Item 1. Business
ITEM 1. BUSINESS
SUMMARY
Medifast, Inc. (“Medifast,” the “Company,” “we” or “us”) is the global company behind one of the fastest-growing health and wellness communities called OPTA VIA ® , which offers Lifelong Transformation, One Healthy Habit at a Time ® . Reflecting the success of our holistic approach to health and wellness, we have consistently grown revenue over the past four years. Of equal importance, we expect our differentiated model to deliver long-term growth in the foreseeable future.
Medifast has created a new business model by combining the most powerful aspects of direct selling, while eliminating those dimensions that have typically challenged other companies. Medifast is often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is different. We employ a differentiated direct-to-consumer sales model in which approximately 92.0% of our revenue comes from subscription-based meal-plan orders.
Our OPTA VIA brand offers a highly competitive and effective lifestyle solution centered on developing new healthy habits through smaller, foundational changes called micro-habits. The program is built around four key components: Independent OPTA VIA Coaches, the OPTA VIA Community, the Habits of Health® Transformational System, and Scientifically Developed Products and Clinically Proven Plans.
● Independent OPTAVIA Coaches: Provide individualized support and guidance to clients on the path to optimal health and wellbeing.
● OPTA VIA Community : A Community of like-hearted people providing each other with real-time connection and support.
● The Habits of Health® Transformational System: A proprietary system which offers easy steps to a sustainably healthy lifestyle.
● Products & Plans: Clinically proven plans and scientifically developed products, called “Fuelings,” backed by dietitians, scientists and physicians.
We help clients achieve their health goals through a network of more than 44,000 independent OPTA VIA Coaches, approximately 90.0% of whom were clients first, and have impacted almost 2.0 million lives to date. OPTA VIA Coaches introduce clients to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive OPTA VIA-branded nutritional products, or Fuelings. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with probiotic cultures, vitamins and minerals, as well as other nutrients essential for good health. Our products support the process of integrating healthy habits into their client’s day-to-day lives.
The OPTA VIA coaching model is client-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. OPTA VIA Coaches provide personalized support to their Clients and motivate them by sharing their passion for healthy living and lifestyle transformation. We believe this personal coaching is an essential factor in client success based on findings from a clinical study published in Obesity Science and Practice in 2018 which validated the OPTA VIA model when its meal plan was combined with education and support consistent with that provided by OPTA VIA Coaches.
The entrepreneurial spirit of our OPTA VIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new Clients, many of whom go on to become Coaches. We offer economic incentives designed to support each Coach’s long-term success, which plays an important role in their financial wellness, providing the
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opportunity to improve their finances while changing the health trajectory of families, communities and generations. 1
OPTA VIA Coaches are independent contractors, not employees, who support our clients and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. As entrepreneurs, OPTA VIA Coaches market our products to friends, family and other acquaintances. OPTA VIA products are shipped directly to OPTA VIA clients who are working with an OPTA VIA Coach. OPTA VIA Coaches do not handle or deliver merchandise to clients. This arrangement frees our OPTA VIA 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 measure our success by the results our clients are able to achieve. The more OPTA VIA Coaches we have, the more clients we can serve. The total number of active earning OPTA VIA Coaches as of December 31, 2020 was 44,200. Our growth is demonstrated by strong financial performance over the last several years. We generated revenue of $934.8 million in 2020, $713.7 million in 2019 and $501.0 million in 2018, representing year-over-year increases of 31.0% in 2020 and 42.4% in 2019. Income from operations was $134.2 million in 2020, $91.0 million in 2019 and $69.1 million in 2018, increases of 47.5% in 2020 and 31.8% in 2019.
As a result of our strategic investment in the development, introduction, and marketing of our OPTA VIA brand, our OPTA VIA business accounted for approximately 98.0% of our revenues for the year ended December 31, 2020.
We are one of the fastest growing health and wellness companies in the United States, with a large and growing market opportunity. Our scalable coach-based approach drives both client success and growth. We believe our continued investment in fostering a robust community around our OPTA VIA brand and our OPTA VIA Coaching Model will continue to drive a sustainable, repeatable business rhythm focused on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time.
Our operations are conducted through our 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.
