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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________to____________.
Commission file number: 001-31573
Medifast, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
100 International Drive
Baltimore, Maryland
(Address of principal executive offices)
13-3714405
(I.R.S. Employer Identification No.)
21202
(Zip code)
(410) 581-8042
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Trading Symbol
MED
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and emerging growth company in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
☒
☐
☐
Accelerated filer
Smaller reporting company
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
As of June 30, 2023, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the Registrant’s common stock
(based on the closing sale price of $92.16, as reported by the New York Stock Exchange on such date) held by non-affiliates was approximately $1.0 billion.
The number of shares of the registrant’s common stock outstanding at February 6, 2024 was 10,895,595.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission for its 2024 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual Report on Form 10-K.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Report”) contains “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements often include words such as “may,” “will,” “should,”
“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “seek,” “would,” “could,” or similar expressions and are made in connection with
discussions of future operating or financial performance and/or events or developments that we expect or anticipate will occur in the future.
Forward-looking statements reflect management’s expectations, beliefs, plans, objectives, goals and strategies as of the date of this Report. Although we
believe that these forward-looking statements and the underlying assumptions on which they are based are reasonable, forward-looking statements are not
guarantees of future performance. By their nature, forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict
or quantify. Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements. Some of the risks
and uncertainties that may affect our business include:
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our ability to maintain and grow our network of independent OPTAVIA Coaches;
industry competition and new weight loss products, including weight loss medications, or services;
health or advertising related claims by our OPTAVIA customers;
our ability to continue to develop innovative new products and to continue to appeal to consumer preferences and the market;
effectiveness of our advertising and marketing programs, including use of social media by OPTAVIA Coaches;
effectiveness of our collaboration with LifeMD, Inc.;
the departure of one or more key personnel;
our ability to protect against online security risks, including security breaches;
risks associated with our direct-to-consumer business model;
disruptions in our supply chain;
adverse publicity associated with our products or offering;
the impact of existing and future laws and regulations on our business;
product liability claims;
actions of activist investors;
consequences of unexpected geopolitical events, natural disasters, or climate change;
overall economic and market conditions and the resultant impact on consumer spending patterns;
fluctuations of the market price of the Company’s common stock due to factors that are beyond our control;
a failure of our internal control over financial reporting; and
other risks and uncertainties described elsewhere in this Report, including those described under Item 1A - “Risk Factors” of this Report, and in
subsequent filings 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 reflect
events or circumstances of which we may become aware after the date of this Report.
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Item 1
Item 1A
Item 1B
Item 1C
Item 2
Item 3
Item 4
Item 5
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 9C
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Table of Contents
PART I
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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 Disclosures
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
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ITEM 1. BUSINESS
SUMMARY
PART I
Medifast, Inc. (“Medifast,” the “Company,” “we” or “us”) is the health and wellness company known for its habit-based and coach-guided lifestyle
solution, OPTAVIA . The Company has initiated its business transformation by expanding into the medically supported weight loss and sports nutrition
markets, reflecting its commitment to providing comprehensive health and wellness solutions to customers as both their needs and the industry evolve.
®
Medifast has created a well-capitalized business and OPTAVIA has grown into a billion-dollar brand under current leadership. It has a powerful business
model, building a network of more than 41,100 active earning Coaches and impacting more than 3 million customers. Medifast was recognized in 2023 by
Financial Times as one of The Americas' Fastest Growing Companies and in 2022 as one of America's Best Mid-Sized Companies by Forbes.
As a physician-founded company with a 40+ year history, Medifast is a leader in the U.S. weight management industry. OPTAVIA's lifestyle plans deliver
clinically proven health benefits as well as evidence-based tools, including scientifically developed products and a framework for habit creation reinforced
by independent Coaches and community support. The Company continues to innovate and build upon its scientific and clinical heritage to fulfill its mission
®
of offering Lifelong Transformation, One Healthy Habit at a Time .
OPTAVIA's holistic lifestyle solution is built around four key components:
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Independent Coaches: Independent OPTAVIA Coaches provide individualized support and guidance to customers on the path to optimal health
and wellbeing.
• OPTAVIA Community: A Community of like-hearted people providing each other with real-time connection and support.
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The Habits of Health Transformational System: A proprietary system that offers easy steps to a sustainable healthy lifestyle.
Products & Plans: Clinically proven plans and scientifically developed products, backed by dietitians, scientists and physicians.
®
OPTAVIA's collaboration with LifeMD, Inc. (Nasdaq: LFMD) (“LifeMD”) offers access to a new resource for eligible customers:
• Clinicians as Partners: Through a collaboration with the national virtual primary care provider LifeMD, OPTAVIA customers have access to
board-certified affiliated clinicians and medication, such as GLP-1s, that support treatment plans for obesity and other health conditions.
We help customers achieve their health goals through a network of approximately 41,100 active earning independent OPTAVIA Coaches, about 90% of
whom were customers first, and have impacted more than 3 million lives to date. OPTAVIA Coaches introduce customers to a set of healthy habits, in
most cases starting with the habit of healthy eating, and offer exclusive OPTAVIA-branded products, including Fuelings as well as OPTAVIA ACTIVE, a
new line of essential amino acid supplements and protein powders. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple
to use. They are formulated with high-quality ingredients and contain probiotic BC ™ cultures, which help support digestive health, as part of a balanced
diet and healthy lifestyle, vitamins and minerals, as well as other nutrients essential for good health. Our products are used as tools and support the process
of integrating healthy habits into our customers' daily life.
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The OPTAVIA Coaching Model is customer-centric and boasts an energized health and wellness community. It promotes holistic health and wellness and
positions healthy weight as a catalyst to greater lifestyle changes. OPTAVIA Coaches provide personalized support to customers and motivate them by
sharing their passion for healthy living and lifestyle transformation.
The entrepreneurial spirit of our OPTAVIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new customers,
many of whom go on to become OPTAVIA Coaches. We offer economic incentives designed to support each OPTAVIA Coach’s long-term success,
which we believe plays an important role in their financial wellness,
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providing the opportunity to improve their finances while changing the health trajectory of families, communities and generations.
OPTAVIA Coaches are independent contractors, not employees, who support customers and market our products and services primarily through word of
mouth, email and via social media channels such as Facebook, Instagram, X and video conferencing platforms. As entrepreneurs, OPTAVIA Coaches
market our products to friends, family and other acquaintances. OPTAVIA products are shipped directly to OPTAVIA customers who are working with an
OPTAVIA Coach. OPTAVIA Coaches do not handle or deliver merchandise to customers. This arrangement frees our OPTAVIA Coaches from having to
manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.
We believe our coach-based model is scalable and drives both customer success and growth. We expect our continued investment in fostering a robust
community around our OPTAVIA brand and our OPTAVIA Coaching Model will continue to drive a sustainable, repeatable business rhythm.
Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA LLC, Jason Enterprises, Inc., Jason
Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD and
OPTAVIA Health Consultation (Shanghai) Co., Ltd.
Competition and Macroeconomic Conditions
Certain global economic challenges including the impact of inflation and adverse labor market conditions have caused macroeconomic uncertainty and
volatility in markets where we, our suppliers and our OPTAVIA Coaches operate.
We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and put pressure
on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could
also adversely impact our business, financial condition or results of operations. Our variable cost structure can be utilized to adapt to changing market
conditions with potential actions including adjustments to our manufacturing, distribution and customer support infrastructure. In addition, adverse labor
market conditions could constrain our ability to manufacture and deliver products or increase the associated costs. We continue to take steps to attract, train,
and develop personnel. As a response, we may periodically take incremental pricing actions to offset supply chain costs, inflationary pressures, and adverse
labor market conditions.
In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by
governmental authorities, or that are determined to be in the best interests of employees, OPTAVIA Coaches and customers.
These macroeconomic uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue
to actively monitor the impact of these developments on our business and will update our practices accordingly.
The weight loss industry is very competitive and encompasses a diverse array of weight loss products and programs. These include a wide variety of
commercial weight loss programs, pharmaceutical products, surgical interventions, books, self-help diets, dietary meal replacements, and appetite
suppressants as well as digital tools, app-based health and wellness monitoring solutions, and wearable trackers. The weight loss market is served by a
diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, online diet-oriented sites,
self-directed dieting and self-administered products such as prescription medications, over-the-counter medications and supplements as well as medically
supervised programs. Recently, it became clear that medical weight loss solutions, such as GLP-1 medications, have become an increasingly key
component of the overall health and wellness ecosystem, and the recent surging awareness and popularity of these weight loss medications serve as another
major competitor, as these products have prompted a huge change in the way that consumers think about weight loss and lifestyle modification solutions in
general. We recognize that these weight loss medications have attracted significant attention from the market and pose a threat to our interactions with our
customer base. Importantly, the efficacy claims of GLP-1 medications for weight loss are based specifically on their incorporation of lifestyle changes that
include a reduced calorie diet and increased physical activity. As a result, under
1
OPTAVIA makes no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence and
leadership. Please see the OPTAVIA Income Disclosure Statement (http://bit.ly/idsOPTAVIA) for statistics on actual earnings of Coaches.
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Medifast’s offering, weight loss medications become one important element in an overall tailored lifestyle plan that also includes Coaching, community
support, nutritionally balanced meals, and exercise.
Medifast’s identified publicly traded peers and competitors in the general health and wellness diet industry include USANA Health Sciences Inc., WW
International, Inc. (formerly Weight Watchers International, Inc.), Herbalife Nutrition Ltd., The Simply Good Foods Co., The Hain Celestial Group, Inc.,
and BellRing Brands, Inc.
We believe we have a competitive advantage over traditional diet companies. The OPTAVIA model:
• Offers a solution that focuses on holistic wellness; it views healthy weight as a catalyst to greater changes and has impacted more than 3 million
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lives.
Provides personalized, empathetic support from Coaches who have been in their customers’ shoes.
Promotes lifelong habit development supported by a proprietary integrated approach to behavior change, the Habits of Health Transformational
System.
Encompasses a vibrant health and wellness community of hundreds of thousands of others.
Provides customers with access to board-certified affiliated clinicians and weight loss medications, such as GLP-1s, that support treatment plans
for obesity and other related health conditions through a collaboration with national virtual primary care provider, LifeMD.
We also compete with other direct-selling organizations, some of which have a longer operating history and greater visibility, name recognition and
financial resources than we do. We also believe we have advantages over traditional direct selling companies:
• OPTAVIA’s innovative model is customer-centric and has one sales price for both OPTAVIA Coaches and customers. There is no tiered pricing.
• OPTAVIA boasts a health and wellness community, where about 90% of OPTAVIA Coaches come from the customer base and have been in their
customers’ shoes. They promote a holistic health and wellness program and are not focused solely on product sales.
• OPTAVIA offers a differentiated direct-to-consumer model, with 100% of products shipped directly to customers.
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The field promotes a unified Habits of Health training system that aligns its leaders around a common mission of Lifelong Transformation, One
Healthy Habit at a Time.
We believe our scientific and clinical heritage combined with our commitment to evaluating programs, plans and products through clinical research are
primary differentiators that allow us to compete in these markets. Our scientifically designed products were originally developed by a physician, and we
have been on the cutting edge in the development of nutrition and weight-management products since our founding.
Medifast has perfected our model over the last 40 years, with habits, Coaches and community at the core, and we will continue to innovate as the industry
evolves.
Recent Initiatives
In response to the competitive landscape, in which acquiring customers has become more difficult due to competitive pressures from GLP-1 medications
being sought after by our potential customers, the Company is focusing on a number of new initiatives to aid in increasing revenue and profit growth in the
years ahead. Some of these started in 2023 with others expected to begin in 2024. These initiatives are expected to be funded internally by the Company’s
existing cash position, capital previously utilized for dividends, as well as savings from the Company’s expense reduction efforts.
At the core of the Company’s initiatives is its desire to grow its business by broadening its customer base through increased brand visibility and
recognition, and by significantly expanding its total addressable market.
Areas of investment anticipated for the year include instituting a new marketing campaign and upgrading customers’ digital experience to increase brand
awareness and drive customer adoption, as well as cultivating new customers through the Company’s collaboration with LifeMD.
In September of 2023, the Company entered the $30 billion sports nutrition market, launching its OPTAVIA ACTIVE line of products. The initial products
consist of essential amino acids and whey protein powders, to aid in supporting healthy muscle in conjunction with both exercise and everyday activities.
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In the second half of 2023, the Company conducted pilot programs with several telehealth companies, focused on providing personalized care to support
holistic health rather than weight loss alone. In December of 2023, the Company entered into a collaboration agreement with LifeMD, a leading provider of
virtual primary care. In January of 2024, the Company expanded into the medically supported weight loss market by operationalizing the collaboration with
the goal of creating a comprehensive and seamless solution for customers who desire to use medications and OPTAVIA’s lifestyle enhancement program.
This collaboration brings together OPTAVIA’s personalized habit-based, coach-guided approach with medical expertise from board-certified affiliated
LifeMD clinicians and access to weight loss medications, including GLP-1s.
GLP-1 medications that meet the FDA weight loss mandate are prescribed along with the recommendation to make lifestyle modifications, such as through
a structured program like OPTAVIA, that encourages a reduced-calorie diet and increased physical activity. Our research shows that most of those who are
interested in weight loss medication are also looking for support beyond a prescription, including clarity on how to incorporate healthy eating and exercise
into their lifestyles while using these medical solutions. While medically supported weight loss can be effective, long-term success is dependent on the
nutrition and lifestyle changes individuals make in combination with taking medication. Additionally, loss of lean muscle mass and maintaining proper
nutrition while on a reduced-calorie diet are two main areas of concern for patients on medically supported weight loss, with evidence suggesting that the
loss of lean body mass can range from 20% to 50% of total weight loss. Late in the fourth quarter, the Company introduced two new bundles, the
OPTAVIA Nutrition Kit for Medically Supported Weight Loss and the OPTAVIA Muscle Health Kit for Medically Supported Weight Loss. These new
bundles include OPTAVIA ACTIVE products, which enable the Company to fill out its product line, making for more comprehensive offerings for those
seeking medically-supported weight loss solutions with lifestyle modifications, and offer the opportunity to extend the lifetime value of all OPTAVIA
customers, as they transition their lifestyles for sustainable improvement.
In connection with this collaboration the Company purchased 1,224,425 shares of LifeMD’s common stock for $10.0 million and has committed to invest
up to an additional $10.0 million to support the collaboration (comprised of $5.0 million paid in December of 2023 and two $2.5 million payments
expected in 2024), for enhancements to LifeMD’s platform, operations and supporting infrastructure to bring together customers, coaches, and clinicians,
offering personalized care and support.
In addition, the Company plans to undertake a significant program to market and build its brand at the corporate level via a comprehensive Company-led
marketing campaign, by utilizing digital advertising and other methods, to aid in bringing in new customers.
In conjunction with these growth initiatives, The Company discontinued its dividend payments effective December 7, 2023, in order to redirect capital to
these growth initiatives as it seeks to deliver a superior return to stockholders in the years ahead. It is expected that much of the funds previously earmarked
for dividends will be utilized to grow the business through marketing and technology initiatives that are expected to increase customer acquisition and the
lifetime value of customers.
2024 will likely be one of the most pivotal years in Medifast’s history, as we adjust to the paradigm change in the weight loss industry and aggressively
execute on bold initiatives to grow our business. We believe by significantly broadening our customer acquisition activities, through launching our new
marketing campaign, upgrading customers' digital experience, and leaning into the medically supported weight loss market through our collaboration with
LifeMD, we will be positioned for future success. The moves we are making don’t come without risks, but we believe a greater risk is not taking action in a
rapidly evolving marketplace. These changes mean that 2024 will be an investment year, one in which we lay the foundation for this future growth. As
such, we don’t expect to see a significant impact, on our operations or revenue, from these actions until late in the year and into 2025 and beyond. And
while we enter 2024 facing similar challenges to 2023, we do expect to exit 2024 well-equipped to seize the opportunities available for growth in the years
ahead, supported by a strong balance sheet with no debt and a solid plan for capitalizing on the opportunities we are addressing.
MARKETS
Health & Wellness Consumers
We develop and market products for consumers who want to lose weight and adopt a holistic approach to overall health and wellness. In the U.S., more
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than two-thirds of the adult population fall within the overweight or obese categories and more than 30% were obese in 2022 .
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CDC BRFSS Prevalence & Trends Data 2022
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According to a proprietary analysis, the addressable market for weight loss is large and growing. It’s estimated to be worth approximately $20 billion today
with a growth rate of approximately 6% per annum . Additionally, roughly 75% of the U.S. population above 18 wants to lose weight and is open to
dieting, and approximately 70% of overweight/obese population considers paid meal plans effective . The total potential pool of OPTAVIA customers is
sizable; there are about 200 million people in the United States looking to lose weight and willing to consider dieting . Additionally, in 2023, Medifast
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entered the $30 billion sports nutrition market and the medically supported weight loss market, which is expected to reach up to $100 billion by 2030 .
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We offer customers a radically different approach to health, with weight loss and weight management serving as a catalyst for an overall improvement in
health, confidence, vitality and general well-being.
Consumer Motivation
Our core customers are highly motivated to adopt a healthy lifestyle that is transformative and sustainable. Many have tried weight loss programs
previously but have been unsuccessful at maintaining a healthy weight and embracing healthy habits for the long-term. Lifestyle issues our customers often
seek to address and resolve include:
physical limitations and chronic diseases linked to an unhealthy weight;
the desire for more energy to meet physical demands and aspirations (e.g. work, parenting, sports and recreation);
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• mental, emotional and psychological limitations caused by being at an unhealthy weight;
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triggers that cause chronic “emotional eating” or “comfort eating”;
lack of knowledge or understanding about the impact of certain foods on their bodies and overall health;
lack of knowledge or understanding about healthy eating and proper hydration;
the role of physical activity and life-style behavior modification to support healthy habit creation;
the role of proper nutrition and lifestyle to augment their weight loss medication;
the need for a convenient and simple, healthy lifestyle solution or program to address their health and wellbeing goals and accommodate demands
on their time; and
the need for a community of like-minded people for support to achieve their goals.
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Experts agree that lifestyle change remains foundational to long-term health and wellbeing, even for those utilizing weight loss medications. In fact,
independent research commissioned by Medifast revealed 96% of people recognized that lifestyle changes are needed for weight loss and maintenance, yet
only 17% are confident they can manage on their own. Findings also showed most individuals interested in weight loss medications are looking for support
beyond prescriptions, including clarity on how to incorporate components of healthy living, such as proper nutrition and exercise, into their lifestyles while
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utilizing these medical solutions .
Obesity is defined as a Body Mass Index (“BMI”) of 30 kg/m or greater, whereas overweight is defined as a BMI ranging between 25 and 29.9 kg/m . In
the U.S., more than two-thirds of the adult population fall within the overweight or obese categories and more than 30% were obese in 2022 . In 2022, only
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the District of Columbia had an obesity rate that was less than 25% and forty-one states had an adult obesity rate of 30% or higher .
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Direct Sellers
Our business model combines the most powerful aspects of direct selling, while eliminating those dimensions that have typically challenged other
companies. Our growth does not depend on recruiting thousands of distributors who take on inventory to sell to customers. Rather, OPTAVIA Coaches
help customers adopt healthy habits and learn the benefits of OPTAVIA products, which are shipped directly to customers. The more OPTAVIA Coaches
we have, the more customers we can serve. We are often compared to diet and weight loss-only companies or to multi-level marketing companies, but our
model is different. We support customers through independent OPTAVIA Coaches, about 90% of whom were customers first.
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Internal estimate based on March 2020 McKinsey study, updated for public & syndicated information where available
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Consumer and OPTAVIA Customer surveys, April 2023
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Consumer and OPTAVIA Customer surveys, April 2023
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Terence Flynn, Framing the Mounjaro bull case in diabesity, Morgan Stanley Research, September 14, 2023
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Source: Independent IPSOS research commissioned by Medifast, June 2023
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CDC BRFSS Prevalence & Trends Data 2022
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CDC Adult Obesity Prevalence Maps, September 21, 2023
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Our competitive advantages:
• OPTAVIA’s innovative model is customer-centric and has one sales price for both OPTAVIA Coaches and customers. There is no tiered pricing.
