Medifast, Inc. Annual Report 2015

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FY2015 Annual Report · Medifast, Inc.

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2015

annual
report

We’re on a Mission

2015 A N N UA L

R E P O R T

11445 Cronhill Drive • Owings Mills • Maryland 21117

2015 A N N U A L

R E P O R T

Lett er to Shareholders — 2

Take Shape For Life® — 6

Medifast Direct® — 10

Franchise Medifast Weight Control
Centers — 14

Medical Providers — 14

Product & Program Innovation — 16

Scientiﬁ c & Clinical Aff airs — 18

Community Impact — 20

I N T RO D U C T I O N

2015:
Mission
Medifast

At Medifast,® we’re on a mission to empower

people with the right opportunities to enjoy

the healthy life they deserve. To ensure that

our products and programs meet the highest

standards so that our Clients can reach their

goals. To spread the word so that wellness is

never out of reach. And this year, the plans we

put into place are doing just that.

We introduced new Health Coaches and Clients to Take Shape For Life.®

We launched new products to give our Clients more options. We

introduced new marketing programs to reach more people. We revamped

plans to be more convenient than ever. And we formed winning

sponsorships and partnerships to get the word out to a larger audience.

At Medifast,® we’re evolving into a company that offers a broad array of

products and services to help customers achieve their weight management

objectives and build a well-rounded, healthy lifestyle. And we’re creating

a broader focus on what consumers want today to give our company the

best opportunities for tomorrow. Making America healthy is our mission,

and we’re pushing ourselves every day to make it a success.

Michael C. MacDonald,
Chairman & CEO, Medifast, Inc.

“ Medifast is evolving from a company identified
solely with diet and weight loss to one that
offers a broad array of products and services to
help customers build a healthy lifestyle.”

L E T T E R T O T H E S H A R E H O L D E R S

Michael C. MacDonald,
Chairman & CEO, Medifast, Inc.

“ The entire Medifast team is unified in its focus on achieving
The Company’s value-building objectives.”

LETTER TO SHAR EH OLDERS

Our team’s dedication and commitment to
excellence was vital to Medifast’s success in 2015.

We remained focused on taking steps to optimize
each of our business units and maintained a
consistent approach in executing on our three
strategic pillars for 2015 — the growth and
simplification of Take Shape For Life,® the
optimization of Medifast Direct,® and product
and program innovation.

Among the 2015 highlights, were the introduction
of many new Take Shape For Life® momentum
building initiatives; the launch of the Medifast
Achieve™ Plan; the development of a Sports
Performance Product Line, Dual Fuel™; and
the kickoff of the Medifast Community Impact
Program.

As we continued to manage our balance sheet
and cash position effectively, we were also
pleased to introduce The Company’s first ever
quarterly dividend in 2015.

TAKE SHAPE FOR LIFE ® GRO WT H
AND SIMPLIFICATION

During the year, every initiative we implemented
was developed to drive growth and/or
simplification. From our new Health Coach
tools to incentives to promotions to technology
and events, we believe we’ve built a strong
foundation for future growth.

In 2015, Mona Ameli’s first full year of leadership
in Take Shape For Life,® we ended the year with
our first quarter of positive year-over-year growth
in Take Shape For Life® since the third quarter of
2013 and made significant strides over the course
of the year in Health Coach sponsorship. We also

generated increased Health Coach productivity
as a result of higher new Client acquisition and
higher average order value year-over-year.

The opportunity for Health Coaches to maximize
the business opportunity while encouraging their
Clients to reach their Optimal Health™ goals,
is an important evolution in how we approach
Take Shape For Life.® These efforts are vital to
attracting new Health Coaches and are essential
for the retention of existing Health Coaches. We
made significant progress in these areas in 2015,
and as we enter 2016, we have solid business
momentum in Take Shape for Life® and are
optimistic about the future growth of our largest
business unit.

M ED I FAST D I RE CT ® O PT I MI ZATI ON

The second key pillar in 2015 was the work in
place to stabilize the Medifast Direct® business.
In 2015, we launched Medifast Achieve,™ a simple
and flexible plan with a wide variety of product
options for customers on their self-guided
weight loss or weight management journey. The
Medifast Achieve™ Plan was designed by our
nutritionists to support gradual, steady weight
loss, while allowing customers additional flexibility.

Through our established Medifast Advantage
program, we continued to offer several options
for convenient, automatic monthly delivery to
customers, which helps promote plan compliance
and higher lifetime value. We know that customers
who join this program are committed to healthy
weight management and interested in the
incentives and rewards offered.

We also identified new opportunities to enhance
our e-Commerce platform and improve the
customer experience. In 2016, we will implement
a number of short- and long-term initiatives to

Medifast leadership team rings the New York Stock Exchange closing bell

support continued optimization of the Medifast
Direct® business unit. Among others, these
include expanded analytics and attribution, new
promotional campaigns, and site configuration
and design enhancements.

compared to the prior year, we reversed the
trend in 2015, and are poised to return to
growth in 2016. Our gross margin for the year
expanded 50 basis points, and we efficiently
managed our expenses.

PRO DU CT A ND PRO GR AM IN N OVATIO N

In 2015, Medifast® launched several new snacks,
including Medifast Crackers and Crisps, which can
be enjoyed as optional snacks in any phase of any
of our Medifast plans. Additionally, we launched
a sports nutrition line, Dual Fuel,™ featuring bars
and ready-to-drink shakes. The products were
developed with feedback from college Health
Coaches and strength and conditioning trainers
to provide athletes and anyone living an active
lifestyle with the right balance of carbohydrates
and protein.

We continue to research and evaluate key trends
across nutrition and ingredients as we expect
they will influence consumer preferences in
2016 and beyond. Additionally, the new product
imagery and icons introduced across our offerings
in 2015, allow us to promote attributes that are in
line with these trends.

2 01 5 F IN A NCIA L SUM MARY

• Income from continuing operations for the fiscal
year 2015 was $19.6 million, or $1.62 per diluted
share based on approximately 12.1 million shares
outstanding, compared to $21.0 million, or $1.65
per diluted share for the comparable period
last year based on approximately 12.8 million
shares outstanding. Excluding the extraordinary
legal and advisory expenses resulting from 13D
filers in 2015 and 2014 and the accrued franchise
loan obligation in 2014, adjusted income from
continuing operations would have been $20.9
million or $1.73 per share in 2015, and $24.1
million, or $1.89 per share in 2014.

• Adjusted earnings per share from continuing

operations was $1.73. These results are a
demonstration of our team’s ability to execute
in our core focus areas and strategic initiatives,
as we work to improve each of our business
units: Take Shape For Life,® Medifast Direct,®
Franchise Medifast Weight Control Centers,
and Medifast Medical Providers.

• Overall, net revenue from continuing

• Our effective tax rate for 2015 was 34.1%

operations for 2015 was $272.8 million.
While net revenue was down slightly when

compared to 33.6% in 2014.

L E T T E R T O T H E S H A R E H O L D E R S cont.

• Net revenue from continuing operations

decreased 4.4% to $272.2 million for the fiscal
year ended December 31, 2015, compared to
$285.3 million in 2014. Take Shape For Life®
revenue in 2015 was $202.2 million compared
to $206.7 million in 2014; Medifast Direct®
revenue was $48.7 million as compared to
$57.2 million in 2014; Franchise Medifast
Weight Control Centers revenue was $17.1
million as compared to $15.4 million in 2014;
and lastly Medifast Wholesale revenue was
$4.8 million in 2015 compared to $6.0 million
in 2014.

• Our cash, cash equivalents, and investment

securities as of December 31, 2015, increased
to $67.1 million compared to $52.6 million at
December 31, 2014. For the full year ended
December 31, 2015, we repurchased 364,341
shares of common stock, at an average
purchase price of $28.83. We currently have
approximately 850,000 shares remaining on
our repurchase authorization as of the end
of 2015.

• Our balance sheet remains strong with

stockholders’ equity of $88.6 million and
working capital of $64.5 million as of
December 31, 2015.

20 16 BUSI NE SS PRI O R I TIE S —
TH E Y E AR AH EAD

Looking ahead, we will leverage and build
upon the stellar progress we’ve made with Take
Shape For Life,® continue the expansion of our
Healthy Living brands, forge new opportunities
to grow our Dual Fuel™ sports nutrition line,
and take a unique approach to our marketing
and web strategy for Medifast Direct.®

We will ignite Take Shape For Life® growth and
expansion by creating differentiated products
and brands to achieve growth in revenue and
productive Health Coaches. We will cultivate
strong working partnerships with Health Coaches
and advance the Take Shape For Life® technology
platform for Health Coaches.

We will position Medifast Direct® for growth
by implementing a new e-Commerce platform
and focus on initiatives to attract new customers
and continue to enhance retention tools.

We will explore new markets such as Sports
Nutrition, beginning with The V Foundation
for Cancer Research® and Rutgers University®
partnerships.

These areas of focus coupled with continued
contributions from Franchise Medifast Weight
Control Centers and Medical Providers will
position us for success in 2016.

New Product Photography

Serving Suggestions

New Apple Cinnamon Pea Crisps

Serving Suggestion

TA K E S H A P E FO R L I F E ®

Take Shape For Life® is a thriving, vibrant community of
independent Health Coaches who provide support and
personal encouragement to help Clients reach and sustain
a healthy weight and adopt habits for a lifetime of health.

OUR MI SSI O N: BUI LD A FO UND AT I O N
FOR G RO W TH

In 2015, we built a strong foundation for future growth during
Mona Ameli’s first year with the Company. The number of

active Health Coaches and Health Coach productivity are key metrics for determining
performance, and both showed improvement. Sponsorship of new Health Coaches has
trended positively, with a 20% increase in both the third and fourth quarters of 2015.
Average revenue per Health Coach also grew as a result of both higher new Client
acquisition and higher average order value year-over-year. Combined, these are great
indicators of growth to come.

OUR MI SSI O N: IM PR OV E THE H E ALT H C OA CH
EXPERI EN CE

We put new initiatives in place to simplify and improve the
Health Coach journey, including an easier initial sign-up and
new standardized trainings. In addition, we’ve provided tools
for Health Coaches to help their Clients reach their overall
Optimal Health™ goals.

Mona Ameli, President, Take Shape For Life®

“ What differentiates Take Shape For Life® from other
companies is that our offering is not just based on buying
products or getting on a program which we know can only
have short-lived results. We offer a comprehensive approach to
healthy living and long-term sustainable health that includes
clinically proven, scientifically formulated products, free
Health Coaching through a network of highly compassionate
Health Coaches, and learning long term healthy habits through
behavioral lifestyle training and tools.”

Dr. Wayne Scott Andersen, Take Shape For Life®
Co-Founder & Integrated Presidential Director

“ Ultimately, we want to help people do well for
themselves while doing something purposeful
for others.”

Take Shape For Life® was

named to Direct Selling

News’ 2015 Global 100 and

2015 North American 50 lists.

TA K E S H A P E FO R L I F E ® c o n t .

EACH ONE REACH ONE

Thanks to the Each One Reach One incentive
program, many new Health Coaches were
welcomed to the Take Shape For Life® family
in 2015. Over 500 incentive achievers were
rewarded for their efforts in growing the
Health Coach base and furthering the Take
Shape For Life® mission to transform lives
around the nation!

BUILDING ALL-STARS GO GLO BA L,
APRIL 2015, TUCSON, A RIZO NA

Take Shape For Life® relaunched Optimal
Health™ at Go Global in Tucson, Arizona,
including a new business path and updated
Trilogy to help Health Coaches grow.

AWAKEN. CONNE CT. T RANS FOR M.
NATIONAL CONV ENTION, JULY 2 0 15,
ORLANDO, FLORIDA

Take Shape For Life® reinvigorated approximately
3,000 Health Coaches with new business and
brand building tools at the 2015 National
Convention. The event also served as a launch
pad for four brand new product kits, a new
business kit and collateral materials for Health
Coaches, fresh new website design and
content, an enhanced mobile site, new and
improved training models, and the introduction
of our Field First Support division within Take
Shape For Life.®

NATI O NAL O P TIM AL H EA LTH™ D AY,
SE PT EM BE R 17, 2015

Take Shape For Life® hosted the 3rd Annual
Optimal Health™ Day to promote Take Shape
For Life’s® mission to offer 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. Take Shape For Life® Health
Coaches across the U.S. sponsored more than
400 events for their communities, and more
than 13,000 people participated.

SUN DAN CE X A DVANCE D LE AD E R S H IP
R ET RE AT ( 10T H ANNI V E RSARY ! )

Take Shape For Life’s® exclusive new
Leadership Program was introduced at the
10th Annual Leadership Retreat. 180 of the
top field leaders joined the Take Shape For
Life® leadership team for an exclusive and
comprehensive Advanced Leadership Training
retreat, equipping them with the knowledge,
insight, inspiration, leadership skills, and
detailed plans to help them continue their
success and growth within the organization.

“By helping people understand

how to focus on healthy

nutrition, physical activity,

proper sleep, and stress

reduction, we can help them

discover a path toward
Optimal Health.™”

– Dr. Wayne Scott Andersen,
Co-founder and Integrated
Presidential Director of
Take Shape For Life®

9M E D I FA S T D I R EC T ®

Medifast Direct® is our self-guided weight-loss and weight-
management program for customers who prefer more independence
and the convenience of online ordering. Medifast Direct® also offers
support through our Client Solutions Center representatives, online
social communities, and nutrition support team members.

OUR M ISSI O N: C EL EBR AT E OU R C U ST O M ER S’ S UC C ES S

Medifast has always believed strongly in the value of demonstrating
the effectiveness of our products and programs by recognizing and
highlighting real life Medifast customers. We know that losing weight and adopting a healthy
lifestyle is no small accomplishment, which is why we take great pride in acknowledging our
customers who achieve their goals with our support. In 2015, we launched our “Your Whole
World Gets Better” campaign and celebrated our Happy Afters winners. Seven winners were
selected as the top success stories and received an all-expenses paid trip to Charleston,
South Carolina, where we honored the winners and their stories of how Medifast helped
change their lives.

This year’s Happy Afters Winners included Bill Horst, 47, of Holtwood, PA; Brooke Ruddy, 43, of Johnston, IA;
Hannah Kolodziejcyk, 25, of Woodstock, GA; Harold Meredith, 57, of Chula Vista, CA; Lauren Atkins 25, of
Rockwall, TX; Lisa Thiel, 43, of Chandler, AZ; and Stephanie Mouzon, 50, of Garner, NC.

“I was so excited to meet

the other winners and

hear their stories.”

– Happy Afters Fan Favorite,

Brooke Ruddy

11M E D I FA S T D I R EC T ® c o n t .

O UR M ISSI O N: L AUNCH A N EW P LAN

In October, we launched the new Medifast Achieve™ Plan
with the goal of attracting new customers and keeping
the ones we have happy on their path to overall wellness.
Medifast Achieve™ is a simple, flexible plan with a wide
variety of product options for customers on their
weight-loss or weight-management journey. And it
offers several options for convenient, automatic monthly
delivery to customers.

The Medifast Achieve™ Plan was specially designed by
our dietitians and nutritionists to catalyze gradual, steady
weight loss by reducing overall calorie intake. The plan
combines simplicity, variety, and flexibility, so it appeals to
any lifestyle. On Medifast Achieve,™ customers can even
include their own meals and tastes in the form of lean and
green meals and healthy snacks.

Kenneth Kopp, Vice President of Medifast Direct®

“ Our Medifast Direct® e-Commerce program targets the customer who
is more comfortable doing things on their own. We provide the right
tools and resources to help them be successful on their journey.”

Sample day on the Medifast AchieveTM Plan

Serving Suggestions13F R A N C H I S E M E D I FA S T W E I G H T C O N T RO L C E N T E R S & M E D I C A L P ROV I D E R S

FRA NCHISE MEDIFA ST WEIGH T C O NT R O L C EN T ER S ®

Located in retail and business centers, our Franchise Medifast Weight Control Centers®
offer structured programs to help customers achieve weight-loss and weight-management
success. Counselors work with each member to provide nutritional and behavioral support
based on the member’s personal needs.

Franchise Medifast Weight Control Centers® provide members with custom programs,
including body composition analysis, assessment of resting metabolism, measurements
and one-on-one counseling sessions in a comfortable, private setting. We ended 2015
with 61 franchise centers in operation in Arizona, California, Louisiana, Maryland, Minnesota,
Pennsylvania, Texas and Wisconsin.

M ED I FAST ® M ED I CAL P RO VI D ER S

Medifast® Medical Providers are licensed health
care providers who recommend the Medifast®
program through their practice and offer support
to patients who use it. They trust Medifast to
provide their patients with the highest quality
weight-loss and weight-management solutions.

The company offers resources and support to
assist providers, staff, and patients.

Michael C. MacDonald,
Chairman & CEO, Medifast, Inc.

“ We are committed to creating weight-management options
for everyone.”

“My world has been changed

forever. My outlook on

every day is so different now

that I feel and look great! I

am so proud of myself for

the work that I have put in

to get where I am, and now I

feel I can do anything!”

– Harold Meredith,

Franchise Medifast Weight
Control Centers Success Story

P RO D U C T & P RO G R A M I N N OVAT I O N

In 2015, Medifast expanded our product and program offering and developed innovative
products to support our customers on the continuum from healthy weight management
to healthy living. Medifast plans are supported with state-of-the-art systems and tools to
ensure our customers meet their goals.

OUR GOAL

Empower our customers to meet their goals with delicious, nutritionally sound food,
plans, and support models that fit their lifestyle.

In 2015, Medifast launched several new snacks, including Medifast Crackers and Crisps,
which can be enjoyed as optional snacks in any phase of any Medifast plan. They can
also be used as a smarter snacking option for anyone striving to live a healthy lifestyle.
Medifast also launched a sports nutrition initiative featuring bars and ready-to-drink
shakes. The products were developed with feedback from Health Coaches and strength
& conditioning trainers at a Division 1 university to provide anyone living an active
lifestyle with the right balance of carbohydrates and protein for top performance.

Rosemary Sea Salt and Multigrain Crackers

Barbecue, Parmesan & Olive Oil, and
Apple Cinnamon Pea Crisps

NUTRITIONAL INTE GRIT Y AND T RA NS PAR EN CY

Medifast is committed to providing our customers with the highest standards of nutrition.
In an effort to share more product information with our customers, we implemented a series
of user-friendly icons to highlight key nutritional information we know our customers are
looking for.

Lisa Goldberg, Director of Product and Program Marketing
and Innovation at Medifast

“ We are committed to continuously improving our product
portfolio with offerings that reflect our deep understanding of
nutrition, and our customer’s evolving taste preferences.”

Serving Suggestions

17S C I E N T I F I C & C L I N I C A L A F FA I R S

In 2015, Medifast published two studies demonstrating the effectiveness of two Medifast
meal plans—the 4 & 2 & 1 Plan™ and the 5 & 2 & 2 Plan.™ These meal plans utilize Medifast
meal replacement products alongside conventional food choices to achieve balanced
nutrition for healthy weight loss. Both studies involved scientific review of a representative
sampling of records from overweight and obese customers who followed these plans at
Franchise Medifast Weight Control Centers,® where they received counseling to support
their weight-loss journey.

