
|
|
|
|
180
|
|
|
|
24
|
|
|
|
13.3
|
%
|
Other income (expense)
|
|
|
36
|
|
|
|
(21
|
)
|
|
|
57
|
|
|
|
-271.4
|
%
|
|
|
|
240
|
|
|
|
159
|
|
|
|
81
|
|
|
|
50.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
20,159
|
|
|
|
11,451
|
|
|
|
8,708
|
|
|
|
76.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
|
6,430
|
|
|
|
3,794
|
|
|
|
(2,636
|
)
|
|
|
-69.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
|
$
|
6,072
|
|
|
|
79.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
75.5
|
%
|
|
|
74.2
|
%
|
|
|
|
|
|
|
|
|
Selling, general, and administrative costs
|
|
|
61.9
|
%
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
13.6
|
%
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
Revenue:
Revenue increased $4.6 million,
or 6.4%, to $75.7 million for the three months ended June 30, 2017 from $71.1 million for the three months ended June 30, 2016.
The revenue to total advertising spend for the three months ended June 30, 2017 was 37.4-to-1 as compared to 43.9-to-1 for the
corresponding period in 2016. Total advertising spend, inclusive of broker fees, was $2.0 million for the three months ended June
30, 2017 as compared to $1.7 million for the corresponding period in 2016. Revenue increased $2.9 million, or 2.0%, to $146.4
million for the six months ended June 30, 2017 from $143.5 million for the six months ended June 30, 2016. The revenue to total
advertising spend for the six months ended June 30, 2017 was 33.1-to-1 as compared to 25.0-to-1 for the corresponding period in
2016. Total advertising spend, inclusive of broker fees, was $4.4 million for the six months ended June 30, 2017 as compared to
$5.8 million for the corresponding period in 2016.
For the three months ended June 30, 2017,
Optavia revenue was $63.5 million as compared to $57.4 million for the corresponding period in 2016. This is the seventh consecutive
quarter-over-quarter of revenue growth for Optavia. The number of active earning Optavia Coaches for the three months ended June
30, 2017 increased to 13,500 from 12,800 for the corresponding period in 2016, an increase of 5.5%. The quarterly revenue per
Optavia Coach increased 5.2% to $4,713 for the three months ended June 30, 2017 from $4,479 for the three months ended June 30,
2016. Optavia revenue increased $7.4 million, or 6.5%, to $121.5 million for the six months ended June 30, 2017 from $114.1 million
for the six months ended June 30, 2016 as a result of an improved mix with higher selling prices and the price increase effective
April 2016.
Medifast Direct revenue decreased $0.7 million,
or 7.5%, to $8.6 million for the three months ended June 30, 2017 from $9.3 million for the three months ended June 30, 2016.
This decrease in revenue for the current quarter represents a significant improvement from the period-to-period comparison of
the first quarter of 2017 to the first quarter of 2016. Sales for the quarter were down in comparison to the corresponding quarter
in 2016 as new customer acquisition continued to be challenging. Revenues in this business unit are driven primarily by targeted
customer marketing and advertising as well as the direct response initiatives we have in place. Medifast Direct advertising during
the three months ended June 30, 2017 increased $0.3 million, or 18.7%, to $1.9 million from $1.6 million for the three months
ended June 30, 2016. The Company continues to reduce advertising spending and only invests in initiatives that meet distinct criteria
in an effort to focus on determining the ideal media mix to optimize profitability. For the six months ended June 30, 2017, Medifast
Direct revenue was $17.5 million as compared to $20.3 million for the corresponding period in 2016 as a result of continued customer
acquisition challenges.
For the three months ended June 30, 2017,
MWCC revenue was $3.4 million as compared to $4.1 million for the corresponding period in 2016. MWCC revenue decreased $1.5 million,
or 17.9%, to $6.9 million for the six months ended June 30, 2017 from $8.4 million for the six months ended June 30, 2016. The
decrease in revenue for both the three and six months ended June 30, 2017 was primarily driven by fewer franchise centers in operation
during these periods combined with a decline in activity within the centers and a decrease in resellers. As of June 30, 2017,
the Company had 36 franchise centers and two reseller locations in operation as compared to 57 franchise centers at the end of
the same period last year.
