What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-03-02 · 136 added, 162 removed, 439 unchanged (40% of the section changed)

11 unchanged sentences

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

Medifast, Inc.

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

and Subsidiaries

Opinion on the Internal Control Over Financial Reporting

2 unchanged sentences

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, 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 as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019 and the related notes to the consolidated financial statements of the Company and our report dated March 2, 2020 expressed an unqualified opinion.

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, 2020 and 2019, 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, 2020, and the related notes to the consolidated financial statements and our report dated February 26, 2021 expressed an unqualified opinion.

Basis for Opinion

17 unchanged sentences

Baltimore, Maryland

March 2, 2020

February 26, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

Medifast, Inc.

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

and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Medifast, Inc.

and its subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).

and Subsidiaries (the Company) as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

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, 2020, 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 26, 2021 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

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.

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(1) relates 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 consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

As described in Notes 1 and 11 of the consolidated 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 OPTA VIA Coaches.

The Company’s provision for income taxes is impacted based on interpretations of the Tax Cuts and Job Act (Tax Act) 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 the Tax Act, related 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.

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 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.

Our audit procedures related to the Company’s provision for income taxes include the following, among others:

matter required significant auditor judgment and 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.

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 the Tax Act and Treasury Regulations and state and local tax regulations.

Our specialists developed an independent assessment of interpretations of the Tax Act and Treasury Regulations, state and local tax positions, and other tax positions requiring significant judgement and 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, deferred tax assets/liabilities and income taxes receivable/payable rollforward.

- 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

1 unchanged sentence

Baltimore, Maryland

March 2, 2020

February 26, 2021

MEDIFAST, INC.

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Years Ended December 31, 2020, 2019 and 2018

(In thousands, except per share amounts & dividend data)

dollars in thousands, except per share amounts & dividend data)

Cost of sales

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Interest income, net

Other income (expense)

Income from operations before income taxes

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Years Ended December 31, 2020, 2019 and 2018

(In thousands)

dollars in thousands)

Other comprehensive income (loss), net of tax:

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Unrealized gains (losses) on investment securities

Change in fair value of investment securities

Adjustment for net losses realized included in net income

Total change in unrealized gains (losses) on investment securities

Other comprehensive income (loss)

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As of December 31, 2020 and 2019

(In thousands, except per share amounts)

dollars in thousands, except per share amounts)

Current Assets

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Total current liabilities

Lease obligations, less current lease obligations

Lease obligations, net of current lease obligations

Total liabilities

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Retained earnings

Treasury stock at cost, 489 and 193 shares at December 31,

2019 and December 31, 2018, respectively

treasury stock at cost, 46 and 489 shares at December 31, 2020 and

December 31, 2019, respectively

Total stockholders' equity

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Years Ended December 31, 2020, 2019 and 2018

(In thousands)

dollars in thousands)

Operating Activities

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Loss on sale of disposal of property, plant and equipment

Bad debt expense

Amortization of premium on investment securities

Deferred income taxes

Bad debt expense

Change in operating assets and liabilities:

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Sale and maturities of investment securities

Purchase of investment securities

Sale of property and equipment

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Years Ended December 31, 2020, 2019 and 2018

(In thousands)

dollars in thousands)

Number of Shares Issued

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Treasury Stock

Balance, December 31, 2016

Balance, January 1, 2018

Share-based compensation

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Net shares repurchased for employee taxes

Other comprehensive income

Restricted shares forfeitures

Treasury stock from cashless options

Treasury stock from stock repurchases

Other comprehensive loss

Cash dividends declared to stockholders

Balance, December 31, 2017, as reported

Cumulative effect of adjustments from

changes in accounting standards (Note 2)

Balance January 1, 2018, as adjusted

Balance, December 31, 2018

Share-based compensation

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Net shares repurchased for employee taxes

Restricted shares forfeitures

Treasury stock from cashless options

Treasury stock from stock repurchases

Other comprehensive loss

Other comprehensive income

Cash dividends declared to stockholders

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Net shares repurchased for employee taxes

Retirement of treasury stock

Treasury stock from stock repurchases

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(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., OPTA VIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Medifast Franchise Systems, Inc., Medifast Nutrition, Inc., Seven Crondall Associates, LLC, Corporate Events, Inc., OPTA VIA (Hong Kong) Limited and OPTA VIA (Singapore) PTE.