OUR SCIENTIFIC ADVISORY B O AR D : B U I LD I NG O N O U R S CI ENT I FI C H ERI TAG E

The role of Medifast’s Scientific Advisory Board is to continually review the effectiveness,
safety, and nutritional benefits of Medifast’s products and programs. The team of specialists
also assists in the development of Medifast Meals and supplements as well as weight-loss
approaches for specific medical needs (e.g., patients with type 2 diabetes) or lifestyles
(e.g., vegetarians). This cross-disciplinary group builds on Medifast’s heritage — a medically
sound approach to weight loss and the incorporation of leading-edge, clinical research into
the company’s products and programs.

The Scientific Advisory Board is comprised of eight medical and scientific experts in the
nutrition, behavioral, and weight-management arena.

Lawrence Cheskin, Scientific Advisory Board Chairman—MD, Associate Professor of
Health, Behavior and Society, Johns Hopkins Bloomberg School of Public Health, and
Director, Johns Hopkins Weight Management Center; and board members include:

George Bray—MD, Boyd Professor Emeritus and Professor of Medicine Emeritus,
Pennington Biomedical Research Center, Louisiana State University;

John Foreyt—PhD, Professor, the Department of Medicine and the Department of
Psychiatry and Behavioral Sciences, and Director, Behavioral Medical Research Center,
Baylor College of Medicine;

Mark Messina—PhD, President of Nutrition Matters and Adjunct Associate Professor,
Department of Nutrition, School of Public Health, Loma Linda University;

Sylvia B. Rowe—President of SR Strategy and Adjunct Professor at Tufts Friedman
School of Nutrition Science and Policy and University of Massachusetts, Amherst;

Susan Barr—PhD, RD, Professor, Food Nutrition and Health, University of British Columbia;

Simon Barquera—MD, PhD, President, Nutrition Board of Professors at the Mexican
School of Public Health and Director, Research on Nutrition Policies and Programs,
National Institute of Public Health; and

Steven Heymsfield—MD, Professor, Pennington Biomedical Research Center, Louisiana
State University

Linda Arterburn PhD, Vice President of Scientific and
Clinical Affairs of Medifast

“ Our customers want flexible, customizable approaches to
weight loss. We’re excited to offer healthy, research-supported
meal plan choices that achieve weight-management goals.”

“Our bodies are vessels

to help us live a full life,

not something to hold

you back from living.

Now I know I am in

control, and anything

is possible!”

– Hannah Kolodziejcyk,
Medifast Success Story

C O M M U N I T Y I M PAC T

In 2015, Medifast launched the Community Impact Program. Over the course of the year,
we took part in more than a dozen community impact initiatives in all areas of business and
contributed 400 employee volunteer hours.

OUR MISS ION: MAKE A P OSIT I V E D I FF E RE NCE

Medifast partnered with Rebuilding Together to help provide critical home repairs, upgrades,
and renovations in the community and clean up a nearby park and alleyway. Other partners
included Believe in Tomorrow Children’s Home at Hopkins House, Maryland Food Bank,
Kennedy Krieger, HBCU Alumni Alliance, and Marine Corps’ Toys for Tots. Medifast also
connected with thousands at the Waterfront Wellness Series in Baltimore, Md., offering
nutritional information, product sampling, and giveaways. The Series also included the Get
Healthy at the Harbor initiative with health information sessions and cooking demonstrations
from Chef Jason Hisley.

REBUILDING TOGETHER – BALTIMORE

TO Y S FO R TO TS

Medifast volunteers partnered with
Rebuilding Baltimore to provide upgrades
and repairs to the home of a retired hospital
employee in an under-resourced Baltimore
neighborhood.

In 2015, Take Shape For Life™ contributed
$10,000 worth of games and toys to the
Marine Corps Foundation’s Toys for Tots
campaign.

“Our employees are deeply

committed to making a

positive impact in the

communities where we

live and work.”

– Michael C. MacDonald,

Chairman & CEO, Medifast, Inc.

212015

annual
report

We’re on a Mission

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the ﬁ scal year ended December 31, 2015

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________ .

Commission ﬁ le number 001-31573

Medifast, Inc.

(Exact name of registrant as speciﬁ ed in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

13-3714405
(I.R.S. Employer Identiﬁ cation No.)

3600 Crondall Lane, Owings Mills, Maryland 21117
(Address of principal executive ofﬁ ces) (Zip code)

Registrant’s telephone number, including area code:
(410) 581-8042

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

Title of each class
Common Stock, par value $.001

Name of each exchange on which registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as deﬁ ned in Rule 405 of the Securities Act.

Yes

Indicate by check mark if the registrant is not required to ﬁ le reports pursuant to Section 13 or Section 15(d) of the Act.

Yes

Indicate by check mark whether the registrant (1) has ﬁ led all reports required to be ﬁ led 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 ﬁ le such reports), and (2) has been subject to such ﬁ ling
requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such ﬁ les).

Yes

Indicate by check mark if disclosure of delinquent ﬁ lers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in deﬁ nitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated ﬁ ler, an accelerated ﬁ ler, a non-accelerated ﬁ ler, or a smaller reporting company.

See the deﬁ nitions of “large accelerated ﬁ ler,” “accelerated ﬁ ler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Non-accelerated ﬁ ler

Large accelerated ﬁ ler

Accelerated ﬁ ler
(Do not check if a smaller reporting company) Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as deﬁ ned in Rule 12b-2 of the Act).

Yes

As of June 30, 2015, the last business day of the Registrant’s most recently completed second ﬁ scal quarter, the aggregate market value of the
Registrant’s common stock (based on the closing sale price of $32.32, as reported by the New York Stock Exchange on such date) held by non-afﬁ liates was
approximately $345 million.

The number of shares of common stock outstanding as of March 1, 2016 was 11,834,724.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s deﬁ nitive proxy statement to be ﬁ led with the Securities and Exchange Commission for its 2016 Annual Meeting of Stockholder’s
are incorporated by reference into Part III of this Annual Report on Form 10-K.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This 2015 Annual Report on Form 10-K for the ﬁ scal year ended December 31, 2015 (“Report”) contains “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Forwardlooking statements often include words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,”
“seek,” “would,” “could,” and similar words or are made in connection with discussions of future operating or ﬁ nancial performance.

Forward-looking statements reﬂ ect management’s expectations, beliefs, plans, objectives, goals strategies as of the date of this Report and are not guarantees
of future performance or results. Although we believe that these forward-looking statements and the underlying assumptions are reasonable, we cannot assure
you that they will be correct. By their nature, forward-looking statements are subject to risks, uncertainties and assumptions that are difﬁ cult to predict or
quantify. Our actual results and ﬁ nancial condition may differ materially from what is anticipated in the forward-looking statements. Some of those factors
(in addition to others described elsewhere in this Report and in subsequent securities ﬁ lings) include:

• our ability to maintain and grow our network of Health Coaches;

• health related claims by our customers;

• the effectiveness of our marketing and advertising programs;

• adverse publicity associated with our products or sales channels;

• the departure of one or more key personnel;

• our ability to continue to develop innovative new services and products;

• the failure of our services or products to continue to appeal to the market;

• our ability to protect our brand and other intellectual property rights;

• product liability claims;

• disruptions in our supply chain, the impact of existing and future laws and regulations on our business, risks associated with unauthorized penetration

of our information security;

• overall economic and market conditions and the resultant impact on consumer spending patterns; and

• other risks and uncertainties described elsewhere in this Report, including those described under Item 1A-“Risk Factors” of this Report, and in

subsequent ﬁ lings with the Securities and Exchange Commission (the “SEC”).

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Report. We undertake no obligation
to update any information contained in this Report or to publicly release the results of any revisions to forward-looking statements to reﬂ ect events or
circumstances of which we may become aware of after the date of this Report.

Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure

Table of Contents

PART I

PART II

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information

PART III

Directors, Executive Ofﬁ cers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneﬁ cial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services

Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4

Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B

Item 10
Item 11
Item 12
Item 13
Item 14

Item 15

Exhibits and Financial Statement Schedules

PART IV

Page

4
9
13
13
14
14

15
16
17
24
24
24
24
26

27
27
27
27
27

ITEM 1. BUSINESS

SUMMARY

PART I

Medifast, Inc. (together with its consolidated subsidiaries, “we,” “us,” “our,” the “Company” or “Medifast”) is engaged in the production, distribution, and
sale of weight loss, weight management, and healthy living products and other consumable health and diet products. The Company primarily operates through
its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., Take Shape For Life,® LLC, Jason Enterprises, Inc., Medifast Franchise Systems (“MFSI”), Inc.,
Jason Properties, LLC, Medifast Nutrition, Inc. and Seven Crondall, LLC. Medifast product lines include weight loss, weight management, and healthy living
meal replacements, snacks, hydration products and vitamins. The Company manufactures a signiﬁ cant portion of its products at its manufacturing facility
located in Owings Mills, Maryland.

MARKETS

Over the past 30 years, obesity in the United States has risen dramatically. In 2013, the American Medical Association ofﬁ cially declared obesity a disease
and The American Heart Association, the American College of Cardiology, and The Obesity Society recommended that obesity be managed as a chronic
disease. Throughout the world, the World Health Organization estimates that approximately 1.9 billion people are overweight. In the United States, over
twothirds of the adult population fall within the overweight or obese categories. According to the Centers for Disease Control and Prevention (“CDC”), over
78 million U.S. adults are obese.

Obesity is deﬁ ned as a Body Mass Index (“BMI”) of 30 kg/m2 or greater, whereas overweight is deﬁ ned as a BMI ranging between 25 and 29.9 kg/m2.
All states in the United States had a prevalence of obesity of at least 20% in 2014. Furthermore, the CDC reported that forty-ﬁ ve states had adult obesity
rates of 25% or higher, and twenty-two of these states had obesity rates at 30% or more. Being overweight and/or obese is linked to a multitude of serious
comorbidities including heart disease, stroke, Type 2 diabetes, certain types of cancers, arthritis, sleep apnea and depression. A 2015 report by Trust for
America’s Health and the Robert Wood Johnson Foundation estimated 80% of people with diabetes are overweight or obese.

The primary factors contributing to obesity, which are well known are: unhealthy food choices and lack of physical activity. Obesity is not limited to adults;
the CDC has reported children and adolescents are also affected. According to the CDC, the prevalence of obesity in children age 6-11 years has doubled and
obesity rates have quadrupled in adolescents age 12-19 years in the past 30 years. Approximately 18% of children and 21% of adolescents are obese and are
at an increased risk of developing health problems such as high blood pressure, high cholesterol and prediabetes.

Studies completed by the CDC reported Americans incurred $147 billion in medical costs associated with obesity in 2008 and that the average annual medical
costs for those who are obese are over $1,400 higher than those of people in normal weight ranges. The U.S. weight loss market itself is estimated to be a
$65 billion per year industry, including consumer spending on diet foods, drinks and low-calorie sweeteners; health clubs and workout videos;medically
supervised and commercial weight loss programs; children’s weight loss camps; diet books; appetite suppressants and more. Portion-controlled, meal-
replacement weight management programs are continuing to gain popularity, as consumers search for a safe and effective solution that provides balanced
nutrition, effective weight loss, and valuable behavior-modiﬁ cation education.

OUR PRODUCTS, SERVICES, AND DISTRIBUTION CHANNELS

THE MEDIFAST® BRAND

Medifast enriches lives by providing weight loss, weight management, and healthy living products and programs through multiple channels of distribution,
speciﬁ cally: (1) our direct to consumer channel through our website and in-house call centers, (2) Take Shape For Life,® (3) Franchise Medifast Weight
Control Centers, and (4) a national network of physicians. Medifast products and programs have been recommended by over 20,000 doctors since 1980.

PRODUCTS

Our products were originally developed by a physician, Medifast has been on the cutting edge in the development of nutritional and weight-management
products since the Company was founded. The Company offers a variety of weight loss, weight management, and healthy living products under the Medifast®,
Thrive by Medifast, Optimal Health by Take Shape For Life®, and Essential 1® brands. On January 20, 2016, the Company announced the launch of a sports
nutrition product line, Dual FuelTM, which will be available for select private label customers. The Medifast meal replacement line includes more than 70
options, including, but not limited to bars, bites, pretzels, puffs, cereal crunch, drinks, eggs, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes,
smoothies, soft bakes, and soups. The Thrive by Medifast and Optimal Health by Take Shape For Life® lines include a variety of specially formulated bars,
shakes, and smoothies for those who are maintaining their weight for long-term healthy living.

Medifast nutritional products are formulated with high-quality, low-calorie, and low-fat ingredients. Medifast meals are individually portioned, calorie- and
carbohydrate-controlled meal replacements that share a similar nutritional “footprint” and provide a balance of protein and good carbohydrates, including
ﬁ ber. Medifast meal replacements are also fortiﬁ ed to contain 24 vitamins and minerals, as well as other nutrients essential for good health.

Medifast brand awareness has expanded through the Company’s marketing campaigns, improved product quality, and an emphasis on quality customer
service, technical support, and publications developed by the Company’s marketing staff. Medifast products have been proven to be effective for weight loss
and weight management in clinical studies conducted by researchers from leading universities. The Company has continued to develop its sales and marketing
operations with qualiﬁ ed management and innovative programs. The Company’s facility in Owings Mills, Maryland manufactures all powderbased products
and the Company subcontracts the production of all other products.

Medifast identiﬁ es opportunities to expand its product line by regularly surveying its customer base and studying industry and consumer trends. This allows
Medifast to introduce new, high quality products that meet consumer demand.

DISTRIBUTION CHANNELS

Medifast Direct – In the direct-to-consumer channel (“Medifast Direct”), customers order Medifast product 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. The
Medifast Direct division focuses on targeted marketing initiatives to acquire and retain customers and provides support through its social communities, its
in-house call center, and nutrition support team of registered dietitians to better serve its customers.

Take Shape For Life® – Take Shape For Life® is the personal coaching division of Medifast. This coaching network consists of independent contractor health
coaches (“Health Coaches”), who are trained to provide coaching and support to clients utilizing the Take Shape For Life® platform. The role of the Health
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 ﬁ nances. Health Coaches and their clients follow the principles of the Discover Your
Optimal Health book, Habits of Health book, and Habits of Health companion workbook written by the NY Times Best-Selling author and Take Shape For
Life® co-founder to create an overall health optimization program. In addition to the encouragement and support of a Health Coach, clients of Take Shape
For Life® are offered a bio-network of support including product and program information on our website, weekly support calls, and access to our registered
dietitians.

Our Health Coaches provide coaching and support to their clients throughout the weight-loss and weight-maintenance process. Most new Health Coaches are
introduced to the opportunity by an existing Health Coach. The vast majority of new Health Coaches started as weight-loss clients of a Health Coach, had
success on the Take Shape For Life® program, and became a Health Coach to help others through the weight-loss process.

Take Shape For Life® 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, Take Shape For Life®, like other active DSA member companies, underwent a
comprehensive and rigorous one-year company review by DSA legal staff 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, Take Shape For
Life® is also a voluntary DSA Code of Ethics participant, which sets higher standards for ensuring compliance. Compliance with the requirements of the Code
of Ethics is paramount to becoming and remaining a member in good standing of the DSA. Accordingly, we believe membership in DSA by Take Shape For
Life® demonstrates its commitment to the highest standards of ethics and a pledge not to engage in any deceptive, unlawful, or unethical business practices.
Among those Code of Ethics proscriptions are pyramid schemes and endless chain schemes as deﬁ ned by federal, state, or local laws. Moreover, Take Shape
For Life®, 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 Take Shape For Life® markets. In 2015, Take Shape For Life®, and its parent company Medifast® was ranked
in the Direct Selling Association’s North American 50 & Global 100 lists.

Franchise Medifast Weight Control Centers – Franchise Medifast Weight Control Centers (“MWCC”) offer structured programs and a team of professionals
to help customers achieve weight-loss and weight-management success at center locations. In 2008, MFSI, a wholly-owned subsidiary of Medifast, began
offering the center model as a franchise opportunity. MFSI currently offers the Medifast Weight Control Center franchise opportunity in most states under
a registered (where required) franchise disclosure document (“FDD”). The MFSI Franchise Agreement requires franchisees to develop a minimum of
three Medifast Weight Control Centers within a deﬁ ned geographic area in the time frame set forth in the Development Agreement between MFSI and the
franchisee. MFSI currently has franchised centers located in Arizona, California, Louisiana, Minnesota, Maryland, Pennsylvania, Texas, and Wisconsin. As
of December 31, 2015, 61 franchise locations were in operation.

MFSI currently offers the Medifast Weight Control Center franchise opportunity in most states under a registered (where required) franchise disclosure
document (“FDD”). The MFSI Franchise Agreement requires franchisees to develop a minimum of three Medifast Weight Control Centers within a deﬁ ned
geographic area in the time frame set forth in the Franchise and Development Agreement between MFSI and the franchisee.

MFSI’s franchise strategy depends on our franchisees’ active involvement in, and management of, Medifast Weight Control Center operations. Candidates
are reviewed for appropriate operational experience and ﬁ nancial stability, including speciﬁ c net worth and liquidity requirements. Upon execution of the
Franchise and Development Agreements, franchisees are required to promptly select sites for their Centers, each of which are subject to MFSI’s approval.

A franchisee’s initial fee includes the franchise fee for their ﬁ rst Center to be developed and a non-refundable deposit for the second and third Centers to be
developed, and covers the cost of MFSI resources provided for, among other things, the training of franchisees and their staff, and approval of the proposed
territory for development. If a franchisee desires to open more than three Centers in the designated territory, there is an additional fee charged for each
additional Center to be developed.

Prior to the opening of each Medifast Weight Control Center franchise established under the Franchise and Development Agreements, MFSI will do the
following:

i. designate the Center’s protected territory.

ii. review for approval the sites selected by the franchisee for the Center.

iii. review for approval the lease governing the location where the Center is to be located.

iv. provide the franchisee with standard plans and speciﬁ cations for the build-out of the Center along with a list of equipment and improvements which

the franchisee is required to purchase and install.

v. provide an initial training program.

vi. provide the franchisee on-site assistance and guidance for approximately three to ﬁ ve days on or about the opening of the Center.

vii. provide the franchisee with online access to a password-protected, electronic version of the Medifast Weight Control Centers® Franchise Operations

Manuals.

MFSI may, in certain limited circumstances, cause its afﬁ liate to provide products at a discounted price. Medifast may, in certain circumstances guarantee a
franchisee’s notes, leases or other obligations. MFSI does not offer direct or indirect ﬁ nancing.

While MFSI does not currently have a purchase option included in its Franchise and Development Agreements, it does have the right of ﬁ rst refusal to acquire
a Center if the franchisee wishes to sell a Center.

Medifast Wholesale – Medifast medical provider practices carry an inventory of wholesale products and resell them to patients while providing appropriate
medical monitoring, testing, and support to ensure healthy weight loss and weight management.

The Company offers extensive 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 2014, the Company began piloting an online offering that features a resource center to provide Medifast medical providers access to the most current
product and program material to support their patients and their business. In addition to opening up the opportunity for current Medifast medical providers
to incorporate an e-commerce solution into their Medifast offering, they now have access to online training, news and tips from Medifast, and customizable
marketing material to help them reach more patients via our wholesale healthcare channel.

In 2012, the Company entered into a 3-year strategic partnership with Medix, a leader in pharmaceutical obesity products in Mexico. The agreement granted
Medix an exclusive license for the distribution of Medifast products and programs through physicians and weight control centers in Mexico under the
Medifast brand. Inventory is shipped to Medix within the United States and the resulting revenues are classiﬁ ed as domestic sales for the Company.