• OPTAVIA Coaches focus on coaching and supporting customers. They do not hold inventory or manage cash.
• OPTAVIA boasts an energized health and wellness community, where about 90% of Coaches come from the customer base and have been in their
customers’ shoes. They promote a holistic wellness program and are not exclusively focused on product sales. Our competitive OPTAVIA Coach
compensation plan is also deliberately structured to incentivize coaching and support customer success.
The field promotes a unified training system that aligns its leaders around a common mission.
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OPTAVIA offers an entrepreneurial opportunity that allows Coaches:
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to start, manage and grow their own business with minimal upfront capital investment;
the ability to earn supplemental income;
the ability to enjoy a work-life balance;
the opportunity to market products they believe in; and
the opportunity to complement other business pursuits.
Geographies
The U.S. market continues to represent significant potential for growth given the high percentage of overweight or clinically obese adults, more than two-
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thirds of the adult population fall within the overweight or obese categories and more than 30% were obese in 2022 .
Industry growth is also being driven by growing consumer awareness and increasing demand for health and wellness products. The intensified interest in
physical fitness, fitness center membership, increased public awareness and incidences of chronic diseases such as type 2 diabetes, heart disease, certain
types of cancer, stroke, arthritis, sleep apnea and depression have increased demand for health and wellness products.
With its recent expansion into medically supported weight loss, Medifast can support even more customers on their health and wellness journeys.
Additionally, the Company also tripled its addressable market by entering the sports nutrition category and is fostering an engaged U.S. Hispanic Coach
Community within the OPTAVIA ecosystem.
OPTAVIA Coaches are focusing on word of mouth and social media marketing toward increasingly younger demographics, reaching out to important and
increasingly diverse communities of health and wellness consumers, and identifying and marketing to consumers who are in varying stages of optimal
well-being. In addition, the Company plans to invest in technology and growth initiatives intended to improve customer acquisition and customer
experience, including a new marketing campaign designed to increase brand awareness and drive customer adoption.
We have seen advancement within our current business model, but know there are new initiatives, markets, and communities where we have opportunities
for growth. With this in mind, we will continue to invest in important growth initiatives, particularly as we explore the ways in which we can expand the
markets we serve and deliver a high-quality experience for more customers.
As we previously disclosed, global expansion is an important component of our long-term growth strategy and our mission of offering the world Lifelong
Transformation, One Healthy Habit at a Time. In July 2019, we entered into the Asia Pacific markets of Hong Kong and Singapore. As of June 2023, as
part of the Company’s Fuel for the Future program, the Company ceased operations in these markets in order to optimize the Company’s spending and
investments to prepare for and catalyze sustainable future domestic growth. This decision was made for the Company to better prioritize resources that
were previously dedicated to the Asia Pacific markets, in order to support initiatives that the Company anticipates will have a greater impact on revenues
and profitability. This includes investing in technology and digital capabilities as well as rolling out product offerings that are complementary to existing
programs, entering new areas such as sports nutrition and medically supported weight loss, and bringing OPTAVIA to new customer demographics
domestically which should all aid in considerably expanding the
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CDC BRFSS Prevalence & Trends Data 2022
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Company’s total addressable market. We plan to continue to monitor and look for opportunities to expand into other geographic markets in the future.
The Company’s 2023 OPTAVIA Convention offered a Coach-led educational session in Spanish for the third straight year. To support our growing
Hispanic Coach community, our customer support call-center network has a global footprint with infrastructure providing multilingual support from the
United States, Guatemala, and Colombia. This sets the groundwork for both our expansion into other Spanish-speaking communities and our aspirations of
eventually developing other markets around the world.
We can clearly see the growth potential, and expansion will be a foundational aspect of our long-term growth strategy for many years to come, as we look
to further our impact and advance the global health movement.
PRODUCTS AND PROGRAMS
We take pride in our scientific heritage. We have authored over 66 peer-reviewed scientific abstracts and publications, 33 scientific journal publications and
28 completed research studies. Most prominently, we conducted a double-blind study that shows the effects that Coaching has on the OPTAVIA program;
the results suggested that speaking with their OPTAVIA Coach more often may help customers lose up to twice as much weight.
11
Our clinically proven plans and our scientifically designed products were developed by physicians, dietitians, and have impacted more than 3 million lives
and been recommended by thousands of healthcare providers. We work closely with our cross-disciplinary Scientific Advisory Board comprised of
physicians and scientists who help guide and provide valuable input into the development of our comprehensive portfolio of offerings. Our products are
individually portioned, calorie and carbohydrate-controlled meal replacements that share a similar nutritional “footprint” provide a balance of protein and
good carbohydrates, including fiber, and are fortified with vitamins, minerals and probiotics. These products are scientifically designed to deliver proper
nutrition at every stage of a person’s health journey toward a sustainable, healthy lifestyle.
Our OPTAVIA Coaching Model offers the personal support of an OPTAVIA Coach, who is often a person who has achieved success with OPTAVIA and
has turned their success into a business opportunity. The majority of our OPTAVIA Coaches began as customers and became OPTAVIA Coaches for a
number of reasons, including to pay it forward and help others through their transformation journey.
COACH SUPPORT
• OPTAVIA Coach Business Kit. Coaches are required to purchase a business kit to join our network. The kits provide new OPTAVIA Coaches
with business essentials to successfully start their independent business, including plan and product information and 12 months of access to a
personalized OPTAVIA replicated website.
PRODUCTS:
• OPTAVIA Fuelings. OPTAVIA Fuelings contain 24 vitamins and minerals, high quality, complete protein, and no colors, flavors or sweeteners
from artificial sources. Each OPTAVIA Fueling is scientifically formulated with the right balance of carbohydrates, protein, and fat which help
promote a gentle, but efficient fat-burning state when on one of our Optimal Weight Plans. Our Fuelings contain high-quality protein which helps
our customers retain lean muscle mass and contain the patented probiotic BC30™ to support digestive health as part of a balanced diet and healthy
lifestyle. Our OPTAVIA Coaches market OPTAVIA Fuelings primarily through clinically proven Optimal Weight Plans. Customers purchase kits
tailored to their individual needs on the advice and guidance of their OPTAVIA Coach.
• OPTAVIA ACTIVE. OPTAVIA Essential Amino Acid (EAAs) Blend and OPTAVIA ACTIVE Whey Protein are designed to help new and
existing customers of all fitness levels optimize their motion habits. Led by the Company’s team of researchers, food scientists, nutritionists, and
other scientific experts, OPTAVIA ACTIVE Essential Amino Acid (EAAs) Blend and OPTAVIA ACTIVE Whey Protein are designed to address
age-related muscle mass decline and support overall muscle health. Formulated to work with or without OPTAVIA nutrition plans and guided by
Coach support, OPTAVIA ACTIVE is backed by science, made with no colors, flavors or sweeteners from artificial
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Based on the results of a 16-week clinical study, those who participated in at least 75% of their 23 assigned OPTAVIA Coaching calls lost 15.2 lbs. compared to 6.7 lbs. for those participating
in fewer calls.
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sources and is Informed Sport certified, a global standard in sports nutrition quality control that ensures its certified products contain no banned
substances.
LIFESTYLE PLANS & BUNDLES
Our Optimal Weight plans help customers enter a gentle, but efficient fat-burning state. Customers’ success is enhanced by the personal attention,
accountability, education, advice, and motivation they receive from our OPTAVIA Coaches. They also benefit from being members of a broader
OPTAVIA Community of customers with like-minded goals and objectives regarding their health. We offer customers incentives to join the OPTAVIA
Community, including access to the corporate “Nutrition Support” team made up of subject matter experts that provide assistance to our Coaches and
customers, and exclusive offers through OPTAVIA Premier, our auto-ship service that helps our customers stay on plan, as well as qualifies them for
discounts on purchased products and free or discounted shipping.
We encourage our customers to embrace our Six Steps to Optimal Health:
•
Prepare for your journey.
• Achieve a healthy weight.
Transition to healthy eating.
•
•
Live the Habits of Health.
• Optimize health for your age.
•
Realize the potential to live a longer healthier life.
12
In addition, the Company offers product bundles as a complement to balanced nutrition specifically designed to support customers on the medically
supported weight loss journey. The Optimal Weight and Health plans and product bundles we market to customers are:
®
• Optimal Weight 5 & 1 Plan . Our proven Optimal Weight 5 & 1 Plan encourages customers to eat six small meals a day, an important habit that
helps maintain healthy weight. Five daily meals are OPTAVIA Fuelings, offering customers a choice from more than 45 delicious, convenient,
nutritionally interchangeable, scientifically-designed products, including shakes, soups, bars, hot beverages, hearty choices, pudding and brownies.
OPTAVIA Coaches guide their customers on which Fuelings to select, and on how to develop healthy habits, such as preparing lean and green
meals and choosing healthy snacks.
• Optimal Weight 4 & 2 & 1 Plan . The Optimal Weight 4 & 2 & 1 Plan is designed for customers who want to continue eating all food groups or
want a flexible meal plan to help them achieve a healthy weight. Under this plan, OPTAVIA Coaches guide their customers to eat four meals of
OPTAVIA Fuelings and prepare two lean and green meals and one healthy snack themselves.
®
• Optimal Health 3 & 3 Plan . The Optimal Health 3 & 3 Plan is designed for customers who want to sustain a healthy weight. This plan focuses
on nutritionally balanced, small meals eaten every two or three hours, similar to our Optimal Weight plans, while integrating more food choices in
the right portions. Customers are guided by their OPTAVIA Coaches to eat three Optimal Health Fuelings and three balanced meals they prepare
themselves daily.
®
• OPTAVIA Nutrition Kit for Medically Supported Weight Loss: As customers lose weight, getting adequate nutrition and retaining lean muscle
is critical. OPTAVIA’s Nutrition Kit for Medically Supported Weight Loss includes nutrient dense, portion controlled Fuelings and OPTAVIA
ACTIVE Whey Protein to help retain lean muscle mass as weight is lost. Each day, customers will enjoy 2 OPTAVIA Fuelings and 2 servings of
OPTAVIA ACTIVE Whey Protein in addition to healthy meals.
• OPTAVIA Muscle Health Kit for Medically Supported Weight Loss: Evidence suggests that the loss of lean body mass can range from 20% to
50% of total weight loss for those on weight loss medications. As customers lose weight, getting adequate nutrition and retaining lean muscle is
critical. The OPTAVIA Muscle Health Kit for Medically Supported Weight Loss aids in the retention of lean muscle mass during weight loss.
Each day, customers consume up to three OPTAVIA ACTIVE Whey Protein shakes in addition to healthy meals. High-quality, complete protein
evenly distributed throughout the day helps to activate muscle protein synthesis and supports muscle health.
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No one can predict how long you are going to live, but research suggests that making an overall lifestyle change by taking an active role in your choices and behavior, including losing weight,
eating healthier, moving more, and reducing stress, has the potential to help you live a longer, healthier life.
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No matter what plan a customer is on, they learn healthy habits through the Habits of Health Transformational System, which is a crucial tool for customer
success and provides the foundation for our community to learn and adopt healthy habits. The Habits of Health Transformational System is an innovative,
mind and body lifestyle approach that encourages and educates customers to replace unhealthy habits with healthy ones that contribute to their long-term
success.
INCENTIVES
We offer economic incentives designed to support each OPTAVIA Coach’s and customer’s success. We believe our business is most successful when our
Coaches can maintain a continuous cycle of growth: Coaches activate new and successful customers, many of whom go on to become OPTAVIA Coaches
themselves, who activate new customers, and so on. Once a Coach has successfully attracted a new customer, the Coach uses personalized coaching and
effective digital tools to drive engagement.
As part of this work, beginning in March 2023, the Company introduced a "Client Support Bonus+" incentive for Coaches that was aimed to encourage and
incentivize each independent OPTAVIA Coach to acquire new and reactivated customers. Programs like these are an important driver of our ongoing
customer acquisition efforts, focusing on fostering alignment of the Coach network around customer acquisition. The aim is not just to acquire first-time
OPTAVIA customers, but also to reactivate lapsed customers who have already had a positive experience with the brand.
Customer acquisition is important to our growth as customer cohorts utilizing the OPTAVIA program today form future Coach cohorts, which in turn drive
optimization of the customer and Coach tenure mix and the associated improvements in efficiency and productivity. Optimizing incentivization and
compensation remains important to drive growth, retention, and engagement. We are investing substantial time and resources in carefully learning from our
existing and prospective customers, listening to what our Coaches are hearing and finding efficient solutions to challenges, along with building programs
that deliver connection, engagement and retention. We are consistently adapting and focusing our efforts on where we believe they will have the most
impact.
CUSTOMERS
Sales are made to individual customers. No single customer accounted for 10% or more of our consolidated revenue for the year ended December 31, 2023.
SEASONALITY
Demand for weight management products and programs are typically seasonal. Traditionally, the predisposition of customers refraining from initiating
weight loss or management programs during the holiday season typically impacts the fourth quarter with fewer sales of weight management products and
services during these months. January and February generally show sequential increases in sales, as these months are considered the commencement of the
“diet season” and "resolution season." We believe our sales pattern does not follow the seasonality of our industry, but rather is predicated on the growth of
our OPTAVIA Coach network.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board consists of seven multi-disciplinary, internationally recognized scientific experts who provide objective insights to guide the
Company in making informed decisions based on the latest scientific developments in health and wellness and serve as the foundation for scientifically-
valid, evidence-based, customer-centric, high-quality innovations by the Company for lasting health. Its mission is to help guide us in making informed
decisions regarding medical, nutritional, food service and scientific matters by providing expertise and information on research and emerging trends. The
cross-disciplinary panel was established in 2008 in service of the Company's commitment to providing an evidence-based, safe and effective health and
wellness program that meets consumer needs.
The work of this cross-disciplinary group builds on our scientific heritage and incorporates leading-edge clinical research into the development of our
products, plans and programs.
MARKETING
We continue to build and leverage our brands through multiple marketing strategies. Customer acquisition and retention strategies include word-of-mouth,
digital marketing, public relations, social media, email marketing, events and other means. These mediums are used to target new customers by stressing
OPTAVIA’s simple and effective approach to weight loss and management and long-term health. Many of these programs are also utilized to reactivate,
encourage and support existing
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customers and OPTAVIA Coaches. We are constantly working to enhance all of our Company materials and websites. The Company plans to invest in
technology and growth initiatives intended to improve customer acquisition and customer experience, including a new Company-led marketing campaign
designed to increase brand awareness and drive customer adoption in 2024.
MANUFACTURING
Jason Pharmaceuticals, Inc., our wholly-owned subsidiary with a manufacturing facility in Owings Mills, Maryland, is one of the manufacturers of our
products, which account for approximately 25% of our total unit sales. We purchased the facility in July 2002 and have gradually increased production
capacity and improved overall efficiencies with additional investments in blending and packaging equipment. Our Owings Mills manufacturing facility is
regulated and inspected by the United States Food and Drug Administration (the “FDA”), the United States Department of Agriculture (the “USDA”), the
Maryland State Department of Health and Mental Hygiene, and Office of Food Protection. It is certified by the Safe Qualified Food Institute as a Safe
Quality Food Program Level 2 facility compliant with the Global Food Safety Initiative, a global non-profit collaboration to advance food safety. The
products underlying the remaining 75% of our total unit sales are manufactured by co-manufacturers in accordance with Medifast proprietary formulas and
manufacturing standards.
GOVERNMENTAL REGULATION
We are subject to extensive federal, state, and local government laws and regulations, including those relating to the preparation and sale of food and
beverages, in the jurisdictions in which we operate, own, and lease properties, and market our offerings, including the OPTAVIA program, products, and
other aspects of our business. We are also subject to laws governing our relationships with employees, including minimum wage requirements, overtime,
working conditions, hiring and firing, non-discrimination for disabilities and other protected characteristics, work permits, and benefit offerings. Further,
we are subject to laws governing our relationships with our independent contractor OPTAVIA Coaches. To date, compliance with federal, state and local
environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position.
In this section, we describe the regulations that are applicable to our business.
Direct Selling Regulations
Direct selling is regulated by various national, state and local government agencies in the United States. These laws and regulations are generally intended
to prevent fraudulent or deceptive schemes, including “pyramid” schemes, which compensate participants primarily for recruiting additional participants
without significant emphasis on product sales to consumers. The laws and regulations governing direct selling may be modified or reinterpreted from time
to time, which may cause us to modify our sales compensation and business models. In almost all of our domestic markets, regulations are subject to
discretionary interpretation by regulators and judicial authorities. There is often ambiguity and uncertainty with respect to the state of direct selling and
anti-pyramid laws and regulations. In the United States, for example, federal law provides law enforcement agencies, such as the Federal Trade
Commission (the “FTC”), broad latitude in policing unfair or deceptive trade practices, but does not provide a bright-line test for identifying a pyramid
scheme. Several states have passed legislation that more clearly distinguishes between illegal pyramid schemes and legitimate multi-level marketing
(“MLM”) business models. Recent settlements between the FTC and other direct selling companies and guidance from the FTC have addressed
inappropriate earnings and lifestyle claims and the importance of focusing on consumer sales. These developments have created a level of ambiguity as to
the proper interpretation of the law and related court decisions. For example, in 2016, the FTC entered into a settlement with another multi-level marketing
company, requiring the company to modify its business model, including basing sales compensation and qualification only on sales to retail and preferred
customers and on purchases by a distributor for personal consumption within allowable limits. Although this settlement does not represent judicial
precedent or a new FTC rule, the FTC has indicated that the industry should look at this settlement, and the principles underlying its specific measures, for
guidance. If the requirements in this settlement lead to new industry standards or new rules, our business could be impacted, and we may need to amend
our compensation plan.
In 2018, the FTC released its nonbinding Business Guidance Concerning Multi-Level Marketing (“MLM Guidance”). The MLM Guidance explains,
among other things, the FTC’s views concerning lawful and unlawful compensation structures, whether personal consumption by participants can be used
in determining an MLM organization’s compensation structure, and how an MLM organization should approach representations to current and prospective
participants. We believe our current business practices comply with the MLM Guidance.
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In 2019, the FTC took aggressive actions against a multi-level marketing company, alleging that the company operated an illegal pyramid scheme that
deceived consumers into believing that they could earn significant income as distributors of its health and wellness products. The company eventually
entered into a consent order with the FTC, pursuant to which the company was permanently prohibited from using a multi-level compensation plan in the
United States. We have taken additional steps to educate our Coaches on proper earnings claims. If our Coaches make improper claims, or if regulators
determine we are making any improper claims, this could lead to an FTC investigation and could harm our business.
Additionally, in 2009 the FTC promulgated nonbinding Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Endorsement
Guides”) which explained what endorsement practices the FTC views as being unfair or deceptive acts or practices. In 2020, the FTC sought public
comments on whether the Endorsement Guides should be amended. The last time the FTC sought similar public comments led to a major revision of the
Endorsement Guides. Consequently, the FTC could bring an enforcement action based on practices that are inconsistent with the current Endorsement
Guides as it considers revisions. Under the current Endorsement Guides, advertisements that feature a consumer and convey his or her atypical experience
with a product or service are required to clearly disclose the typical results that consumers can generally expect. OPTAVIA has adapted its rules regarding
the practices of its Coaches in order to comply with the current Endorsement Guides, but we cannot be sure that the FTC will not challenge our advertising
or other operations in the future.
We continue to monitor developments to assess whether we should make any changes to our business or compensation plan. If we are required to make
changes or if the FTC seeks to enforce similar measures in the industry, either through rulemaking or an enforcement action against our Company, our
business could be harmed.
Environmental Regulations
We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we
otherwise may be subject to liability for environmental conditions that could materially affect operations.