COVID-19 Update
In December 2019, a novel strain of coronavirus (“COVID-19”) was identified in Asia. Over the next several months, COVID-19 quickly spread across the world. In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic. As of February 2021, the virus continues to spread, infecting more than 110 million people worldwide, and impacting worldwide economic activity. In response to the pandemic, many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing and shelter-in-place orders. This has resulted in the temporary closure of schools and non-essential businesses. Because the Company sells products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material impact to our consolidated operating results for the year ended December 31, 2020.
While the duration and severity of this COVID-19 pandemic is uncertain, the extent to which the pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current estimates. The difference is due to inherent uncertainties regarding the duration and further spread of the outbreak, its severity, government actions taken to contain the virus or treat its impact, changes in consumer behavior resulting from the pandemic and how quickly and to what extent normal economic and operating conditions can resume.
1 OPTA VIA makes no guarantee of financial success. Success with OPTA VIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership. Please see the OPTA VIA Income Disclosure Statement (http://bit.ly/ids OPTA VIA) for statistics on actual earnings of Coaches.
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These uncertainties make it challenging for our management to estimate our future business performance. However, we continue to actively monitor the impact of COVID-19 and related developments on our business.
Although the COVID-19 pandemic has impacted our business operations in multiple ways, our manufacturing facility remains fully operational to date and we have not experienced any meaningful disruption to our worldwide supply chain. Additionally, nutritional supplements and health foods have been designated critical/essential infrastructure in the U.S. and, as such, we have continued to actively manufacture and distribute our products in our markets around the world. We will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. While our manufacturing and distribution employees continue to work on site, they are following additional health and safety guidelines. In response to the public health crisis posed by COVID-19, we took numerous actions, including:
● instituting enhanced safety protocols, limited visitation to our plant and distribution center and rolling out additional sick leave (crisis pay) for our onsite essential employees
● successfully implementing a work-from-home plan for all non-essential employees to comply with guidelines from government and health officials and also extended crisis pay;
● changing this year’s OPTA VIA convention from a live event in July to a virtual event;
● prioritizing production to our highest volume products limiting our stock keeping unit (“SKU”) assortment to ensure that we are able to meet anticipated product demand across core items;
● employing incentives and promotions to help OPTA VIA Coaches adjust to the adverse effect of overall economic conditions and the nationwide actions taken to control the spread of the virus;
● providing additional health and safety precautions in our headquarters, manufacturing and distribution centers, including use of personal protective equipment and frequent hand sanitization; and
● process controls in relation to social distancing, visitors, travel and quarantine.
The Company’s priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees and OPTA VIA Coaches, and their families; maximizing the availability of products that help consumers with their needs; and the use of our employees’ talents and our resources to help society meet and overcome the current challenges. The senior management team meets regularly to review and assess the status of the Company’s operations and health and safety of its various constituencies, and will continue to proactively respond to the situation and may take further actions that alter the Company’s business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTA VIA Coaches and consumers.
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. According to the Center for Disease Control and Prevention (“CDC”), over 70.0% of all adults in the United States (US) aged 20 and above were overweight or obese in 2017-2018, and is growing at approximately 2.0% per annum.
According to a proprietary analysis, the addressable market for weight loss is large and growing. It’s worth about $20.0 billion today with a growth rate of approximately 6.0% per annum. Additionally, roughly 75.0% of the US population above 18 wants to lose weight and is open to dieting, and approximately 65.0% of overweight/obese population considers paid meal plans effective. The total potential pool of OPTA VIA clients is sizable; there are about 175.0 million people looking to lose weight and willing to consider dieting in the US. 2
2 Consumer and OPTA VIA Client surveys February 2020, NCHS, team analysis
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We offer clients a radically different approach to health, with weight loss and weight management serving as a catalyst to an overall improvement in health, confidence, vitality and general well-being.
Consumer Motivation
Our core clients 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 clients often seek to address and resolve include:
● physical limitations and debilitating medical conditions linked to an unhealthy weight;
● the desire for more energy to meet physical demands and aspirations (e.g. work, parenting, sports and recreation);
● mental, emotional and psychological limitations caused by being at an unhealthy weight;
● 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 how to balance different food groups;
● the need for a convenient and simple, healthy lifestyle solution or program to accommodate demands on their time; and
● the need for a community of like-minded people for support to achieve their goals.