Medifast is the company behind one of the fastest-growing health and wellness communities called OPTA VIA ® , which offers Lifelong Transformation, One Healthy Habit at a Time ® .

The Company’s operations are primarily conducted through its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTA VIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Medifast Franchise Systems, Inc., Seven Crondall Associates, LLC, Corporate Events, Inc., OPTA VIA (Hong Kong) Limited, OPTA VIA (Singapore) PTE.

LTD and OPTA VIA Health Consultation (Shanghai) Co., Ltd.

Medifast is the company behind one of the fastest-growing health and wellness communities called OPTA VIA ® .

OPTA VIA is a highly effective lifestyle solution for people for whom diets alone have failed.

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Fair Value of Financial Instruments - Our financial instruments include cash and cash equivalents, investment in available-for-sale securities, and trade receivables.

The carrying amounts of cash and cash equivalents, and trade

receivables approximate fair value due to their short maturities.

The fair values of investment in available-for-sale securities are based on third-party pricing services provided by the Company’s investment advisory firm.

The carrying amounts of cash and cash equivalents and trade receivables approximate fair value due to their short maturities.

The fair value of investments in available-for-sale securities are based on third-party pricing services provided by the Company’s investment advisory firm.

Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded net of provisions for doubtful accounts.

Allowances for doubtful accounts are based primarily on an analysis of aged accounts receivable balances, credit card chargeback trends and activities and the credit worthiness of our clients as determined by credit checks and analysis, as well as customer payment history.

The allowance for doubtful accounts as of December 31, 2019 and 2018 was $ 0.2 million and $ 0.4 million, respectively.

Inventory - Inventories consist principally of packaged meal replacements held in the Company’s warehouses.

Inventory is stated at the lower of cost or net realizable value, utilizing the first-in, first-out method.

We estimate losses on account receivable based on expected losses, including our historical experience of actual losses.

Accounts receivable is considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement.

The allowance for doubtful accounts as of December 31, 2020 and 2019 was $ 0.2 million.

Inventories - Inventories consist principally of raw materials and packaged meal replacements held in the Company’s warehouses and outsourced distribution centers.

Inventories are stated at the lower of cost or net realizable value, utilizing the first-in, first-out method.

The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor, and other indirect manufacturing costs.

On a quarterly basis, management reviews inventory for unsalable or obsolete inventory.

On a quarterly basis, management reviews inventories for unsalable or obsolete inventories.

Investment Securities - The Company’s investments consist of debt securities classified as available-for-sale securities.

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Interest and dividends on marketable debt securities are recognized in income when declared.

Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, if any, are included in income.

Realized gains and losses, if any, are included in income.

Property, Plant, and Equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

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(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.

Long-lived Fixed 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.

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.

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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 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, the performance obligation is satisfied.

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.

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Generally, this occurs with the transfer of control upon receipt of products by our clients.

Any consideration received prior to the fulfillment of the Company performance obligation is deferred and recognized as a liability.

Any consideration received prior to the fulfillment of the Company’s performance obligation is deferred and recognized as a liability.

Sales returns

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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, incentives that represent variable consideration and separate performance obligations.

The Company accounts for sales rewards 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.

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

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These costs are deferred along with the revenues for goods that are in transit and not received by clients by period end.

These costs are recorded in selling, general and administrative expense in the Consolidated Statements of Income.

Disaggregated revenue and entity-wide revenue disclosures

The nature, amount, timing and uncertainty of revenue and cash flows from our revenues amongst contracts, product offerings and clients do not differentiate and are recognized consistently based on policies discussed above.

In addition, effective January 1, 2018, we changed how we internally and externally report our revenues to simplify and align with changes in how we manage our business, review operating performance and allocate resources as a result of our primary focus on the OPTA VIA business and the significance this business represents to the overall results of the Company.

We considered the following factors in making this decision:

the nature of business activities overlapping amongst previous defined sales channels, the management structure directly accountable to our chief operating decision maker for operating and administrative activities and information presented to the Board of Directors and investors.