Other Regulations
A number of laws and regulations govern our advertising and marketing, services, products, operations and relations with consumers, other service
providers and government authorities in the countries in which we operate.
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, USDA and state and local health departments are the major agencies whose regulatory mission is to assure that products are made using
approved ingredients, labeling, manufacturing procedures and testing to ensure that safe quality products are delivered to consumers.
Laws and regulations directly applicable to data protection and communications, operations or commerce over the Internet, such as those governing
intellectual property, privacy and taxation, continue to evolve. Our operations are subject to these laws and regulations, and we continue to monitor their
development and our compliance. In addition, we are subject to other laws and regulations in the United States.
The FTC has principal regulatory authority 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.
During the mid-1990s, the FTC filed complaints against a number of commercial weight management providers alleging violations of federal law in
connection with the use of advertisements that featured testimonial claims for program success and program costs. 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.
If our collaboration and relationship with LifeMD grows, in the future, we may become subject to the same government regulators that regulate LifeMD’s
business operations. These include federal and state healthcare regulatory laws which include,
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but are not limited to, federal and state anti-kickback, false claims, and other healthcare fraud and abuse laws. For additional information, see Item 1A. Risk
Factors.
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 or death. The Company maintains insurance against product liability claims with respect to the
products it manufactures. With respect to the retail and direct marketing and 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 a covered entity under each of such vendor’s product
liability insurance policies. The Company does not buy products from suppliers who do not maintain such coverage.
WORKING CAPITAL PRACTICES
We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our customers. Substantial inventories are required to
meet the needs of our dual role as manufacturer and distributor.
HUMAN CAPITAL MANAGEMENT
As of December 31, 2023, the Company employed 634 team members, all employed in the United States, of whom 326 were engaged in manufacturing,
logistics, and supply chain support, and 308 in marketing, administrative and corporate support functions. None of our team members are subject to a
collective bargaining agreement with the Company. At Medifast, we actively foster an organizational culture centered on strong cross-functional
relationships and collaborating as one team to support our customers in their health and wellness journey. 2023 has been a year of significant
transformation for our company, and now more than ever, we are focused on nurturing a strong community - independent Coaches and corporate team
members together - enabling our customers to achieve Lifelong Transformation, One Healthy Habit at a Time. Internally, this starts with a clear and
transparent communication cadence reinforced by the culture tenets that make us a strong team. To support this significant transformation period, and to
reinforce our Success Driver, Innovate, we launched a virtual Innovation Box in 2023 to give team members the opportunity to submit new ideas that
support our business strategy with a focus on productivity and customer acquisition. The Innovation Box is another channel for our team members to
participate in influencing the Company’s strategic plan.
As a cross-functional team, we believe our ability to effectively collaborate will be a key enabler to successfully navigate the business transformation ahead
of us. Together, we are building relationships of trust dedicated to lifelong transformation, together we care for each other, prioritizing the mental and
physical wellbeing of our people, together we continually improve the ways we work and together we help each other grow, investing in training,
encouraging feedback and embracing challenges along the way.
We have several resources and tools that help us nurture a “One Team” mindset centered around strong cross-functional teaming and partnering. Our north
star is our Culture Compass that helps us understand the behaviors, values, and ways of working that define our culture today, identifying gaps, areas of
growth and where we need to adjust in order to deliver on our strategy more effectively moving forward. Our Culture Contract lays out the explicit
behaviors that underlie our Core Values. It details the commitments we make to one another when we join Medifast and the commitments the Company
makes to ensure an excellent work experience for all our team members. Our Culture Contract Toolkit is a companion piece that provides many tools and
activities that team members can bring into their daily work to improve in forming bonds, establishing healthy work/life balance, inclusive leadership and
much more. In 2023, we released phase one of our Culture Contract training aimed at giving team members an opportunity to apply our Core Values or
Success Drivers to real world business scenarios and discuss how they can use the Culture Contract to help bring desired behaviors to life.
Our Community is united by our values – we are one team with one mission, guided by clear, shared behaviors that help us stay aligned as we grow and
enable us to prioritize our work, plan for the future and harness our combined energy to accomplish our company objectives. Our culture narrative is fully
embedded in our core human capital processes to ensure our team members understand how their success translates to the success of the greater team and
ultimately to an amazing Coach & customer experience. Each year we host a program called Coach Encounters, which gives our team members an
opportunity to hear directly from our amazing Coaches about their personal journey and how the Company supports their work in seeking positive health
outcomes for our customers. In 2023, we were recognized by U.S. News & Reports as a Best Place to Work in the Food & Drink Industry, a reflection of
the work we have done to nurture our culture and support a strong employee experience.
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Building transparency and developing communication channels that allow us to cascade information and connect our teams are critical components of our
people strategy. We leverage our Workplace by Meta platform to connect, collaborate and incite conversations around topics that matter to us (like
wellness). We also have a weekly Pulse newsletter to ensure important initiatives and events are communicated in a timely matter. We leverage Slack, our
internal messaging platform, to drive company and senior leadership communications. We also launched a quarterly video series from our CEO to ensure
team members hear directly from him about Company performance and updates on key initiatives. We leverage our communication channels to remind
team members of the significant impact they have on the Coach & customer experience, help them understand our business, get them engaged in learning
and increase empathy across functional teams.
Recognition is another key component of our culture. Our #AcedIt program provides team members with a platform to recognize excellent work that
supports our business strategy, applauds behaviors that reinforce our cultural values, and fosters a sense of gratitude — all key components in nurturing
strong relationships and building tight-knit communities. #AcedIt allows for both social and point-based recognition and celebrates team members for
achieving important milestones in service. In 2022, we tied our #AcedIt platform to our wellness platform, LiveWell, to incentivize greater focus on health
and wellness. In 2023, we saw strong engagement with LiveWell with over 70% of employees leveraging the tool.
Diversity is one of Medifast’s Core Values and an important part of our culture. As an organization, we are committed to generating an open dialog with
our team members and building a more inclusive work environment that enables all our team members to have a voice. In 2023, we conducted two cycles
of our listening initiative, The Loop, which promotes communication transparency, empowers our team leaders to review their employee engagement
results and facilitates candid conversations to shape and improve the work experience.
Biannually, we repeat training for our senior leaders to foster inclusive leadership. In 2023, we welcomed 22 senior leaders to this training to build their
leadership toolkits as they foster diversity and inclusion among their teams. Our Culture Club program, established in 2020, gives all of our team members,
whether onsite, hybrid or fully remote, the opportunity to come together to connect, build bonds and learn together in a virtual environment. Culture Club
covers a learning topic related to our culture or ways of working, and always includes a fun element to give team members a moment to relax and deepen
bonds. For the past two years, we have also hosted a Culture Week to celebrate the differences that make our Community special.
Nurturing growth and learning are also key elements of our culture. In 2023, we enhanced our performance management process (called PEAK) by
introducing an improved technology platform which delivered a superior user experience as our team members engage in quarterly conversations on
performance and development. The tool automates 360 feedback which reinforces the role of feedback in developing strong relationships. Through our
Optimal Learning platform, team members have access to online courses. In 2023, we launched a Culture Journey learning path to further integrate an
understanding of our culture for new team members. Within our supply chain, we continued our Level Up shadow program for a second year, which creates
opportunities for our supply chain team members to be cross trained in other areas of the supply chain and learn new skills. This program is geared towards
enabling greater sponsorship of junior talent and an increase of internal mobility.
Medifast is focused on attracting and retaining top talent who are eager to participate in our mission. Our Total Rewards Program is intended to deliver
competitive compensation and benefits that align with our company mission and values. Annually, we review our market reference ranges and pay to
ensure we remain competitive, consistent, and equitable. Our variable pay targets are performance based and tied to organizational results.
Wellness is not just what we do, it’s who we are, and our commitment to being a best-in-class wellness company starts with providing team members equal
access to all our programs and products. Our Employees on Plan program allows our team members to experience the support of a Coach, as they tackle
their own weight loss journey. Our Wellness Committee oversees a host of programming throughout the year to integrate healthy habits into the lives of our
team members, such as incentives through LiveWell, for taking on a step challenge, doing a biometric screening or attending a wellness event among other
activities. In 2023, aligned with the launch of our OPTAVIA ACTIVE products, we challenged our Coaches and team members to get in motion. Medifast
team members took the challenge and the company sponsored special contests and activities related to this event.
To continue to support the adoption of our Work Playbook and further evaluate the effectiveness of our work strategy principles, we conducted several ad-
hoc pulse surveys of our senior leaders in 2023. The Playbook is a tool used to empower our team members to do their best work while sustaining strong
collaboration, trust, and effectiveness. Our surveys continue to show strong support for our work strategies while also highlighting room for improvement
in cross-functional teaming. We are continuing to listen and adjust our plans throughout our work journey.
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In addition to our team members, our Human Capital also includes our independent contractor OPTAVIA Coaches. They support our customers and
market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, X, and video
conferencing platforms. The more OPTAVIA Coaches we have, the more customers we can serve. The total number of active earning OPTAVIA Coaches
as of December 31, 2023 was 41,100. For information about our OPTAVIA Coaches, see Item 1. Business.
INFORMATION SYSTEMS & TECHNOLOGY
We have adopted a cybersecurity framework that, where appropriate, aligns with the National Institute of Standards and Technology's ("NIST")
Cybersecurity Framework, and we have maintained systems that, where appropriate, are Payment Card Industry Data Security Standard compliant ("PCI")
under current standards.
Our websites use commercially developed software which are hosted by data center colocation and cloud service providers. The hosting facilities provide
carrier-diverse network connectivity, information security technologies, redundant and emergency power, fire prevention and control, and physical security.
We continuously monitor our information systems and infrastructure, and have sufficient polices and committees in place to evaluate if and when an
incident occurs and becomes material. We also use redundant carrier-diverse networks to interconnect our corporate locations. We annually evaluate SSAE
18 compliance of key third party service organizations by reviewing relevant System and Organization Controls (SOC) reports. Where applicable, we also
review service provider PCI compliance annually.
We use a variety of information security methods to protect confidential customer and corporate data against unauthorized access, including periodic
network and website vulnerability/penetration testing. Network intrusion detection and prevention technologies are in use to alert and mitigate unauthorized
access and distributed denial of service attacks. Industry standard multi-factor authentication solutions and encryption methods are used for data protection.
As our operations evolve, we will continue to improve and upgrade our information systems and infrastructure while maintaining their reliability and
integrity. For additional information about our cybersecurity processes and risks, see Item 1C. Cybersecurity.
INTELLECTUAL PROPERTY
Products manufactured by and programs marketed by the Company are sold under their own trademarks and trade names. Our policy is to protect our
products and programs through trademark registrations both in the United States and in significant international markets. The Company carefully monitors
trademark use and strongly promotes enforcement and protection of all of its trademarks.
AVAILABLE INFORMATION
Our principal office is located at 100 International Drive, 18 Floor, Baltimore, Maryland 21202. Our telephone number at this office is (410) 581-8042.
Our corporate website is http://www.medifastinc.com. All periodic and current reports, registration statements, code of conduct and other material that we
are required to file 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 filed or furnished pursuant to Section 13(a) of the Exchange Act are available free of charge through our investor relations page at
https://ir.medifastinc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our website
and the information contained therein or connected thereto are not intended to be incorporated into this Report.
th
The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file
such information electronically with the SEC.
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, financial 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.
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Risks Related to Our Business
Deterioration of economic conditions, an economic recession or slow growth, periods of inflation or economic uncertainty, could continue to
adversely affect consumer spending as well as demand for our products.
General global economic downturns and macroeconomic trends, including heightened inflation, capital market volatility, interest rate and currency rate
fluctuations, and economic slowdown or recession, may result in unfavorable conditions that could negatively affect consumer spending and demand for
our products, and exacerbate some of the other risks that affect our business, financial condition and results of operations. For example, economic forces,
including changes in disposable consumer income and/or reductions in discretionary spending, unemployment levels, labor shortages, demographic trends,
inflation and consumer confidence in the economy, may cause consumers to defer or decrease purchases of our products and programs which could
adversely affect our revenue, gross profit, and/or our overall financial condition and operating results.
The success of our business is dependent on our ability to maintain and grow our network of OPTAVIA Coaches.
We consider our number of active earning OPTAVIA Coaches and average quarterly revenue per active earning OPTAVIA Coach to be key indicators of
our financial performance and condition. As of December 31, 2023, the Company had 41,100 total active earning OPTAVIA Coaches as compared to
60,900 as of December 31, 2022. If we are unable to reverse the downtrend of the number of active earning Coaches, which has been declining since Q3
2022, or revenue per active earning Coach, which has been declining since Q2 2023, our future revenue and operating results will continue to be adversely
affected, as we believe that the success of the Company depends on the success of our OPTAVIA Coaches.
Additionally, OPTAVIA Coaches are subject to high turnover and we depend on our network of OPTAVIA Coaches to continually grow their businesses
by supporting customers and attracting, training and motivating new OPTAVIA Coaches. Our failure to provide the business essentials and competitive
compensation necessary to motivate OPTAVIA Coaches to grow their businesses will adversely affect our future growth and operating results. The growth
and sustainability of our network of OPTAVIA Coaches is also subject to risks which may be outside of our control. These include: potential misconduct
or improper claims by OPTAVIA Coaches; 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 direct selling model may be challenged, which could harm our business.
We may be subject to challenges by government regulators regarding our direct selling model. Legal and regulatory requirements concerning the direct
selling industry generally do not include “bright line” rules and are inherently fact-based and subject to interpretation. As a result, regulators and courts
have discretion in their application of these laws and regulations, and the enforcement or interpretation of these laws and regulations by government
agencies or courts can change.
Settlements between the FTC and other direct selling companies and guidance from the FTC have addressed inappropriate earnings and lifestyle claims and
the importance of focusing on consumer sales. These developments have created a level of ambiguity as to the proper interpretation of the law and related
court decisions. Any adverse rulings or legal actions could impact our business if direct selling laws or anti-pyramid laws are interpreted more narrowly or
in a manner that results in additional burdens or restrictions on direct selling companies. For example, in 2019, the FTC took aggressive actions against a
multi-level marketing company, which ultimately led to the company being permanently prohibited from using a multilevel compensation plan in the
United States. If our OPTAVIA Coaches make improper claims regarding our products or business, or if regulators determine we are making any improper
claims, this could lead to an FTC investigation and could harm our business.
We continue to monitor developments to assess whether we should make any changes to our compensation structure. If we are required to make changes or
if the FTC seeks to enforce similar measures in the industry, either through rulemaking or an enforcement action against us, our business could be harmed.
The FTC has also increased its scrutiny of the use of testimonials, which we also utilize, as well as the role of endorsers. We cannot be sure that the FTC
will not challenge our advertising or other operations in the future, which could have a material adverse effect on our business.
In addition, our ability to sustain satisfactory levels of sales is dependent in significant part on our ability to introduce innovative products. However,
governmental regulations can delay or prevent the introduction, or require the reformulation or
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withdrawal, of certain of our products. Any such regulatory action, whether or not it results in a final determination adverse to us, could create negative
publicity, with detrimental effects on the motivation and recruitment of OPTAVIA Coaches and, consequently, on sales.
We could also be subject to challenges by private parties in civil actions. We are aware of recent civil actions against other companies in the United States
that use a direct selling model, which have and may in the future result in significant legal costs. Allegations against companies that use a multi-level
marketing strategy in various markets have also created intense public scrutiny of companies in the direct selling industry. Similarly, the FTC continues to
scrutinize multi-level marketers. All of these actions and any future scrutiny of us or the direct selling industry could generate negative publicity or further
regulatory actions that could result in fines, restrict our ability to conduct our business, enter into new markets, and ultimately attract customers.
We rely on third parties to provide us with a majority of the products we sell and we manufacture the remaining portion. We also rely on third
parties to distribute and deliver our products. The inability to obtain the necessary products from our third-party manufacturers, produce the
products we manufacture in-house or distribute and deliver our products could cause our revenue, earnings or reputation to suffer.
We rely on third-party manufacturers to supply a majority of the food and other products we sell. If we are unable to obtain a sufficient quantity, quality and
variety of foods and other products from these manufactures in a timely and low-cost manner, we will be unable to fulfill 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 our reputation and the value of our brands. We also
rely on third-parties to distribute and deliver our products.
Therefore, it is critical that we maintain good relationships with our manufacturers and third parties that distribute and deliver our products. The services
we require from these parties may be disrupted due to a number of factors associated with their businesses, including the following:
public health crises, such as pandemics and epidemics;
labor disruptions;
delivery and transportation problems;
financial condition or results of operations;
internal inefficiencies;
power failures;
equipment failure;
severe weather, climate and other adverse environmental conditions;
fire;
natural or man-made disasters, war, terrorism, or political instability;
adverse changes in third-party contract terms;
shortages or increases in prices of ingredients; and
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• USDA or FDA compliance issues.
We manufacture and produce a portion of our products, which account for approximately 25% of our total unit sales, at our manufacturing facility in
Owings Mills, Maryland. As a result, we are dependent upon the uninterrupted and efficient 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:
public health crises, such as pandemics and epidemics;
labor disruptions;
power failures;
equipment failure;
internal inefficiencies;
severe weather, climate and other adverse environmental conditions;
fire;
natural or man-made disasters, war, terrorism, or political instability; and
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• USDA or FDA compliance issues.
There can be no assurance that the occurrence of these or any other operational problems at our sole facility would not have a material adverse effect on our
business, financial condition or results of operations.
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Our ability to source quality ingredients and other products is critical to our business, and any disruption to our supply or supply chain could
materially adversely affect our business.
We depend on frequent deliveries of ingredients and other products from domestic and foreign suppliers, especially for our non-powder products. Some of
our suppliers may depend on a variety of other local, regional, national and international suppliers to fulfill the purchase orders we place with them. The
availability of such ingredients and other products at competitive prices depends on many factors beyond our control, including the number and size of the
suppliers that provide the raw materials that meet our quality and production standards.
We rely on our suppliers, and their supply chains, to meet our quality and production standards and specifications and supply ingredients and other products
in a timely and safe manner. However, no safety and quality measures can eliminate the possibility that suppliers may provide us with defective or out-of-
specification products against which regulators may take action or which may subject us to litigation or require a recall. Suppliers may provide us with
ingredients that are or may be unsafe, below our quality standards or improperly labeled. In addition to a negative customer experience, we could face
possible seizure or recall of our products and the imposition of civil or criminal sanctions if we incorporate a defective or out-of-specification item into one
of our deliveries.
Furthermore, there are many factors beyond our control which could cause shortages or interruptions in the supply of our ingredients and other products,
including adverse weather, climate and environmental factors, natural disasters, unanticipated demand, labor or distribution problems, changes in law or
policy, food safety issues by our suppliers and their supply chains, and the financial health of our suppliers and their supply chains. Production or yield of
the agricultural crops that are used as ingredients in our products may also be materially adversely affected by drought, water scarcity, temperature
extremes, scarcity of agricultural labor, changes in government agricultural programs or subsidies, import restrictions, scarcity of suitable agricultural land,
crop conditions, crop or animal diseases or crop pests. Failure to take adequate steps to mitigate the likelihood or potential effect of such events, or to
effectively manage such events if they occur, may materially adversely affect our business, financial condition and operating results, particularly in
circumstances where an ingredient or product is sourced from a single supplier or location.
In addition, unexpected delays in deliveries from suppliers or increases in transportation costs (including through increased fuel costs) could materially
adversely affect our business, financial condition and operating results. Labor shortages or work stoppages in the transportation industry, long-term
disruptions to the national transportation infrastructure, reduction in capacity and industry-specific regulations such as hours-of-service rules that lead to
delays or interruptions of deliveries could also materially adversely affect our business, financial condition and operating results.