Weight management is a challenge for a significant portion of the U.S. population, as well as the global population. According to the U.S. Department of Health and Human Services, overweight and obese individuals are increasingly at risk for diseases such as Type 2 diabetes, heart disease, certain types of cancer, stroke, arthritis, sleep apnea and depression. In 2013, The American Medical Association declared obesity a disease and the American Heart Association, the American College of Cardiology, and the Obesity Society jointly issued treatment guidelines recommending obesity be managed as a chronic disease. In 2016, the World Health Organization estimates that approximately 1.9 billion people 18 years and older were overweight worldwide, triple the rate since 1975.
Obesity is defined as a Body Mass Index (“BMI”) of 30 kg/m2 or greater, whereas overweight is defined as a BMI ranging between 25 and 29.9 kg/m. In the United States, more than two-thirds of the adult population fall within the overweight or obese categories and approximately 42.4% were obese in 2017. By 2017, only two states and the District of Columbia had an obesity rate that was less than 25.0%; twenty-nine states had an adult obesity rate of 30.0% or higher. Being overweight and/or obese is linked to a multitude of serious comorbidities including heart disease, stroke, Type 2 diabetes, certain types of cancers, arthritis, sleep apnea and depression. In fact, the 2016 State of Obesity Report by Trust for America’s Health and the Robert Wood Johnson Foundation estimated approximately 80.0% of people with diabetes were overweight or obese.
Consumers in the United States spend an estimated approximately $190.0 billion annually on obesity-related medical conditions; the average annual medical costs for those who are obese are more than $1,400 higher than those of people in a normal weight range. According to a 2019 study by Marketdata Enterprises, the United States weight loss market itself is estimated to be a roughly $73.0 billion per year industry, including consumer spending on diet foods, drinks and low-calorie sweeteners, health clubs, fitness centers and workout videos; medically supervised and commercial weight loss programs; children’s weight loss camps; diet books; appetite suppressants and more. Portion-controlled, meal-replacement weight management programs are continuing to gain popularity, as consumers search for a safe and effective solution that provides balanced nutrition, effective weight loss, and valuable behavior-modification education.
Direct Sellers
We have created a new business model by combining 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 clients. Rather, OPTA VIA Coaches help clients adopt healthy habits and learn the benefits of OPTA VIA products, which are shipped directly to the client. We are often compared to diet and
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weight loss-only companies or to multi-level marketing companies, but our model is different. We support clients through independent OPTA VIA Coaches, about 90.0% of whom were clients first.
Our competitive advantages:
● OPTA VIA’s innovative model is client centric, it has one price and approximately 90.0% of its revenue is from clients.
● OPTA VIA Coaches focus on coaching and supporting clients. They do not hold inventory or manage cash.
● OPTA VIA boasts an energized health and wellness community, where about 90.0% of Coaches come from the client base and have been in their clients’ shoes. They promote a holistic wellness program and are not exclusively focused on product sales. Our competitive commissions are also deliberately structured to incentivize coaching and support client success.
● The field promotes a unified training system that aligns its leaders around a common mission.
OPTA VIA offers an entrepreneurial opportunity that allows Coaches:
● 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.
The Direct Selling Association (“DSA”) estimates that approximately 6.8 million U.S. adults participate in the direct selling industry as “sellers” based on 2019 data. The majority of these direct sellers are women and nearly 90.0% of all direct sellers operate their businesses part-time. We develop and market products and services that promote the success of our OPTA VIA Coaches, each a micro-entrepreneur who plays an integral role in our operating performance and growth. OPTA VIA Coaches are effective advocates for our mission and the sale of our nutrition products and health and wellness programs. We offer direct sellers business essentials, supplies and interactive marketing services that help them launch and organize their direct-selling business as an independent OPTA VIA Coach. In 2020, we were ranked in the DSA’s Top 20 list, a recognition given annually to the largest direct selling companies in the United States.
Transparency is a core principal at Medifast. We adhere to the direct-selling industry’s highest ethical standards and best practices. We are a member in good standing of the DSA, a well-known and widely respected national trade association representing over 100 direct selling companies in the United States. As a member of the DSA, we underwent a comprehensive and rigorous review that included a detailed analysis of our business model and practices.
Markets
United States
The United States is our principal market and continues to represent significant potential for growth given the high percentage of overweight or clinically obese adults, where over 70.0% of adults aged 20 and over were considered overweight or obese in 2017-2018. Sales of weight loss and health and wellness products and services are projected to grow at a compound average growth rate (“CAGR”) of approximately 7.0% in the United States through 2022, according to industry research and analysis.