Leases - The Company determines if an arrangement is a lease at inception and categorize leases with contractual terms longer than twelve months as either operating or finance.

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.

1 unchanged sentence

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.

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.

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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, 2020, 2019 and 2018, amounted to $ 4.4 million, $ 5.3 million and $ 6.0 million, respectively.

Research and Development - The Company incurs research and development costs in connection with the development of new products and programs, which are expensed as incurred.

They are recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.

The Company incurred $ 2.8 million, $ 2.7 million and $ 2.2 million in research and development expense for the years ended December 31, 2020, 2019 and 2018, respectively.

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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.

Market and performance-based share awards that are tied to the Company’s total shareholder return and stock price are valued using the Monte Carlo method and are recognized as expense over the award’s achievement period.

Market and performance-based share awards that are tied to the Company’s total stockholder return and stock price are valued using the Monte Carlo method and are recognized as expense over the award’s achievement period.

The Company issues new shares upon the exercise of stock options and the granting of restricted stock awards.

Income Taxes - 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.

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.

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We are generally no longer subject to United States federal, state and local income tax examinations by tax authorities for the years before 2017.

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.

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, gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity.

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 securities, and foreign currency translation adjustments.

Accounting Pronouncements - Adopted in 2020

In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) to address a specific consequence of the Tax Cuts and Jobs Act (“TCJA”) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S.

federal corporate income tax rate.

This ASU was effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and was to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S.

federal corporate income tax rate in the TCJA is recognized.

The Company adopted this ASU in the first quarter of 2019.

There was no material impact on the Company's consolidated results of operations or cash flows.

The Company's policy for releasing disproportionate income tax effects from accumulated other comprehensive income utilizes the portfolio approach.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which requires an entity to recognize a ROU asset and a lease liability on the balance sheet for all leases, including operating leases, and also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases.

Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs;

hereinafter the collection of lease guidance is referred to as “ASC 842.”

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption.

Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases .

The standard had a material impact on the Company’s consolidated balance sheets, but did not have a significant impact on the Company’s consolidated results of operations or cash flows.

The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients that do not require the Company to reassess:

(i) whether any expired or existing contracts contain leases;

(ii) the lease classification for any expired or existing leases;

and (iii) initial direct costs for any existing leases.

The Company also elected to exclude leases with a term of 12 months or less in the recognized ROU assets and lease liabilities.

As a result of the cumulative impact of adopting ASC 842, the Company recorded ROU assets of $ 11.9 million, net of $ 0.7 million of accrued rent and lease liabilities of $ 12.6 million as of January 1, 2019, primarily related to office and warehouse space and certain equipment, based on the present value of the future lease payments on the date of adoption.

Recently Issued Accounting Pronouncements - Pending Adoption

We have considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition, or cash flows, based on current information, except for:

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), which addresses the accounting for implementation costs associated with a hosted service.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), which addresses the accounting for

implementation costs associated with a hosted service.

The standard provides amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted.

Management is currently evaluating the effect that the provisions of ASU 2018-15 will have on the Company’s consolidated financial statements.

On January 1, 2020, the Company adopted ASU 2018-15.

The Company capitalized $ 2.9 million in total for the year ended December 31, 2020, principally related to the configuration and development of the Company’s new hosted enterprise resource planning tool (“ERP”).

The amortization expense associated with the capitalized costs was $ 0.2 million for the year ended December 31, 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments , which institutes a new model for recognizing credit losses on financial instruments that are not measured at fair value.

On January 1, 2020, the Company adopted ASU 2016-13.

There was no material impact on the Company's consolidated financial statements.

Recently Issued Accounting Pronouncements - Pending Adoption

We have considered all new accounting pronouncements and have concluded that there are no new pronouncements that have the potential for a material impact on our results of operations, financial condition, or cash flows, based on current information, except for:

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):

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The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries.

allocating consolidated income taxes to separate financial statements of entities not subject to income tax.

The standard also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax.

This ASU is effective for fiscal years beginning after December 15, 2020, with early adoption permitted.

Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.

Management is currently evaluating the effect that the provisions of ASU 2019-12 will have on the Company’s consolidated financial statements.