We currently source certain of our ingredients from suppliers located outside of the United States. Any event causing a disruption or delay of imports from
suppliers located outside of the United States, including weather, drought, crop-related diseases, the imposition of import or export restrictions, restrictions
on the transfer of funds or increased tariffs, destination-based taxes, value-added taxes, quotas or increased regulatory requirements, could increase the cost
or reduce the supply of our ingredients and the other materials required by our product offerings, which could materially adversely affect our business,
financial condition and operating results. Furthermore, our suppliers’ operations may be adversely affected by political and financial instability, resulting in
the disruption of trade from exporting countries, restrictions on the transfer of funds or other trade disruptions, each of which could adversely affect our
access or ability to source ingredients and other materials used in our product offerings on a timely or cost-effective basis.
We may be subject to claims that our OPTAVIA Coaches are unqualified to provide proper weight loss advice.
Our OPTAVIA Coaches are independent contractors and, accordingly, we are not in a position to provide the same level of oversight as we would if these
OPTAVIA Coaches were our own employees. As a result, there can be no assurance that our OPTAVIA Coaches will comply with our policies and
procedures. Additionally, most of our OPTAVIA Coaches do not have extensive training or certification in nutrition, diet or health fields and have only
undergone the education they receive from us. We may be subject to claims from our customers alleging that our OPTAVIA Coaches lack the
qualifications necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our OPTAVIA Coaches
have provided inappropriate advice or have failed to recommend customers consult with their health care providers during the course of the customers’
weight loss journey, as recommended in the Company’s Medical Disclaimer. Such claims could result in lawsuits, damage to our reputation and divert
management’s attention from our business, which would adversely affect our business.
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We may be subject to health or advertising related claims from our customers.
While we collaborate with LifeMD healthcare providers, our businesses are separate, and our weight loss and weight management programs do not include
medical treatment or medical advice, and we do not engage physicians or nurses, with LifeMD or otherwise, 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 programs, including outcomes based on interactions with our independent OPTAVIA Coaches or healthcare providers associated with LifeMD.
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. From time-to-time we are subject to such allegations and have been involved in such litigation. We may ultimately be
unsuccessful in defending ourselves against such claims. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome,
may be lengthy and costly, and could 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 significant resources
pursues a weight management program similar to ours, our business could be significantly affected.
Competition is intense in the weight management industry and we must remain competitive in the areas of program efficacy, price, taste, customer service
and brand recognition. Our competitors include companies selling weight loss medications, pharmaceutical products and weight loss programs, digital
tools, app-based health and wellness monitoring solutions 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 significantly larger than we are and have substantially greater
resources. 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. Additionally, the entrance into the market and
growing acceptance of the favorably perceived and easier to use weight loss medications, such as GLP-1s, has reduced and may further reduce demand for
our services and products.
New weight loss medications, 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 efficacy 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, which continue to evolve with the introduction of new technologies and innovations, and, on an ongoing basis, many existing and potential
providers of weight loss solutions, including many pharmaceutical firms with significantly greater financial and operating resources than we have, are
developing new products and services. The growing popularity of weight loss solutions, such as a drug therapy or GLP-1 medications, which may be
perceived to be safe, effective and “easier” than a portion-controlled meal plan has affected the marketplace and could negatively impact our results of
operations.
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If we do not continue to develop innovative new products or if our products do not continue to appeal to the market, or if we are unable to
successfully expand or respond to consumer trends, our business may suffer.
The increasing focus of consumers on more integrated lifestyle and fitness 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 products and to enhance our
existing 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 products, and we cannot assure you that any new or enhanced products will appeal to the market. Our results of operations
are highly dependent on the number of product sales generated by our OPTAVIA Coaches. Our failure to develop new products and to enhance our
existing products, and the failure of our products 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, financial condition or results of operations. Additionally, we commit and invest substantial time and
resources into developing innovative new products. There is no assurance that any new products will be successfully adopted by our customer base, or that
we will be able promote such new products without taking steps such as reducing pricing or incurring acquisition costs that would affect our revenues
and/or profitability.
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 units, and
competitive advantages. Our efforts to capitalize on business opportunities may not bring the intended results. Assumptions underlying expected financial
results or consumer demand may not be met or economic conditions may deteriorate. We also may be unable to attract and retain highly qualified 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, financial condition and results of operations may be adversely affected.
Our business depends on the effectiveness of our advertising and marketing programs, including the strength of the Company's and our
OPTAVIA Coaches’ social media presence, to attract and retain customers. Use of social media may materially and adversely affect our reputation
or subject us to fines or other penalties, and restrictions on the use of or access to social media may adversely impact sales of our products and
services.
Our business success depends on our ability to attract and retain customers. Our ability to attract and retain customers depends significantly on the
effectiveness of our OPTAVIA Coaches’ advertising and marketing practices. Our OPTAVIA Coaches support our customers and market our products and
services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, X, and video conferencing platforms. If their
advertising and marketing campaigns do not generate a sufficient number of customers, our business, financial condition and results of operations will be
adversely affected.
We and our OPTAVIA Coaches, as well as social media influencers or other brand ambassadors that we may utilize from time to time, use email and social
media platforms as a means of communicating with customers. We use digital marketing, social media, and email marketing, among other means, to attract
and retain customers. Unauthorized or inappropriate use of these channels could result in harmful publicity or negative consumer experiences, which could
have an adverse impact on the effectiveness of our marketing through these channels. In addition, the rising popularity of social media and other consumer-
oriented technologies has increased the speed and accessibility of information dissemination. Our target consumers often value readily available
information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate without
affording us an opportunity for redress or correction. Negative or false commentary about us may be posted on social media platforms or similar devices at
any time and may harm our business, brand, reputation, Coaches, financial condition, and results of operations, regardless of the information’s accuracy.
An increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such
materials and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. As laws
and regulations, including FTC enforcement, rapidly evolve to govern the
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use of these platforms and devices, the failure by us, our employees, or our Coaches or other third parties acting at our direction to abide by applicable laws
and regulations in the use of these platforms and devices could adversely impact our business, financial condition and results of operations or subject us to
fines or other penalties.
We are dependent on our key executives for future success. If we lose the services of any of our key executives and we are unable to timely retain a
qualified replacement, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our key executives. The loss of the services of any of these
individuals could harm our business. We have not obtained life insurance on any key executives. If any key executives left us or were seriously injured and
became unable to work, our business could be harmed.
Any failure of our technology or systems to perform satisfactorily could result in an adverse impact on our business.
Information Technology and Cyber Security Risks
We rely on software, hardware, network systems, including cloud-based technology, that is either developed by us or licensed from or maintained by third
parties to operate our websites. As much of this technology is complex, there may be future errors, defects or performance problems, including when we
update our technology or integrate new technology to expand and enhance our capabilities. Our technology may malfunction or suffer from defects that
become apparent only after extended use. The integrity of our technology may also be compromised as a result of third-party cyber-attacks, such as
hacking, spear phishing campaigns and denial of service attacks, which are increasingly negatively impacting companies. In addition, our operations
depend on our ability to protect our information technology systems against damage from third-party cyber-attacks, fire, power loss, water, earthquakes,
telecommunications failures and similar unexpected adverse events. Interruptions in our websites, services and products or network systems could result
from unknown technical defects, insufficient capacity or the failure of our third-party providers to provide continuous and uninterrupted service. While we
maintain disaster recovery capabilities to return to normal operation in a timely manner, we do not have a fully redundant system that includes an
instantaneous recovery capability.
As a result of such possible defects, failures, interruptions or other problems, our services and products could be rendered unreliable or be perceived as
unreliable by customers, which could result in harm to our reputation and brand. Any failure of our technology or systems could result in an adverse 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 systems 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 significant 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 systems. In addition to purposeful security breaches, the inadvertent transmission of computer
viruses could adversely affect our computer systems and, in turn, harm our business.
Existing, proposed or new data privacy legislation and regulations, including interpretations thereof, could also significantly affect our business. For
example, data protection and privacy laws have been enacted by the U.S. federal and state governments, including the California Privacy Rights Act, which
became effective on January 1, 2023 and replaced the previously established California Consumer Privacy Act (CCPA) and other relevant statutes. These
laws typically impose significant penalties for non-compliance. Further, a significant number of states require that customers be notified if a security breach
results in the disclosure of their personal financial 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. The effects of these new and evolving laws, regulations, and
other obligations potentially are far-reaching and may require us to further modify our data processing practices and policies and to incur substantial costs
and expenses in an effort to comply.
In addition, if we choose to expand our business internationally in the future, we may be subject to international privacy, data protection, consumer
protection and other laws and regulations, which in some cases are more restrictive than those in the United States. For example, the European Union
traditionally has imposed stricter obligations under such laws than the United States. Consequently, any future expansion of our international operations
may require changes to the ways we collect and use consumer information. In the ordinary course of our business, we collect and utilize proprietary and
customer information and
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data. As a result, we have developed systems that are designed to protect consumer information and prevent fraudulent transactions and other security
breaches. 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, financial 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. Failure to prevent or mitigate fraudulent payment transactions or security 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 fraudulently charged amounts. Furthermore, widespread credit card fraud may lessen our customers’
willingness to purchase our products on our website.
Risks Related to Intellectual Property
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 confidentiality 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 into the market. Our precautions may
not prevent misappropriation of our intellectual property by state actors, competitors, or individuals or groups that are or are not affiliated with the
Company. 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
sufficiently 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 significantly 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 have to 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.
Changes in consumer preferences could negatively impact our operating results.
Risks Related to Our Industry
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 fitness regimens, such as low
carbohydrate diets, appetite suppressants and medically supported weight loss initiatives, including weight loss medications, such as GLP-1s. Changes in
consumer tastes and preferences away from our pre-packaged food and support and coaching services, and any failure to provide innovative responses to
these changes, may have a materially adverse impact on our business, financial condition, operating results, cash flows 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.
Consumer’s increased attention to recent developments, innovations, and FDA approvals of weight loss medications, and the perception of their safety,
effectiveness, and ease of use, may also reduce consumer engagement in our offering. Consumer’s purchasing decisions are highly subjective and can be
influenced by many factors, such as perception of the ease of use and
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efficacy of the service and product offerings as well as brand image or reputation, marketing programs, cost, social media presence and sentiment,
consumer trends, personalization, the digital platform, and user experience. Moreover, consumers can, and frequently do, change approaches easily.
We anticipate competition from other companies that provide telehealth services associated with weight management, and certain of these competitors have
greater financial and other resources than us and have operations in therapeutic or other areas where we may seek to expand in the future.
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 or investigative 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 confidence 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 regulations. Certain federal and state agencies, such as the FTC and the U.S. states’
consumer protection agencies, 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
2009, the FTC promulgated nonbinding Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Endorsement Guides”) which
explained what endorsement practices the FTC views as being unfair or deceptive acts or practices. In 2020, the FTC sought public comments on whether
the Endorsement Guides should be amended. The last time the FTC sought similar public comments led to a major revision of the Endorsement Guides.
Consequently, the FTC could bring an enforcement action based on practices that are inconsistent with the current Endorsement Guides as it considers
revisions. Under the current Endorsement Guides, advertisements that feature a consumer and convey his or her atypical experience with a product or
service are required to clearly disclose the typical results that consumers can generally expect. We cannot be sure that the FTC will not challenge our
advertising or other operations 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
significant 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 require us to refund amounts paid by all affected
customers or pay 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.
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The manufacture and sale of ingested products are subject to product liability claims 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 United States 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 significant 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. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for us and reduce our revenue.
Furthermore, the products we manufacture and distribute, or certain components of those products, may be subject to product recalls or other deficiencies.
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 profits.
Risks Related to the Company’s Common Stock
Actions of activist stockholders could cause us to incur substantial costs, divert management's attention and resources, and have an adverse effect
on our business.
We have been the target of activist stockholder activities in the past. If a new activist investor purchased our stock, our business could be adversely affected
because responding to proxy contests and reacting to other actions by activist stockholders can be costly and time-consuming, disruptive to our operations
and divert the attention of management and our employees. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a
consequence of activist stockholder initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors,
customers, employees, suppliers and other strategic partners, and cause our share price to experience periods of volatility or stagnation.
There can be no assurance that we will declare cash dividends in the future or in any particular amounts.
On December 13, 2023, we announced that the Company updated its capital allocation priorities following a thorough review, and decided to discontinue
the Company’s quarterly cash dividend. Our Board of Directors periodically reviews our capital allocation strategy to ensure that it is in the best interest of
our stockholders and is in compliance with all applicable laws and agreements. Our capital allocation strategy may change from time to time, and we
cannot provide any assurance that we will declare dividends in the future or in any particular amounts. The discontinuation of our dividend payments could
have a negative effect on our stock price.
Our stock price fluctuates from time to time and may fall below expectations of securities analysts and investors, and could subject us to litigation,
which may result in you suffering a loss on your investment.
The market price of the Company’s common stock may fluctuate significantly in response to a number of factors, many of which are out of our control.
These factors include: quarterly variations in operating results; changes in accounting treatments or principles; announcements by us or our competitors of
new products and services offerings; significant contracts, acquisitions, or strategic relationships; additions or departures of key personnel; any future sales
of the Company’s common stock or other securities; stock market price and volume fluctuations of publicly-traded companies; and general political,
economic and market conditions. In some future quarter our operating results may fall below the expectations of securities analysts and investors, which
could result in a decrease in the trading price of the Company’s common stock. In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results.
Provisions in our certificate 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 beneficial to our stockholders.
Provisions of our certificate 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
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shares over the then current market prices. In addition, these provisions may limit the ability of our stockholders to approve transactions that they may
deem to be in their best interests.
Our certificate 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 the Company’s 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 difficult for a
third-party to acquire, or discourage a third-party from acquiring, a majority of the Company's outstanding common stock. The issuance of a substantial
number of preferred shares could adversely affect the price of the Company’s common stock.
General Risk Factors
If we do not maintain effective internal control over financial reporting, we could fail to report our financial results accurately.
Effective internal control over financial reporting is necessary for us to provide reliable financial reports. In the future, if we identify a control deficiency
that rises to the level of a material weakness in our internal control over financial reporting, this material weakness may adversely affect our ability to
record, process, summarize and report financial information timely and accurately and, as a result, our financial statements may contain material
misstatements or omissions. If we fail to maintain effective internal control over financial reporting, we could be required to take costly and time-
consuming corrective measures, to remedy any number of deficiencies, significant deficiencies or material weaknesses, be required to restate the affected
historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by
security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in our Company and could
result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.
Our collaboration with LifeMD may not achieve the anticipated benefits.
On December 13, 2023, we announced a new strategic collaboration (the “Collaboration”) with telehealth company, LifeMD, in furtherance of our
expansion into the medically supported weight loss market, and with the expectation that the Collaboration would result in various long-term benefits to
both companies, including increase in revenue, customer acquisition increase, and longer tenure in customer retention. Achieving the anticipated benefits of
the Collaboration is subject to a number of uncertainties, including whether our business and LifeMD’s business can become integrated in an effective and
efficient manner. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues generated by
the Collaboration and diversion of management’s attention and energy away from ongoing business operations, which could have a material adverse effect
on our business or financial results.
The Collaboration’s success will depend to a substantial extent on the willingness of customers to use LifeMD’s telehealth platform. If our customers do
not perceive the benefits of LifeMD’s telehealth services, or if the Collaboration does not drive customer acquisition or retention, then our market may not
develop, or it may develop more slowly than we expect. Similarly, individual and healthcare industry concerns could limit acceptance of LifeMD’s
healthcare services. If any of these occur, it could have a material adverse effect on the success of the collaboration.
Finally, if LifeMD terminates its agreement with us, we may find it more difficult to attract new collaborators and our perception in the marketplace could
be adversely affected.
Our Collaboration with LifeMD could open us up to additional risks.
The Collaboration may pose a number of risks, including: LifeMD has discretion in determining the efforts and resources that they will apply; LifeMD may
not perform their obligations as expected; and LifeMD may fail to comply with applicable regulatory requirements.
Healthcare professionals providing telehealth services have become subject to a number of lawsuits alleging malpractice and some of these lawsuits may
involve large claims and significant defense costs. Through the Collaboration, it is possible that these claims could also be asserted against us or our
independent OPTAVIA Coaches and include us as an additional defendant.
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We could incur reputational harm or negative publicity in relation to an adverse event involving a LifeMD healthcare provider.
Additionally, a number of laws and regulations govern anti-kickbacks, physician self-referrals, and the business of advertising, promotion, dispensing, and
marketing services, products, and pharmaceuticals. These regulatory regimes are overseen by state and federal level governmental bodies, including the
FDA, the U.S. Department of Health and Human Services (“HHS”), and the FTC. Through the Collaboration, failure to comply with the laws and
regulations of these governmental agencies may result in legal or other enforcement actions, including orders to cease non-compliant activities. There can
be no assurance that we will not be subject to state, federal or foreign government actions or class action lawsuits, which could harm our business, financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Overview
Organizations across the globe are experiencing cybersecurity incidents at an increasing rate, and cybersecurity threats are increasingly sophisticated and
constantly evolving. We have developed and maintained policies, procedures, and controls to mitigate material risks from cybersecurity threats, and assess
and disclose information to investors concerning material cybersecurity incidents. These risks are evaluated on an ongoing basis as part of our overall risk
management strategy. As discussed in more detail below, we have policies and procedures in place to safeguard our information systems, monitor these
systems, protect the confidentiality and integrity of our data, train and raise awareness of cybersecurity threats amongst employees, detect intrusions into
our systems, and respond to cybersecurity incidents. Despite these efforts, no system is impenetrable, and we cannot provide assurances that we will
prevent every attack or detect every incident timely.
Risk Management and Strategy
We have established processes for assessing, identifying, and managing material risks from cybersecurity threats and have integrated these cybersecurity
processes into our overall risk management system. Specifically, we have adopted a cybersecurity framework that, where appropriate, aligns with the
NIST's Cybersecurity Framework, and we have maintained systems that, where appropriate, are PCI compliant under current standards.
We regularly review our Incident Response Plans to ensure readiness if and when an incident does occur, including through live testing via planned and
surprise tabletop exercises. In the event of a cybersecurity incident, if a system does become non-operational, we maintain disaster recovery capabilities to
return to normal operation in a timely manner.
Our cybersecurity processes to assess and identify cybersecurity risks includes periodic risk assessments, deployment of security monitoring tools for
continuous monitoring of our information systems, periodic testing for vulnerabilities in our systems, periodic testing of employees’ cybersecurity
awareness, receiving cybersecurity alerts, among other procedures. Our Information Security (“IS”) department, which reports to the Vice President,
Information Security, evaluates cybersecurity risks and works to design and ensure implementation of appropriate controls and safeguards in alignment
with our business objectives and operational needs. Management periodically reviews cybersecurity risks as part of the overall risks to the company as part
of the enterprise risk management program. This review helps in identifying areas for improvement and ensuring the alignment of cybersecurity efforts
with the overall risk management framework.
We engage various third parties to assess, test, or assist with the implementation of our risk management strategies, policies, and procedures to enhance our
detection and management of cybersecurity risks, including but not limited to: consultants who assist with assessing risks, assist with our PCI compliance
assessments, assess our systems alignment with the NIST Cybersecurity Framework, and test and/or scan for vulnerabilities.
We rely on software, hardware, and network systems, including cloud-based technology, that are either developed by us or licensed from or maintained by
third parties to maintain operations. In the ordinary course of our business, we collect and utilize proprietary and customer information and data. We utilize
systems designed to protect customer information and prevent fraudulent transactions and other security breaches. We rely on third-party software products
to secure our credit card transactions.
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Furthermore, we maintain a process to evaluate and manage risks associated with third-party service providers. We conduct cybersecurity assessments of
our key vendors before engagement, maintain continued monitoring during the engagement, and maintain the ability to discontinue our engagement with a
key vendor if their cybersecurity posture fails to meet pre-established standards.