In January 2013, the Company and Medix, amended their agreement to provide an exclusive 5-year licensing agreement to increase distribution of Medifast
meal replacement products and programs beyond Mexico and into Argentina, Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El
Salvador, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Venezuela, and Uruguay. In 2015, Medix operated one Medifast Weight Control Center
in Mexico and launched their brand revitalization strategy with the opening of a 180° Center that features Medifast products and programs. Along with seven
Slim Centers, Medix continued operations in nine total locations in Mexico.

The Company recently started to expand its international presence into Canada.

SEASONALITY

Sales of the Company’s weight management products and programs have historically been seasonal. Traditionally, predisposition of consumers not to initiate
a weight loss or management program during the holiday season impacts the fourth quarter with fewer sales of weight management products and services.
January and February generally show increases in sales, as these months are considered the commencement of the “diet season.”

SCIENTIFIC ADVISORY BOARD

Medifast has a Scientiﬁ c Advisory Board that consists of a multi-disciplinary, international panel that serves as the foundation for scientiﬁ cally-valid,
consumer-centric, high quality innovations for lasting health. Its mission is to help guide Medifast in making informed decisions regarding medical,
nutritional, and scientiﬁ c matters by providing expertise and information on research and emerging trends.

The work of this cross-disciplinary group builds on Medifast’s heritage of medically sound approaches to weight loss, and the incorporation of leading-
edge clinical research into the Company’s products and programs. The Scientiﬁ c Advisory Board is chaired by Lawrence Cheskin, M.D., F.A.C.P., associate
professor of Health, Behavior, and Society at Johns Hopkins Bloomberg School of Public Health and director at Johns Hopkins Weight Management Center.

COMPETITION

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

Medifast’s identiﬁ ed peers and competitors in the general health and wellness diet industry include NutriSystem Inc., Herbalife Ltd., USANA Health
Sciences, and Weight Watchers International, Inc. The Company believes that it competes effectively in the weight-loss industry and differentiates itself
from the competition.

The Company believes its scientiﬁ c and clinical heritage and commitment to evaluating its products and programs through clinical research are primary
differentiators that allow it to compete in this market. Another primary differentiator is the Company’s unique multi-channel distribution strategy, which
provides varying support modalities, and broadens the availability of the Medifast brand by targeting a customer’s individual needs. Originally developed

by a physician, Medifast has been on the cutting edge in the development of nutritional and weight-management products since the Company was founded.
Medifast meals are individually portioned, calorie- and carbohydrate-controlled meal replacements that share a similar nutritional “footprint” and provide a
balance of protein and good carbohydrates, including ﬁ ber.

Medifast Medical Providers offer Medifast products and programs to patients in their practice and utilize wholesale sales. Medifast Direct serves customers
through the Medifast website and call center with various online support tools, along with access to registered dietitians. The Take Shape For Life® division
offers the personal support of a Health Coach that is often a person who has achieved success with Take Shape For Life® and has turned their success
into a business opportunity. Medifast Weight Control Centers offer a supervised and structured model for customers who prefer more accountability and
personalized counseling as part of the ongoing program. Medifast weight management programs utilize meal replacements as part of a structured meal plan
that clinical research has shown to be effective for weight loss.

MARKETING

In 2015, Medifast continued to build and leverage its core Medifast brand through multiple marketing strategies for each distinct distribution channel:
Take Shape For Life®, Medifast Direct, Medifast Weight Control Centers, and Medifast Wholesale. Customer acquisition and retention strategies vary by
distribution channel and may include digital marketing, television advertising, public relations, social media, email marketing, events, and other means.
These mediums were used to target new customers by stressing Medifast’s and Take Shape For Life’s® simple and effective approach to weight loss and
management and long term health. Many of these programs were also utilized to reactivate, encourage and support existing customers and Health Coaches.
Medifast and Take Shape For Life® continues to enhance all company materials and websites.

MANUFACTURING

Jason Pharmaceuticals, Inc., the Company’s wholly-owned subsidiary, manufactures and produces all Medifast powder-based products, which is approximately
42% of Medifast’s product revenues, in the manufacturing facility in Owings Mills, Maryland. The Company purchased the plant in July 2002 and has
gradually increased production capacity and improved overall efﬁ ciencies with additional investments in blending and packaging equipment. The remaining
58% of Medifast products are manufactured by third party vendors in accordance with Medifast proprietary formulas and manufacturing standards. Our
Owings Mills manufacturing facility is regulated and inspected by the United States Food and Drug Administration (“FDA”), the United States Department
of Agriculture (“USDA”) and the Maryland State Department of Health and Mental Hygiene. It is certiﬁ ed as a Safe Quality Food Program (SQF) Level 2
facility compliant with the Global Food Safety Initiative.

GOVERNMENTAL REGULATION HISTORY

The formulation, processing, packaging, labeling, marketing, advertising and selling of the Company’s products is subject to regulation by federal, state and
local agencies. Products must comply with the Federal Food Drug and Cosmetic Act, the Food Safety Modernization Act, the Federal Trade Commission Act,
State Consumer Protection laws and several other federal, state and local statutes and regulations applicable in localities in which the company products are
made or are sold.

The FDA and USDA and State and local Health departments are the major agencies whose regulatory mission is to assure that products are made using
approved ingredients, manufacturing procedures and testing to ensure that safe quality products are delivered to consumers. The Federal Trade Commission
(“FTC”) has principal regulatory control over the Company’s advertising and trade practices, its enforcement powers are aimed at protecting the consumer
from being deceived by unfair marketing and trading practices.

The FTC has principal regulatory control over the Company’s advertising. Historically, the FTC has ﬁ led complaints against a number of commercial weight
management providers alleging violations of federal law in connection with the use of advertisements that featured testimonials and claims for program
success. In 2012, Jason Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company, entered into a consent decree with the FTC regarding certain
statements included in the advertising for the Company’s weight-loss programs. The consent decree requires us to comply with certain procedures and
disclosures in connection with our advertisements of products and services.

PRODUCT LIABILITY AND INSURANCE

The Company, like other producers and distributors of ingested products, faces an inherent risk of exposure to product liability claims in the event that,
among other things, the use of its products results in injury. The Company maintains insurance against product liability claims with respect to the products it
manufactures. With respect to the retail and direct marketing distribution of products produced by others, the Company’s principal form of insurance consists
of arrangements with each of its suppliers of those products to name the Company as beneﬁ ciary on each of such vendor’s product liability insurance policies.
The Company does not buy products from suppliers who do not maintain such coverage.

EMPLOYEES

As of December 31, 2015, the Company’s subsidiaries employed 425 employees, of whom 182 were engaged in manufacturing, logistics, and supply chain
support, and 243 in marketing, administrative, call center and corporate support functions. None of the employees are subject to a collective bargaining
agreement with the Company. All employees are employed by Jason Pharmaceuticals, Inc.

INFORMATION SYSTEMS INFRASTRUCTURE

Our websites are based on commercially developed software and are hosted at a co-location data center located in Baltimore, Maryland. This data center
is SSAE16 and PCI-DSS compliant. This facility provides redundant network connections, uninterruptible power supplies, robust physical security, ﬁ re

prevention controls, and diesel generated power back up for the equipment on which our websites rely. Our servers and our network are monitored 24 hours
a day, seven days a week.

We use a variety of security techniques to protect our conﬁ dential customer data, including regularly scheduled penetration security tests on our websites.
We also use an industry leading network monitoring service for our Intrusion Detection Services solution along with Intrusion Prevention System devices on
our network’s perimeter. When our customers place an order or access their account information, we use secure channels to encrypt and transmit information.
Our security certiﬁ cates encrypt all information entered before it is sent to our servers. We have a secondary ﬁ rewall layer of security between our customer
facing websites and the databases which house their information and we have deployed mitigation devices to protect against Distributed Denial of Service
attacks. Customer data is protected against unauthorized access. We have a redundant network across our organization which provides for inter-connectivity
and redundancy for our corporate locations.

As our operations grow in both size and scope, we will continuously improve and upgrade our information systems and infrastructure while maintaining their
reliability and integrity.

INTELLECTUAL PROPERTY

Products manufactured by and programs marketed by the Company are sold primarily under its own trademarks and trade names. Ours policy is to protect our
products and programs through trademark registrations both in the U.S. and in signiﬁ cant international markets. The Company carefully monitors trademark
use and promotes enforcement of its trademarks in a manner that is designed to balance the cost of such protection against obtaining the greatest value for
the Company.

AVAILABLE INFORMATION

Our principal ofﬁ ce is located at 3600 Crondall Lane, Owings Mills, Maryland 21117. Our telephone number at this ofﬁ ce is (410) 581-8042. Our corporate
website is located at http://www.medifastnow.com. All periodic and current reports, registration statements, code of conduct and other material that we are
required to ﬁ le with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports ﬁ led or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of
charge through our investor relations page at http://www.medifastnow.com. Such documents are available as soon as reasonably practicable after electronic
ﬁ ling of the material with the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into
this Annual Report.

The public may also read and copy any materials ﬁ eld by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that ﬁ le such information
electronically with the SEC.

CERTIFICATIONS

The Company’s Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer have ﬁ led their certiﬁ cations as required by the SEC regarding the quality of the
Company’s public disclosure for each of the periods ended during the Company’s ﬁ scal year ended December 31, 2015 and the effectiveness of internal
control over ﬁ nancial reporting as of December 31, 2015. Further, the Company’s Chief Executive Ofﬁ cer has certiﬁ ed to the New York Stock Exchange
(“NYSE”) that he is not aware of any violation by the Company of the NYSE corporate governance listing standards, as required by Section 303A.12(a) of
the NYSE listing standards.

QUARTERLY RESULTS (Unaudited)

2015
Revenue
Gross Proﬁ t
Income from continuing operations before income taxes
Income from continuing operations
Net Income
Earnings per share from continuing operations- diluted
Earnings (loss) per common share- diluted

2014
Revenue
Gross Proﬁ t
Income from continuing operations before income taxes
Income from continuing operations
Net Income
Earnings per share from continuing operations
Earnings per common share- diluted

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

73,364,000
53,770,000
6,792,000
4,416,000
4,444,000
0.36
0.36

79,233,000
57,924,000
9,930,000
6,545,000
5,967,000
0.49
0.45

72,161,000
53,167,000
8,828,000
5,847,000
6,248,000
0.48
0.51

74,732,000
55,574,000
10,094,000
6,619,000
5,720,000
0.50
0.44

65,936,000
49,160,000
8,109,000
5,402,000
5,506,000
0.45
0.46

69,017,000
50,734,000
7,508,000
5,281,000
4,855,000
0.42
0.39

61,312,000
45,218,000
5,942,000
3,902,000
3,860,000
0.33
0.33

62,303,000
44,975,000
4,161,000
2,584,000
(3,361,000)
0.21
(0.28)

Earnings per common share (sometimes referred to as “EPS”) is computed independently for each of the quarters presented; accordingly, the sum of the
quarterly earnings per common share may not equal the total computed for the year.

ITEM 1A. RISK FACTORS

You should consider carefully the following risks and uncertainties when reading this Report. If any of the events described below actually occurs, the
Company’s business, ﬁ nancial condition and operating results could be materially adversely affected. You should understand that it is not possible to
predict or identify all such risks and uncertainties. Consequently, you should not consider the following to be a complete discussion of all potential risks or
uncertainties.

Risks Related to Our Business

The success of our Take Shape For Life® business is dependent on our ability to maintain and grow our network of Health Coaches.

Sales in our Take Shape For Life® channel are generated by our independent contractor Health Coaches. The channel is subject to high turnover and we
depend on our network of Health Coaches to continually grow their businesses by attracting, training and motivating new Health Coaches. We consider our
number of Health Coaches and revenue per Health Coach to be key indicators of our success in the Take Shape For Life® channel. For the quarter ended
December 31, 2015, the Company had 11,900 active Health Coaches and the average revenue per Health Coach was $4,039. If we fail to provide the tools
and competitive compensation necessary to promote Health Coaches to grow their businesses, we believe these key indicators will weaken and our revenue
will decline.

The growth and sustainability of our network of Health Coaches is also subject to risk factors which may be outside of our control. These include:

• Negative public perceptions of multi-level marketing;

• General economic conditions;

• Failure to develop innovative products to meet consumer demands

• Adverse opinions of our products, services, or industry; and

• Regulatory actions against our company, competitors in our industry, or other direct selling companies.

Our future growth and proﬁ tability will depend in large part upon the effectiveness and efﬁ ciency of our marketing expenditures and our ability to
select effective markets and media in which to advertise.

Our business success depends on our ability to attract and retain customers, which signiﬁ cantly depends on our marketing practices. In 2015, 2014 and 2013
our marketing expenditures were $15.3 million, $17.0 million and $22.1 million, respectively. Our future growth and proﬁ tability will depend in large part
upon the effectiveness and efﬁ ciency of our marketing expenditures, including our ability to:

• create greater awareness of our brand and our program;

• identify the most effective and efﬁ cient levels of spending in each market, media and speciﬁ c media vehicle;

• determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures;

• effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs;

• acquire cost-effective television advertising;

• select the most effective markets, media and speciﬁ c media vehicles in which to advertise; and

• convert consumer inquiries into actual orders.

Our planned marketing expenditures may not result in increased revenue or generate sufﬁ cient levels of brand name and program awareness. We may not be
able to manage our marketing expenditures on a cost-effective basis whereby our customer acquisition costs may exceed the contribution proﬁ t generated
from each additional customer.

Our sales may be adversely impacted by the health and stability of the general economy.

Our results of operation are highly dependent on product sales and program fees. A downturn in general economic conditions, such as a recession or
prolonged economic slowdown, may reduce the demand for our products and otherwise adversely affect our sales. For example, economic forces, including
general economic conditions, demographic trends, consumer conﬁ dence in the economy, changes in disposable consumer income and/or reductions in
discretionary spending, may cause consumers to defer or decrease purchases of our products and programs which could adversely affect our revenue, gross
margins, and/or our overall ﬁ nancial condition and operating results.

We rely on third parties to provide us with a majority of the products we sell and we manufacture the remaining portion. The inability to obtain the
necessary product from our third-party manufacturers or to produce products could cause our revenue, earnings or reputation to suffer.

We rely on third-party manufacturers to supply approximately 58% of the food and other products we sell. If we are unable to obtain sufﬁ cient quantity,
quality and variety of food and other products in a timely and low-cost manner from our manufacturers, we will be unable to fulﬁ ll our customers’ orders in
a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of the Medifast brand.

Therefore, we are dependent on maintaining good relationships with these manufacturers. The services we require from these parties may be disrupted due
to a number of factors associated with their businesses, including the following:

• labor disruptions;

• delivery problems;

• ﬁ nancial condition or results of operations;

• internal inefﬁ ciencies;

• equipment failure

• severe weather;

• ﬁ re;

• nature or man-made disasters;

• shortages of ingredients; and

• USDA or FDA compliance issues.

We manufacture approximately 42% of the food and other products we sell. As a result we are dependent upon the uninterrupted and efﬁ cient operation of
our sole manufacturing facility in Owings Mills, Maryland. The operations at this facility may be disrupted by a number of factors, including the following:

• labor disruptions;

• power failures;

• equipment failure;

• internal inefﬁ ciencies;

• severe weather;

• ﬁ re;

• nature or man-made disasters; and

• USDA or FDA compliance issues.

There can be no assurance that the occurrence of these or any other operation problems at our sole facility would not have a material adverse effect on our
business, ﬁ nancial condition or results of operations.

We may be subject to claims that our Health Coaches are unqualiﬁ ed to provide proper weight loss advice.

Our Health Coaches are independent contractors and, accordingly, we are not in a position to provide the same level of oversight as we would if Health
Coaches were our own employees. As a result, there can be no assurance that our Health Coaches will comply with our policies and procedures despite
our internal compliance efforts. Additionally, some of our Health Coaches do not have extensive training or certiﬁ cation in nutrition, diet or health ﬁ elds
and have only undergone the training they receive from us. We may be subject to claims from our customers alleging that our Health Coaches lack the
qualiﬁ cations necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our Health Coaching have
provided inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for matters other than weight loss. Such
claims could result in lawsuits, damage to our reputation and divert management’s attention from our business, which would adversely affect our business.

We may be subject to health or advertising related claims from our customers.

Our weight loss program does not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our
customers. Many people who are overweight suffer from other physical conditions, and our target consumers could be considered a high-risk population.
A customer who experiences health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by
participating in our weight management program. Further, customers who allege that they were deceived by any statements that we made in advertising or
labeling could bring a lawsuit against us under consumer protection laws. Currently, we are neither subject to any such allegations nor have we been named
in any such litigation. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in
our defense. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely be lengthy and costly, and adversely
affect our brand image, customer loyalty and results of operations.

The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with signiﬁ cant resources pursues
a weight management program similar to ours, our business could be signiﬁ cantly affected.

Competition is intense in the weight management industry and we must remain competitive in the areas of program efﬁ cacy, price, taste, customer service
and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, digital tools and wearable trackers,
as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some of our competitors
are signiﬁ cantly larger than we are and have substantially greater resources. Our business could be adversely affected if someone with signiﬁ cant resources
decided to imitate our weight management program. For example, if a major supplier of pre-packaged foods decided to enter this market and made a
substantial investment of resources in advertising and training diet counselors, our business could be signiﬁ cantly affected. Any increased competition from
new entrants into our industry or any increased success by existing competition could result in reductions in our sales or prices, or both, which could have
an adverse effect on our business and results of operations.

New weight loss products or services may put us at a competitive disadvantage and our business may suffer.

The weight management industry is subject to changing consumer demands based, in large part, on the efﬁ cacy and popular appeal of weight management
programs. The popularity of weight management programs is dependent, in part, on their ease of use, cost and channels of distribution as well as consumer

trends, and, on an ongoing basis, many existing and potential providers of weight loss solutions, including many pharmaceutical ﬁ rms with signiﬁ cantly
greater ﬁ nancial and operating resources than we have, are developing new products and services. The creation of a weight loss solution, such as a drug
therapy, that is perceived to be safe, effective and “easier” than a portion-controlled meal plan would put us at a disadvantage in the marketplace and our
results of operations could be negatively affected.

If we do not continue to develop innovative new services and products or if our services and products do not continue to appeal to the market, or if
we are unable to successfully expand into new channels of distribution or respond to consumer trends, our business may suffer.

The increasing focus of consumers on more integrated lifestyle and ﬁ tness approaches rather than just food, nutrition and diet could adversely impact the
popularity of our programs. Our future success depends on our ability to continue to develop and market new, innovative services and products and to
enhance our existing services and products, each on a timely basis to respond to new and evolving consumer demands, achieve market acceptance and keep
pace with new nutritional, weight management, technological and other developments. We may not be successful in developing, introducing on a timely
basis or marketing any new or enhanced services and products, and we cannot assure you that any new or enhanced services or products will appeal to the
market. Our failure to develop new products and services and to enhance our existing products and services, and the failure of our products and services to
continue to appeal to the market could have an adverse impact on our ability to attract and retain customers and thus adversely affect our business, ﬁ nancial
condition or results of operations.

We may be subject to litigation from our competitors.