Medifast Wholesale revenue decreased $70 thousand,
or 23.3%, to $230 thousand for the three months ended June 30, 2017 from $300 thousand for the three months ended June 30, 2016.
The decrease for the quarter was due to the loss of certain accounts resulting from Medifast’s enforcement of business partner
compliance distribution requirements. For the six months ended June 30, 2017, Medifast Wholesale revenue was $491 thousand as
compared to $798 thousand for the corresponding period in 2016.
Costs of Sales:
Cost of sales increased
$0.2 million, or 1.1%, to $18.1 million for the three months ended June 30, 2017 from the corresponding period in 2016 and decreased
$1.2 million, or 3.3%, to $35.8 million for the six months ended June 30, 2017 from the corresponding period in 2016. The decrease
in cost of sales for the six months ended June 30, 2017 was primarily driven by reduced shipping costs and improved efficiencies
in the Company’s supply chain operations.
Gross Profit:
For the three months
ended June 30, 2017, gross profit increased $4.4 million, or 8.2%, to $57.6 million from the corresponding period in 2016. As
a percentage of sales, gross margin increased 130 basis points to 76.1% for the three months ended June 30, 2017 from 74.8% for
the corresponding period in 2016. The gross margin improvement for the quarter primarily resulted from an increase in revenue
driven by an improved mix with higher prices. For the six months ended June 30, 2017, gross profit increased $4.1 million, or
3.8%, to $110.5 million from the corresponding period in 2016. As a percentage of sales, gross margin increased 130 basis points
to 75.5% for the six months ended June 30, 2017 from 74.2% for the corresponding period in 2016. The gross margin improvement
for the year-to-date was primarily driven by an increase in revenue from an improved mix with higher selling prices and a price
increase effective April 2016. In addition, cost of sales decreased as a result of efficiencies in the Company’s supply
chain operations.
Selling, General and Administrative Expenses:
Selling, general and administrative (“SG&A”) expenses were $46.3 million for the three months ended June 30,
2017, a decrease of $1.9 million, or 3.9%, as compared to $48.2 million for the corresponding period in 2016. SG&A expenses
included $359 thousand and $543 thousand in research and development costs for the three months ended June 30, 2017 and 2016,
respectively. As a percentage of sales, SG&A expenses was 61.1% for the three months ended June 30, 2017 as compared to 67.8%
for the corresponding period in 2016. The decrease in SG&A expenses was primarily a result of the $6.1 million asset impairment
costs incurred during the three months ended June 30, 2016. This decrease was partially offset by increased commission expenses
resulting from both increased sales and additional Optavia Coaches, and increased personnel costs. Excluding the impairment costs,
adjusted SG&A expenses increased $4.2 million to $46.3 million for the three months ended June 30, 2017 from $42.1 for the
corresponding period in 2016. Adjusted SG&A expenses as a percentage of sales were 61.1% and 59.2% for the three months ended
June 30, 2017 and 2016, respectively.
For the six months ended June 30, 2017, SG&A
expenses decreased $4.5 million, or 4.8%, to $90.6 million from $95.1 million for the corresponding period in 2016. SG&A expenses
included $743 thousand and $1.2 million in research and development costs for the six months ended June 30, 2017 and 2016, respectively.
As a percentage of sales, SG&A expenses were 61.9% for the six months ended June 30, 2017 as compared to 66.3% for the corresponding
period in 2016. The decrease was primarily the result of $1.2 million in restructuring costs and $6.1 million in impairment costs
that occurred during the six months ended June 30, 2016. In addition, SG&A expenses decreased as a result of reduced and more
effective advertising spend in Medifast Direct and reduced depreciation expense. These decreases were partially offset by increased
commission expenses due to higher sales and personnel costs. Excluding restructuring and impairment costs, adjusted SG&A expenses
increased $2.7 million to $90.6 million for the six months ended June 30, 2017 from $87.9 for the corresponding period in 2016.
Optavia commission expense, which is variable
based upon product sales and the number of Optavia Coaches, increased $2.8 million, or 11.6%, for the three months ended June
30, 2017 from the corresponding period in 2016, which is in line with the sales growth of 10.6% that Optavia experienced during
the period. For the six months ended June 30, 2017, Optavia commission expense increased $3.3 million, or 7.0%, from the corresponding
period in 2016, which is in line with the sales growth of 6.5% that Optavia experienced during the period.