The Company, from time to time, experiences or is subject to a variety of incidents that arise during the ordinary course of its business. As of the date of
this report and based upon the Company’s experience, current information, and applicable laws, we do not believe that these incidents are material, or will
have or have had a material adverse effect on business strategy, results of operations, or financial position. However, future cybersecurity incidents could
materially affect our strategy, results of operations, or financial condition. See Item 1A. Risk Factors for additional information on how risks could
materially affect the company.
Governance
The Board of Directors has responsibility for oversight and approval of our cybersecurity risk management processes, and the Board has established an
oversight mechanism for cybersecurity risks.
Senior executives provide the Board of Directors with quarterly updates concerning cybersecurity risks and the Company’s cybersecurity strategies and
objectives. In addition, members of management briefed on specific issues attend Board meetings to provide additional insight into the specific issues being
discussed, including risk exposure.
The Board works with our senior executives in reviewing the cybersecurity risks and strategy, provides guidance on the Company’s cybersecurity goals and
objectives, and monitors the information it receives from management regarding the assessment and management of cybersecurity risk. If a significant
cybersecurity incident occurs, it will be reported promptly to the Board near the time of discovery.
The IS department is charged with monitoring risks, implementing controls, developing information security policies and procedures, and assessing cyber
events. On a day-to-day basis, IS informs the Vice President, Information Security concerning cybersecurity risks and events, including any mitigation and
remediation efforts. Our Vice President, Information Security joined the Company in September 2022, and is responsible for approving IS policies and
procedures, implementing controls, monitoring and detection programs, and employee training on cybersecurity risks, and reports cybersecurity risks and
strategies directly to executive leadership. He has over a decade of security experience, received his Master of Science in Computer Information and
Information Systems Security/Information Assurance from Norwich University, and holds various certifications including Certified Ethical Hacker (CEH)
and Certified Information Systems Security Professional (CISSP).
Cybersecurity incidents are escalated to the cybersecurity incident response team ("CIRT") who is responsible for overseeing our incident response
strategy, including remediation. Significant cybersecurity incidents are escalated to the Company’s Incident Response Materiality Assessment Committee
(“IRMAC”) that assesses and evaluates whether the incident is material using criteria based on our enterprise risks. This committee is comprised of a cross-
functional team that consists, in part, of employees at the management level and members of the executive team. As noted above, if a significant
cybersecurity incident occurs, it will be reported promptly to the Board on an ad hoc and as-needed basis. Otherwise, management reports cybersecurity
risks and developments to the Board quarterly.
ITEM 2. PROPERTIES
The Company leases office space in Baltimore, Maryland which serves as our corporate headquarters. The corporate headquarters’ lease expires in
February 2026. In January 2020, the Company entered into a lease for a satellite office in Lehi, Utah, which expires in December 2026. In May 2021, the
Company entered into a lease for our product innovation research center in Owings Mills, Maryland. The product innovation research center lease expires
in February 2029.
The Company owns a 49,000 square-foot manufacturing facility in Owings Mills, Maryland, and a 119,000 square-foot distribution facility in Ridgley,
Maryland. The Company outsources a domestic distribution center in Haltom City, Texas. In April 2021, the Company entered into a lease for a
distribution center in Havre De Grace, Maryland. The distribution center lease expires in August 2026. In 2023, the Company exited it contracts and
terminated its relationships with its outsourced distribution centers in Reno, Nevada and in Hong Kong.
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ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to a variety of litigation and similar proceedings that arise out of the ordinary course of 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, financial position, or liquidity. However, the results of legal actions cannot be predicted with certainty. Therefore, it is
possible that the Company’s results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the
unfavorable resolution of one or more legal actions.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
PART II
The Company’s common stock is listed and traded on the NYSE under the ticker symbol “MED.”
Dividends
While historically the Company has declared and paid dividends on the Company’s common stock, in December 2023, it announced the discontinuation of
dividends to support investments in technology and future growth. Declaration and payment of dividends on the Company’s common stock are subject to
the discretion of our board of directors and compliance with applicable laws. The decision to declare and pay dividends in the future will depend on general
business conditions, the effect of such payments on our financial condition and other factors the Company’s board of directors consider relevant.
Holders
There were approximately 68 record holders of the Company’s common stock as of February 6, 2024. This number does not include beneficial owners of
our securities held in the name of nominees.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information regarding
securities authorized for issuance under our equity compensation plans, which information is incorporated herein by reference.
Issuer Purchases of Equity Securities
The following table provides information about the Company’s repurchases of common stock for the three months ended December 31, 2023:
2023
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total Number of
Shares Purchased
(1)
Average Price
Paid per Share
Total Number of Shares Purchased as
Part of a Publicly Announced Plan or
Program
Maximum Number of Shares that May
Yet Be Purchased Under the Plans or
Programs
(2)
114 $
—
—
74.19
—
—
—
—
—
1,323,568
1,323,568
1,323,568
____________________
(1) Also included are shares of common stock surrendered by employees and directors to the Company to cover minimum tax liability withholding obligations upon the exercise of stock
options or the vesting of shares of restricted stock previously granted to such employees and directors.
(2) At the outset of the quarter ended December 31, 2023, there were 1,323,568 shares of the Company's common stock eligible for repurchase under the repurchase authorization dated
September 16, 2014 (the "Stock Repurchase Plan").
As of December 31, 2023, there were 1,323,568 shares of the Company’s common stock eligible for repurchase under the Stock Repurchase Plan. There
can be no assurances as to the amount, timing or prices of repurchases, which may vary based on market conditions and other factors. The Stock
Repurchase Plan does not have an expiration date and can be modified or terminated by the Board of Directors at any time.
Performance Graph
The following line graph compares the yearly percentage change in the Company’s cumulative total stockholder return (Common Stock price appreciation
plus dividends, on a reinvested basis) for the last five fiscal years to that of the Standard & Poor’s 600 Consumer Staples Index and the Company’s selected
peer group. The 2022 Peer Group included 1-800-flowers.com Inc., Blue Apron Holdings Inc., Duluth Holdings Inc., Farmer Brothers Company, Herbalife
Nutrition Ltd., Inter Parfums Inc., Nature’s Sunshine Products Inc., Nu Skin Enterprises Inc., Simply Good Foods Co., Tupperware Brands Corp., USANA
Health
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Sciences Inc., WW International, Inc., The Hain Celestial Group, Inc., and Edgewell Personal Care Company. The 2023 Peer Group includes 1-800-
flowers.com Inc., Duluth Holdings Inc., Herbalife Nutrition Ltd., Inter Parfums Inc., Nu Skin Enterprises Inc., Simply Good Foods Co., Tupperware
Brands Corp., USANA Health Sciences Inc., WW International, Inc., The Hain Celestial Group, Inc., Edgewell Personal Care Company, B&G Foods, Inc.,
Etsy, Inc., McCormick & Company, Inc., and Spectrum Brand Holdings, Inc.
Medifast, Inc.
Benchmarking Peer Group
S&P 600 Consumer Staples
2019
2020
2021
2022
2023
$
90.27 $
102.27
116.90
168.05 $
145.68
129.93
183.79 $
161.75
167.35
106.02 $
108.46
156.52
65.38
103.06
179.98
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Our
significant accounting policies are described in Note 2 to the consolidated financial statements.
The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on
various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions
or conditions. Management considers the following accounting policies to be the most critical in preparing our consolidated financial statements. These
critical accounting policies have been discussed with our Audit Committee, as appropriate.
Revenue Recognition: Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight
management, and other healthy living products. Prior to a change in our Customer Terms & Conditions (Customer T&Cs) in the first quarter of 2023,
revenue was recognized upon receipt by the customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to
loyalty programs, and estimated returns. Upon the change of our Customer T&Cs, revenue is now recognized upon delivery to the shipping carrier and net
of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. The impact of this
change to the quarter ended March 31, 2023 was an increase of approximately $9.1 million in revenue and $2.8 million of income from operations.
Revenue is recognized when control of the promised products is transferred to our customers, in an amount that reflects the consideration we expect to be
entitled to in exchange for transferring those products. When determining whether the customer has obtained control of the products, we consider any
future performance obligations.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards
Codification ("ASC") 606, Revenue from Contracts with Customers. A contract’s transaction price is allocated to each distinct performance obligation and
recognized as revenue when, or as, each performance obligation is satisfied. Our contracts have performance obligations to fulfill and deliver products from
the point of sale transaction along with the related customer reward programs.
Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially
all of our revenue for the years ended December 31, 2023, 2022, and 2021. Revenue on these contracts is recognized when the obligations under the terms
of the contract with our customer are satisfied.
Our return policy allows for customer returns of consumable products from the time of order until 30 days following the date of receipt, and upon our
authorization. We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to customers. We estimate
expected returns based on historical levels and project this experience into the future.
Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to acquire additional products at a discount
can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements, and promotions.
We reduce the transaction price for customer reward programs and certain incentive offerings including pricing arrangements, promotions, and incentives
that represent variable consideration and separate performance obligations. The Company accounts for sales rewards that provide the customer with a
material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the
customer reward program and incentive offering.
Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and are recorded as revenue in
our Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the Company for the
delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in our Consolidated Statements of Income.
We expense OPTAVIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned. These costs are recorded
in selling, general and administrative expense in our Consolidated Statements of Income.
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Long-lived Asset Impairment: 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 flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Income Taxes: 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.
The benefit of a tax position is recognized in the consolidated financial 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 benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in
our Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.
BACKGROUND
Medifast is the health and wellness company known for its habit-based and coach-guided lifestyle solution OPTAVIA, which provides people with a
simple, yet comprehensive approach to help them achieve lasting optimal health and wellbeing. OPTAVIA's lifestyle plans deliver clinically proven health
benefits, and our program includes evidence-based tools, including scientifically developed products and a framework for habit creation reinforced by
independent Coaches and Community support. As a physician-founded company with a 40+ year history, Medifast is a leader in the U.S. weight
management industry. In early January 2024, through a collaboration with the national virtual primary care provider LifeMD, OPTAVIA customers will
have access to board-certified affiliated clinicians and medications, such as GLP-1s, that support treatment plans for obesity and other health conditions.
The Company is entering into the medically supported weight loss area and continues to innovate and build upon its scientific and clinical heritage to fulfill
its mission of offering the world Lifelong Transformation, One Healthy Habit at a Time. Medifast was recognized in 2023 by Financial Times as one of
The Americas' Fastest Growing Companies and in 2022 as one of America's Best Mid-Sized Companies by Forbes. Our product sales accounted for
approximately 97.5%, 97.2% and 98.0% of our revenues in each of 2023, 2022, and 2021, respectively. We review and analyze a number of key operating
and financial metrics to manage our business, including the number of active earning OPTAVIA Coaches and average quarterly revenue generated per
active earning OPTAVIA Coach. The number of active earning OPTAVIA Coaches decreased by approximately 32.5% to 41,100 as of December 31,
2023 from December 31, 2022, and the average revenue per active earning OPTAVIA Coach was $4,648 for the quarter ended December 31, 2023.
Our OPTAVIA business unit accounted for approximately 100%, 100%, and 99.9% of our revenues in 2023, 2022 and 2021, respectively. We have
operated and reported as a single sales segment, OPTAVIA, since 2018. By maintaining our commitment to building capabilities in the areas that matter
most to our OPTAVIA Coaches and customers within the OPTAVIA channel, we believe our strong financial foundation, flexible model and variable cost
structure coupled with disciplined growth initiatives position Medifast for the current environment and the future.
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CONSOLIDATED RESULTS OF OPERATIONS - 2023 COMPARED TO 2022
The following table reflects our consolidated statements of income for the years ended December 31, 2023 and 2022 (in thousands, except percentages):
2023
2022
$ Change
% Change
Revenue
Cost of sales
Gross Profit
$
1,072,054 $
296,204
775,850
1,598,577 $
458,163
1,140,414
(526,523)
(161,959)
(364,564)
Selling, general, and administrative
649,448
955,608
(306,160)
Income from operations
126,402
184,806
(58,404)
Other income (expense)
Interest income (expense)
Other (expense) income
2,490
(95)
2,395
(701)
(46)
(747)
3,191
(49)
3,142
Income before provision for income taxes
128,797
184,059
(55,262)
Provision for income taxes
29,382
40,491
(11,109)
Net income
$
99,415 $
143,568 $
(44,153)
% of revenue
Gross Profit
Selling, general, and administrative
Income from Operations
72.4%
60.6%
11.8%
71.3%
59.8%
11.6%
(32.9)%
(35.3)%
(32.0)%
(32.0)%
(31.6)%
455.2 %
106.5%
420.6 %
(30.0)%
(27.4)%
(30.8)%
Revenue: Revenue decreased $526.5 million, or 32.9%, to $1.072 billion in 2023 from $1.599 billion in 2022. The year-over-year decline in revenue was
primarily driven by a decrease in the number of active earning OPTAVIA Coaches and lower productivity per active earning OPTAVIA Coach, partially
offset by a pricing adjustment in the fourth quarter of 2022 and a $9.1 million impact from a timing difference related to changes in the Company’s sales
order terms and conditions with its customers in the first quarter. The total number of active earning OPTAVIA Coaches for the three months ended
December 31, 2023 decreased to 41,100 from 60,900 for the corresponding period in 2022, a decrease of 32.5%. The average revenue per active earning
OPTAVIA Coach decreased 16.1% to $4,648 for the three months ended December 31, 2023 from $5,538 for the three months ended December 31, 2022.
Decrease in the revenue per active earning OPTAVIA Coach for the quarter was driven by continued pressure on customer acquisition rates through the
fourth quarter.
Costs of Sales: Cost of sales decreased $162.0 million, or 35.3%, to $296.2 million in 2023 from $458.2 million in 2022. This decrease in cost of sales was
primarily driven by decreased volumes and the restructuring of certain external manufacturing agreements in 2022, partially offset by higher product costs
resulting from inflationary pressures on raw ingredient costs, shipping costs, and labor costs.
Non-GAAP adjusted cost of sales were $296.2 million for 2023, a decrease of $149.8 million, or 33.6%, as compared to $446.0 million for 2022. Non-
GAAP adjusted cost of sales excludes expenses in connection with the restructuring of certain external manufacturing agreements of $12.2 million for
2022. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most
comparable GAAP financial measure.
Gross Profit: In 2023, gross profit decreased $364.6 million, or 32.0%, to $775.9 million from $1.140 billion in 2022. The decrease in gross profit was
primarily attributable to lower revenue as well as cost inflation from raw ingredient costs, shipping
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costs, and labor costs, partially offset by restructuring costs of certain manufacturing agreements in 2022. As a percentage of sales, gross profit increased
110 basis points to 72.4% for 2023 from 71.3% for 2022. The increase in gross margin percentage was primarily due to cost savings from the Company's
Fuel for the Future program and restructuring costs of certain manufacturing agreements 2022.
Non-GAAP adjusted gross profit was $775.9 million for 2023, a decrease of $376.8 million, or 32.7%, as compared to $1.153 billion for 2022.
Selling, General and Administrative: Selling, general and administrative (“SG&A”) expenses were $649.4 million in 2023, a decrease of $306.2 million,
or 32.0%, as compared to $955.6 million in 2022, primarily due to decreased Coach compensation on lower volumes and fewer active earning Coaches,
progress on several cost reduction and optimization initiatives, and charitable donations in 2022, partially offset by market research and investment costs
related to medically supported weight loss activities. As a percentage of sales, SG&A expenses were 60.6% for 2023 as compared to 59.8% for 2022,
primarily due to the loss of leverage on fixed costs due to lower sales volumes when compared to 2022 and market research and investment costs related to
medically supported weight loss activities, partially offset by progress on several cost reduction and optimization initiatives and charitable donations in
2022. SG&A expenses included research and development costs of $4.6 million and $4.5 million for 2023 and 2022, respectively, in connection with the
development of new products and programs and clinical research activities.
Non-GAAP adjusted SG&A expenses were $641.9 million for 2023, a decrease of $294.7 million, or 31.5%, as compared to $936.6 million for 2022. Non-
GAAP adjusted SG&A expenses for 2023 exclude expenses in connection with the Company's IT and supply chain optimization and costs for the
Collaboration. Non-GAAP adjusted SG&A expenses for 2022 exclude expenses in connection with donations made to support to Ukrainian relief effort of
$19.0 million for 2022. Refer to the section titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to
its most comparable GAAP financial measure.
Income from operations: Income from operations in 2023 decreased $58.4 million to $126.4 million from $184.8 million in 2022 primarily as a result of
decreased gross profit, partially offset by decreased SG&A expenses. Income from operations as a percentage of sales increased to 11.8% for 2023 as
compared to 11.6% for 2022 due to the factors described above in the explanations from gross profit and SG&A expenses.
Non-GAAP adjusted income from operations in 2023 decreased to $134.0 million from $216.0 million in 2022. Refer to the section titled “Non-GAAP
Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
Provision for income taxes: For 2023, the Company recorded $29.4 million in income tax expense, an effective tax rate of 22.8%, as compared to $40.5
million in income tax expense and an effective tax rate of 22.0%, for 2022. The increase in the effective tax rate for 2023 as compared to 2022 was
primarily driven by a decrease in the charitable contribution benefit and an increase in the limitation for executive compensation, partially offset by an
increase in the research and development benefit and a decrease in state taxes.
Non-GAAP adjusted income tax provision was $31.1 million for 2023, an effective tax rate of 22.8%, compared to $51.8 million in 2022, an effective tax
rate of 24.1%, primarily due to the decrease in state taxes and the impact of charitable donations. Refer to the section titled “Non-GAAP Financial
Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial measure.
Net income: Net income was $99.4 million, or $9.10 per diluted share, in 2023 as compared to $143.6 million, or $12.73 per diluted share, in 2022. The
period-over-period changes were driven by the factors described above in the explanations from operations.
Non-GAAP adjusted net income was $105.2 million or $9.64 per diluted share for 2023 as compared to $163.5 million or $14.50 per diluted share for
2022. The period-over-period changes were driven by the factors described above in the Non-GAAP explanations from operations. Refer to the section
titled “Non-GAAP Financial Measures” below for a reconciliation of each of Non-GAAP financial measures to its most comparable GAAP financial
measure.
Additionally, refer to Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2022 for management’s discussion and analysis of financial condition and results of operations for the fiscal year
2022 compared to fiscal year 2021.
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Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding our results as determined by GAAP, we disclose various non-GAAP financial
measures in our quarterly reports, our quarterly earnings press releases and other public disclosures. The following GAAP financial measures have been
presented for 2023 on an as-adjusted basis: cost of sales, gross profit, SG&A expenses, income from operations, other income (expense), provision for
income taxes, net income and diluted earnings per share. Each of these as-adjusted financial measures for 2023 excludes the impact of certain amounts
related to the Company IT and supply chain optimization efforts and collaboration costs to stand up the LifeMD relationship, as further identified below
and have not been calculated in accordance with GAAP. A reconciliation of each of these non-GAAP financial measures to its most comparable GAAP
financial measure is included below. These non-GAAP financial measures are not intended to replace GAAP financial measures.
We use these non-GAAP financial measures internally to evaluate and manage the Company’s operations because we believe they provide useful
supplemental information regarding the Company’s on-going economic performance. We have chosen to provide this information to investors to enable
them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.
The following tables reconcile the non-GAAP financial measures included in this report (in thousands, except per share amounts):
$
$
Cost of sales
Gross profit
Selling, general, and administrative
Income from operations
Other income
Provision for income taxes
Net income
Diluted earnings per share
(1)
Cost of sales
Gross profit
Selling, general, and administrative
Income from operations
Other expense
Provision for income taxes
Net income
Diluted earnings per share
(1)
GAAP
IT and Supply Chain
Optimization
LifeMD Collaboration
Costs
(2)
Non-GAAP
Year Ended December 31, 2023
296,204 $
775,850
649,448
126,402
2,395
29,382
99,415
9.10
GAAP
458,163 $
1,140,414
955,608
184,806
(747)
40,491
143,568
12.73
— $
—
(2,555)
2,555
—
583
1,972
0.18
— $
—
(5,000)
5,000
—
1,141
3,859
0.35
296,204
775,850
641,893
133,957
2,395
31,106
105,246
9.64
Year Ended December 31, 2022
Donation
Adjustments
Restructuring of External
Manufacturing Agreements
Non-GAAP
— $
—
(18,986)
18,986
—
8,544
10,442
0.93
(12,195) $
12,195
—
12,195
—
2,744
9,451
0.84
445,968
1,152,609
936,622
215,987
(747)
51,779
163,461
14.50
(1) The weighted-average diluted shares outstanding used in the calculation of these non-GAAP financial measures are the same as the weighted-average
shares outstanding used in the calculation of the reported per share amounts.