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 diabetes, hypertension, heart disease, stroke, osteoporosis and others have increased demand for health and wellness products. The nutrition and weight management segment of the industry continued to dominate the health and wellness market in 2020.
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We are targeting our 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.
Asia Pacific
As we previously disclosed, global expansion is an important component of our long-term growth strategy. In July 2019, we commenced our international operations, entering into the Asia Pacific markets of Hong Kong and Singapore. The Company outsources a distribution center in Hong Kong to give the Company adequate product distribution capacity for the foreseeable future. Our decision to enter these markets was based on industry market research that reflects a dynamic shift in how health care is being prioritized and consumed in those countries.
Like the United States, we believe healthy lifestyles have increasingly become a priority to middle-class consumers in the Asia Pacific markets as disposable income grows. Our research has found that while traditional remedies are still essential, consumers are increasingly incorporating healthy living products into their daily lives. In-market testing of our products and programs evoked strong consumer response and acceptance.
Asia Pacific is the largest health and wellness marketplace in the world, in terms of revenue share, with robust growth projected over the next several years. The region also is a leading direct selling marketplace, with China representing the second largest market for direct selling retail sales as of 2019.
PRODUCTS AND PROGRAMS
We take pride in our scientific heritage. We authored 17 peer reviewed publications over the past 10 years. Most recently, we conducted a double blind study that shows the effects that Coaching has on the program, that showed clients speaking with their OPTA VIA Coach more often may help them lose up to twice as much weight. 3
Our clinically proven plans and our scientifically developed products were developed by physicians, dietitians, and scientists to help consumers achieve a healthy weight. 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 scientifically designed to deliver proper nutrition at every stage of a person’s journey toward a sustainable, healthy lifestyle. Fuelings, our hero product, are nutrient dense, portion controlled, and nutritionally interchangeable.
OPTA VIA- BRANDED PRODUCTS
OPTA VIA-branded nutritional products we market include:
OPTA VIA Essential Fuelings . OPTA VIA Essential Fuelings contain 24 vitamins and minerals, high quality, complete protein, and no colors, flavors or sweeteners from artificial sources. Each OPTA VIA Essential Fueling is scientifically formulated with the right balance of carbohydrates, protein and fat which helps promote a gentle, but efficient fat-burning state. Our Fuelings contain high-quality protein which helps our clients retain lean muscle mass and each contains the patented probiotic GanedenBC30 ® to support digestive health as part of a balanced diet and healthy lifestyle. Our OPTA VIA Coaches market OPTA VIA Essential Fuelings primarily through a suite of Scientifically Proven Optimal Weight Plans. Consumers purchase kits tailored to their individual needs on the advice and counsel of their OPTA VIA Coach. Kits, ranging in price from approximately $415.00 to $458.00, include up to a 30-day supply of Fuelings and are purchased by our clients through either our ecommerce website, their OPTA VIA Coach’s personal website or our call center.
3 Based on the results of a 16-week clinical study, those who participated in at least 75% of their 23 assigned OPTA VIA Coaching calls lost 15.2 lbs. compared to 6.7 lbs. for those participating in fewer calls.
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OPTA VIA Select Fuelings . OPTA VIA Select Fuelings represent our Non-GMO line of products. These products have unique flavor profiles, work with the same suite of Optimal Weight Plans described above but are formulated for those who desire Non-GMO products.
OPTA VIA Coach Business Kit . Coaches are required to purchase a business kit to join our network. The kits provide new OPTA VIA Coaches with business essentials to successfully start their independent business, including plan information and 12 months of free access to a personalized OPTA VIA website.
OPTA VIA- BRANDED PLANS
Our OPTA VIA-branded health and wellness plans help consumers enter a gentle, but efficient fat-burning state. Their success is enhanced by the personal attention, counseling, education, advice and motivation they receive from our OPTA VIA Coaches. They also benefit from being members of a broader OPTA VIA Community of consumers with
like-minded goals and objectives regarding their health. We offer consumers incentives to join the OPTA VIA Community, including support calls with a caring community, exclusive offers through our OPTA VIA Premier service that help our clients stay on plan, as well as qualifies them for discounts on purchased products and free shipping. We encourage our clients 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.