Our competitors may pursue litigation against us based on our advertising or other marketing practices regardless of merit and chances of success, especially
if we engage in competitive advertising, which includes advertising that directly or indirectly mentions a competitor or a competitor’s weight loss program in
comparison to our program. While we would defend ourselves against any such claims, our defense may ultimately be unsuccessful. Also, defending against
such claims, regardless of merit and ultimate outcome, may be lengthy and costly, strain our resources and divert management’s attention from their core
responsibilities, which would have a negative impact on our business.

Our business is subject to online security risks, including security breaches and identity theft.

Unauthorized users who penetrate our information security could misappropriate proprietary or customer information or data or cause interruptions to the
product offerings on our website. As a result, it may become necessary to expend signiﬁ cant additional amounts of capital and resources to protect against,
or to alleviate, problems caused by unauthorized users. These expenditures, however, may not prove to be a timely remedy against unauthorized users who
are able to penetrate our information security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could adversely
affect our computer systems and, in turn, harm our business.

A signiﬁ cant number of states require that customers be notiﬁ ed if a security breach results in the disclosure of their personal ﬁ nancial account or other
information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that
material security breaches be reported. If we experience a security breach and such notice or public disclosure is required in the future, our reputation and
our business may be harmed.

In the ordinary course of our business, we collect and utilize proprietary and customer information and data. Privacy concerns among prospective and
existing customers regarding our use of such information or data collected on our website or through our services and products, such as weight management
information, ﬁ nancial data, email addresses and home addresses, could keep them from using our website or purchasing our services or products. We currently
face certain legal obligations regarding the manner in which we treat such information and data. Businesses have been criticized by privacy groups and
governmental bodies for their use and handling of such information and data. We rely on third-party software products to secure our credit card transactions.
Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other
security breaches, failure to prevent or mitigate such fraud or breaches or changes in industry standards or regulations may adversely affect our business and
operating results or cause us to lose our ability to accept credit cards as a form of payment and result in chargebacks of the fraudulently charged amounts.
Furthermore, widespread credit card fraud may lessen our customers’ willingness to purchase our products on our website.

Third parties may infringe on our brand, trademarks and other intellectual property rights, which may have an adverse impact on our business.

We currently rely on a combination of trademark and other intellectual property laws and conﬁ dentiality procedures to establish and protect our proprietary
rights, including our brand. Because our business relies heavily on a direct-to-consumer business model, our brand is an important element of our business
strategy. If we fail to successfully enforce our intellectual property rights, the value of our brand, services and products could be diminished and our business
may suffer. Additionally, failure to protect our intellectual property could result in the entry of a competitor to the market. Our precautions may not prevent
misappropriation of our intellectual property. Any legal action that we may bring to protect our brand and other intellectual property could be unsuccessful
and expensive and could divert management’s attention from other business concerns. In addition, legal standards relating to the validity, enforceability and
scope of protection of intellectual property, especially in Internet-related businesses, are uncertain and evolving. We cannot assure you that these evolving
legal standards will sufﬁ ciently protect our intellectual property rights in the future.

We may in the future be subject to intellectual property rights claims.

Third parties may in the future make claims against us alleging infringement of their intellectual property rights. Any intellectual property claims, regardless
of merit, could be time-consuming and expensive to litigate or settle and could signiﬁ cantly divert management’s attention from other business concerns.
In addition, if we were unable to successfully defend against such claims, we may have to pay damages, stop selling the service or product or stop using
the software, technology or content found to be in violation of a third party’s rights, seek a license for the infringing service, product, software, technology
or content or develop alternative non-infringing services, products, software, technology or content. If we cannot license on reasonable terms, develop

alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our
service and product offerings. Any of these results could reduce our revenue and our ability to compete effectively, increase our costs or harm our business.

We may not be able to successfully implement new strategic initiatives, which could adversely impact our business.

We are continuously evaluating changing consumer preferences and the competitive environment of our industry and seeking out opportunities to improve
our performance through the implementation of selected strategic initiatives. The goal of these efforts is to develop and implement a comprehensive and
competitive business strategy which addresses the continuing changes in the weight management industry environment and our position within the industry.
For example, as the healthcare industry continues to evolve its response to the obesity epidemic so do the requirements, both regulatory and business, for
providers. If we do not successfully meet these requirements, we may not be perceived as an appropriate partner for certain purposes. We may not be able
to successfully implement our strategic initiatives and realize the intended business opportunities, growth prospects, including new business channels, and
competitive advantages. Our efforts to capitalize on business opportunities may not bring the intended results. Assumptions underlying expected ﬁ nancial
results or consumer demand may not be met or economic conditions may deteriorate. We also may be unable to attract and retain highly qualiﬁ ed and skilled
personnel to implement our strategic initiatives. If these or other factors limit our ability to successfully execute our strategic initiatives, our business
activities, ﬁ nancial condition and results of operations may be adversely affected.

The sale of our products in markets outside of the United States may subject us to risks.

We have entered into certain arrangements for the sale of our products in international markets and we plan to expand our international sales, marketing and
distribution activities on our own and through arrangements with partners located in other countries. The sale, marketing and distribution of our products and
programs in such locations is subject to a number of uncertainties, including, but not limited to, the following:

• Economic and political instability;

• Import or export licensing requirements;

• Trade restrictions;

• Product registration requirements;

• Longer payment cycles;

• Changes in regulatory requirements and tariffs;

• Potentially adverse tax consequences; and

• Potentially weak protection of intellectual property rights.

We are dependent on our key executive ofﬁ cers for future success. If we lose the services of any of our key executive ofﬁ cers and we are unable to
timely retain a qualiﬁ ed replacement, our business could be harmed.

Our future success depends to a signiﬁ cant degree on the skills, experience and efforts of our key executive ofﬁ cers. The loss of the services of any of these
individuals could harm our business. We have not obtained life insurance on any key executive ofﬁ cers. If any key executive ofﬁ cers left us or were seriously
injured and became unable to work, our business could be harmed.

Provisions in our certiﬁ cate of incorporation may deter or delay an acquisition of us or prevent a change in control, even if an acquisition or a change
of control would be beneﬁ cial to our stockholders.

Provisions of our certiﬁ cate of incorporation (as amended) may have the effect of deterring unsolicited takeovers or delaying or preventing a third party
from acquiring control of us, even if our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these
provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests.

Our certiﬁ cate of incorporation (as amended) permits our Board of Directors to issue preferred stock without stockholder approval upon such terms as the
Board of Directors may determine. The rights of the holders of our common stock will be junior to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difﬁ cult for a third party to
acquire, or discouraging a third party from acquiring, a majority of our outstanding common stock. The issuance of a substantial number of preferred shares
could adversely affect the price of our common stock.

Risks Related to Our Industry

Changes in consumer preferences could negatively impact our operating results.

Our program features pre-packaged food selections, which we believe offer convenience and value to our customers. Our continued success depends,
to a large degree, upon the continued popularity of our program versus various other weight loss, weight management and ﬁ tness regimens, such as low
carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences away from our pre-packaged
food and support and counseling services, and any failure to provide innovative responses to these changes, may have a materially adverse impact on our
business, ﬁ nancial condition, operating results, cash ﬂ ows and prospects. Our success is also dependent on our food innovation including maintaining a
robust array of food items and improving the quality of existing items. If we do not continually expand our food items or provide customers with items that
are desirable in taste and quality, our business could be harmed.

The weight loss industry is subject to adverse publicity, which could harm our business.

The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity could harm us, even if the adverse publicity is
not directly related to us. Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity and a consequent decline
in the revenue of weight loss businesses. Future research reports or publicity that is perceived as unfavorable or that question certain weight loss programs,
products or methods could result in a decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with illness
or other undesirable effects resulting from the consumption of our products or similar products by competitors, whether or not accurate, could also damage
customer conﬁ dence in our weight loss program and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated
with weight loss products or services resulted from the user’s failure to use such products or services appropriately.

Our industry is subject to governmental regulation that could increase in severity and hurt results of operations.

Our industry is subject to federal, state and other governmental regulation. Certain federal and state agencies, such as the Federal Trade Commission (the
“FTC”), regulate and enforce laws relating to advertising, disclosures to consumers, privacy, consumer pricing and billing arrangements and other consumer
protection matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or new laws or regulations
could result in liability, adverse publicity, and restrictions of our business operations. Some advertising practices in the weight loss industry have led to
investigations from time to time by the FTC and other governmental agencies. Many companies in the weight loss industry, including our predecessor
businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. In October 2009, the FTC published
its revised Guides concerning the Use of Endorsements and Testimonials in Advertising which now requires us to use a statement as to what the typical
weight loss customers can expect to achieve on our program when using a customer’s weight loss testimonial in advertising. Federal and state regulation
of advertising practices generally, and in the weight loss industry in particular, may increase in scope or severity in the future, which could have a material
adverse impact on our business.

Other aspects of our industry are also subject to government regulation. For example, the labeling and distribution of food products, including dietary
supplements, are subject to strict USDA and FDA requirements and food manufacturers are subject to rigorous inspection and other requirements of the
USDA and FDA, and companies operating in foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene,
food preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any reason, then we may be required to incur
signiﬁ cant expenses, as well as modify our operations to comply with new regulatory requirements, which could harm our operating results. Additionally,
remedies available in any potential administrative or regulatory actions may include product recalls and requiring us to refund amounts paid by all affected
customers or pays other damages, which could be substantial.

Laws and regulations directly applicable to communications, operations or commerce over the Internet such as those governing intellectual property, privacy,
libel and taxation, are more prevalent and remain unsettled. If we are required to comply with new laws or regulations or new interpretations of existing laws
or regulations, or if we are unable to comply with these laws, regulations or interpretations, our business could be adversely affected.

Future laws or regulations, including laws or regulations affecting our marketing and advertising practices, relations with consumers, employees, service
providers, or our services and products, may have an adverse impact on us.

The manufacture and sale of ingested products involves product liability and other risks.

Like other manufacturers and distributors of products that are ingested, we face an inherent risk of exposure to product liability claims if the use of our
products results in illness or injury. The foods and products that we manufacture and sell in the U.S. are subject to laws and regulations, including those
administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a
material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, including dietary
supplements, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim,
a signiﬁ cant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by
diverting the attention of senior management from the operation of the business. We may also be subject to claims that our products contain contaminants,
are improperly labeled; include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Additionally, the
manufacture and sale of these products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. To
date, we have not been a party to any product liability litigation and we are not aware of any instance in which any of our products have been defective in
any way that could give rise to product liability claims. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse
publicity for us and reduce our revenue. Any negative publicity associated with these actions would adversely affect our brand and may result in decreased
product sales and, as a result, lower revenue and proﬁ ts.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. DESCRIPTION OF PROPERTY

In Owings Mills, Maryland, the Company owns a 49,000 square-foot manufacturing facility and leases two buildings which serve as corporate headquarterswhich
are set to expire on August 31, 2016 and October 31, 2017. The Company owns a 119,000 square-foot distribution facility in Ridgley, Maryland and leases
a second distribution center in Dallas, Texas which includes a call center. This lease is set to expire on March 31, 2018. Both distribution facilities give
the Company adequate product distribution capacity for the foreseeable future. The Company owned a 3,000 square-foot conference and training facility
in Ocean City, Maryland that was sold in February 2016. The Company leases a raw materials warehouse in Arbutus, Maryland that expires in May 2018.
The Company also has 41 leases for what were its corporate owned Medifast Weight Control Centers. The 41 leases include 3 agreements for Centers that
were closed in December 2013 and 7 agreements for Centers that were closed in December 2014 that the Company is in the process of negotiating lease
terminations or sublease arrangements, if possible. The remaining 31 agreements are for Centers that were sold to franchise partners during 2014 and the
Company entered into sublease agreements with the franchisees. All corporate leases range in terms from one to ten years.

ITEM 3. LEGAL PROCEEDINGS

Medifast entered into a number of Franchise and Development Agreements with Team Wellness, Inc. and Team Wellness Louisiana, LLC for the operation
of Medifast Centers in the States of Alabama, Tennessee, and Louisiana. The primary owner and representative of the Team Wellness companies personally
guaranteed the companies’ obligations.

Team Wellness, Inc. failed to make payments required under the terms of a Loan Agreement that Team Wellness, Inc. had entered into with Bank of America
and for which Medifast provided a limited guarantee. As a result, Medifast served Team Wellness, Inc. with a Notice of Default and Opportunity to Cure.
After Team Wellness, Inc. failed to cure and pay the outstanding amounts, and was otherwise in default under the Franchise and Development Agreements,
Medifast served Team Wellness, Inc. with a Notice of Termination. In addition, Medifast terminated Team Wellness Louisiana LLC’s franchises, alleging that
Team Wellness Louisiana LLC and its guarantor never disclosed to Medifast that RMS Management LLC was an owner of Team Wellness Louisiana LLC
but rather represented to Medifast that the guarantor was the sole owner.

When the companies and the primary guarantor failed to pay the monies owed or comply with their post-termination obligations, Medifast ﬁ led a lawsuit on
November 21, 2014 against the primary guarantor and the companies in the United States District Court for the District of Maryland (Medifast Franchise
Systems, Inc. v. Team Wellness, Inc., et al., No. 14-03668 (D. Md.) for breach of contract (nonpayment) and fraud (relating to Medifast’s allegation that
Team Wellness LLC and its guarantor failed to disclose that RMS Management LLC was an owner of Team Wellness Louisiana LLC). The complaint seeks
damages, enforcement of the termination of the Franchise and Development Agreements, and an injunction ordering the defendants to comply with their post-
termination obligations under the Franchise and Development Agreements. Medifast moved for a default judgment against the companies after they failed to
answer the complaint. The court granted the motion on June 24, 2015. The Court’s Order requires the companies to pay $2,100,927.53 million to Medifast,
which includes the following: outstanding royalties and receivables on food purchases in the amount of $141,239.89, reimbursement for loan payments in the
amount of $1,892,834.44, and interest and fees on those loan payments in the amount of $66,853.20. In addition, the court awarded Medifast its attorneys’
fees and costs in the amount of $45,231.05. The Court’s Order also requires the companies to abide by their post-termination obligations under the Franchise
Agreements, including that they cease using Medifast’s conﬁ dential information. The case against the primary guarantor remains ongoing.\ Medifast recently
ﬁ led for summary judgment against the guarantor for nonpayment and fraud – the remaining counts in the complaint on February 2, 2016. The guarantor ﬁ led
a motion for summary judgment on the fraud claim and on February 2, 2016. Those motions are currently pending before the court.

Medifast granted franchise rights to operate 16 weight loss control Centers to franchisee TransformU, LLC (“TransformU”) in Virginia and Maryland in May
and December, 2014. In connection with those transactions, Jason Properties, LLC (“Jason Properties”) assigned certain real estate leases and other liabilities
in connection with the Centers, which were assumed by TransformU and guaranteed by TransformU’s principals, Ronald M. Fields, Jr. and James Smith.
TransformU ceased operating the Centers, ceased paying fees pursuant to the governing franchise agreements, and ceased paying rent under the operative
leases prior to the expiration of the lease terms.

On January 12, 2016, Medifast and Jason Properties ﬁ led suit against TransformU, Mr. Fields, and Mr. Smith in the United States District Court for the
Eastern District of Virginia in a case entitled Jason Properties, LLC, et al. v. TransformU , et al., Case No. 1:16-cv-35 AHH/JFA alleging that TransformU
and Messrs. Fields and Smith defaulted on their obligations pursuant to the above-mentioned agreements and seeking in excess of $650,000 in damages.
The action was dismissed with prejudice on February 5, 2016 by joint stipulation in accordance with the terms of a settlement agreement reached between
the parties.

In addition to the above matters, the Company is, from time to time, subject to a variety of litigation and similar proceedings incidental to its business. Based
upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse
effect on its results of operations, ﬁ nancial position or liquidity.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES

The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the symbol MED. The following table sets forth the low and high
closing prices for the Company’s common stock as reported by the NYSE by ﬁ scal quarters for 2015 and 2014:

PART II

Quarter Ended March 31, 2015
Quarter Ended June 30, 2015
Quarter Ended September 30, 2015
Quarter Ended December 31, 2015

Quarter Ended March 31, 2014
Quarter Ended June 30, 2014
Quarter Ended September 30, 2014
Quarter Ended December 31, 2014

Holders

2015

Low

High

29.64
29.66
26.67
26.70

2014

Low

High

24.23
28.88
26.15
29.39

33.40
33.34
32.66
31.99

29.57
34.08
34.98
33.79

There were approximately 112 record holders of the Company’s common stock as of March 1, 2016. This number does not include beneﬁ cial owners of our
securities held in the name of nominees.

Dividends

Prior to the fourth quarter of 2015, the Company had not declared or paid any dividend since inception. On December 16, 2015, the Company’s board of
directors declared a dividend of $0.25 per share to stockholders of record as of the close of business on December 28, 2015. Subsequent to December 31,
2015, the Company’s board of directors declared a dividend of $0.25 per share to stockholders of record as of the close of business on March 21, 2016,
payable on May 10, 2015. The declaration and payment of dividends in the future will be determined by the Company’s board of directors in light of
conditions then existing, including the Company’s earnings, ﬁ nancial condition, capital requirements and other factors. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources.”

Securities Authorized for Issuance Under Equity Compensation Plans

The information under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” will be ﬁ led in the Company’s deﬁ nitive proxy
statement for the 2015 annual meeting of stockholders and is incorporated herein by reference.

Issuer Purchases of Equity Securities

At the outset of the quarter ended December 31, 2015, there were 847,567 shares of the Company’s common stock eligible for repurchase under the
repurchase authorization dated September 16, 2014.

No repurchases were made during the fourth quarter of 2015; however throughout the year 40,368 shares of common stock, at an average purchase price of
$31.89, were surrendered by employees to the Company during 2015 for the payment of the minimum tax liability withholding obligations upon the vesting
of shares of restricted stock.

Performance Graph

The following graph compares the Company’s cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis)
over the last ﬁ ve ﬁ scal years with the Standard & Poor’s S&P 500 Index and the Company’s selected peer group, including NutriSystem Inc., Herbalife Ltd.,
USANA Health Sciences, and Weight Watchers International, Inc.

12/10

12/11

12/12

12/13

12/14

Medifast, Inc.
S&P 500
Peer Group

100.00
100.00
100.00

47.51
102.11
138.28

91.38
118.45
108.88

90.48
156.82
184.28

116.17
178.29
117.72

ITEM 6. SELECTED FINANCIAL DATA

The selected condensed consolidated ﬁ nancial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in Part II, Item 7 of this Report, and the consolidated ﬁ nancial statements and notes thereto of the Company
included in Part II, Item 8 of this Report. The historical results provided below are not necessarily indicative of future results.

(In thousands, except per share data)
Revenue
Income from Operations
Income from Continuing Operations before Income Taxes

Basic EPS from continuing operations
Basic EPS
Diluted EPS from continuing operations
Diluted EPS
Cash dividends declared per share

2015

2014

2013

2012

2011

$ 272,773
28,684
29,671

$ 285,285
30,246
31,693

$ 324,054
38,410
39,043

$ 318,571
27,140
28,356

$ 272,467
33,768
34,067

1.64
1.68
1.62
1.66
0.25

1.66
1.04
1.65
1.03
–

1.97
1.74
1.96
1.73
–

1.34
1.16
1.34
1.16
–

1.63
1.33
1.60
1.31
–

Total Assets
Current Portion of long-term debt and capital lease facilities
Total long-term debt and capital leases

$ 117,326
219
–

$ 115,910
232
242

$ 132,650
222
474

$ 130,251
528
3,809

$ 105,665
1,426
4,251

Weighted average shares outstanding

Basic
Diluted

11,959
12,071

12,670
12,778

13,774
13,818

13,722
13,740

13,965
14,198

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated ﬁ nancial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Our signiﬁ cant accounting
policies are described in Note 2 to the consolidated ﬁ nancial statements.