Inventories consist principally of packaged meal replacements held in the Company’s warehouses.

Inventory is stated at the lower of cost or net realizable value, utilizing the first-in, first-out method.

The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs.

On a quarterly basis management reviews inventory for unsalable or obsolete inventory.

Management has determined the effect that the provisions of ASU 2019-12 will have on the Company’s consolidated financial statements is immaterial.

Inventories consisted of the following (in thousands):

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Property, plant and equipment - gross

Less accumulated depreciation

accumulated depreciation

Property, plant and equipment - net

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EARNINGS PER SHARE

Basic EPS computations are calculated utilizing the weighted average number of shares of common stock outstanding during the periods presented.

Diluted EPS is calculated utilizing the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive common stock equivalents.

The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2020, 2019 and 2018 (in thousands, except per share data):

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The calculation of diluted earnings per share for the years ended December 31, 2020, 2019 and 2018 also excluded 2,658 , 718 and 258 antidilutive restricted stock awards, respectively.

Authorized Shares

Pursuant to the Company’s Restated and Amended Certificate of Incorporation, the Company has the authority to issue 21,500,000 capital shares consisting of:

(i) 20,000,000 shares of common stock having a par value of $ 0.001 per share and (ii) 1,500,000 shares of preferred stock having a par value $ 0.001 per share.

As of December 31, 2020, there were approximately 11,822,000 and 0 shares of common stock and preferred stock issued, respectively.

Issuance of Additional Common Stock

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On September 12, 2019, the Company's Board of Directors authorized an additional 2,000,000 shares for repurchase under the Stock Repurchase Plan.

The Company repurchased approximately 296,000 shares during the year ended December 31, 2019.

The Company repurchased approximately 46,000 and 296,000 shares during the years ended December 31, 2020 and 2019, respectively.

As of December 31, 2020, there were approximately 2,323,000 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.

Stockholder Rights Plan

On November 21, 2019, the Company adopted a limited duration stockholder rights plan (the “Rights Plan”), as amended on December 13, 2019, and declared a dividend of one right for each outstanding share of Medifast common stock.

The Rights Plan expires on October 21, 2020, and the Board of Directors may terminate the Rights Plan at any time if it no longer believes that the Rights Plan is in the best interests of the Company and its stockholders.

These rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events.

SHARE-BASED COMPENSATION

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The exercise price of these options ranges from $ 26.52 to $ 171.68 .

Due to the Company’s lack of option exercise history, the expected term is calculated using the simplified method defined as the midpoint between the vesting period and the contractual term of each option.

Due to the Company’s lack of option exercise history on the date of grant, the expected term is calculated using the simplified method defined as the midpoint between the vesting period and the contractual term of each option.

The risk free interest rate is based on the U.S.

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The dividend yield is computed as the annualized dividend rate at the grant date divided by the strike price of the stock option.

For the year ended December 31, 2019, the Company did not grant stock options.

The weighted average input assumptions used for the years ended December 31, 2018 and 2017 were as follows:

For the years ended December 31, 2020 and 2019, the Company did no t grant stock options.

The weighted average input assumptions used for the year ended December 31, 2018 were as follows:

Expected term (in years)

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Weighted-Average Exercise Price

(shares in thousands)

(awards in thousands)

Outstanding at beginning of period

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The unrecognized compensation expense calculated under the fair value method for shares expected to vest as of December 31, 2020 was $ 0.2 million and is expected to be recognized over a weighted average period of 2.1 years.

The Company received $ 0.3 million and $ 0.5 million in cash proceeds from the exercise of stock options during the years ended December 31, 2019 and 2018, respectively.

Upon exercising of options, the Company withheld shares for employee taxes of 1 thousand and 6 thousand for the years ended December 31, 2019 and 2018, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $ 1.0 million and $ 4.1 million, respectively.

The Company received $ 1.6 million, $ 0.3 million and $ 0.5 million in cash proceeds from the exercise of stock options during the years ended December 31, 2020, 2019 and 2018, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2020, 2019 and 2018 was $ 1.5 million, $ 1.0 million and $ 4.1 million, respectively.

Restricted Stock:

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Expense for restricted stock is amortized ratably over the vesting period.