(2) We expect the remaining $5.0 million of LifeMD Collaboration Costs to be recorded in 2024.
Liquidity and Capital Resources
The Company had stockholders’ equity of $201.5 million and working capital of $131.7 million at December 31, 2023 compared with $155.0 million and
$81.9 million at December 31, 2022. The $46.4 million net increase in stockholders’ equity
37
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reflects $99.4 million in net income for 2023 offset by $3.6 million spent on repurchases of common stock and $54.6 million for dividends paid to holders
of the Company’s common stock as well as the other equity transactions described in the Consolidated Statements of Changes in Stockholders’ Equity
included in our consolidated financial statements included in this report. The Company’s cash, cash equivalents and investment securities increased to
$150.0 million at December 31, 2023 from $87.7 million at December 31, 2022. In December 2023, the Company’s board of directors determined to
change the Company’s capital allocation priorities and discontinued the Company’s quarterly cash dividend to support investments in technology and future
growth. The decision to declare and pay dividends in the future will depend on general business conditions, the effect of such payments on our financial
condition and other factors the Company’s board of directors consider relevant.
Net cash provided by operating activities decreased $46.9 million to $147.7 million for 2023 from $194.6 million for 2022 primarily as a result of a $44.2
million decrease in net income and adjustments to reconcile net income to cash provided by operating activities.
Net cash used in investing activities was $61.0 million for 2023 as compared to $11.4 million for 2022. This year-over-year change resulted primarily from
a $54.6 million increase in cash used in the purchase of investment securities for 2023 as compared to 2022. Cash used in capital expenditures for 2023
expanded our technology and supply chain capabilities to support our planned growth.
Net cash used in financing activities decreased $119.8 million to $79.8 million for 2023 from $199.6 million for 2022. This decrease was primarily due to a
$122.8 million decrease in stock repurchases, partially offset by a $1.8 million increase in net shares repurchased for employee taxes and a $1.4 million
increase in cash dividends paid to stockholders.
In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash
requirements, if any, to be funded from operating cash flow and financing activities.
From time to time the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of
our working capital or require the issuance of equity or debt. We have no present understandings, commitments or agreements with respect to any material
acquisitions.
On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement among the Company, the
Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to
increase the borrowing capacity and convert the interest rate to be based on SOFR, from LIBOR (the “Amended Credit Agreement”). The Amended Credit
Agreement provides for a $225.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit
Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured
revolving credit facility by up to $100.0 million. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to
credit facilities. As of December 31, 2023, the Company had no borrowings under the credit facility and was in compliance with all of its debt covenants.
Contractual Obligations and Commercial Commitments
The Company had the following contractual obligations with a remaining term in excess of one year as of December 31, 2023 (in thousands):
Operating leases
Unconditional purchase obligations
(a)
(b)
Total contractual obligations
____________________
2024
2025 - 2026
2027 - 2028
Thereafter
Total
$
6,312 $
47,041
53,353
11,245 $
22,186
33,431
5,171 $
2,955
8,126
240 $
—
240
22,968
72,182
95,150
(a) The Company has operating leases in place for leased corporate offices, warehouses, and certain equipment.
(b) The Company has unconditional purchase obligations primarily for inventories, outsourced information technology and Coach events.
INFLATION
During 2023, the Company's business experienced a certain amount of inflation impact on raw ingredient, freight and supply chain labor. The Company
previously increased sales prices for most of its products in November 2022 by an average of approximately 4.5%.
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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 financial instruments for trading or speculative purposes other than
strategic investments.
The Company is exposed to market risk related to changes in interest rates and market pricing impacting our credit facility and investment in money market
securities, government and agency securities, and corporate bonds. Other than for strategic investments, its current investment policy is to maintain an
investment portfolio consisting of corporate bonds and U.S. money market securities directly or through managed funds. Its cash is deposited in and
invested through highly rated financial institutions in North America. Its marketable securities, purchased during 2023, are subject to interest rate risk and
market pricing risk and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market
pricing were to decrease immediately and uniformly by 10% from levels at December 31, 2023, the Company estimates that the fair value of its investment
portfolio would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant
degree by the effect of a change in market conditions on our investments.
The Company is exposed to market risk related to price fluctuations in equity markets related to its investment in LifeMD common stock, purchased in
December of 2023. If equity prices were to decrease immediately and uniformly by 10% from levels at December 31, 2023, the Company estimates that the
fair value of the Company investment would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be
affected by any significant degree by the effect of a change in market conditions on our investment.
As of December 31, 2023, the Company did not have any outstanding borrowings.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDIFAST, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 49)
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to Consolidated Financial Statements
40
41
44
45
46
47
48
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Medifast, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Medifast, Inc.’s (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, 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) (PCAOB), the consolidated
balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for the three years in the period ended December 31, 2023, and the related notes to the consolidated financial
statements of the Company and our report dated February 20, 2024 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting 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 financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial 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 (3) 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 financial
statements.
Because of its inherent limitations, internal control over financial 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.
/s/ RSM US LLP
Baltimore, Maryland
February 20, 2024
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Medifast, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Medifast, Inc. (the Company) as of December 31, 2023 and 2022, the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations
and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of December 31, 2023, 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 February 20, 2024 expressed an unqualified opinion
on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical
audit matter or on the accounts or disclosures to which they relate.
Income Taxes
As described in Notes 2 and 11 of the financial statements, the Company operates in multiple markets in the U.S. and internationally using an e‑commerce
platform and a direct selling network of OPTAVIA Coaches. The Company’s provision for income taxes is impacted based on interpretations of U.S.
federal and various state and local income tax laws. Management prepared the Company’s provision for income taxes using significant judgment when
interpreting the provisions of Treasury and state and local tax regulations and assessing the positions taken as a result of these considerations as to whether
or not the amount of benefit recorded would be more‑likely‑than‑not to be sustained upon examination.
We identified the evaluation of the Company’s provision for income taxes as a critical audit matter due to the significant judgments made by management
when assessing the complex provisions of the tax laws and regulations. Auditing the matter required significant auditor judgment and increased audit effort,
including use of our tax specialists, in evaluating the recorded results of management’s tax positions and their assessment of the sustainability of these tax
positions.
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Our audit procedures related to the Company’s provision for income taxes included the following, among others:
We obtained an understanding of the relevant controls related to the determination of current and deferred taxes and tested such controls for design
•
and operating effectiveness, including controls related to the interpretation and application of tax laws.
•
We involved our specialized tax professionals to assist in evaluating the application of Treasury regulations and state and local tax regulations. Our
specialists considered the interpretations of Treasury regulations, state and local tax positions, and other tax positions requiring significant judgement, made
an independent assessment of such positions and related calculations and then compared them to the Company’s recorded positions.
We tested the accuracy and completeness of the data and inputs used to calculate the effective federal and state tax rate, current provision
•
calculations and deferred tax assets/liabilities.
/s/ RSM US LLP
We have served as the Company's auditor since 2010.
Baltimore, Maryland
February 20, 2024
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Revenue
Cost of sales
Gross profit
Selling, general, and administrative
Income from operations
Other income (expense)
Interest income (expense)
Other (expense) income
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share - basic
Earnings per share - diluted
Weighted average shares outstanding
Basic
Diluted
Cash dividends declared per share
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2023, 2022 and 2021
(U.S. dollars in thousands, except per share amounts & dividend data)
2023
2022
2021
1,072,054 $
296,204
775,850
1,598,577 $
458,163
1,140,414
1,526,087
398,490
1,127,597
649,448
955,608
911,356
126,402
184,806
216,241
2,490
(95)
2,395
(701)
(46)
(747)
(231)
119
(112)
128,797
184,059
216,129
29,382
40,491
52,098
99,415 $
143,568 $
164,031
9.13 $
12.82 $
9.10 $
12.73 $
10,884
10,921
11,195
11,276
14.01
13.89
11,705
11,813
4.95 $
6.56 $
5.68
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
44
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MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2023, 2022 and 2021
(U.S. dollars in thousands)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation
Unrealized gains (losses) on investment securities
Other comprehensive income (loss)
Comprehensive income
2023
2022
2021
$
$
99,415 $
143,568 $
164,031
(72)
296
224
(67)
(20)
(87)
112
(42)
70
99,639 $
143,481 $
164,101
The accompanying notes are an integral part of these consolidated financial statements.
45
Table of Contents
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2023 and 2022
(U.S. dollars in thousands, except par value)
ASSETS
Current Assets
Cash and cash equivalents
Inventories
Investments
Income taxes, prepaid
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment - net of accumulated depreciation
Right-of-use assets
Other assets
Deferred tax assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses
Income taxes payable
Current lease obligations
Total current liabilities
Lease obligations, net of current lease obligations
Total liabilities
Commitments (Note 12)
Stockholders' Equity
Common stock, par value 0.001 per share: 20,000 shares authorized;
10,896 and 10,928 issued and 10,896 and 10,873 outstanding
at December 31, 2023 and December 31, 2022, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Less: treasury stock at cost, 0 and 54 shares at December 31, 2023 and December 31, 2022, respectively
Total stockholders' equity
2023
2022
$
94,440 $
54,591
55,601
8,727
10,670
224,029
51,467
15,645
14,650
4,117
87,691
118,856
—
—
16,237
222,784
57,185
18,460
12,456
5,328
$
$
309,908 $
316,213
86,415 $
—
5,885
92,300
16,127
108,427
11
26,573
248
174,649
—
201,481
134,690
428
5,776
140,894
20,275
161,169
11
21,555
24
139,852
(6,398)
155,044
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
309,908 $
316,213
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2023, 2022 and 2021
(U.S. dollars in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization
Non-cash lease expense
Share-based compensation
Loss on sale or disposal of property, plant and equipment
Amortization of (discount) premium on investment securities
Deferred income taxes
Unrealized gain on equity investment securities
Change in operating assets and liabilities:
Inventories
Income taxes
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Net cash flow provided by operating activities
Investing Activities
Purchase of investment securities
Sale and maturities of investment securities
Purchase of property and equipment
Net cash flow used in investing activities
Financing Activities
Options exercised by executives and directors
Net shares repurchased for taxes
Cash dividends paid to stockholders
Stock repurchases
Net cash flow used in financing activities
Foreign currency impact
Increase (Decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of the period
Cash and cash equivalents - end of period
Supplemental disclosure of cash flow information
Income taxes paid
Dividends declared included in accounts payable
2023
2022
2021
$
99,415 $
143,568 $
164,031
10,980
6,098
11,053
2,130
14
(924)
—
61,187
1,373
97
(3,412)
(37,594)
194,570
—
5,267
(16,681)
(11,414)
—
(1,516)
(71,620)
(126,445)
(199,581)
6,812
5,069
9,903
2
89
(3,715)
—
(126,651)
(945)
(9,887)
(4,543)
54,380
94,545
—
5,145
(34,209)
(29,064)
811
(6,089)
(63,856)
(55,999)
(125,133)
(67)
112
13,107
4,607
8,188
1,172
(169)
1,211
(150)
64,265
(9,155)
5,567
(4,694)
(35,707)
147,657
(54,564)
—
(6,483)
(61,047)
188
(3,358)
(73,017)
(3,602)
(79,789)
(72)
6,749
87,691
(16,492)
104,183
$
$
$
94,440 $
87,691 $
34,255 $
1,407 $
37,212 $
19,641 $
(59,540)
163,723
104,183
56,758
17,186
The accompanying notes are an integral part of these consolidated financial statements.
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MEDIFAST, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2023, 2022 and 2021
(U.S. dollars in thousands)
Number
of Shares
Issued
Common
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Treasury
Stock
Total
Balance, January 1, 2021
11,822 $
12 $
7,842 $
41 $
154,351 $
(5,000) $
157,246
Net income
Share-based compensation
Options exercised by executives and directors
Net shares repurchased for taxes
Treasury stock from stock repurchases
Treasury stock retired from stock repurchases
Other comprehensive income
Cash dividends declared to stockholders
—
55
29
(28)
—
(284)
—
—
—
—
—
—
—
—
—
—
—
9,454
811
(6,089)
—
—
—
—
—
—
—
—
—
—
70
—
164,031
142
—
—
—
(60,999)
—
(67,192)
—
—
—
—
(55,999)
60,999
—
—
164,031
9,596
811
(6,089)
(55,999)
—
70
(67,192)
Balance, December 31, 2021
11,594 $
12 $
12,018 $
111 $
190,333 $
— $
202,474
Net income
Share-based compensation
Net shares repurchased for taxes
Treasury stock from stock repurchases
Treasury stock retired from stock repurchases
Other comprehensive income
Cash dividends declared to stockholders
—
20
(9)
—
(677)
—
—
—
—
—
—
(1)
—
—
—
11,053
(1,516)
—
—
—
—
—
—
—
—
—
(87)
—
143,568
—
—
—
(120,047)
—
(74,002)
—
—
—
(126,445)
120,047
—
—
143,568
11,053
(1,516)
(126,445)
(1)
(87)
(74,002)
Balance, December 31, 2022
10,928 $
11 $
21,555 $
24 $
139,852 $
(6,398) $
155,044
Net income
Share-based compensation
Options exercised by executives and directors
Net shares repurchased for taxes
Treasury stock from stock repurchases
Treasury stock retired from stock repurchases
Other comprehensive income
Cash dividends declared to stockholders
—
76
7
(31)
—
(84)
—
—
—
—
—
—
—
—
—
—
—
8,188
188
(3,358)
—
—
—
—
—
—
—
—
—
224
—
99,415
—
—
—
—
(10,000)
—
(54,618)
—
—
—
—
(3,602)
10,000
—
—
99,415
8,188
188
(3,358)
(3,602)
—
224
(54,618)
Balance, December 31, 2023
10,896 $
11 $
26,573 $
248 $
174,649 $
— $
201,481
The accompanying notes are an integral part of these consolidated financial statements.
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1. NATURE OF THE BUSINESS
MEDIFAST, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2023, 2022, and 2021
Medifast, Inc. (the “Company” or “Medifast”) is a Delaware corporation, incorporated in 1989. The Company’s operations are primarily conducted through
its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates,
LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD and OPTAVIA Health Consultation (Shanghai) Co.,
Ltd. Medifast is the health and wellness company known for its habit-based and coach-guided lifestyle solution OPTAVIA. The Company has one modern,
United States Food and Drug Administration (the “FDA”) approved manufacturing facility located in Owings Mills, Maryland.
Medifast sells a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the OPTAVIA,
OPTAVIA ACTIVE, and Optimal Health brands. The Company’s product line includes more than 65 consumable options, including, but not limited to,
bars, puffs, cereal, crunchers, drinks, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups. Medifast’s
nutritional products are formulated with high-quality ingredients. 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 (the “FTC”), the Consumer Product
Safety Commission, the United States Department of Agriculture, and the United States Environmental Protection Agency.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31.
Reclassification - Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation. No
reclassification in the consolidated financial statements had a material impact on the presentation.
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash on deposit in financial institutions, institutional money funds and other short-term
investments with a maturity of 90 days or less at the time of purchase. All credit card and debit card transactions that process in less than seven days are
classified as cash and cash equivalents. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $3.7 million as of
December 31, 2023, and $7.4 million as of December 31, 2022.
Concentration of Credit Risk - Our cash and cash equivalents and available-for-sale debt securities are maintained at several financial institutions and the
balances with these financial 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 financial 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 financial instruments include cash and cash equivalents, and investments in debt and equity securities. The
carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. The fair value of investments in available-for-sale debt
securities are based on third-party pricing services provided by the Company’s investment advisory firm. The fair value of investments in equity securities
with readily determinable fair values are based on the closing price on the last trading day of the period from the applicable exchange.
Inventories - Inventories consist principally of raw materials and packaged meal replacements held in the Company’s warehouses and outsourced
distribution center. Inventories are stated at the lower of cost or net realizable value, utilizing the first-in, first-out method. The cost of finished goods
includes the cost of raw materials, packaging supplies, direct and indirect
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labor, and other indirect manufacturing costs. On a quarterly basis, management reviews inventories for unsalable or obsolete inventories.
Investments - The Company’s investments consist of debt securities classified as available-for-sale securities and equity investments with readily
determinable fair values.
Available-for-sale debt 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 (loss) in stockholders’ equity. Interest and dividends on marketable debt securities are
recognized in income when declared. Realized gains and losses, if any, are included in income.
Equity investments with readily determinable fair values are those securities in which the Company has no control or significant influence and is not the
primary beneficiary. The securities are stated at fair value based on a quoted market price per unit in active markets multiplied by the number of units held
without consideration of transaction costs (Level 1). Gains and losses are recorded in other income (expense), net on the consolidated statement of
operations.
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
Leasehold Improvements
Equipment and fixtures
(2)
Software
Vehicles
(1)
10 - 35 years
Lease term
3 - 15 years
2 - 5 years
5 years
(1) The depreciation life for leasehold improvements is the lesser of the estimated useful life of the addition or the term of the related lease.
(2) Capitalized costs of cloud software are reported in Other assets on the balance sheet and are amortized over an estimated useful life of 2 to 5 years.
Long-lived Asset Impairment - 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 flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows,
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 - Our revenue is derived primarily from point-of-sale transactions executed over an e-commerce platform for weight loss, weight
management, and other healthy living products. Revenue is recognized when control of the promised products is transferred to our customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for transferring those products. When determining whether the customer has obtained
control of the products, we consider any future performance obligations.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in Accounting Standards
Codification ("ASC") 606, Revenue from Contracts with Customers. A contract’s transaction price is allocated to each distinct performance obligation and
recognized as revenue when, or as, each performance obligation is satisfied. Our contracts have performance obligations to fulfill and deliver products from
the point of sale transaction along with the related customer reward programs.
Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially
all of our revenue for the years ended December 31, 2023, 2022, and 2021. Revenue on these contracts is recognized when the obligations under the terms
of the contract with our customer are satisfied.
Sales returns
Our return policy allows for customer returns of consumable products from the time of order until 30 days following the date of receipt, and upon our
authorization. We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to customers. We estimate
expected returns based on historical levels and project this experience into the future.
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Customer reward programs and sales incentives
Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to acquire additional products at a discount
can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements and promotions.
We reduce the transaction price for certain customer reward programs and incentive offerings including pricing arrangements, promotions, and incentives
that represent variable consideration and separate performance obligations. The Company accounts for sales rewards that provide the customer with a
material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the
customer reward program and incentive offering.
Shipping and handling costs
Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and are recorded in revenue in
the accompanying Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the
Company for the delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying
Consolidated Statements of Income.
Contract costs
We expense OPTAVIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned. These costs are recorded
in selling, general and administrative expense in the accompanying Consolidated Statements of Income.
Leases - The Company determines if an arrangement is a lease at inception and categorizes leases with contractual terms longer than twelve months as
either operating or finance. All the Company’s leases are operating leases. The right-of-use (“ROU”) assets represent the Company’s right to use an
underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease
liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s
leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease
commencement date in determining the present value of lease payments. The ROU asset also consists of any prepaid lease payments and lease incentives
received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably
certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an
operating expense.
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 first used. They are recorded in selling, general, and administrative expense in the accompanying Consolidated
Statements of Income. Advertising expense, excluding broker fees, for the years ended December 31, 2023, 2022 and 2021, amounted to $3.4 million, $1.7
million and $1.6 million, respectively.