The preparation of our consolidated ﬁ nancial 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 ﬁ nancial 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 policies to be the most critical in preparing our consolidated ﬁ nancial statements. These critical
accounting policies have been discussed with our Audit Committee, as appropriate.

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 for prior to shipping. Medifast Weight Control Centers’ program fees were recognized over the
estimated service period.

Impairment of Fixed Assets and Long-Lived 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 ﬁ xed
and intangible assets may be impaired. Any resulting impairment loss would be limited to the value of net ﬁ xed and intangible assets.

Income Taxes: The beneﬁ t of a tax position is recognized in the ﬁ nancial statements in the period during which, based on all available evidence, management
believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as
the largest amount of tax beneﬁ t that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the
beneﬁ ts associated with tax positions taken that exceeds the amount measured as described above is reﬂ ected as a liability for unrecognized tax beneﬁ ts in
the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We evaluated our tax positions and determined that we did not have any material uncertain tax positions. Our policy is to recognize interest and penalties accrued on
uncertain tax positions as part of income tax expense. For the twelve months ended December 31, 2015 and 2014, no material estimated interest or penalties were
recognized for the uncertainty of certain tax positions. We ﬁ le income tax returns in the United States, Canada and various states jurisdictions. We are currently
under audit by the IRS for 2010, but do not anticipate it to have a signiﬁ cant impact on previously reported results as well as beneﬁ ts realized under our current
tax structure. Other than 2010, we are no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for the years before 2012.

Reserves for Returns: We review the reserves for customer returns at each reporting period and adjust them to reﬂ ect data available at that time. To estimate
reserves for returns, we consider actual return rates in preceding periods. To the extent the estimate of returns changes, we will adjust the reserve, which will
impact the amount of product sales revenue recognized in the period of the adjustment. Our estimates for returns have not differed materially from our actual
returns. The provision for estimated returns as of December 31, 2015 and 2014 were $323,000 and $290,000, respectively.

Operating leases: Medifast leases retail stores, distribution facilities, and ofﬁ ce space under operating leases. Many lease agreements contain tenant improvement
allowances, rent holidays, rent escalation clauses and contingent rent provisions. The Company recognizes incentives and minimum rental expenses on a
straight-line basis over the terms of the leases. We commence recording rent expense on the date of initial possession, which is generally when we enter the space
and begin to make improvements to properties for our intended use. For tenant improvement allowances and rent holidays, we record a deferred rent liability on
the consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of income.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, we record
minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of income. Several leases provide for contingent
rents, which are determined as a percentage of gross sales in excess of speciﬁ ed levels. We record a contingent rent liability on the consolidated balance
sheets and the corresponding rent expense when we determine achieving speciﬁ ed levels is probable.

BACKGROUND

The Company is engaged in the production, distribution, and sale of weight loss, weight management, and healthy living products and other consumable
health and diet 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 in 2015 and 98% of our revenues in 2014.

We review and analyze a number of key operating and ﬁ nancial metrics to manage our business, including revenue to advertising spend, number of active
Health Coaches and average monthly revenue generated per Health Coach in the Take Shape For Life® channel.

In 2014, the Company exited the MWCC corporate center model with the sale of 41 Centers to existing franchise partners and the closure of the remaining
34 corporate Centers. The assets, liabilities, operating results, and cash ﬂ ows of the MWCC corporate center channel have been presented separately as
discontinued operations in the consolidated ﬁ nancial statements for all periods presented.

CONSOLIDATED RESULTS OF OPERATIONS
2015 COMPARISON WITH 2014

Overview of the Twelve Months Ended December 31, 2015 Compared to the Twelve Months Ended December 31, 2014

Twelve Months Ended December 31,

2014

$ Change

% Change

Revenue

Cost of sales

Gross Proﬁ t

$ 272,773,000

$ 285,285,000

(12,512,000)

71,458,000

201,315,000

76,078,000

209,207,000

(4,620,000)

(7,892,000)

Selling, general, and administrative costs

172,631,000

178,961,000

(6,330,000)

Income from operations

28,684,000

30,246,000

(1,562,000)

Other income

Interest income, net

Other income

Income from continuing operations before income taxes

Provision for income tax expense

Income from continuing operations

Income (loss) from discontinued operations, net of tax

Net income

% of revenue

Gross Proﬁ t

Selling, general, and administrative costs

Income from Operations

661,000

326,000

987,000

29,671,000

10,104,000

19,567,000

491,000

716,000

731,000

1,447,000

31,693,000

10,664,000

21,029,000

(7,848,000)

(55,000)

(405,000)

(460,000)

(2,022,000)

(560,000)

(1,462,000)

8,339,000

20,058,000

13,181,000

6,877,000

73.8%

63.3%

10.5%

73.3%

62.7%

10.6%

-4%

-6%

-4%

-5%

-8%

-55%

-32%

-6%

-5%

-7%

-106%

52%

Revenue: Revenue decreased to $272.8 million in 2015 compared to $285.3 million in 2014, a decrease of $12.5 million. The Take Shape For Life® sales
channel accounted for 74.1%, the Medifast Direct channel accounted for 17.8%, the Franchise Medifast Weight Control Centers channel accounted for 6.3%,
and the Medifast Wholesale channel accounted for 1.8% of total revenue. The year to date revenue to spend ratio for continuing operations for 2015 was
17.9-to-1 compared to 16.8-to-1 for 2014. Total advertising spend, inclusive of broker fees, for continuing operations was $15.3 million in 2015 compared
to $17.0 million in 2014.

Take Shape For Life® revenue decreased 2% to $202.2 million in 2015 compared with $206.7 million in 2014. The decline in revenue for Take Shape For
Life® was caused by the Company having less active Health Coaches and clients coming out of 2014 as compared to 2013, driving down revenues in the ﬁ rst
three quarters of 2015. This impact was partially offset by a price increase in the ﬁ rst quarter of 2015.

In 2014, the Company deﬁ ned active Health Coaches as Health Coaches earning income from a product sale in the last month of the quarter. However, in
order to provide a more accurate depiction of the number of Health Coaches contributing to Take Shape For Life® revenues, the Company began reporting
a new active Health Coach count and average revenue per active Health Coach in the ﬁ rst quarter of 2015. The number of active Health Coaches is now
reported as the number of earning coaches each quarter instead of the number of earning Health Coaches in the last month of the quarter. The average revenue
per Health Coach will now be calculated on a quarterly basis instead of an average month within the quarter. These new quarterly measurements provide a
more consistent metric for quarterly comparison. The number of active Health Coaches and quarterly revenue per Health Coach rebounded in the quarter
ended December 31, 2015, in which the number of active Health Coaches increased to 11,900 compared with 11,700 for the quarter ended December 31,
2014, an increase of 2%. For the same period, the average quarterly revenue per Health Coach increased to $4,039 in 2015 from $3,896 in 2014.

The new and historical metrics for the prior period are as follows:

Reporting
Period

Q4 2014

New Active
Health Coaches

11,700

Historical Active
Health Coaches

9,300

New Revenue
per Health Coach

$3,896

Historical Revenue
per Health Coach

$1,401

Medifast Direct Sales revenue decreased 15% to $48.7 million in 2015 as compared with $57.2 million in 2014, a decrease of $8.5 million. Revenues in this
channel are driven primarily by targeted customer marketing and advertising. Sales were down in comparison to 2014 as new customer acquisition continues
to be challenging. To optimize proﬁ tability, we decreased our advertising spend in 2015 by 10.1% in comparison to 2014.

Franchise Medifast Weight Control Centers channel revenue increased 11% year-over-year, with revenue of $17.1 million in 2015 compared to $15.4 million
in 2014. Sixty-one franchise centers were in operation as of December 31, 2015, as compared to 73 Centers as of December 31, 2014. Twelve Centers were
closed during the year, including 10 corporate centers that were transitioned to the franchise model in June of 2014. The increase in revenue was the result
of sales derived from corporate centers that were transitioned to the franchise model in June 2014 and December 2014, partially offset by decreased sales per
Center and the closure of two Centers opened greater than a year.

Medifast Wholesale revenue decreased 20%, or $1.2 million, to $4.8 for the year ended December 31, 2015 compared to $6.0 million for the year ended
December 31, 2014. The decrease was due to the loss of certain accounts resulting from Medifast’s enforcement of business partner compliance distribution
requirements.

Costs of Sales: Cost of sales decreased $4.6 million in 2015 to $71.5 million as compared to $76.1 million in 2014, primarily due to decreased sales volumes.
As a percentage of sales, gross margin increased to 73.8% in 2015 from $73.3% in 2014. The gross margin improvement was primarily driven by price
increases and shipping efﬁ ciencies recognized during the year.

Selling, General and Administrative Costs: Selling, general and administrative expenses decreased by $6.3 million compared to 2014. As a percentage of
sales, selling, general and administrative expenses increased to 63.3% versus 62.7% in 2014. Selling general and administrative costs include $2.1 million
and $2.6 million for 2015 and 2014, respectively, of extraordinary legal expenses resulting from certain Schedule 13D ﬁ lings. Fiscal year 2014 also includes
a $2.0 million accrual for a franchise loan default guaranteed by Medifast. Excluding these items, selling, general, and administrative expense decreased $3.8
million. Adjusted selling, general, and administrative expenses as a percentage of sales increased to 62.5% of sales in 2015 as compared to 61.1% in 2014.

Take Shape For Life® commission expense, which is variable based upon product sales, decreased by approximately $2.1 million, or 2.5%, which is in
line with the 2% decrease in revenue year-over-year. Health Coaches are compensated on product sales referred to the Company. Health Coaches can earn
compensation under the Integrated Compensation Plan in two ways:

• Commissions: The primary way a Health Coach is compensated is through earning commissions on product sold to their clients. Health Coaches earn
commissions by selling products through their own replicated website or through the Company’s in-house call center. The clients of Health Coaches
are responsible for ordering and paying for products, and their order is shipped directly from the Company to the client’s home or designated address.
Our Health Coaches do not handle payments and are not required to purchase or store products in order to receive a commission. In addition, Health
Coaches do not receive a commission on their own personal product orders. Health Coaches pay the same price for products as their clients. The
Company pays retail commissions to qualiﬁ ed Health Coaches on a weekly basis.

• Bonuses: Health Coaches are offered several bonus opportunities for acquiring clients, sponsoring Health Coaches and helping them to build their
business, and sponsoring Health Coaches who become higher ranking leaders. The purposes of these bonuses are to reward Health Coaches for successfully
growing and supporting their clients and to incentivize Health Coaches to further support and develop other Health Coaches within their team.

Health Coaches do not earn a commission or bonus when they recruit a new Health Coach into the Take Shape For Life® network. Fees paid by new Health
Coaches for start-up materials are at the Company’s approximate cost.

Salaries and beneﬁ ts increased by approximately $0.6 million in 2015 as compared to 2014. The year-over-year increase was driven by higher bonus expenses
and medical costs, partially offset by a reduction in salaries and beneﬁ ts resulting from lower headcount and a decrease in stock compensation expense.

Sales and marketing expense decreased by $1.3 million in 2015 as compared to the prior year as a result of lower advertising spend and a decrease in expenses
associated with the Take Shape For Life® annual convention. Total advertising spend was $15.3 million in 2015 versus $17.0 million in 2014. The decrease in
spending was offset by an increase in production costs for the Medifast commercials that aired in the ﬁ rst quarter of 2015 and an increase in the Company’s
research and development costs related to an ongoing study.

General expenses decreased $2.2 million in 2015 as compared to 2014. Included in 2014, was the recording of a $2.0 million default of a franchise loan
agreement. Excluding this, the year-over-year change would have been $0.2 million and was driven by a decrease in legal expenses. The decrease in legal
fees is largely due to the settlement agreement with Engaged Capital, LLC that was reached during the ﬁ rst quarter, limiting the extraordinary legal fees
incurred during 2015. These savings were partially offset by an increase in accounting expenses and costs associated with retaining GKV as the Company’s
marketing and advertising agency.

Other expenses decreased by $1.1 million for the year ended December 31, 2015 compared to the year ended December 31, 2014. The improvement was due
to a decrease in depreciation expense and a reduction in credit card fees due to reduced revenues. These improvements were partially offset by an increase
in licenses and fees.

Income taxes: In 2015, the Company recorded $10.1 million in income tax expense, an effective tax rate of 34.1%. In 2014, the Company recorded 10.7
million in income tax expense, an effective tax rate of 33.6%. The increase in the effective tax rate in 2015 over 2014 was the result of beneﬁ ts realized in
2014 from research and development credits that were retroactive to 2010. The Company anticipates a tax rate of approximately 33 – 34% in 2016.

Income from continuing operations: Income from continuing operations was $19.6 million in 2015 as compared to $21.0 million in 2014, a decrease of $1.4
million. Pre-tax proﬁ t as a percent of sales decreased to 10.9% for the year ended December 31, 2015 compared to 11.1% for the year ended December 31,
2014. The year to date decrease in income is a result of the reduced sales offset by the Company’s efforts to manage expenses. Excluding the extraordinary
legal expenses in 2015 and 2014 and the accrued franchise loan obligation in 2014, income from continuing operations would have been $20.9 million, or
$1.73 per share, for the year ended December 31, 2015 and $24.1 million, or $1.89 per share, for the year ended December 31, 2014.

Loss from discontinued operations: In 2014, the Company exited the MWCC corporate center model with the sale of 41 Centers to existing franchise partners
and the closure of the remaining 34 corporate centers. The Company had $0.5 million in income from discontinued operations in 2015 compared to a $7.8
loss from discontinued operations in 2014. The income generated in 2015 was primarily the result of the settlement of lease agreements offset by incremental
closure costs incurred during the year.

Net income: Net income was $20.1 million in 2015 compared to $13.2 million in 2014. The year-over-year change was driven by the factors described above
in the explanations for income from continuing operations and loss from discontinued operations.

CONSOLIDATED RESULTS OF OPERATIONS
2014 COMPARISON WITH 2013

Overview of the Twelve Months Ended December 31, 2014 Compared to Twelve Months Ended December 31, 2013

Twelve Months Ended December 31,

2014

2013

$ Change

% Change

Revenue

Cost of sales

Gross Proﬁ t

$ 285,285,000

$ 324,054,000

(38,769,000)

76,078,000

209,207,000

83,488,000

240,566,000

(7,410,000)

(31,359,000)

Selling, general, and administrative costs

178,961,000

202,156,000

(23,195,000)

Income from operations

30,246,000

38,410,000

(8,164,000)

Other income

Interest income, net

Other income

716,000

731,000

1,447,000

509,000

124,000

633,000

Income from continuing operations before income taxes

Provision for income tax expense

31,693,000

10,664,000

39,043,000

11,908,000

Income from continuing operations

Loss from discontinued operations, net of tax

21,029,000

(7,848,000)

27,135,000

(3,166,000)

207,000

607,000

814,000

(7,350,000)

(1,244,000)

(6,106,000)

(4,682,000)

Net income

% of revenue

Gross Proﬁ t

Selling, general, and administrative costs

Income from Operations

13,181,000

23,969,000

(10,788,000)

73.3%

62.7%

10.6%

74.2%

62.4%

11.9%

-12%

-9%

-13%

-11%

-21%

41%

490%

129%

-19%

-10%

-23%

148%

-45%

Revenue: Revenue decreased to $285.3 million in 2014 compared to $324.1 million in 2013, a decrease of $38.8 million. The Take Shape For Life® sales
channel accounted for 72.5%, the Medifast Direct channel accounted for 20.0%, the Franchise Medifast Weight Control Centers channel accounted for 5.4%,
and the Medifast Wholesale channel accounted for 2.1% of total revenue. The year to date revenue to spend ratio for continuing operations for 2014 was
16.8-to-1 compared to 14.7-to-1 for 2013. Total advertising spend, inclusive of broker fees, for continuing operations was $17.0 million in 2014 compared
to $22.1 million in 2013.

Take Shape For Life® revenue decreased 10% to $206.7 million in 2014 compared with $228.7 million in 2013. The decrease in revenue for Take Shape
For Life® was driven by a decrease in the number of active Health Coaches and revenue per Health Coach along with the accrued impact from the creation
of the new BeSlim Club loyalty program. Utilizing the new quarterly metrics, the number of active Health Coaches at the end of 2014 decreased to 11,700
compared with 12,800 during the period a year ago, a decrease of 11%. The average revenue per Health Coach per quarter decreased to $3,896 in 2014 from
$4,047 in 2013. Approximately half of the decrease of the Health Coach count was due to having less pay periods used in the calculation versus the number
of pay periods used in the prior year.

As discussed above, the Company redeﬁ ed the active Health Coach and revenue per active Health Coach metrics in the ﬁ rst quarter of 2015. The new and
historical metrics for the two periods presented are as follows:

Reporting
Period

Q4 2014
Q4 2013

New Active
Health Coaches

11,700
12,800

Historical Active
Health Coaches

New Revenue
per Health Coach

Historical Revenue
per Health Coach

9,300
10,500

$3,896
$4,047

$1,401
$1,477

Medifast Direct Sales revenue decreased 24% to $57.2 million as compared with $75.5 million in 2013, a decrease of $18.3 million. Revenues in this channel
are primarily driven by targeted customer advertising on-line, across local radio, via email and direct mail campaigns, and by highlighting customer successes
in large national publications and on television. The Company experienced lower marketing efﬁ ciencies and new customer acquisition during the year; and
therefore, reduced marketing spending to optimize proﬁ tability. The Company’s decision to reduce spending impacted the year-over-year revenue for the
channel. As compared to 2013, the Company increased fourth quarter spending in an effort to drive 2015 sales.

Franchise Medifast Weight Control Centers channel revenue increased 1% year-over-year, with revenue of $15.4 million in 2014 compared to $15.3 million
in 2013. There were 73 franchise centers in operation as of December 31, 2014, including 19 corporate centers that were transitioned in June 2014 and 17
corporate centers that were transitioned in December 2014. There were 17 franchise centers that closed during 2014, including 5 Centers transitioned to
the franchise model in June 2014 and 7 Centers opened during 2014. There were 41 franchise centers in operation as of December 31, 2013. The increase
in revenue was driven by the conversion of corporate centers over to Franchise Centers offset by franchise center closures as well as a decrease in sales of
franchise centers open greater than one year.

Medifast Wholesale revenue increased 30%, or $1.4 million, to $6.0 for the year ended December 31, 2014 compared to $4.6 million for the year ended
December 31, 2013. The increase was driven by a reallocation of internal sales resources to improve revenue in the channel for both domestic and international
customers.

Costs of Sales: Cost of sales decreased $7.4 million in 2014 to $76.1 million as compared to $83.5 million in 2013. As a percentage of sales, gross margin
decreased from 74.2% in 2013 to $73.3% in 2014, which was the result of increased year-over-year product costs primarily driven by a reduction in
manufacturing volumes.