● The potential to live a longer healthier life. 4
The majority of our OPTA VIA Coaches began as weight-loss clients, who had success on the OPTA VIA program, and became OPTA VIA Coaches, for a number of reasons, including to pay it forward and help others through their transformation journey. Optimal Weight plans we market to consumers are:
The Optimal Weight 5 & 1 Plan ® . Our proven Optimal Weight 5 & 1 Plan encourages consumers to eat six small meals a day, an important habit that helps maintain healthy weight. Five daily meals are OPTA VIA Fuelings, offering consumers a choice from more than 50 delicious, convenient, nutritionally interchangeable, scientifically-designed products, including shakes, soups, bars, hot beverages, hearty choices, biscuits, pretzels, pudding and brownies. OPTA VIA Coaches counsel their clients on which Fuelings to select. OPTA VIA Coaches also counsel their clients 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 consumers who want to continue eating all food groups or want a flexible meal plan to help them achieve a healthy weight. Under this plan, OPTA VIA Coaches counsel their clients to eat four meals of OPTA VIA 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 consumers 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. Consumers are counseled by their OPTA VIA Coaches to eat three Optimal Health Fuelings and three balanced meals they prepare themselves daily.
4 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 client is on, they learn the Habits of Health through the Habits of Health® Transformational System which is a crucial tool for client 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 consumers to replace unhealthy habits with healthy ones that contribute to their long-term success.
THE MEDIFAST BRAND
While OPTA VIA now accounts for a majority of our revenue, we also have products under the Medifast brand name. About 16.0% of our consumable units sold in 2020 were tied to the Medifast brand. As of December 31, 2020, our Medifast meal replacement line includes more than 30 options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, pudding, shakes, and soft bakes. We also offer a variety of weight loss, weight management, and healthy living products under the Medifast, Optimal Health, and Flavors of Home brands.
Consistent with business and brand strategy, we decided to sunset our Medifast Direct channel and Medifast branded products by the end of Q2, 2021. By maintaining our commitment to building capabilities in the areas that matter most to our OPTA VIA Coaches and clients within the OPTA VIA channel, we believe we will enhance our ability to further grow our business over the next several years, enabling robust revenue growth while also maintaining our profitability in the long-term.
CLIENTS
Sales are made to individual clients. No single client accounted for 10% or more of our consolidated revenue for the year ended December 31, 2020.
SEASONALITY
Demand for weight management products and programs are typically seasonal. Traditionally, the predisposition of consumers not to initiate a weight loss or management program during the holiday season impacts the fourth quarter with fewer sales of weight management products and services during these months. January and February generally show increases in sales, as these months are considered the commencement of the “diet season.” We believe our sales pattern does not follow the seasonality of our industry, but rather is predicated on the growth of our OPTA VIA Coach network.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board consists of a multi-disciplinary, international panel that serves as the foundation for scientifically-valid, consumer-centric, high quality innovations for lasting health. Its mission is to help guide us in making informed decisions regarding medical, nutritional, and scientific matters by providing expertise and information on research and emerging trends.
The work of this cross-disciplinary group builds on our scientific heritage and incorporates leading-edge clinical research into our products and programs.
COMPETITION
The weight-loss industry is very competitive and encompasses various weight loss products and programs. These include a wide variety of commercial weight-loss programs, pharmaceutical products, books, self-help diets, dietary 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 clients seeking to manage their weight can turn to other traditional center-based competitors, online diet-oriented sites, self-directed dieting and self-administered products such as prescription drugs, over-the-counter drugs and supplements, as well as
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medically supervised programs. 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.
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.), Nature’s Sunshine Products Inc., Herbalife Nutrition Ltd., and Simply Good Foods Co.
We have a competitive advantage over traditional diet companies. The OPTA VIA model:
● Promotes a program that focuses on holistic wellness; it views healthy weight as a catalyst to greater changes.
● Offers personalized, empathetic support from Coaches that have been in their clients’ shoes.
● Offers lifelong habit development supported by a proprietary integrated system, the Habits of Health Transformational System.
● Has a vibrant health and wellness community that has impacted almost 2.0 million lives.
We also have an advantage over traditional direct selling companies:
● OPTA VIA’s innovative model is client centric, it has one price and approximately 90.0% of its revenue is from clients.
● OPTA VIA boasts a health and wellness community, where about 90.0% of coaches come from the client base and have been in their clients’ shoes. They promote a holistic health and wellness program and are not focused on product sales.