A summary of outstanding restricted stock and award activity as of December 31, 2019 and 2018 are as follows:

A summary of outstanding restricted stock activity as of December 31, 2020 and 2019 are as follows:

Weighted-Average Grant Date Fair Value

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Outstanding at end of the period

The Company withheld 0.0 million, 0.1 million and 0.0 million 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, 2020, 2019 and 2018.

The total fair value of restricted stock awards vested during the years ended December 31, 2020, 2019 and 2018 was $ 3.7 million, $ 4.7 million and $ 8.6 million, respectively.

The total share-based compensation charged against income during the years ended December 31, 2019, 2018 and 2017 was $ 4.5 million, $ 3.1 million, and $ 4.3 million, respectively.

The total costs of the options and restricted stock awards charged against income was $ 2.9 million, $ 2.2 million and $ 3.4 million during the years ended December 31, 2019, 2018 and 2017, respectively.

Also included in the years ended December 31, 2019, 2018 and 2017 was $ 0.3 million, respectively, for 63,300 performance-based deferred shares in expense for certain key executives that became fully vested on December 31, 2019.

Included for each of the years ended December 31, 2019, 2018 and 2017 was $ 0.6 million in expense for 210,000 performance-based contingent shares granted to our Chief Executive Officer (“CEO”) that became fully vested on December 31, 2019 based on the achievement of certain Company performance targets.

Included for the year ended December 31, 2019 was $ 0.7 million for 17,780 performance-based contingent shares for certain other key executives granted in 2019.

The total income tax benefit recognized in the consolidated statements of income for restricted stock awards was $ 7.5 million, $ 2.5 million and $ 2.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.

There was $ 2.7 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2019, which is expected to be recognized over a weighted-average period of 1.90 years.

Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.

The total costs during the years ended December 31, 2020, 2019 and 2018 was $ 6.8 million, $ 4.5 million, and $ 3.1 million, respectively.

The total costs of the options and restricted stock awards was $ 3.5 million, $ 2.9 million and $ 2.2 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Included for the years ended December 31, 2020 and 2019 was $ 1.6 million and $ 0.7 million, respectively, for 16,637 and 17,780 performance-based share awards for certain other key executives granted in 2019.

Also included for the year ended December 31, 2020 was $ 1.7 million for 27,525 performance-based share awards for certain key executives granted in 2020.

Additionally, included in the years ended December 31, 2019 and 2018 was $ 0.3 million, respectively, for 63,300 performance-based share awards for certain key executives, and $ 0.6 million, respectively for 210,000 performance-

based share awards granted to our Chief Executive Officer.

These 273,300 performance-based shares were fully vested on December 31, 2019.

The total income tax benefit recognized in the accompanying Consolidated Statements of Income for restricted stock awards was $ 1.4 million, $ 7.5 million and $ 2.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

There was $ 3.7 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2020, which is expected to be recognized over a weighted-average period of 1.

There was $ 5.4 million of unrecognized compensation cost related to the 44,162 performance-based shares discussed above as of December 31, 2020, which is expected to be recognized over 1.8 years.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable (in thousands):

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table sets forth the components of accumulated other comprehensive income, net of tax where applicable (in thousands):

December 31, 2020

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Foreign currency translation

Unrealized gains (losses) on marketable securities

Accumulated other comprehensive income (loss)

Unrealized gains on investment securities

Accumulated other comprehensive income

FINANCIAL INSTRUMENTS

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Investment Securities

Certificate of deposit

Money market accounts

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December 31, 2019

Unrealized Losses

Unrealized Gains

Accrued Interest

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The Company had no realized losses or gains for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2019, 2018, and 2017, gross unrealized losses and gains related to individual securities that had been in a continuous loss position for 12 months or longer were not significant.

The maturities of the Company’s investment securities generally range up to 3 years for municipal bonds and for government and agency securities.

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Income from operations

Stockholders' equity, unrealized losses on

Stockholders' equity, unrealized gains on

investment securities & foreign currency

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Inventory capitalization

Unrealized gain on investments

Lease obligations

Valuation allowance

Total deferred tax assets

Unrealized loss on investments

Right-of-use assets

Unrealized loss on investment securities

Prepaid expenses

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Foreign taxes

Domestic manufacturer deduction

Share-based compensation

Share-based compensation - windfall

Other permanent differences

Research and development and jobs credits

Effect of Federal tax law change

Valuation allowance

Provision for income taxes

On December 22, 2017, the President of the United States signed into law the TCJA.

It amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.

For businesses, the TCJA reduces the corporate federal tax rate from a maximum of 35 % to a flat 21 % rate.

The rate reduction took effect on January 1, 2018.

As a result of the reduction in the corporate income tax rate from 35 % to 21 % under the TCJA, the Company revalued its net deferred tax liability resulting in a reduction of approximately $ 0.4 million, which had been recorded as a reduction of income tax expense in the Company’s consolidated statements of income for the year ended December 31, 2017.

The impact to the Company’s 2017 earnings per common share was an increase of approximately $ 0.04 per share.

In addition, the 2019, 2018 and 2017 effective tax rate was impacted by the excess tax benefit from share-based compensation activity which is reflected as a reduction of the provision for income taxes.

In 2019 and 2018, the effective tax rate was also impacted by the Company’s research and development credits.

However, the 2017 effective tax rate was not impacted by the Company’s research and development credits.

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (the “ CARES Act”).

It amends the Internal Revenue Code to provide relief and supportive measures for taxpayers impacted by the outbreak of COVID-19 virus.

The key components of the Act are as follows:

eliminating taxable income limitation for certain net operating losses (“NOL”) and permitting carry back NOLs arising in 2018 , 2019 and 2020 to five prior tax years;

accelerating refunds of previously generated Alternative Minimum Tax credit;

increase business interest limitation from 30 percent to 50 percent of adjusted taxable income;

amending depreciation for qualified improvement property (“QIP”) to 15- year property for QIP placed in service after December 31, 2017.

The Company’s income tax provision provided under the CARES Act did not have a material impact on the year ended December 31, 2020.

The Company has not placed into service material amount of QIP during tax years 2018 and 2019 but did place some amount of QIP into service these years.

The impact to the Company’s 2020 earnings per common share was immaterial.

The Company has separate state and foreign net operating loss carry forwards totaling $ 25.6 million that start expiring in 2029 .

The company continues to utilize the net operating loss carry forward in 2020.

The company continues to utilize the net operating loss carry forwards in 2021.

As of December 31, 2020, the Company has established a valuation allowance for the portion of the net operating loss carry forwards which is not expected to be realized.

LEASES AND COMMITMENTS

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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, 2019 and for the twelve-month period then ended.

The Company did not have any finance leases as of December 31, 2020 and 2019, respectively, or for the years then ended.

Our leases relating to office and warehouse space have terms of 19 months to 122 months .

Our leases relating to equipment have lease terms of 60 to 203 months , with some of them having clauses relating to automatic renewal.

The Company’s warehouse agreement also contains 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.

Our leases relating to equipment have lease terms of 24 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.

For the year ended December 31, 2019, expense associated with operating leases was $ 3.1 million.

The operating lease expense was $ 3.6 million and $ 3.1 million for the years ended December 31, 2020 and 2019, respectively.

Supplemental cash flow information related to the Company’s operating leases were as follows (in thousands):

Year ended December 31, 2019

Cash paid for amounts included in the measurements of lease liabilities

Operating cash flow from operating leases

Operating cash flow used in operating leases

Right-of-use assets obtained in exchange for lease obligations

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imputed interest

As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and under the previous lease accounting standard, future minimum lease commitments under non-cancelable operating leases with terms in excess of one year would have been as follows (in thousands):

Total minimum lease payments

Unconditional purchase obligations:

At December 31, 2019, the Company had $ 4.8 million in unconditional purchase obligations primarily for outsourced information technology and Coach events.

At December 31, 2020, the Company had $ 41.6 million in unconditional purchase obligations primarily for inventories, outsourced information technology and Coach events.

SELECTED QUARTERLY FINANCIAL DATA (unaudited)

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Diluted earnings per share

Earnings per share (sometimes referred to as “EPS”) is computed independently for each of the quarters presented;

EPS is computed independently for each of the quarters presented;

accordingly, the sum of the quarterly earnings per share may not equal the total computed for the year.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data