Selling, General and Administrative Costs: Selling, general and administrative expenses decreased by $23.2 million compared to 2013. As a percentage of
sales, selling, general and administrative expenses increased to 62.7% versus 62.4% in 2013. Included in selling general and administrative costs for 2014
are $2.6 million in extraordinary legal expenses resulting from certain Schedule 13D ﬁ lings and a $2.0 million accrual for a franchise loan default guaranteed
by Medifast. Excluding these items, selling, general, and administrative expense as a percentage of sales would have been 61.1%, a decrease of 130 basis
points compared to 2013.

Take Shape For Life® commission expense, which is variable based upon product sales, decreased by approximately $15.6 million, or 15.4%, as a result of a
new compensation plan introduced in late 2013 and a 10% decrease in sales for the channel.

Salaries and beneﬁ ts decreased by approximately $3.5 million in 2014 as compared to 2013. The year-over-year decrease was driven by reductions in
bonuses, salaries, and medical expenses resulting from the Company’s continued focus on headcount. These improvements were partially offset by an
increase in stock compensation expense.

Sales and marketing expense decreased by $5.1 million in 2014 as compared to the prior year as a result of lower advertising expenses. The Company
continues to focus on efﬁ ciency improvements and balancing sales and marketing expense in an effort to drive proﬁ tability. The Company increased
yearover- year fourth quarter revenue spending in an effort to drive 2015 sales.

General expenses increased $3.0 million in 2014 as compared to 2013. The year-over-year change was driven by a $2.0 million accrual relating to a default on
a franchise loan guaranteed by Medifast and an increase in legal expenses, inclusive of $2.6 million in extraordinary expenses resulting from certain Schedule
13D ﬁ lings. These were partially offset by a decrease in information technology consulting fees.

Other expenses consisting primarily of depreciation and credit card processing fees, decreased by $1.7 million. The decrease in expenses for the period was
the result of a reduction in credit card fees due to reduced revenues and the ﬁ nal settlement of Voluntary Disclosure Agreement’s (VDA) accrued in 2012
and issued in 2013.

Income taxes: In 2014, the Company recorded $10.7 million in income tax expense, an effective rate of 33.6%. In 2013, the Company recorded $11.9 million
in income tax expense, an effective rate of 30.5%. The increase in the effective tax rate in 2014 over 2013 was a result of beneﬁ ts realized in 2013 from
research and development credits of $0.5 million that were retroactive to 2012, as well as realizing beneﬁ ts of $0.8 million from extensive state income tax
restructuring (to take advantage of apportionment methodology) which also related to prior years. As a manufacturing entity based in Maryland, in 2013 the
Company adopted the single sales factor apportionment method in addition to claiming new state jobs credits and research and development credits. The
Company anticipates a tax rate of approximately 33 – 34% in 2015.

Income from continuing operations: Income from continuing operations was $21.0 million in 2014 as compared to $27.1 million in 2013, a decrease of $6.1
million. Income from operations decreased by $8.2 million, or 21%, versus 2013 with the percent of sales decreasing to 10.6% in 2014 as compared to 11.9%
in 2013. The year-over-year decrease in proﬁ tability was primarily driven by the 11.9% reduction in sales coupled with an increase in product costs, a $1.8
million after tax extraordinary legal and advisory expenses incurred in relation to the certain Schedule 13D ﬁ lings and a $1.3 million after tax accrual relating
to a default on a franchise loan guaranteed by Medifast. These negative impacts to proﬁ ts were partially offset by the Company’s continued efforts to closely
monitor spending as demonstrated in the decrease in selling, general, and administrative expenses outlined above.

Loss from discontinued operations: In 2014, the Company exited the MWCC corporate center model by selling 41 Centers to existing franchise partners
(24 Centers were sold in June 2014 and the remaining 17 Centers were sold in December 2014) and closing the remaining 34 corporate centers. Loss from
discontinued operations was $7.8 million in 2014 as compared to $3.1 million in 2013, a decrease of $4.7 million. The year-over-year decrease includes
the $8.6 million pre-tax, $5.2 million after-tax, charge for the closure of 34 Centers in December 2014. This charge includes $0.6 million for one-time
termination beneﬁ ts, $4.4 million for closed clinic lease obligations, $3.3 million for impaired assets, and $0.5 million in other facility related closure costs.
These exit activity costs were partially offset by a gain of $0.2 million on the sale of Centers.

Net income: Net income was $13.2 million in 2014 compared to $24.0 million in 2013. The year-over-year change was driven by the factors described above
in the explanations for income from continuing operations and loss from discontinued operations.

Non-GAAP Financial Measures

In addition to providing results that are determined in accordance with GAAP, the Company provides certain non-GAAP ﬁ nancial measures. The Company’s
2015 and 2014 non-GAAP ﬁ nancial measures of adjusted net income and adjusted diluted earnings per share exclude the charges the Company incurred in
relation to extraordinary legal expenses in connection with the Schedule 13D ﬁ lings. The 2014 results also exclude a franchise loan default guaranteed by
Medifast. Because all of these charges are unique events, not directly related to the Company’s normal operations, the Company believes these non-GAAP
ﬁ nancial measures may help investors better understand and compare our operating results and trends by eliminating this component.

The reconciliations of these non-GAAP ﬁ nancial measures are as follows:

Income from operations
Adjustments

Franchise loan guarantee accrual
Legal expenses- 13D

Adjusted Income from operations

Income from continuing operations
Adjustments

Franchise loan guarantee accrual
Legal expenses- 13D

Adjusted income from continuing operations
Loss on discontinued operations, net of tax
Adjusted Net Income

Diluted earnings per share from continuing operations
Impact for adjustments
Adjusted diluted earnings per share continuing operations
Diluted Loss per share from discontinued operations
Adjusted diluted earnings per share

2015

Years Ended December 31,
2014

2013

28,684,000

30,246,000

38,410,000

-
2,084,000
30,768,000

1,980,000
2,597,000
34,823,000

-
-
38,410,000

2015

Years Ended December 31,
2014

2013

19,567,000

21,029,000

27,135,000

-
1,374,000
20,941,000
491,000
21,432,000

1.62
0.11
1.73
0.04
1.77

$
$
$

1,342,000
1,761,000
24,132,000
(7,848,000)
16,284,000

1.65
0.24
1.89
(0.62)
1.27

$
$
$

-
-
27,135,000
(3,166,000)
23,969,000

1.96
-
1.96
(0.23)
1.73

$
$
$

The weighted-average diluted shares outstanding used in the calculation of theses non-GAAP ﬁ nancial measures are the same as the weighted-average shares
outstanding used in the calculation of the reported per share amounts.

Excluding the impact of the $2.1 million extraordinary legal expenses incurred in connection with the Schedule 13D ﬁ lings for the year ended December 31,
2015 and the impact of the $2.0 million franchise loan guarantee and the $2.6 extraordinary legal expenses incurred in connection with the 13D ﬁ lings for
the year ended December 31, 2014, income from operations decreased $4.0 million to $30.8 million from $34.8 million. Adjusted income from continuing
operations for the year ended December 31, 2015 decreased to $20.9 million from income from adjusted continuing operations of $24.1 million for the year
ended December 31, 2014. Adjusted net income for the year ended December 31, 2015 increased to $21.4 million from net income of $16.3 million for the
year ended December 31, 2014. Adjusted diluted earnings per share from continuing operations for the year ended December 31, 2015 decreased to $1.73 as
compared to adjusted diluted earnings per share from continuing operations of $1.89 for the same period in 2014. Adjusted diluted earnings per share for the
year ended December 31, 2015 increased to $1.77 as compared to adjusted diluted earnings per share of $1.27 for the same period in 2014.

LIQUIDITY AND CAPITAL RESOURCES

The Company had stockholders’ equity of $88.6 million and working capital of $64.5 million on December 31, 2015 compared with $80.5 million and
$55.0 million at December 31, 2014, respectively. The $8.1 million net decrease in stockholder’s equity reﬂ ects $20.1 million in 2015 proﬁ ts offset by the
$10.5 million used to purchase shares of the Company’s common stock as well as other equity transactions as outlined in the “Consolidated Statement of
Changes in Stockholders’ Equity” included in our consolidated ﬁ nancial statements. The Company also declared a dividend of $0.25 per share to its common
stockholders during the fourth quarter of 2015 which was paid in the ﬁ rst quarter of 2016. Subsequent to December 31, 2015, the Company’s board of
directors declared a dividend of $0.25 per share to stockholders of record as of the close of business on March 21, 2016, payable on May 10, 2015. While
we intend to continue the dividend program and believe we will have sufﬁ cient 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 and cash equivalents position increased from $24.5 million at December 31, 2014 to $42.0
million at December 31, 2015.

In the year ended December 31, 2015 the Company generated cash ﬂ ow of $33.1 million from continuing operations, partially attributable to $19.6 million in
income from continuing operations. Cash provided by operating activities of $16.5 million primarily includes depreciation and amortization of $7.1 million,
a $3.6 million decrease in prepaid income taxes, share-based compensation of $3.1 million, a decrease in inventory of $2.4 million, and a $0.3 million
decrease in other assets. This was offset by cash used by operating activities of $3.0 million including a $2.4 million decrease in accounts payable and accrued
expenses, a $0.5 million net realized gain on investment securities, and deferred income taxes of $0.1 million.

Net cash used in operating activities from discontinued operations was $3.7 million including income from discontinued operations of $0.5 million. Cash
provided by operating activities from discontinued operations totaled $2.6 million and includes a non-cash beneﬁ t of $2.4 million for deferred taxes and a
$0.1 decrease in inventory. Cash used by operating activities from discontinued operations of $6.8 million include a $6.5 million decrease in accounts payable
and accrued expenses and a $0.3 million increase in accounts receivable.

In the year ended December 31, 2015, net cash used in investing activities from continuing operations was $0.2 million, which was due to $9.3 million
for the purchase of investment securities offset by $11.9 million of cash generated by the sale of investment securities and $2.8 million for the purchase of
property and equipment.

In the year ended December 31, 2015, ﬁ nancing activities from continuing operations used $11.7 million in cash. The Company used $10.5 million to
purchase shares of the Company’s common stock in the open market, to repurchase shares of the Company’s common stock to cover employee taxes of
$1.3 million, and to repay $0.3 million in capital leases. The Company realized a cash beneﬁ t for excess tax beneﬁ ts from share-based compensation in the
amount of $0.2 million. As of December 31, 2015, there are 847,567 shares of the Company’s common stock eligible for repurchase under the repurchase
authorization dated September 16, 2014.

In the year ended December 31, 2015, the Company had a non-cash beneﬁ t of $0.1 million related to foreign currency translation.

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 ﬂ ow and ﬁ nancing activities.

The Company evaluates acquisitions from time to time as presented.

Contractual Obligations and Commercial Commitments

The Company has the following contractual obligations as of December 31, 2015:

Operating Leases (a)
Operating Leases for Closed MWCC Centers (b)
Operating Leases for Sold MWCC Centers (c)
Capital Leases (d)

Less Than 1 Year

1 - 3 Years

Total

$ 1,330,000
409,000
1,090,000
225,000

$ 1,026,000
252,000
866,000
-

$ 2,356,000
661,000
1,956,000
225,000

Total contractual obligations

$ 3,054,000

$ 2,144,000

$ 5,198,000

(a) The Company has operating leases in place for leased corporate ofﬁ ces, our Texas Distribution center, our raw materials warehouse, and the Company’s

printers.

(b) The Company has 10 operating leases in place that extend beyond December 31, 2015 for closed Medifast Corporate Weight Control Centers. The
Company is actively seeking to reach lease termination agreements on these obligations and settled three termination agreements during the ﬁ rst quarter
of 2016. These Centers made up $143,000, and $162,000 of the costs above for the periods less than 1 year and 1-3 years, respectively.

(c) The Company has 31 operating leases in place that extend beyond December 31, 2015 for previous Medifast Corporate Weight Control Centers sold to

franchise partners. The Company remains named on the leases, however the obligations have been subleased to the franchisees.

(d) The Company leases large commercial printers for our printing operations that are accounted for as capital leases, these obligations are detailed in Note

7 of the consolidated ﬁ nancial statements.

INFLATION

To date, inﬂ ation has not had a material effect on the Company’s business.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company
does not enter into derivatives, foreign exchange transactions or other ﬁ nancial instruments for trading or speculative purposes. The Company paid off its
outstanding debt during the ﬁ rst quarter of 2013, eliminating our current exposure to interest rate risk.

We are exposed to market risk related to changes in interest rates and market pricing impacting our investment portfolio. Our current investment policy is to
maintain an investment portfolio consisting mainly of U.S. money market and high-grade corporate securities, directly or through managed funds. Our cash
is deposited in and invested through highly rated ﬁ nancial institutions in North America. Our marketable securities are subject to interest rate risk and market
pricing risk and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market pricing
were to decrease immediately and uniformly by 10% from levels at December 31, 2015, we estimate that the fair value of our investment portfolio would
decline by an immaterial amount and therefore we would not expect our operating results or cash ﬂ ows to be affected to any signiﬁ cant degree by the effect
of a change in market conditions on our investments.

ITEM 8. FINANCIAL STATEMENTS

The information required by this item is set forth on pages 29 to 45 hereto and incorporated by reference herein.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

There were no disagreements with the Company’s independent auditors, regarding accounting and financial disclosures for the fiscal year ending
December 31, 2015.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In accordance with Exchange Act Rule 13a-15(e), we carried out an evaluation, under the supervision and with the participation of management, including
our Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer, of the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule
13a- 15(b) as of the end of the period covered by this report. Based upon that evaluation, our management has concluded that our disclosure controls and
procedures are effective as of December 31, 2015.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting for the Company. Internal control over
ﬁ nancial reporting is a process to provide reasonable assurance regarding the reliability of our ﬁ nancial reporting for external purposes in accordance with
accounting principles generally accepted in the United States of America. Internal control over ﬁ nancial reporting includes maintaining records that in
reasonable detail accurately and fairly reﬂ ect our transactions, providing reasonable assurance that transactions are recorded as necessary for preparation
of our ﬁ nancial statements, providing reasonable assurance that receipts and expenditures of Company assets are made in accordance with management
authorization, and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on
our ﬁ nancial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over ﬁ nancial reporting is not
intended to provide absolute assurance that a misstatement of our ﬁ nancial statements would be prevented or detected.

Management conducted an evaluation of the effectiveness of our internal control over ﬁ nancial reporting based on the framework in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this evaluation, our management
concluded that the Company’s internal control over ﬁ nancial reporting was effective as of December 31, 2015.

The effectiveness of the Company’s internal control over ﬁ nancial reporting as of December 31, 2015, was audited by RSM US LLP, our independent
registered public accounting ﬁ rm, as stated in their report appearing below.

Changes in our Internal Control

No change in our internal control over ﬁ nancial reporting (as deﬁ ned in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fourth
quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over ﬁ nancial reporting.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer, does not expect that our disclosure controls or our internal controls will
prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further, the design of a control system must reﬂ ect the fact that there are resource constraints, and the beneﬁ ts
of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree
of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Medifast, Inc.

We have audited Medifast, Inc. and subsidiaries’ (the “Company”) internal control over ﬁ nancial reporting as of December 31, 2015, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. The
Company’s management is responsible for maintaining effective internal control over ﬁ nancial reporting and for its assessment of the effectiveness of internal
control over ﬁ nancial reporting included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is
to express an opinion on the Company’s internal control over ﬁ nancial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁ nancial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over ﬁ nancial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁ nancial reporting
and the preparation of ﬁ nancial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over ﬁ nancial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reﬂ ect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of ﬁ nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the ﬁ nancial statements.

Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over ﬁ nancial reporting as of December 31, 2015, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash ﬂ ows for each
of the three years in the period ended December 31, 2015 of the Company and our report dated March 15, 2016 expressed an unqualiﬁ ed opinion.

/s/ TSM US LLP

Baltimore, Maryland
March 15, 2016

ITEM 9B. OTHER INFORMATION

Not applicable

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PART III

Information required by this item is incorporated herein by reference from the Company’s deﬁ nitive proxy statement for the 2016 annual meeting of
stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated herein by reference from the Company’s deﬁ nitive proxy statement for the 2016 annual meeting of
stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this item is incorporated herein by reference from the Company’s deﬁ nitive proxy statement for the 2016 annual meeting of
stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required by this item is incorporated herein by reference from the Company’s deﬁ nitive proxy statement for the 2016 annual meeting of
stockholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated herein by reference from the Company’s deﬁ nitive proxy statement for the 2016 annual meeting of
stockholders.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are ﬁ led as part of this Report

(a) 1. Financial Statements

See Index to the Consolidated Financial Statements on page 29 of this Report

2. Financial Statement Schedules

None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.

3. Exhibits

Reference is made to the Exhibit Index on page 46 of this Report for a list of exhibits required by Item 601 of Registration S-K to be ﬁ led as part of this Report.

MEDIFAST, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Medifast, Inc.

We have audited the consolidated balance sheets of Medifast, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related
consolidated statements of income, comprehensive income, stockholders’ equity, and cash ﬂ ows for each of the three years in the period ended December
31, 2015. These ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the ﬁ nancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting
principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated ﬁ nancial statements referred to above present fairly, in all material respects, the ﬁ nancial position of Medifast, Inc. and
subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash ﬂ ows for each of the three years in the period ended
December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control
over ﬁ nancial reporting as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2016 expressed an unqualiﬁ ed opinion on the effectiveness
of the Company’s internal control over ﬁ nancial reporting.

/s/ RSM US LLP

Baltimore, Maryland
March 15, 2016

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2015 and 2014

ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable-net of allowance for sales returns and doubtful accounts of $417,000 and $354,000
Inventory
Investment securities
Income taxes, prepaid
Prepaid expenses and other current assets
Deferred tax assets
Current assets of discontinued operations

Total current assets

Property, plant and equipment - net
Other assets
Long-term assets of discontinued operations

TOTAL ASSETS

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses
Current maturities of capital leases
Current liabilities of discontinued operations

Total current liabilities

Other liabilities:
Capital leases, net of current portion
Deferred tax liabilities
Long-term liabilities of discontinued operations

Total liabilities

Stockholders’ Equity:
Common stock; par value $.001 per share; 20,000,000 shares authorized; 12,013,952 and 12,365,690 issued

11,796,774 and 12,075,764 issued and outstanding

Additional paid-in capital
Accumulated other comprehensive income/(loss)
Retained earnings
Total stockholders’ equity

2015

2014

42,037,000
1,633,000
13,335,000
25,072,000
1,549,000
2,886,000
1,208,000
353,000
88,073,000

29,029,000
205,000
19,000

24,459,000
1,650,000
15,735,000
28,185,000
5,099,000
2,875,000
3,727,000
184,000
81,914,000

33,477,000
497,000
22,000

$ 117,326,000

$ 115,910,000

22,504,000
219,000
841,000
23,564,000

21,854,000
232,000
4,858,000
26,944,000

-
4,890,000
288,000
28,742,000

242,000
5,492,000
2,756,000
35,434,000

12,000

-
(62,000)
88,634,000
88,584,000

1,132,000
435,000
78,897,000
80,476,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$ 117,326,000

$ 115,910,000

The accompanying notes are an integral part of these consolidated ﬁ nancial statements.