Research and Development - The Company incurs research and development costs in connection with the development of new products and programs
and clinical research activities, which are expensed as incurred. They are recorded in selling, general, and administrative expense in the accompanying
Consolidated Statements of Income. The Company incurred $4.6 million, $4.5 million, $4.4 million in research and development expense for the years
ended December 31, 2023, 2022 and 2021, respectively.
Share-Based Compensation - Share-based compensation consists primarily of restricted stock awards, performance-based share awards, and stock 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. Performance-based share awards are measured based on the grant-date market price of the
Company's common stock adjusted by expected level of achievement over the performance period. Market and performance-based share awards that are
tied to the Company's total stockholder return ("TSR") are valued using the Monte Carlo method. The fair value of the incentive stock options and non-
qualified stock options is calculated using the Black-Scholes option pricing model as of the grant date and recognized over the service period.
Income Taxes - 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
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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.
The benefit of a tax position is recognized in the consolidated financial 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 benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in
the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon
examination.
Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.
Earnings Per Share - Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of common stock
outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of common stock outstanding adjusted
for the effect of dilutive common stock equivalents.
Comprehensive Income - Other comprehensive income refers to revenues, expenses, and 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 debt
securities, and foreign currency translation adjustments.
Accounting Pronouncements - Adopted in 2023
The Company has not adopted any new accounting standards during the year ended December 31, 2023.
Recently Issued Accounting Pronouncements - Pending Adoption
In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") 2022-03—Fair Value Measurement (Topic
820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to (1) to clarify the guidance in Topic 820, Fair Value
Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend
a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are
measured at fair value in accordance with Topic 820. For public business entities, the amendments in this Update are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that
have not yet been issued or made available for issuance. The Company did not early adopt the standard, but is in compliance with the provisions as of
December 31, 2023.
In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09—Income Taxes (Topic 740): Improvements to Income Tax
Disclosures to enhance the transparency and decision usefulness of income tax disclosures, including jurisdictional information, by requiring consistent
categories and greater disaggregation of information in the rate reconciliation and income taxes paid disclosures. The ASU is effective for public business
entities for annual periods beginning after December 15, 2024, and for all other entities for annual periods beginning after December 15, 2025. Prospective
application is required, though retrospective application is permitted. Entities are permitted to early adopt the standard. The Company did not early adopt
for the 2023 reporting period. The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements.
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3.
INVENTORIES
Inventories consisted of the following (in thousands):
Raw materials
Packaging
Non-food finished goods
Finished goods
Reserve for obsolete inventory
Total
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following (in thousands):
Land
Building and improvements and leasehold improvements
Equipment and fixtures
Software
Vehicles
Property, plant and equipment - gross
Less: accumulated depreciation
Property, plant and equipment - net
December 31, 2023
December 31, 2022
7,944 $
1,962
3,703
43,248
(2,266)
54,591 $
12,670
3,611
8,738
97,675
(3,838)
118,856
December 31, 2023
December 31, 2022
565 $
24,499
50,344
23,270
95
98,773
(47,306)
51,467 $
565
25,905
49,260
21,278
118
97,126
(39,941)
57,185
$
$
$
$
Depreciation expense for the years ended December 31, 2023, 2022 and 2021 was $10.0 million, $7.9 million and $5.7 million, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following (in thousands):
Trade payables and accrued expenses
Accrued payroll and related taxes
OPTAVIA Coach compensation payable
Gross unrecognized tax liability, including interest and penalties
Promotional sales incentive accruals
Dividends payable
Sales tax payable
Deferred revenue
Total
53
December 31, 2023
December 31, 2022
$
$
39,193 $
17,184
13,277
8,763
4,923
1,407
1,094
574
53,120
13,581
23,633
5,547
10,240
19,641
1,571
7,357
86,415 $
134,690
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6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2023, 2022 and 2021 (in thousands, except per
share data):
Numerator:
Net income
Denominator:
Weighted average shares of common stock outstanding
Effect of dilutive common stock equivalents
Weighted average shares of common stock outstanding
Earnings per share - basic
Earnings per share - diluted
2023
2022
2021
$
$
$
99,415 $
143,568 $
164,031
10,884
37
10,921
11,195
81
11,276
9.13 $
12.82 $
9.10 $
12.73 $
11,705
108
11,813
14.01
13.89
The calculation of diluted earnings per share for the years ended December 31, 2023, 2022 and 2021 excluded 24 thousand, 5 thousand and less than
1 thousand antidilutive restricted stock awards, respectively.
7. EQUITY
Authorized Shares
Pursuant to the Company’s Restated and Amended Certificate of Incorporation, the Company has the authority to issue 21.5 million capital shares
consisting of: (i) 20.0 million shares of common stock having a par value of $0.001 per share and (ii) 1.5 million shares of preferred stock having a par
value $0.001 per share. As of December 31, 2023, there were approximately 10.9 million and 0 shares of common stock and preferred stock issued,
respectively.
Issuance of Additional Common Stock
On May 18, 2017, the stockholders of the Company approved the Medifast, Inc. Amended and Restated 2012 Share Incentive Plan (the “Amended and
Restated 2012 Plan”) that increased the number of shares of the Company’s common stock that may be awarded under the Amended and Restated 2012
Plan by 0.6 million, to an aggregate of 1.6 million.
Stock Repurchase Plan
The Company implemented a stock repurchase plan on September 16, 2014 (the “Stock Repurchase Plan”). On September 12, 2019, the Company's Board
of Directors authorized an additional 2.0 million shares for repurchase under the Stock Repurchase Plan. The Company repurchased approximately 31
thousand and 739 thousand shares during the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, there were approximately
1.3 million shares of common stock remaining under the Company’s Stock Repurchase Plan. There is no guarantee as to the exact number of shares of the
Company’s common stock, if any, that will be repurchased under the Stock Repurchase Plan.
8. SHARE-BASED COMPENSATION
Stock Options:
The Company has issued non-qualified and incentive stock options to employees and non-employee directors. The fair value of these options were
estimated on the date of grant using the Black-Scholes option pricing model, which required estimates of the expected term of the option, the risk-free
interest rate, the expected volatility of the price of the Company’s common stock, and dividend yield. Options outstanding as of December 31, 2023
generally vested over a period of three years and expire ten years from the date of grant. The exercise price of these options ranges from $26.52 to $66.68.
Due to the Company’s lack of option
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exercise history on the date of grant, the expected term was calculated using the simplified method defined as the midpoint between the vesting period and
the contractual term of each option. The risk free interest rate was based on the U.S. Treasury yield curve in effect on the date of grant that most closely
corresponded to the expected term of the option. The expected volatility was based on the historical volatility of the Company’s common stock over the
period of time equivalent to the expected term for each award. The dividend yield was computed as the annualized dividend rate at the grant date divided
by the strike price of the stock option. For the years ended December 31, 2023 and 2022, the Company did not grant stock options.
The number of stock options and weighted-average exercise prices as of December 31, 2023 and 2022 are as follows:
(awards in thousands)
Outstanding at beginning of period
Exercised
Forfeited
Outstanding at end of the period
Exercisable at end of the period
2023
2022
Awards
Weighted-Average
Exercise Price
Awards
Weighted-Average
Exercise Price
32 $
(7)
—
25 $
25 $
54.98
27.40
—
62.20
62.20
32 $
—
—
32 $
28 $
54.98
—
—
54.98
52.76
As of December 31, 2023, the weighted-average remaining contractual life was 45 months with an aggregate intrinsic value of $0.1 million for both
outstanding and exercisable stock options. The compensation expense calculated under the fair value method as of December 31, 2023 was less than
$0.1 million and was fully recognized during the period. The Company received $0.2 million, $0.0 million, and $0.8 million in cash proceeds from the
exercise of stock options during the years ended December 31, 2023, 2022, and 2021, respectively. The total intrinsic value of options exercised during the
years ended December 31, 2023, 2022, and 2021 was $0.4 million, $0.0 million, and $5.9 million, respectively.
Restricted Stock:
The Company has issued restricted stock to employees and non-employee directors generally with vesting terms up to five years after the date of grant. The
fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized
ratably over the vesting period. A summary of outstanding restricted stock activity as of December 31, 2023 and 2022 are as follows:
(shares in thousands)
Outstanding at beginning of period
Granted
Vested
Forfeited
Outstanding at end of the period
2023
2022
Shares
Weighted-Average
Grant Date Fair Value
Shares
Weighted-Average
Grant Date Fair Value
60 $
87
(25)
(8)
114 $
187.94
97.96
169.69
133.57
127.87
43 $
38
(20)
(1)
60 $
183.51
176.60
156.68
188.60
187.94
The Company withheld approximately 31 thousand, 9 thousand and 22 thousand shares of the Company’s common stock to cover minimum tax liability
withholding obligations upon the vesting of shares of restricted stock for the years ended December 31, 2023, 2022 and 2021, respectively. The total fair
value of restricted stock awards vested during the years ended December 31, 2023, 2022 and 2021 was $8.3 million, $3.5 million and $7.0 million,
respectively.
Market and Performance-based Share Awards:
The Company has issued market and performance-based share awards to certain key executives who were granted deferred shares and may earn between
0% and 250% of the target number depending upon both the Company's TSR and the Company's performance against predetermined performance goals
over a three-year performance period after the date of grant. Market and
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performance-based share awards that are tied to the Company's TSR are valued using the Monte Carlo method and recognized ratably as expense over the
award's performance period. The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date
of grant adjusted by expected level of achievement over the performance period. Expense for performance-based share awards is amortized ratably over the
performance period. In the event that management determines that the Company will not reach the lower threshold of the predetermined performance goals
established in the grant agreement, any previously recognized expense is reversed in the period in which such a determination is made. Management
determined that the market and performance-based share awards granted in 2022 would not reach the lower threshold of the predetermined performance
goal resulting in a $1.4 million decrease in the Company’s share-based compensation expense for the year ended December 31, 2023.
Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.
The total expenses during the years ended December 31, 2023, 2022 and 2021 are as follows (in thousands):
2023
Share-Based
Compensation
Expense
Shares
2022
Share-Based
Compensation
Expense
Shares
2021
Share-Based
Compensation
Expense
Shares
Options and restricted stock
Market and performance-based share awards granted in 2023
Market and performance-based share awards granted in 2022
Performance-based share awards granted in 2021
Performance-based share awards granted in 2020
Performance-based share awards granted in 2019
Total share-based compensation
139 $
47
24
14
—
—
224 $
5,926
1,536
(1,388)
2,005
109
—
8,188
92 $
—
25
15
52
—
184 $
5,167
—
1,389
2,595
1,902
—
11,053
75 $
—
—
15
26
—
116 $
4,302
—
—
1,986
1,807
1,808
9,903
The total income tax benefit recognized in the accompanying Consolidated Statements of Income for restricted stock awards was $0.6 million, $1.2 million
and $2.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.
There was $7.5 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2023, which is expected to be
recognized over a weighted-average period of 21 months. There was $4.0 million of unrecognized compensation cost related to the 85 thousand
performance-based shares discussed above as of December 31, 2023, which is expected to be recognized over 20 months.
9. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table sets forth the components of accumulated other comprehensive income, net of tax where applicable (in thousands):
Foreign currency translation
Unrealized gains on investment securities
Accumulated other comprehensive income
56
December 31, 2023
December 31, 2022
$
$
(48) $
296
248 $
24
—
24
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10. INVESTMENTS
Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to
measure fair value:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the
reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally
developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
The following tables present the Company’s cash and financial assets that are measured at fair value on a recurring basis for each of the hierarchy levels (in
thousands):
Cost
Unrealized
Gains
Accrued
Interest
Estimated
Fair Value
Cash & Cash
Equivalents
Investment
Securities
December 31, 2023
Cash and cash equivalents, excluding money market
accounts
$
88,778 $
— $
— $
88,778 $
88,778 $
—
Level 1:
Money market accounts
Government & agency securities
Equity securities
Level 2:
Corporate bonds
Total
5,662
15,282
10,000
30,944
—
126
150
276
—
40
—
40
5,662
15,448
10,150
31,260
5,662
—
—
5,662
—
15,448
10,150
25,598
29,440
293
270
30,003
—
30,003
$
149,162 $
569 $
310 $
150,041 $
94,440 $
55,601
Cost
Unrealized
Gains
Accrued
Interest
Estimated
Fair Value
Cash & Cash
Equivalents
Investment
Securities
December 31, 2022
Cash and cash equivalents
Total
$
$
87,691 $
— $
— $
87,691 $
87,691 $
87,691 $
— $
— $
87,691 $
87,691 $
—
—
The Company had no realized losses or gains for the years ended December 31, 2023, 2022 and 2021.
During the fourth quarter of 2023, the Company entered into an agreement to purchase common stock of LifeMD (Nasdaq: LFMD), a leading provider of
virtual primary care. The securities are subject to a registration rights agreement which stipulates that the registration of the securities is to be made as soon
as practicable, but not later than 90 days, following written demand
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by the Company. Written notice of demand for registration was submitted to LifeMD on December 12, 2023. In addition, the shares are subject to a 180-
day lock-up period from the closing date of the agreement, December 11, 2023. The fair value of the investment is recorded within the investment
securities of the consolidated balance sheet. The gains related to the Company's LifeMD investment for the year ended December 31, 2023, 2022 and 2021
are summarized in the table below (in thousands):
December 31, 2023
December 31, 2022
December 31, 2021
Net gains recognized during the period on equity securities
Less: Net gains recognized on equity securities sold
Unrealized gains recognized during the reporting period on equity securities still held at the
reporting date
$
$
150 $
—
150 $
— $
—
— $
—
—
—
The Company concurrently entered into an agreement in which LifeMD would provide services to stand-up the collaboration between LifeMD and the
Company. The agreement stipulated an initial milestone payment of $5 million due upon execution of the agreement for these services. The services under
the initial milestone were completed prior to December 31, 2023, and this amount was included in the Company's selling, general, and administrative
expenses on the consolidated statement of income. The agreement between the Company and LifeMD has two additional milestones aggregating to
$5.0 million for which work began in 2024, and that will be recognized in the consolidated statement of income as the services are rendered.
11. INCOME TAXES
Income tax expense for the years ended December 31, 2023, 2022 and 2021 consisted of the following (in thousands):
Current
Federal
State
Total current
Deferred
Federal
State
Foreign
Total deferred
2023
2022
2021
$
25,170 $
3,001
28,171
35,857 $
5,558
41,415
1,523
(312)
—
1,211
(738)
(186)
—
(924)
49,433
6,380
55,813
(3,424)
(291)
—
(3,715)
Provision for income taxes
$
29,382 $
40,491 $
52,098
The total provision for income taxes for the years ended December 31, 2023, 2022 and 2021 was $29.5 million, $40.5 million and $52.2 million,
respectively. Those amounts have been allocated to the following financial statement items:
2023
2022
2021
Income before provision for income taxes
Stockholders' equity, unrealized (losses) gains on investment securities & foreign currency
Total provision for income taxes
$
$
29,382 $
112
29,494 $
40,491 $
(27)
40,464 $
52,098
66
52,164
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The reconciliation of the United States federal statutory tax provision to the Company’s provision for income taxes for the years ended December 31, 2023,
2022 and 2021 (in thousands, except percentages):
2023
2022
2021
Statutory federal tax
State income taxes, net of federal benefit
Foreign taxes
Hong Kong
Singapore
Share-based compensation
Research and development and jobs credits
Executive compensation
Charitable donations
Valuation allowance
Intercompany loan restructuring
Other permanent differences
Provision for income taxes
$
$
27,048
2,124
63
(199)
143
(1,258)
1,895
(1,094)
(613)
1,167
106
29,382
21.0 % $
1.7 %
0.0 %
(0.2)%
0.1 %
(1.0)%
1.5 %
(0.8)%
(0.5)%
0.9 %
0.1 %
22.8 % $
38,621
4,635
75
28
(26)
(819)
1,470
(4,316)
396
—
427
40,491
21.0 % $
2.5 %
0.0 %
0.0 %
0.0 %
(0.4)%
0.8 %
(2.3)%
0.2 %
— %
0.2 %
22.0 % $
45,405
4,980
91
32
(1,835)
(503)
2,652
—
468
—
808
52,098
21.0 %
2.3 %
0.0 %
0.0 %
(0.8)%
(0.2)%
1.2 %
0.0 %
0.2 %
— %
0.4 %
24.1 %
Significant components of the Company’s deferred tax assets (liabilities) consisted of the following (in thousands):
Reserves on inventory and sales
Credit and loss carryforwards
Stock compensation
Accrued expenses and deferred costs
Inventory capitalization
Lease obligations
Capitalized research costs
Charitable donations
State taxes
Other
Valuation allowance
Total deferred tax assets
Right-of-use assets
Prepaid expenses
Depreciation
Other
Total deferred tax liabilities
Net deferred tax assets
December 31, 2023
December 31, 2022
$
721 $
2,881
1,784
2,986
587
5,542
5,841
114
1,520
164
(1,680)
20,460
(3,938)
(2,084)
(10,321)
—
(16,343)
1,069
3,713
2,374
5,153
1,781
5,773
2,502
1,862
—
190
(2,523)
21,894
(4,089)
(1,289)
(11,165)
(23)
(16,566)
$
4,117 $
5,328
On August 12, 2022, the President of the United States signed into law the Inflation Reduction Act. The two primary tax implications for corporations are a
15% alternative minimum tax (“AMT”) that applies to corporations with at least one billion of pretax income and a one percent surtax on share buybacks.
The AMT will not apply to the Company in 2023 since the Company’s 2023 pretax income does not exceed the threshold. The share buyback surtax will
not apply to the Company as its share issuances exceed its share buybacks in 2023. The Inflation Reduction Act did not have a material impact on the
Company’s tax provision for the years ended December 31, 2023 and 2022.
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We file income tax returns in the United States and various states and foreign jurisdictions. The Company has separate state and foreign net operating loss
carry forwards totaling $28.7 million that start expiring in 2029. The Company has recorded a valuation allowance for the portion of the net operating loss
carry forwards which are not expected to be realized.
As of December 31, 2023, the Company had $7.5 million of gross unrecognized tax benefits, which would have a net $6.2 million impact on the effective
tax rate, if recognized. As of December 31, 2022, the Company had $6.0 million of gross unrecognized tax benefits, which would have a net $4.8 million
impact on the effective tax rate, if recognized. The change for both 2023 and 2022 primarily relates to additional gross unrecognized benefits for current
and prior year tax positions. The amounts of unrecognized tax benefits were as follows:
Unrecognized tax benefit at the beginning of the period
Increase for current year tax positions
Increase for prior period tax positions
Reduction due to lapse in statute of limitations
Unrecognized tax benefit at the end of the period
December 31, 2023
December 31, 2022
$
$
6,011 $
1,744
38
(291)
7,502 $
2,714
860
2,487
(50)
6,011
The Company recognizes interest and penalty expenses related to unrecognized tax positions as a component of the income tax provision. As of
December 31, 2023, and 2022, interest and penalties accrued were $1.3 million and $0.9 million, respectively. For 2023 and 2022, the Company recorded
expenses (benefits) related to interest and penalties of $0.3 million and $0.2 million, respectively. As of December 31, 2023, the current year reduction
primarily relates to the expiration of federal, state, and foreign statutes of limitation. The Company cannot reasonably project the change in its uncertain tax
positions over the next twelve months. Our tax returns are subject to examination by various federal, state, and local tax authorities. The Company believes
that it has adequately provided for all tax positions; however, amounts asserted by taxing authorities could be greater than our accrued position. Pending the
resolution of one examination, and specific to jurisdictions where the Company has filed tax returns and examination of such returns is constrained by a
statute of limitations, we are no longer subject to United States federal, state, and local income tax examinations by tax authorities for years prior to 2020.
12. LEASES AND COMMITMENTS
Operating Leases:
The Company has operating leases for office and warehouse space and certain equipment. In certain of the Company’s lease agreements, the rental
payments are adjusted periodically based on defined terms within the lease. The Company did not have any finance leases as of December 31, 2023 and
2022, respectively, or for the years then ended.