Salaries and benefits increased $1.1 million
quarter-over-quarter for the three months ended June 30, 2017, primarily as a result of higher share-based compensation expense
and incentive costs. For the six months ended June 30, 2017, salaries and benefits increased $713 thousand from the corresponding
period in 2016 primarily as a result of higher share-based compensation expense, incentive costs, and salaries and related benefits
offset by a onetime severance expense that was incurred during the three months ended June 30, 2016.
Sales and marketing expenses increased $437
thousand during the three months ended June 30, 2017 and decreased $975 thousand during the six months ended June 30, 2017 from
the corresponding periods in 2016. This decrease for the six months ended June 30, 2017 was primarily driven by reduced advertising
spend, particularly for Medifast Direct.
General and administrative expenses decreased
$5.9 million for the three months ended June 30, 2017 and $6.8 million for the six months ended June 30, 2017 from the corresponding
periods in 2016 primarily due to the impairment costs incurred during the three months ended June 30, 2016 and lower depreciation
expense.
Income from operations:
For the three
months ended June 30, 2017, income from operations increased $6.3 million to $11.3 million from $5.0 million for the corresponding
period in 2016 primarily as a result of increased revenue and reduced SG&A expenses. Income from operations for the six months
ended June 30, 2017 increased $8.6 million to $19.9 million from the corresponding period in 2016 primarily as a result of increased
revenue and reduced cost of sales and SG&A expenses. Adjusted income from operations which excludes impairment costs and restructuring
costs increased $203 thousand to $11.3 million for the three months ended June 30, 2017 from the corresponding period in 2016
and increased $1.4 million to $19.9 million for the six months ended June 30, 2017 from the corresponding period in 2016.
Interest income, net:
For the three
months ended June 30, 2017 and 2016, interest income was $141 thousand and $65 thousand, respectively, and for the six months
ended June 30, 2017 and 2016, interest income was $204 thousand and $180 thousand, respectively.
Other income (expense):
For the three
months ended June 30, 2017 and 2016, other expense was $3 thousand and other income was $3 thousand, respectively. For the six
months ended June 30, 2017 and 2016, other income was $36 thousand and other expense was $21 thousand, respectively.
Income from operations before income taxes:
Income from operations before income taxes was $11.4 million for the three months ended June 30, 2017 as compared to $5.1
million for the three months ended June 30, 2016, an increase of $6.3 million. Pre-tax profit as a percentage of sales increased
to 15.1% for the three months ended June 30, 2017 from 7.2% for the three months ended June 30, 2016. Income from operations before
income taxes was $20.2 million for the six months ended June 30, 2017 as compared to $11.5 million for the six months ended June
30, 2016, an increase of $8.7 million. Pre-tax profit as a percentage of sales increased to 13.8% for the six months ended June
30, 2017 from 8.0% for the six months ended June 30, 2016.
Provision for income tax expense:
For the three months ended
June 30, 2017, the Company recorded $3.9 million in income tax expense, an effective rate of 33.8%, as compared to $1.7 million
in income tax expense, an effective rate of 33.3%, for the three months ended June 30, 2016. The increase in the effective tax
rate for the three months ended June 30, 2017 as compared to the three months ended June 30, 2016 was primarily driven by a decrease
in the Domestic Manufacturer Deduction partially offset by reduced state income taxes. For the six months ended June 30, 2017,
the Company recorded $6.4 million in income tax expense, an effective rate of 31.9%, as compared to $3.8 million in income tax
expense, an effective rate of 33.1%, for the six months ended June 30, 2016. The decrease in the effective tax rate for the six
months ended June 30, 2017 as compared to the six months ended June 30, 2016 was primarily due to the 1.6% rate reduction related
to the discrete change in accounting for taxes associated with share-based compensation, 1.2% rate reduction of the state income
tax offset by an 1.6% reduction to the benefit from the Domestic Manufacturer Deduction. The Company anticipates a full year tax
rate of 33% to 34% in 2017.
Net income:
Net income was $7.6 million
and $13.7 million, or $.63 and $1.14 per diluted share, for the three and six months ended June 30, 2017 as compared to $3.4 million
and $7.7 million, or $.29 and $.64 per diluted share, for the three and six months ended June 30, 2016, respectively. Excluding
restructuring and impairment costs, adjusted net income was $7.5 million and $12.5 million, or $.63 and $1.05 per diluted share
for the three and six months ended June 30, 2016, respectively. The period-over-period changes were driven by the factors described
above in the explanations from operations.