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2015, 2014, and 2013

Revenue
Cost of sales
Gross Proﬁ t

2015

2014

2013

$ 272,773,000
71,458,000
201,315,000

$ 285,285,000
76,078,000
209,207,000

$ 324,054,000
83,488,000
240,566,000

Selling, general, and administrative

172,631,000

178,961,000

202,156,000

Income from operations

Other income

Interest and dividend income, net
Other income

Income from continuing operations before income taxes
Provision for income taxes

Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net income

Basic earnings per share

Earnings per share from continuing operations
Earnings (loss) per share from discontinued operations
Earnings per share

Diluted earnings per share

Earnings per share from continuing operations
Earnings (loss) per share from discontinued operations
Earnings per share

Weighted average shares outstanding -

Basic
Diluted

28,684,000

30,246,000

38,410,000

661,000
326,000
987,000

29,671,000
10,104,000

19,567,000
491,000
20,058,000

1.64
0.04
1.68

1.62
0.04
1.66

$
$
$

716,000
731,000
1,447,000

31,693,000
10,664,000

21,029,000
(7,848,000)
13,181,000

1.66
(0.62)
1.04

1.65
(0.62)
1.03

$
$
$

509,000
124,000
633,000

39,043,000
11,908,000

27,135,000
(3,166,000)
23,969,000

1.97
(0.23)
1.74

1.96
(0.23)
1.73

$
$
$

11,959,252
12,070,730

12,670,387
12,778,277

13,774,083
13,817,693

Cash dividends declared per share

0.25

The accompanying notes are an integral part of these consolidated ﬁ nancial statements.

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2015, 2014, and 2013

Net income
Other comprehensive income, net of tax

2015

2014

2013

20,058,000

13,181,000

23,969,000

Change in foreign currency translation, net of tax
Change in unrealized gains/losses on marketable securities:
Change in fair value of marketable securities, net of tax
Adjustment for net (gains)/losses realized and included in net income, net of tax
Total change in unrealized (gains)/losses on marketable securities, net of tax

64,000

(245,000)
(316,000)
(561,000)

207,000
(475,000)
(268,000)

257,000
(107,000)
150,000

Other comprehensive income (loss)

(497,000)

(268,000)

150,000

Comprehensive income

19,561,000

12,913,000

24,119,000

The accompanying notes are an integral part of these consolidated ﬁ nancial statements.

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2015, 2014, and 2013

Balance, December 31, 2012

Share-based compensation
Share-based compensation tax beneﬁ t
Treasury stock purchases
Treasury stock retirement
Net income
Other comprehensive income

Number
of Shares
Issued
15,525,955

Par Value
$0.001
Amount

16,000

Additional
Paid-In
Capital
40,191,000

Retained
Earnings
76,534,000

Accumulated
other
comprehensive
income

553,000

Treasury
Stock
(26,508,000)

16,163

3,209,000
383,000

(2,398,809)

(3,000)

(43,783,000)

(2,803,000)
23,969,000

(20,081,000)
46,589,000

150,000

Total
90,786,000

3,209,000
383,000
(20,081,000)
-
23,969,000
150,000

Balance, December 31, 2013

13,143,309

13,000

97,700,000

703,000

98,416,000

Share-based compensation
Net shares repurchased for employee taxes
Share-based compensation tax beneﬁ t
Treasury stock purchases
Treasury stock retirement
Net income
Other comprehensive income

349,473
(37,634)

3,918,000
(1,152,000)
275,000

(1,127,092)

(1,000)

(1,909,000)

(31,984,000)
13,181,000

(33,894,000)
33,894,000

(268,000)

3,918,000
(1,152,000)
275,000
(33,894,000)
-
13,181,000

(268,000)

Balance, December 31, 2014

12,365,690

12,000

1,132,000

78,897,000

435,000

80,476,000

Options exercised by executives and directors
Share-based compensation
Net shares repurchased for employee taxes
Share-based compensation tax beneﬁ t
Cash dividends declared to stockholders
Treasury stock purchases
Treasury stock retirement
Net income
Other comprehensive loss

1,666
51,305
(40,368)

44,000
3,081,000
(1,296,000)
247,000

(364,341)

(3,208,000)

(3,013,000)

(7,308,000)
20,058,000

(10,516,000)
10,516,000

(497,000)

44,000
3,081,000
(1,296,000)
247,000
(3,013,000)
(10,516,000)
-
20,058,000
(497,000)

Balance, December 31, 2015

12,013,952

12,000

88,634,000

(62,000)

$ 88,584,000

The accompanying notes are an integral part of these consolidated ﬁ nancial statements.

MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2015, 2014 & 2013

Cash ﬂ ows from operating activities:

Net income
Income (loss) from discontinued operations, net of tax
Income from continuing operations
Adjustments to reconcile net income to net cash provided by operating activities
from continuing operations:

Depreciation and amortization
Realized (gain) on investment securities, net
Share-based compensation
Deferred income taxes
(Gain)/loss on disposal of ﬁ xed assets

Changes in assets and liabilities which provided (used) cash:
Accounts receivable

Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Income taxes

Net cash provided by operating activities- continuing operations
Net cash provided by (used in) operating activities- discontinued operations
Net cash provided by operating activities

Cash Flow from Investing Activities:

Sale of investment securities
Purchase of investment securities
Purchase of property and equipment

Net cash used in investing activities- continuing operations
Net cash provided by (used in) investing activities- discontinued operations
Net cash used in investing activities

Cash Flow from Financing Activities:

Repayment of long-term debt and capital leases
Decrease in note receivable
Net shares repurchased for employees taxes
Options exercised by executives and directors
Excess tax beneﬁ ts from share-based compensation
Purchase of treasury stock

Net cash used in ﬁ nancing activities- continuing operations
Net cash used in ﬁ nancing activities- discontinued operations
Net cash used in ﬁ nancing activities

2015

2014

2013

20,058,000
491,000
19,567,000

13,181,000
(7,848,000)
21,029,000

23,969,000
(3,166,000)
27,135,000

7,115,000
(458,000)
3,081,000
(106,000)
81,000

17,000
2,400,000
(56,000)
292,000
(2,363,000)
3,550,000
33,120,000
(3,709,000)
29,411,000

11,880,000
(9,250,000)
(2,819,000)
(189,000)
-
(189,000)

(255,000)
45,000
(1,296,000)
44,000
247,000
(10,516,000)
(11,731,000)
-
(11,731,000)

8,052,000
(771,000)
3,918,000
286,000
(29,000)

(708,000)
1,802,000
(349,000)
(318,000)
(376,000)
(5,198,000)
27,338,000
(1,802,000)
25,536,000

29,636,000
(26,080,000)
(7,024,000)
(3,468,000)
950,000
(2,518,000)

(222,000)
52,000
(1,152,000)
-
275,000
(33,894,000)
(34,941,000)
-
(34,941,000)

7,901,000
(74,000)
3,209,000
428,000
392,000

87,000
2,615,000
204,000
746,000
(1,427,000)
972,000
42,188,000
172,000
42,360,000

14,359,000
(25,355,000)
(11,386,000)
(22,382,000)
(220,000)
(22,602,000)

(3,641,000)
26,000
-
-
383,000
(20,081,000)
(23,313,000)
-
(23,313,000)

Foreign currency impact

87,000

NET CHANGE IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents - beginning of the period
Cash and cash equivalents - end of period

Supplemental disclosure of cash ﬂ ow information:

Interest paid
Income taxes paid

17,578,000
24,459,000
42,037,000

22,000
4,182,000

$
$

(11,923,000)
36,382,000
24,459,000

131,000
12,721,000

$
$

(3,555,000)
39,937,000
36,382,000

57,000
9,983,000

$
$

The accompanying notes are an integral part of these consolidated ﬁ nancial statements.

Medifast, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2015, 2014 and 2013

1. NATURE OF THE BUSINESS

Medifast, Inc. (the “Company” or “Medifast”) is a Delaware corporation, incorporated in 1989. The Company’s operations are primarily conducted through
seven of its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., Take Shape For Life,® LLC, Jason Enterprises, Inc., Jason Properties, LLC, Medifast
Franchise Systems, Medifast Nutrition, Inc. and Seven Crondall, LLC. The Company is engaged in the production, distribution, and sale of weight loss, weight
management, and healthy living products and other consumable health and diet products. Medifast product lines include weight loss, weight management,
and healthy living meal replacements, snacks, hydration products and vitamins. The Company has one modern, Food and Drug Administration (“FDA”)-
approved manufacturing facility located in Owings Mills, Maryland.

These products are sold through various channels of distribution, including the internet, call center, independent health advisors, medical professionals,
franchise weight loss clinics, and direct consumer marketing supported via the phone and internet. The processing, formulation, packaging, labeling and
advertising of the Company’s products are subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission (“FTC”),
the Consumer Product Safety Commission, the United States Department of Agriculture, and the United States Environmental Protection Agency.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Signiﬁ cant accounting policies followed in the preparation of the consolidated ﬁ nancial statements are as follows:

Principles of Consolidation - The consolidated ﬁ nancial statements include the accounts of the Company and its wholly owned subsidiaries, Jason
Pharmaceuticals, Inc., Take Shape For Life,® LLC, Seven Crondall Associates, LLC, Jason Properties, LLC, Medifast Franchise Systems, Inc., Medifast
Nutrition, Inc. and Jason Enterprises, Inc. All inter-Company transactions and balances have been eliminated in consolidation.

Reclassiﬁ cation – Certain amounts reported for prior periods have been reclassiﬁ ed to be consistent with the current period presentation. No reclassiﬁ cation
in the consolidated ﬁ nancial statements had a material impact on the presentation.

Use of Estimates – The preparation of ﬁ nancial statements in conformity with generally accepted accounting principles 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 ﬁ nancial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ
materially from those estimates.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash on deposit in ﬁ nancial institutions, institutional money funds and other short-term
investments with a maturity of 90 days or less at the time of purchase.

Concentration of Credit Risk – Our cash and cash equivalents and available-for-sale securities are maintained at several ﬁ nancial institutions, and the
balances with these ﬁ nancial institutions often exceed the amount of insurance provided on such accounts by the Federal Deposit Insurance Corporation. The
cash and cash equivalents generally are maintained with ﬁ nancial institutions with reputable credit, and therefore bear minimal credit risk. Historically, we
have not experienced any losses due to such concentration of credit risk.

Fair Value of Financial Instruments - Our ﬁ nancial instruments include cash and cash equivalents, investment in available-for-sale securities, trade
receivables and debt. The carrying amounts of cash and cash equivalents, and trade receivables approximate fair value due to their short maturities. The fair
values of investment in available-for-sale securities are based on dealer quotes. The Company believes that its indebtedness approximates fair value based
on current yields for debt instruments with similar terms.

Accounts Receivable and Allowance for Sales Returns and Doubtful Accounts - Accounts receivable are recorded net of reserves for sales returns and
allowances, and net of provisions for doubtful accounts.

We review the reserves for customer returns at each reporting period and adjust them to reﬂ ect data available at that time. To estimate reserves for returns, we
consider actual return rates in preceding periods. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of
product sales revenue recognized in the period of the adjustment. Our estimates for returns have not differed materially from our actual returns. The provision
for estimated returns as of December 31, 2015 and 2014 was $323,000 and $290,000, respectively.

Allowances for doubtful accounts are based primarily on an analysis of aged accounts receivable balances and the credit worthiness of our customers as
determined by credit checks and analysis, as well as customer payment history. The allowance for doubtful accounts as of December 31, 2015 and 2014 was
$94,000 and $64,000, respectively.

Inventory - 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 ﬁ rst-in, ﬁ rst-out method. The cost of ﬁ nished 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.

Investment Securities – The Company’s investments consist of debt and equity securities classiﬁ ed as available-for-sale securities. Available-for-sale
securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of
accumulated other comprehensive income in stockholders’ equity. Interest and dividends on marketable debt and equity securities are recognized in income

when declared. Realized gains and losses, including losses from declines in value of speciﬁ c securities determined by management to be other-thantemporary,
if any, are included in income.

Income Taxes – The beneﬁ t of a tax position is recognized in the ﬁ nancial statements in the period during which, based on all available evidence, management
believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as
the largest amount of tax beneﬁ t that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the
beneﬁ ts associated with tax positions taken that exceeds the amount measured as described above is reﬂ ected as a liability for unrecognized tax beneﬁ ts in
the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We evaluated our tax positions and determined that we did not have any material uncertain tax positions. Our policy is to recognize interest and penalties
accrued on uncertain tax positions as part of income tax expense. For the years ending December 31, 2015 and 2014, no material estimated interest or
penalties were recognized for the uncertainty of certain tax positions. We ﬁ le income tax returns in the United States, Canada and various states jurisdictions.
We are currently under audit by the IRS for 2010, but do not anticipate it to have a signiﬁ cant impact on previously reported results as well as beneﬁ ts realized
under our current tax structure. Other than 2010, we are no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for the
years before 2012.

Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Advertising Costs - Advertising costs are expensed as incurred, except for the preparation, layout, design and production of advertising costs which are
expensed when the advertisement is ﬁ rst used. Advertising expense for continuing operations, excluding broker fees, for the years ended December 31, 2015,
2014, and 2013, amounted to $15 million, $17 million, and $21 million, respectively.

Operating Leases - Medifast leases retail stores, distribution facilities, and ofﬁ ce space under operating leases. Many of our lease agreements contain tenant
improvement allowances, rent holidays, rent escalation clauses, and contingent rent provisions. The Company recognizes incentives and minimum rental
expenses on a straight-line basis over the terms of the leases. We commence recording rent expense on the date of initial possession, which is generally when
we enter the space and begin to make improvements to properties for our intended use. For tenant improvement allowances and rent holidays, we record
a deferred rent liability on the consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense on the
consolidated statements of income.

Clinic Opening Costs - Clinic opening costs were expensed as incurred.

Clinic Closure Costs - Clinic closure costs are expensed and recognized as a liability at their fair value when incurred. One-time employee severance costs
are expensed and recognized as a liability when the plan is ﬁ nalized by management, approved and committed to by management, and communicated to
the employee. Contractual costs that will continue to be incurred (operating leases) are recognized at the cease use date. The fair value of operating lease
contracts is determined based on the present value of the remaining lease payments. Other costs associated with closing the clinic or relocating employees
are expensed as incurred.

Property, Plant, and Equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The Company computes
depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:

Building and building improvements
Equipment and ﬁ xtures
Leasehold Improvements
Vehicles

10 - 35 years
3 - 15 years
Lease term
5 years

The depreciation life for leasehold improvements is the lesser of the estimated useful life of the addition or the term of the related lease.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash ﬂ ows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash ﬂ ows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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. Medifast Weight Control Centers program fees were recognized over the estimated
service period.

Shipping and Handling Costs - Our shipping and handling costs for shipments of our product to our customers are included in cost of sales. All shipping
and handling charges that are billed to customers are included in net revenue. All other shipping and handling costs are included in selling, general and
administration expenses.

Earnings per Share - Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding
during the periods presented. Diluted EPS is calculated utilizing the weighted average number of common shares outstanding adjusted for the effect of
dilutive common stock equivalents.

The following table sets forth the computation of basic and diluted EPS for the ﬁ scal years ended December 31:

Numerator:
Income from continuing operations
Income (loss) from discontinued operations
Net income

Denominator:
Weighted average shares of common stock outstanding
Effect of dilutive common stock equivalents

2015

2014

2013

19,567,000
491,000
20,058,000

21,029,000
(7,848,000)
13,181,000

27,135,000
(3,166,000)
23,969,000

11,959,252
111,478

12,670,387
107,890

13,774,083
43,610

Weighted average shares of common stock outstanding

12,070,730

12,778,277

13,817,693

EPS:
Basic earnings per share

Earnings per share from continuing operations
Earnings (loss) per share from discontinued operations
Earnings per share

Diluted earnings per share

Earnings per share from continuing operations
Earnings (loss) per share from discontinued operations
Earnings per share

$
$
$

1.64
0.04
1.68

1.62
0.04
1.66

$
$
$

1.66
(0.62)
1.04

1.65
(0.62)
1.03

$
$
$

1.97
(0.23)
1.74

1.96
(0.23)
1.73

The calculation of diluted earnings per share excluded 69,375, 67,375 and 0 options outstanding for the years ended December 31, 2015, 2014, and 2013,
respectively, that could potentially dilute base earnings per share in the future.

Share-Based Compensation - Share-based compensation, primarily restricted stock awards and options granted to employees and directors. Restricted stock
awards are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the requisite service period. The
fair value of the incentive stock options and non-qualiﬁ ed stock options is calculated using the Black-Scholes option pricing model as of the grant date and
recognized over the service period. The Company issues new shares upon the exercise of stock options and granting of restricted stock awards.

Comprehensive Income - Other comprehensive income refers to revenues, expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders’ equity. Comprehensive income consists of net income, unrealized gains and losses on available-for-sale securities, and
foreign currency translation adjustments.

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, ﬁ nancial condition, or cash ﬂ ows, 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 ﬁ scal years beginning after December 15, 2018. Management is current evaluating the effect that the provisions of
ASU 2016-02 will have on the Company’s ﬁ nancial 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 ﬁ nancial 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-speciﬁ c credit risk. The pronouncement is effective for ﬁ scal years beginning after
December 15, 2017. Management is currently evaluating the effect that the provisions of ASU 2016-01 will have on the Company’s ﬁ nancial statements.

ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classiﬁ cation of Deferred Taxes requires the Company to classify all deferred tax assets and deferred
tax liabilities as noncurrent. The pronouncement is effective for ﬁ scal years beginning after December 15, 2016. Management is currently evaluating the
effect that the provisions of ASU 2015-17 will have on the Company’s ﬁ nancial statements.

ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, requires the Company to recognize inventory at the lower of cost and
net realizable value. Net realizable value is deﬁ ned as the estimated selling price in the ordinary course of business less costs of completion, disposal, and
transportation. The pronouncement is effective for ﬁ scal years beginning after December 31, 2016. Management is currently evaluating the effect that the
provisions of ASU 2015-11 will have on the Company’s ﬁ nancial 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 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 satisﬁ es a performance obligation. The provisions of this ASU are effective for interim and annual periods beginning
after December 15, 2017. Management is currently evaluating the effect that the provisions of ASU 2015-09 will have on the Company’s ﬁ nancial statements.

3. FINANCIAL INSTRUMENTS

Certain ﬁ nancial assets and liabilities are accounted for at fair value, which is deﬁ ned 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 sufﬁ cient 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 ﬁ nancial instruments that are valued using models or other valuation methodologies.