Our leases relating to office and warehouse space have terms of 18 months to 126 months. Our leases relating to equipment have lease terms of 24 months
to 203 months, with certain of them having clauses relating to automatic renewal.
The Company’s warehouse agreements also contain non-lease components, in the form of payments towards variable logistics services and labor charges,
which the Company is obligated to pay based on the services consumed by it. Such amounts are not included in the measurement of the lease liability but
will be recognized as expense when they are incurred.
The operating lease expense was $5.1 million, $6.7 million and $5.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
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Supplemental cash flow information related to the Company’s operating leases were as follows (in thousands):
Cash paid for amounts included in the measurements of lease liabilities
Operating cash flow used in operating leases
Right-of-use assets obtained in exchange for lease obligations
Operating leases
2023
2022
$
$
6,333 $
7,199
1,785 $
101
As of December 31, 2023, the weighted average remaining lease term was 48 months and the weighted average discount rate was 2.3%.
The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2023 (in thousands):
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: imputed interest
Total
Unconditional purchase obligations:
$
$
$
6,312
6,462
4,783
2,553
2,618
240
22,968
(956)
22,012
At December 31, 2023, the Company had $72.2 million in unconditional purchase obligations with a remaining term in excess of one year primarily for
inventories, outsourced information technology and Coach events.
13. DEBT
Credit Agreement
On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement (the “Credit Agreement”)
among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit
Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on Secured Overnight Financing Rate ("SOFR"), from
London Inter-Bank Offered Rate (LIBOR) ("the "Amended Credit Agreement"). The Amended Credit Agreement provides for a $225.0 million senior
secured revolving credit facility with a $20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted
incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million.
The Credit Agreement matures on April 13, 2026.
The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors. The obligations of the Company and the Guarantors
are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.
Under the Amended Credit Agreement, the Company will pay to the administrative agent for the account of each revolving lender a commitment fee on a
quarterly basis based on amounts committed but unused under the revolving facility from 0.20 to 0.40% per annum depending on the Company’s Total Net
Leverage Ratio (as defined in the Amended Credit Agreement). The Company is also obligated to pay the administrative agent customary fees for credit
facilities of this size and type.
Revolving borrowings under the Amended Credit Agreement bear interest at a rate per annum equal to (i) the Term SOFR Rate for the interest period plus
the Applicable Rate (as defined in the Amended Credit Agreement) based on the Company’s Total Net Leverage Ratio or (ii) the Alternate Base Rate (as
defined in the Amended Credit Agreement) as in effect from time to time
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plus the Applicable Rate based on the Company’s Total Net Leverage Ratio. As of December 31, 2023, the Applicable Rate for SOFR Loans is 1.25% per
annum and the Applicable Rate for ABR Loans is 0.25% per annum. SOFR based loans also include a Credit Spread Adjustment based on the duration of
the borrowing.
The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants
that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness
and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay
other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Amended Credit
Agreement also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default,
cross default to other material indebtedness and judgment default. In addition, the Amended Credit Agreement requires the Company to maintain a Total
Net Leverage Ratio of no more than 2.75 to 1.00 and an Interest Coverage Ratio of at least 3.50 to 1.00.
The Company had no borrowings under the Amended Credit Agreement as of December 31, 2023 and December 31, 2022.
ITEM 9. CHANGES IN 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 ended December
31, 2023.
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 Officer and Chief Financial Officer, 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 were effective as of December 31, 2023.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with
accounting principles generally accepted in the United States. Internal control over financial reporting includes maintaining records that in reasonable detail
accurately and fairly reflect our transactions, providing reasonable assurance that transactions are recorded as necessary for preparation of our financial
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 financial
statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to
provide absolute assurance that a misstatement of our financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial 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 financial reporting was effective as of December 31, 2023.
Changes in Internal Control over Financial Reporting
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the last fiscal quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, was audited by RSM US LLP, our independent
registered public accounting firm, as stated in their report appearing in our 2023 financial statements in Item 8 of this report under the captions entitled
“Report of Independent Registered Public Accounting Firm.”
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, 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 reflect the fact that there are resource constraints,
and the benefits 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.
ITEM 9B. OTHER INFORMATION
Not applicable
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information required by this item is incorporated herein by reference from the Company’s definitive proxy statement for the 2024 annual meeting of
stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from the Company’s definitive proxy statement for the 2024 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 definitive proxy statement for the 2024 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 definitive proxy statement for the 2024 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 definitive proxy statement for the 2024 annual meeting of
stockholders.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Report
1. Consolidated Financial Statements
PART IV
The Consolidated Financial Statements of Medifast, Inc. and related notes, together with the Reports of RSM US LLP dated February 20, 2024,
are included in Part II, Item 8.
2. Consolidated Financial Statement Schedules
None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.
3. Exhibits required to be filed by Item 601 of Regulation S-K
The information called for by this item is incorporated herein by reference from the Exhibit Index included in this Report.
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No.
INDEX TO EXHIBITS
3.1 Restated and Amended Certificate 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) filed on February 27, 2015).
3.2 Amended and Restated Bylaws of Medifast, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Amendment No. 1 Current
Report on Form 8-K (File No. 001-31573) filed on December 4, 2019).
4.1 Description of Securities (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K (File No. 001-31573)
filed on February 26, 2021).
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) filed on May 10, 2017).*
10.2 Form of Restricted Share Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K (File
No. 001-31573) filed on March 15, 2016).*
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) filed on February 4, 2014).*
10.4 Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K
(File No. 001-31573) filed on March 15, 2016).*
10.5 Form of Performance-Based Deferred Share Award Agreement (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report
on Form 10-K (File No. 001-31573) filed on March 15, 2016).*
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) filed on April
6, 2015.
10.8 Medifast, Inc. Amended and Restated 2012 Share Incentive Plan Grant Notice Performance Share Unit (incorporated by reference to Exhibit
10.8 to the Company’s Annual Report on Form 10-K (File No. 001-31573) filed on March 1, 2019).
10.9 Medifast, Inc. Amended and Restated 2012 Share Incentive Plan Grant Notice Employee Deferred Shares (incorporated by reference to
Exhibit 10.9 to the Company’s Annual Report on Form 10-K (File No. 001-31573) filed on March 1, 2019).
10.10 Medifast, Inc. Amended and Restated 2012 Share Incentive Plan Grant Notice Nonemployee Director Deferred Shares (incorporated by
reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (File No. 001-31573) filed on March 1, 2019).
10.11 Medifast, Inc. Amended and Restated 2012 Share Incentive Plan Grant Notice Nonemployee Director Deferred Share Cash Equivalent
(incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K (File No. 001-31573) filed on March 1, 2019).
10.12 Medifast, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File
No. 001-31573) filed on November 8, 2019).
10.13 Amendment to Medifast, Inc. Executive Severance Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q (File No. 001-31573) filed on November 3, 2020).
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10.15 Credit Agreement, dated as of April 13, 2021, among Medifast, Inc., certain of its subsidiaries party thereto, the lenders party thereto and
Citibank, N.A., in its capacity as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8
K (File No. 001-31573) filed on April 19, 2021).
10.16 Medifast, Inc. Amended and Restated Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Company’s
Current Report on Form 10-Q (File No. 001-31573) filed on August 4, 2021.
10.17 First Amendment to Credit Agreement, dated May 31, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K (File No. 001-31573) filed on June 3, 2022).
21.1 Subsidiaries of Medifast, Inc. (filed herewith).
23.1 Consent of RSM US LLP (filed herewith).
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (furnished
herewith).
97 Medifast, Inc. Clawback Policy Amended and Restated (filed herewith).
101 The following financial statements from Medifast, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2022, filed February
23, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Income, (ii) Consolidated
Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Cash Flows, (v) Consolidated
Statements of Changes in Stockholders’ Equity and (vi) Notes to the Consolidated Financial Statements (filed herewith).
104 Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are
embedded within the Inline XBRL document.
____________________
* Indicates a management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
MEDIFAST, INC.
By:
/s/ DANIEL R. CHARD
Daniel R. Chard
Chief Executive Officer
(Principal Executive Officer)
Dated:
February 20, 2024
/s/ JAMES P. MALONEY
James P. Maloney
Chief Financial Officer
(Principal Financial Officer)
Dated:
February 20, 2024
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Name
Title
Date
/s/ JEFFREY J. BROWN
Jeffrey J. Brown
/s/ DANIEL R. CHARD
Daniel R. Chard
Lead Director
February 20, 2024
Chairman and Chief Executive Officer
February 20, 2024
/s/ ELIZABETH A. GEARY
Director
Elizabeth A. Geary
/s/ MICHAEL A. HOER
Michael A. Hoer
Director
February 20, 2024
February 20, 2024
/s/ JONATHAN B. MACKENZIE
Vice President Finance and Chief Accounting Officer
February 20, 2024
Jonathan B. MacKenzie
/s/ JAMES P. MALONEY
James P. Maloney
Chief Financial Officer
February 20, 2024
/s/ SCOTT SCHLACKMAN
Director
Scott Schlackman
/s/ ANDREA B. THOMAS
Andrea B. Thomas
/s/ MING XIAN
Ming Xian
Director
Director
69
February 20, 2024
February 20, 2024
February 20, 2024
Exhibit 21.1
Subsidiaries of Medifast, Inc.
Corporate Subsidiaries
Corporate Events, Inc.
Jason Enterprises, Inc.
Jason Pharmaceuticals, Inc.
Jason Properties, LLC
OPTAVIA LLC
OPTAVIA Health Consultation (Shanghai) Co., Ltd.
OPTAVIA (Hong Kong) Limited
OPTAVIA (Singapore) PTE. LTD
Seven Crondall Associates, LLC
State of Incorporation
Delaware
Delaware
Maryland
Delaware
Delaware
Shanghai, China
Hong Kong
Singapore
Maryland
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement (No. 333-187974 and No. 333-218243) on Form S-8 of Medifast, Inc. of our
reports dated February 20, 2024, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of
Medifast, Inc., appearing in the Annual Report to Shareholders, which is incorporated in this annual report on Form 10-K of Medifast, Inc. for the year
ended December 31, 2023.
/s/ RSM US LLP
Baltimore, Maryland
February 20, 2024
RULE 13a-14(a) CERTIFICATION
Exhibit 31.1
I, Daniel R. Chard, certify that:
1.
I have reviewed this report on Form 10-K of Medifast, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: February 20, 2024
/s/ Daniel R. Chard
Daniel R. Chard
Chief Executive Officer
RULE 13a-14(a) CERTIFICATION
Exhibit 31.2
I, James P. Maloney, certify that:
1.
I have reviewed this report on Form 10-K of Medifast, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: February 20, 2024
/s/ James P. Maloney
James P. Maloney
Chief Executive Officer
MEDIFAST, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the Annual Report of Medifast, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2023 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Daniel R. Chard, Chief Executive Officer, and I, James P. Maloney, Chief Financial
Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge,
that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of the operations of the
Company.
By:
/s/ DANIEL R. CHARD
Daniel R. Chard
Chief Executive Officer
February 20, 2024
/s/ JAMES P. MALONEY
James P. Maloney
Chief Financial Officer
February 20, 2024
MEDIFAST, INC.
CLAWBACK POLICY
AMENDED AND RESTATED
Exhibit 97
Introduction
The Board of Directors (the “Board) of Medifast, Inc. (the “Company”) believes that it is in the best interests of the Company and its stockholders to
create and maintain a culture that emphasizes integrity and accountability and that reinforces the Company’s pay for performance compensation
philosophy. The Board has therefore adopted this policy which provides for the recoupment of certain executive compensation in the event of an
Accounting Restatement resulting from material noncompliance with financial reporting requirements under the federal securities laws (the “Policy”). This
Policy is intended to comply with and be interpreted in accordance with the requirements of Section 303A.14 (“Section 303A.14”) of the New York Stock
Exchange (“NYSE”) Listed Company Manual. The provisions of Section 303A.14 shall prevail in the event any conflict between the text of this Policy and
such section.
Administration
This Policy shall be administered by the Board or, if so designated by the Board, the Compensation Committee, in which case references herein to the
Board shall be deemed references to the Compensation Committee. Any determinations made by the Board shall be final and binding on all affected
individuals.
Covered Executives
This policy applies to (i) the Company’s current and former officers as defined in Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and (ii) such other senior executives/employees who the Board, in its sole discretion, determines committed any act or omission that
contributed to the circumstances requiring the Accounting Restatement and which involved any of the following: (A) negligence, misconduct, wrongdoing
or a violation of any of the Company’s rules or of any applicable legal or regulatory requirements in the course of such employee’s employment by, or
otherwise in connection with, the Company; or (B) a breach of a fiduciary duty to the Company or its stockholders by such employee (collectively, the
“Covered Executives”). For the sake of clarity, Covered Executives includes at a minimum executive officers identified by the Board pursuant to 17 CFR
229.401(b).
Incentive Compensation
For purposes of this Policy, Incentive Compensation means any compensation that is granted earned or vested based in whole or in part on the attainment of
a Financial Reporting Measure, and includes but is not limited to:
•
•
•
•
•
•
Annual bonuses and other short-and long-term cash incentives;
Stock options;
Restricted stock;
Restricted stock units;
Performance shares; and
Performance units.
For clarity, Incentive Compensation does not include awards that vest based solely on the performance of services over a period of time. For purposes of
the Policy “Financial Reporting Measures” shall mean those measures based on accounting principles used in preparing the Company’s financial
statements, any measures derived in whole or in part from that information (including reportable segments of the Company’s business and non-GAAP
financial measures), stock price and total stockholder return (“TSR”). A “Financial Reporting Measure” need not be presented within the Company’s
financial statements or included in a filing with the Securities and Exchange Commission (the “Commission”).
US_ACTIVE-119745955.2
Recoupment: Accounting Restatement
As used herein, an “Accounting Restatement” is a restatement of the Company’s financial statements due to the Company’s material noncompliance with
any financial reporting requirement under the securities laws, including any required accounting restatement which (A) restates historical financial
statements to correct errors that were material to those previously issued financial statements; or (B) restates errors that occurred in prior periods and were
not material to previously issued financial statements, but would result in a material misstatement (i) if the errors were left uncorrected in the current period
or (ii) if the error correction was recognized in the current period financial statements.
In the event the Company is required to prepare an Accounting Restatement, the Board shall require reimbursement or forfeiture of the Excess Amount of
any Incentive Compensation Received by any Covered Executive during the three-year period preceding the date on which the Company is required to
prepare an Accounting Restatement. As used herein, Incentive Compensation is deemed “Received” in the fiscal period that the Financial Reporting
Measure specified in the Incentive Compensation arrangement is attained, even if the payment, vesting, or grant of the Incentive Compensation occurs after
the end of that period.
The date that the Company is required to prepare an Accounting Restatement for purposes of this policy is the earlier of (1) the date that the Board, a
committee of the Board or a group of officers of the Company concludes, or reasonably should have concluded, that the Company’s previously issued
financial statements contain a material error, or (2) the date a court, regulator or other legally authorized body directs the Company to restate its previously
issued financial statements to correct a material error.
As used herein, the “Excess Amount” to be recovered will be the excess of the Incentive Compensation Received by the Covered Executive based on the
erroneous data over the Incentive Compensation that would have been paid to the Covered Executive had it been based on the information in the
Accounting Restatement, as determined by the Board. In the event the Excess Amount is based on a measurement that is not subject to mathematical
recalculation, the Excess Amount shall be based on a reasonable estimate of the effect of the Accounting Restatement, as determined by the Board, which
shall be set forth in writing. For example, in the case of Incentive Compensation based on stock price or TSR, the Excess Amount shall be based on a
reasonable estimate of the effect of the Accounting Restatement on the stock price or TSR.
The Board cannot forgo, settle, or release amounts subject to the clawback and cannot indemnify or insure Covered Executives against the loss of
erroneously awarded Incentive Compensation. However, the Board shall not seek recovery of the Excess Amount if the Compensation Committee of the
Board or a majority of the independent directors determines that to do so would be impracticable because (i) the cost of recovery would be in excess of the
Excess Amount and a reasonable attempt to recover the Excess Amount has already been made and documented; or (ii) such recovery would violate home-
country law (provided such law was adopted prior to November 28, 2022), and only if the Company obtained an opinion of home-country counsel
establishing that recovery would result in such violation; or (iii) such recovery would jeopardize the qualified status of a tax-qualified retirement plan,
under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and
regulations thereunder.
Method of Recoupment
The Board will determine, in its sole discretion, the method for recouping the Excess Amount hereunder which may include, without limitation:
a) Requiring reimbursement of cash incentive compensation previously paid;
b) Seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer or other disposition of any equity-based awards;
c) Offsetting the Excess Amount from any compensation otherwise owed by the Company to the Covered Executive;
d) Canceling outstanding vested or unvested equity awards; and/or
e) Taking any other remedial and recovery action permitted by law, as determined by the Board.
Any Excess Amount must be computed and collected from impacted Covered Executives on a pre-tax basis.
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Interpretation
The Board is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of
this Policy. It is intended that this Policy be interpreted in a manner that is consistent with any applicable rules or regulations adopted by the Securities and
Exchange Commission and the NYSE, or any national securities exchange on which the Company’s shares are then listed, pursuant to Section 10D and
10D-1 of the Exchange Act (the “Applicable Rules”) and any other applicable law and shall otherwise be interpreted (including in the determination of
amounts recoverable) in the business judgment of the Board. To the extent the Applicable Rules require recovery of Incentive Compensation in additional
circumstances besides those specified above, nothing in this policy shall be deemed to limit or restrict the right or obligation of the Company to recover
incentive-based compensation to the fullest extent required by the Applicable Rules.
Effective Date
This Policy shall be effective as of the date it is adopted by the Board and shall apply to Incentive Compensation that is Received by Covered Executives
on or after that date.
Amendment
The Board may amend this Policy from time to time in its discretion and shall amend this Policy as it deems necessary to reflect regulations adopted by the
Commission under Section 10D of the Exchange Act and to comply with any rules or standards adopted by the NYSE, or any national securities exchange
on which the Company’s shares are then listed.
Other Recoupment Rights
The Board intends that this Policy will be applied to the fullest extent of the law. The Board may require that any employment agreement, equity award
agreement or similar agreement entered into on or after the Effective Date shall, as a condition to the grant of any benefit thereunder, require a Covered
Executive to agree to abide by the terms of this Policy. Any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or
rights of recoupment that may be available to the Company pursuant to the terms of any similar policy in any employment agreement, equity award
agreement, or similar agreement and any other legal remedies available to the Company.
Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators, or other legal
representatives.
Disclosure Required
Pursuant to Item 4-2 of Regulation S-K, in the event of an Accounting Restatement, the Company must disclose the following information:
a)
b)
c)
d)
the date the Company was required to prepare an Accounting Restatement and the aggregate dollar amount of erroneously awarded compensation
attributable to such Accounting Restatement (including the estimates used in calculating the Excess Amount in the case of awards based on stock
price or TSR and an explanation of the methodology used for such estimates);
if the aggregate dollar amount of erroneously awarded compensation has not yet been determined, an explanation of the reasons and disclosure of
all required information in the next company filing subject to Item 402 of Regulation S-K;
the amounts recovered and any amounts that remain outstanding at the end of the Company’s most recent fiscal year (as well as, for each current
or former Covered Executives, any amounts that remain outstanding for 180 days or longer since the Company determined the amount owed);
if the Company has determined to forego recovery of any amounts as “impracticable,” then it must disclose for each Covered Executive, the
amount of recovery foregone and brief description of why recovery was not pursued; and
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a)
if the Company was required to prepare an Accounting Restatement at any time during or after its last completed fiscal year and
concluded that recovery of erroneously awarded Incentive Compensation was not required in connection with such restatement, a
brief explanation of why application of the Company’s recovery policy led to such conclusion.
Effective: December 5, 2015
Amended: June 14, 2023
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