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 our quarterly earnings
press release and other public disclosures. The following GAAP financial measures have been presented on an as adjusted basis:
SG&A expenses, income from operations, net income and diluted earnings per share. Each of these as adjusted financial measures
excludes the impact of certain amounts 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):
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative
|
|
$
|
46,301
|
|
|
$
|
48,201
|
|
|
$
|
90,584
|
|
|
$
|
95,127
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
-
|
|
|
|
6,083
|
|
|
|
-
|
|
|
|
6,083
|
|
Restructuring charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,166
|
|
Adjusted selling, general, and administrative
|
|
$
|
46,301
|
|
|
$
|
42,118
|
|
|
$
|
90,584
|
|
|
$
|
87,878
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
11,310
|
|
|
$
|
5,024
|
|
|
$
|
19,919
|
|
|
$
|
11,292
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
-
|
|
|
|
6,083
|
|
|
|
-
|
|
|
|
6,083
|
|
Restructuring charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,166
|
|
Adjusted income from operations
|
|
$
|
11,310
|
|
|
$
|
11,107
|
|
|
$
|
19,919
|
|
|
$
|
18,541
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,584
|
|
|
$
|
3,397
|
|
|
$
|
13,729
|
|
|
$
|
7,657
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets
|
|
|
-
|
|
|
|
4,058
|
|
|
|
-
|
|
|
|
4,067
|
|
Restructuring charges
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
780
|
|
Adjusted net income
|
|
$
|
7,584
|
|
|
$
|
7,455
|
|
|
$
|
13,729
|
|
|
$
|
12,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (1)
|
|
$
|
0.63
|
|
|
$
|
0.29
|
|
|
$
|
1.14
|
|
|
$
|
0.64
|
|
Impact for adjustments (1)
|
|
|
-
|
|
|
|
0.34
|
|
|
|
-
|
|
|
|
0.41
|
|
Adjusted diluted earnings per share (1)
|
|
$
|
0.63
|
|
|
$
|
0.63
|
|
|
$
|
1.14
|
|
|
$
|
1.05
|
|
(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 $104.2 million and working capital of $85.6 million at June 30, 2017 as compared with $96.0 million and $76.9 million at December
31, 2016, respectively. The $8.2 million net increase in stockholder’s equity reflects $13.7 million in net income for the
six months ended June 30, 2017 offset by $7.7 million declared dividends to stockholders as well as other equity transactions
as described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in our condensed
consolidated financial statements. The Company declared a dividend of $4.1 million, or $0.32 per share, to common stockholders
as of June 23, 2017 that will be paid in the third quarter of 2017. While we intend to continue the dividend program and believe
we will have sufficient liquidity to do so, we can provide no assurance we will be able to continue the declaration and payment
of dividends. The Company’s cash, cash equivalents, and investment securities increased from $76.8 million at December 31,
2016 to $88.6 million at June 30, 2017.
Net cash provided by continuing operating
activities increased $1.7 million to $20.7 million for six months ended June 30, 2017 from $19.0 million for the six months ended
June 30, 2016 primarily as a result of increased net income partially offset by a decrease in cash generated from working capital.
Net cash used in discontinued operating activities
was $272 thousand for the six months ended June 30, 2016.
Net cash used in investing activities was
$1.7 million for the six months ended June 30, 2017 as compared to net cash provided by investing activities of $4.2 million for
the six months ended June 30, 2016. This change resulted from cash used in net investment securities for the six months ended
June 30, 2017 as compared to cash provided by net investment securities for the corresponding period in 2016. Also, cash generated
from the sale of property, plant and equipment decreased and cash used in capital expenditures increased for the six months ended
June 30, 2017 from the corresponding period in 2016.
Net cash used in financing activities increased
$1.5 million to $7.9 million for six months ended June 30, 2017 from $6.4 million for the six months ended June 30, 2016. This
increase was primarily due to an increase in cash dividends paid to stockholders.
In pursuing its business strategy, the Company
may require additional cash for operating and investing activities. The Company expects future cash requirements, if any, to be
funded from operating cash flow and financing activities.
The Company evaluates acquisitions from time to time as presented.