Level 3 – Pricing inputs include signiﬁ cant 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 table represents cash and the available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by
signiﬁ cant investment category recorded as cash and cash equivalents or investment securities as of December 31, 2015 and 2014:

Cost

Unrealized
Gains

Unrealized
Losses

Accrued
Interest

Estimated
Fair Value

Cash
& Cash
Equivalents

Investment
Securities

December 31, 2015

Cash

$ 38,276,000

$38,276,000

Level 1:
Money Market Accounts
Mutual Funds
Corporate Equity Securities
Government & Agency Securities

Level 2:
Municipal Bonds
Corporate Bonds

3,761,000
9,654,000
1,332,000
5,425,000
20,172,000

2,735,000
6,054,000
8,789,000

-
37,000
246,000
25,000
308,000

42,000
22,000
64,000

-
(444,000)
(76,000)
(19,000)
(539,000)

(3,000)
(41,000)
(44,000)

-
-
-
17,000
17,000

20,000
46,000
66,000

3,761,000
9,247,000
1,502,000
5,448,000
19,958,000

2,794,000
6,081,000
8,875,000

3,761,000
-
-
-
3,761,000

-
9,247,000
1,502,000
5,448,000
16,197,000

-
-
-

2,794,000
6,081,000
8,875,000

Total

$ 67,237,000

372,000

$ (583,000)

83,000

$ 67,109,000

$ 42,037,000

$ 25,072,000

Cost

Unrealized
Gains

Unrealized
Losses

Accrued
Interest

Estimated
Fair Value

Cash
& Cash
Equivalents

Investment
Securities

December 31, 2014

Cash

$ 23,894,000

Level 1:
Money Market Accounts
Mutual Funds
Corporate Equity Securities
Government & Agency Securities

Level 2:
Municipal Bonds
Corporate Bonds

565,000
10,733,000
3,408,000
4,559,000
19,265,000

3,652,000
5,022,000
8,674,000

-
63,000
695,000
49,000
807,000

78,000
29,000
107,000

-
(129,000)
(31,000)
(5,000)
(165,000)

(7,000)
(12,000)
(19,000)

-
-
-
15,000
15,000

28,000
38,000
66,000

565,000
10,667,000
4,072,000
4,618,000
19,922,000

3,751,000
5,077,000
8,828,000

565,000
-
-
-
565,000

-
10,667,000
4,072,000
4,618,000
19,357,000

-
-
-

3,751,000
5,077,000
8,828,000

Total

$ 51,833,000

914,000

$ (184,000)

81,000

$ 52,644,000

$ 24,459,000

$ 28,185,000

The Company had realized gains of $458,000, $771,000 and $74,000 for the years ended December 31, 2015, 2014 and 2013, respectively. As of December
31, 2014 and 2015, gross unrealized losses related to individual securities that had been in a continuous loss position for 12 months or longer were not
signiﬁ cant. The maturities of the Company’s investment securities generally range from 1 to 30 years for corporate bonds, 1 to 5 years for municipal bonds,
and 1 to 7 years for government and agency securities.

4. INVENTORY

Inventories consisted of the following as of:

Raw Materials

3,666,000

4,410,000

December 31, 2015

December 31, 2014

Packaging

Non-food Finished Goods

Finished Goods

Reserve for Obsolete Inventory

788,000

635,000

8,545,000

(299,000)

920,000

1,108,000

9,689,000

(392,000)

13,335,000

15,735,000

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consisted of the following as of:

December 31, 2015

December 31, 2014

Land

650,000

Building and leasehold improvements

Equipment and ﬁ xtures

Vehicle

Less accumulated depreciation and amortization

Property, plant and equipment- net

13,122,000

61,573,000

149,000

75,494,000

46,465,000

29,029,000

13,346,000

59,501,000

149,000

73,646,000

40,169,000

33,477,000

Depreciation and amortization expense for continuing operations for the years ended December 31, 2015, 2014 and 2013 was $7,115,000, $8,052,000, and
$7,810,000, respectively. Depreciation and amortization expense for discontinued operations related to the Medifast Corporate Weight Control Centers for
the years ended December 31, 2015, 2014 and 2013 was $0, $1,699,000, and $3,144,000, respectively. As a result of the sale and closure of the Medifast
Weight Control Centers, the Company incurred an asset impairment loss of $3.3 million in 2014 that is included in discontinued operations.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Trade payables

11,264,000

12,178,000

December 31, 2015

December 31, 2014

Sales commissions payable

Accrued payroll and related taxes

Dividends payable

Sales tax payable

Accrued loan guarantee

4,245,000

3,440,000

3,013,000

542,000

3,890,000

3,000,000

806,000

1,980,000

22,504,000

21,854,000

7. LEASES

Operating and Capital Leases:

As of December 31, 2015, the Company leases ofﬁ ce space for corporate ofﬁ ces, a distribution facility in Texas, a raw materials warehouse in Maryland, as
well as 41 leases for previously corporate-operated Medifast Weight Control Centers under lease terms ranging from ﬁ ve to ten years. The 41 leases include
3 Centers closed in December 2013, 7 Centers that were closed in December 2014, and 31 leases for Centers that were sold to franchise partners during 2014
and entered into sublease agreements with the franchisees. The Company accrued for the remaining lease obligations net of any sublease income in 2014, see
Note 12 for exit activity and clinic obligations. Monthly payments under the Medifast Weight Control Centers leases range in price from $1,800 to $5,000.
The Company is additionally required to pay property taxes, utilities, insurance and other costs relating to the leased facilities.

The Company leases large commercial printers for our printing operation that supports our sales channels and network equipment for information technology
that are accounted for as capital leases. The leases extend through December 2016.

The following table summarizes our future minimum rental and lease payments required under non-cancelable original lease terms in excess of one year as
of December 31, 2015:

2016

2017

2018

2019

Total minimum lease payments

Less amount representing interest

Present value of minimum lease payments (current)

Current portion

Long-term portion

Operating Leases

Capital Leases

2,829,000

225,000

1,758,000

355,000

31,000

4,973,000

225,000

6,000

219,000

Total minimum lease payments have not been reduced by minimum sublease rent income of approximately $2.0 million due under future non-cancelable
subleases.

The following is a summary of the Company’s rent expense for the years ended December 31, 2015, 2014 and 2013:

Continuing Operations

Discontinued Operations

2015

2014

2013

$ 1,506,000

$ 1,460,000

$ 1,400,000

(1,002,000)

7,189,000

5,233,000

504,000

$ 8,649,000

$ 6,633,000

For the period ended December 31, 2015, the positive impact to rent expense is due to lease termination agreements that resulted in the reversal of rent
obligations estimates that were expensed in 2014. For the periods ended December 31, 2014 and 2013, the discontinued operations rent expense includes an
accrual of $4.4 million and $1.1 million, respectively, for continuing obligations for operating leases related to centers closed during the periods.

Equipment lease expense for continuing operations for the years ended December 31, 2015, 2014, and 2013 was $1.0 million, $1.2 million, and $1.4 million,
respectively.

8. CONTINGENCIES

The Company has entered into guarantee agreements with key franchisee partners in order to support them obtaining additional funding to expand their
business into new markets. All of the loans associated with these agreements have been paid in full and the Company incurred a charge of $2 million in 2014
to fulﬁ ll its guarantee obligation on one of the loans. The guarantee with Team Wellness, Inc. provided ﬁ nancial coverage for a $1.0 million loan and a $1.0
million line of credit. The franchisee associated with these loans failed to pay the monthly obligations and the Company paid off the loans in April 2015,
which was fully accrued and expensed in the amount of $2.0 million as of December 31, 2014. The Company was a secondary guarantor on the loan and line
of credit and has pursued personal recourse against the franchise owner.

9. INCOME TAXES

The components of the income tax expense from continuing operations are as follows:

Current
Federal
State
Total Current

Deferred
Federal
State
Foreign
Total Deferred

2015

2014

2013

9,814,000
396,000
10,210,000

10,282,000
96,000
10,378,000

11,682,000

(202,000)
11,480,000

(125,000)
39,000
(20,000)
(106,000)

176,000
206,000
(96,000)
286,000

365,000
63,000
-
428,000

Total Income Tax Expense from Continuing Operations

10,104,000

10,664,000

11,908,000

The total tax provision for the years ended December 31, 2015, 2014, and 2013 was $9.9 million, $4.9 million, $10.0 million, respectively. Those amounts
have been allocated to the following ﬁ nancial statement items:

2015

2014

2013

Income from continuing operations
Income/(loss) from discontinued operations
Stockholders’ equity, unrealized gain (loss) on investment securities & foreign currency
Additional paid in capital, share-based compensation tax beneﬁ t

10,104,000
387,000
(357,000)
(247,000)

10,664,000
(5,302,000)
(182,000)
(275,000)

11,908,000
(1,690,000)
143,000
(383,000)

Total Income Tax Expense

9,887,000

4,905,000

9,978,000

Deferred tax assets (liabilities) consisted of the following at December 31,

Reserves on inventory and sales
Credit and loss carryforwards
Stock compensation
Accrued expenses and deferred costs
Inventory capitalization
Sales tax accrual
Unrealized gain/loss on investments

Total deferred tax assets

Unrealized gain/loss on investments
Prepaid expenses
Depreciation
Foreign currency

Total deferred tax liabilities

Net deferred tax liabilities

2015

2014

2013

199,000
735,000
1,149,000
1,068,000
49,000
-
85,000
3,285,000

-
(755,000)
(6,189,000)
(23,000)
(6,967,000)

291,000
699,000
1,283,000
3,170,000
142,000
8,000
-
5,593,000

(294,000)
(779,000)
(6,285,000)
-
(7,358,000)

332,000
413,000
896,000
1,260,000
337,000
337,000
-
3,575,000

(476,000)
(710,000)
(7,091,000)
-
(8,277,000)

(3,682,000)

(1,765,000)

(4,702,000)

The differences between the United States federal statutory tax rate and the Company’s effective tax rate are as follows:

Statutory federal tax
State income taxes, net of federal beneﬁ t
Foreign Taxes
Domestic manufacturer deduction
Other permanent differences
Research and development and jobs credits
Other state income tax beneﬁ ts
Other

2015

$ 10,381,000
414,000
15,000
(824,000)
4,000
(247,000)
114,000
247,000
$ 10,104,000

35.0%
1.4%
0.1%
-2.8%
0.0%
-0.8%
0.4%
0.8%
34.1%

2014
$ 11,093,000
314,000
73,000
(811,000)
200,000
(203,000)
(113,000)
111,000
$ 10,664,000

35.0%
1.0%
0.2%
-2.6%
0.6%
-0.6%
-0.4%
0.4%
33.6%

2013
$ 13,665,000
393,000
-
(979,000)
173,000
(459,000)
(707,000)
(178,000)
$ 11,908,000

35.0%
1.0%
0.0%
-2.5%
0.4%
-1.2%
-1.8%
-0.4%
30.5%

The 2015, 2014 and 2013 effective tax rates were impacted by the Company’s extensive state income tax planning. This planning includes taking advantage
of Maryland’s apportionment methodology. As a manufacturing entity based in Maryland, the Company utilizes the single sales factor apportionment method
in addition to claiming new state jobs credits and research & development credits. In 2013 the Company beneﬁ ted from research and development credits
effective January 1, 2013, applicable retroactively to 2012 activity. In 2014 the Company beneﬁ ted from research and development credits effective January
1, 2014 in addition to ﬁ ling an amended federal return to claim 2010 research and development credits due to changes in Federal regulations.

The Company has separate company state net operating loss carry forwards totaling $10.9 million start expiring in 2031. Maryland state credits carry
forwards totaling $201,000 will begin to expire in 2018.

10. SHARE-BASED COMPENSATION

Stock Options:

The Company has issued non-qualiﬁ ed 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 expected volatility of the price
of the Company’s common stock, dividend yield and the risk-free interest rate. Options outstanding as of December 31, 2015 generally vest over a period
of three years with an expiration term of ten years. The exercise price of these options ranges from $24.26 to $31.55. 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. Due to the Company’s lack of
option exercise history, the expected term is calculated using the simpliﬁ ed method deﬁ ned as the midpoint between the vesting period and the contractual
term of each award. 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. All of the options were issued prior to the Company declaring its ﬁ rst dividend in December 2015; and therefore, a dividend
yield is not utilized in the calculation. The weighted average input assumptions used and resulting fair values were as follows:

Expected life (in years)
Risk-free interest rate
Expected volatility
Dividend yield

2015

2014

6
1.71%
50.91%

6
1.61%
63.15%

The following table summarizes the stock option activity:

Weighted-
Average Exercise
Price

Weighted-Average
Remaining
Contractual Life (Yrs)

Aggregate
Intrinsic Value

Outstanding at December 31, 2014

Granted
Exercised
Forfeited

Outstanding at December 31, 2015
Exerciseable at December 31, 2015

67,375
66,000
(1,666)
(33,336)
98,373
34,615

$
$

26.05
30.99
26.52
29.54
28.17
26.27

8.52
7.92

256,175
145,052

The weighted-average grant date fair value of options granted was $15.24. The unrecognized compensation expense calculated under the fair value method for
shares expected to vest as of December 31, 2015 was approximately $0.6 million and is expected to be recognized over a weighted average period of 1.9 years.
The Company received $44,000 in cash proceeds from the exercise of stock options during 2015. No options were exercised in 2014 or 2013.

Restricted Stock:

The Company has issued restricted stock to employees and nonemployee directors generally with terms ranging up to seven years. 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:

Unvested at December 31, 2014

Granted
Vested
Forfeited

Unvested at December 31, 2015

Weighed-
Average Grant
Date Fair Value
25.31
$
31.39
25.68
31.55
26.38

333,676
58,685
(124,053)
(4,600)
263,708

The total share-based compensation expense charged against income during the years ended December 31, 2015, 2014, and 2013 were $3,081,000, $3,918,000,
and $3,209,000, respectively. Included in share-based compensation expense for 2015 is $734,000 for 46,530 shares of performance awards to be issued to
certain key employees based on achieving 2015 ﬁ nancial plan that will vest on December 31, 2016. The Company intends to issue additional performance
awards in 2016 to certain key employees if certain 2016 ﬁ nancial plans are met. During 2015, the Company issued 12,155 shares to members of the Board of
Directors including 4,600 shares that were later forfeited. The total income tax beneﬁ t recognized in the consolidated statement of income for these restricted
stock awards was approximately $1,012,000, $1,398,000 and $1,123,000 for the years ending December 31, 2015, 2014, and 2013, respectively. The tax
beneﬁ t recognized in additional paid-in capital upon vesting of restricted stock awards and exercise of stock options was approximately $247,000, $275,000
and $383,000 for the years ending December 31, 2015, 2014, 2013, respectively. There was approximately $4.6 million of total unrecognized compensation
cost related to restricted stock awards as of December 31, 2015. The cost is expected to be recognized over a weighted-average period of approximately 2.2
years.

11. BUSINESS SEGMENTS

Operating segments are components of an enterprise about which separate ﬁ nancial information is available that is regularly reviewed by the chief operating
decision maker about how to allocate resources and in assessing performance. The consolidated operating proﬁ t of the Company is reviewed by the chief
operating decision maker as a single segment and sales are reviewed at the channel level.

The following table represents sales by channel for the years ended:

Take Shape For Life®
Medifast Direct
Medifast Weight Control Centers - Franchise
Medifast Wholesale
Net Revenue

December 31, 2015

December 31, 2014

December 31, 2013

202,218,000
48,658,000
17,072,000
4,825,000
272,773,000

206,657,000
57,159,000
15,424,000
6,045,000
285,285,000

228,729,000
75,521,000
15,336,000
4,468,000
324,054,000

12. DISCONTINUED OPERATIONS, EXIT ACTIVITIES, AND CLINIC OBLIGATIONS

In 2014, the Company exited the MWCC corporate center model by selling 41 centers to existing franchise partners (24 centers were sold in June 2014
and the remaining 17 centers were sold in December 2014) and closing the remaining 34 corporate centers. In accordance with ASU 2014-08, Presentation
of Financial Statements (Topic 205) and Property Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity, the assets, liabilities, operating results, and cash ﬂ ows of the MWCC corporate center channel have been presented separately as
discontinued operations in the Consolidated Financial Statements for all periods presented.

The following is a summary of the Company’s operating results for discontinued operations for the years ended:

December 31, 2015

December 31, 2014

December 31, 2013

Revenue
Income/(loss) before income taxes from discontinued operations
Income tax/(beneﬁ t) provision
Income/(loss) from discontinued operations, net of tax

-
878,000
387,000
491,000

22,509,000
(13,150,000)
(5,302,000)
(7,848,000)

32,832,000
(4,856,000)
(1,690,000)
(3,166,000)

The following table presents the aggregate carrying amounts of the major classes of assets and liabilities included in discontinued operations as of:

ASSETS
Current assets:
Receivables, net

Total current assets

Other assets

Total assets

LIABILITIES
Current liabilities:
Accounts payable and accrued expenses

Total current liabilities

Long-term lease obligations

Total liabilities

December 31, 2015

353,000
353,000

19,000

372,000

841,000
841,000

288,000

1,129,000

The following table summarizes the exit obligations primarily consisting of closed clinic lease obligations, severance accruals, and customer refunds incurred
for the years ended December 31, 2014 and 2015:

Ending accrued balance as of December 31, 2013
Charges incurred during the period
Payments during the period
Ending accrued balance as of December 31, 2014
Charges incurred during the period (1)
Payments during the period
Ending accrued balance as of December 31, 2015

1,361,000
6,006,000
(833,000)
6,534,000
(1,483,000)
(3,922,000)
1,129,000

(1)- The adjustments to the accrual recorded in 2015 relate primarily to favorable termination agreements reached with landlords of closed Corporate
Medifast Weight Control Centers.

These charges were recorded in the balance sheet as of December 31, 2015 as follows:

Total current liabilities of discontinued operations
Total long-term liabilities of discontinued operations
Ending accrued balance as of December 31, 2015

841,000
288,000
1,129,000

13. SUBSEQUENT EVENTS

On March 9, 2016, the Company’s board of directors declared a $0.25 cash dividend to its stockholders, valued at $3.0 million. The dividend is payable on
May 10, 2016 to stockholders of record as of the close of business on March 21, 2016.

INDEX TO EXHIBITS

No.

3.1

3.2

Restated and Amended Certiﬁ cate of Incorporation of Medifast, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report
on Form 8-K (File No. 001-31573) ﬁ led February 27, 2015).

Amended and Restated Bylaws of Medifast, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File
No. 001-31573) ﬁ led on April 6, 2015).

10.1

Amended and Restated 2012 Share Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File
No. 001-31573) ﬁ led on June 20, 2014).*

10.2

Form of Restricted Share Award Agreement (ﬁ led herewith).*

10.3

Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (File No.
001-31573) ﬁ led on February 4, 2014). *

10.4

Form of Non-Qualiﬁ ed Stock Option Agreement (ﬁ led herewith). *

10.5

Form of Performance-Based Deferred Share Award Agreement (ﬁ led herewith). *

10.6

Lease relating to the Company’s Owings Mills, Maryland facility incorporated by reference to the Registration Statement on Form S-4 of the
Company (File No. 33-81524).

10.7

Cooperation Agreement dated April 3, 2015, by and among the Company, Engaged Capital LLC, and the persons set forth on the signature pages
thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-31573) ﬁ led on April 6, 2015.

21.1

Subsidiaries of Medifast, Inc. (ﬁ led herewith).

23.1

Consent of RSM US LLP (ﬁ led herewith).

31.1

Certiﬁ cation of Chief Executive Ofﬁ cer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes- Oxley
Act of 2002 (ﬁ led herewith).

31.2

Certiﬁ cation of Chief Financial Ofﬁ cer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes- Oxley
Act of 2002 (ﬁ led herewith).

Certiﬁ cation of Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (furnished
herewith).

101

The following ﬁ nancial statements from Medifast, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, ﬁ led March 15,
2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income,
(iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity (v) Consolidated
Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements (ﬁ led herewith).

* Indicates a management contract or compensatory plan.

2015 A N N U A L

R E P O R T

Le(cid:31) er to Shareholders — 2

Take Shape For Life® — 6

Medifast Direct® — 10

Franchise Medifast Weight Control

Centers — 14

Medical Providers — 14

Product & Program Innovation — 16

Scientiﬁ c & Clinical Aﬀ airs — 18

Community Impact — 20

2015

annual

report

We’re on a Mission

2015 A N N UA L

R E P O R T

11445 Cronhill Drive • Owings Mills • Maryland 21117