● OPTA VIA Coaches promote a unified training system that aligns its leaders around a common mission.
We believe our scientific and clinical heritage and commitment to evaluating products and programs through clinical research are primary differentiators that allow us to compete in this market. Our products were originally developed by a physician, and we have been on the cutting edge in the development of nutritional and weight-management products since our founding. Our products are individually portioned, calorie and carbohydrate-controlled meal replacements that share a similar nutritional “footprint” and provide a balance of protein and good carbohydrates, including fiber.
Our OPTA VIA Integrated Coaching Model offers the personal support of an OPTA VIA Coach, who is often a person who has achieved success with OPTA VIA and has turned their success into a business opportunity.
MARKETING
We continue to build and leverage our core 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 clients by stressing Medifast’s and OPTA VIA’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 clients and OPTA VIA Coaches. We are constantly working to enhance all of our Company materials and websites.
MANUFACTURING
Jason Pharmaceuticals, Inc., our wholly-owned subsidiary with a manufacturing facility in Owings Mills, Maryland, is the primary manufacturer of our powder-based products, which account for approximately 46% of our unit sales. We purchased the plant in July 2002 and have gradually increased production capacity and improved overall efficiencies with additional investments in blending and packaging equipment. The remaining 54% of our unit sales are manufactured by third-party vendors in accordance with Medifast proprietary formulas and manufacturing standards. Our Owings Mills manufacturing facility is regulated and inspected by the United States Food and Drug Administration (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
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Food Program Level 2 facility compliant with the Global Food Safety Initiative, a global non-profit collaboration to advance food safety.
GOVERNMENTAL REGULATION
We are subject to extensive foreign, federal, state, and local government laws and regulations, including those relating to the preparation and sale of food and beverages, in the various jurisdictions in which we operate, own, and lease properties, and market our offerings, including our OPTA VIA program, our 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 individual characteristics, work permits, and benefit offerings. Further, we are subject to laws governing our relationships with our independent contractor OPTA VIA 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 and foreign markets. 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 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-pyramiding 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 consumers. 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 a MLM organization’s compensation structure, and how a MLM organization should approach representations to current and prospective participants. We believe our current business practices comply with the MLM Guidance.
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 multilevel 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.
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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. OPTA VIA 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.
Other Regulations
A number of laws and regulations govern our advertising and marketing, services, products, operations and relations with consumers, franchisees, and 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 and internationally.
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.
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 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
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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 clients. Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor.
ENVIRONMENT LAWS
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.
HUMAN CAPITAL MANAGEMENT
As of December 31, 2020, the Company employed 713 employees, of whom approximately 409 were engaged in manufacturing, logistics and supply chain support, and the remaining 304 in marketing, administrative and corporate support functions. None of our employees are subject to a collective bargaining agreement with the Company. We believe that we have a good relationship with our employees. Of our total employees, 701 were employed in the United States and 12 were employed in Asia Pacific.
At Medifast, we are focused on nurturing a One Team mindset that celebrates strong cross-functional teaming and partnering. Our culture emphasizes the importance of strong relationships between our team members to facilitate trust, understanding and empathy. We have a Culture Compass that expresses:
● Our Mission … why we exist
● Our Focus … on Coaches and Clients
● Our Core Values … what we believe
● Our Success Drivers … how we lead
● Our Operating Principles … how we make choices
Together, these cultural elements enable us to prioritize our work, plan for the future and harness our combined energy to accomplish our company objectives. Our Culture Compass is 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 amazing Coach and Client Experiences.
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 the Facebook platform to connect, collaborate, incite conversations around topics that matter to us (like Wellness), foster greater comradery, celebrate our successes and build trust among peers. We leverage our communication channels to remind team members of the significant impact they have on the Coach & Client Experience, help them understand our business model and get them engaged in opportunities to learn and increase empathy across functional teams.
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 as well as improving our learning on how we can foster a more inclusive work environment that enables all our team members to have a voice. Currently, we deploy pulse surveys after significant events or programs so that we can gain a deeper understanding of how we can better serve our team members’ needs, ensure we are staying aligned with our mission and gauge our team members’ understanding of our company strategy and goals.
We regularly review our employees’ feedback to better align our human capital initiatives to the needs of our employees. In 2020, the company established a relationship with an external partner to assess our work environment and identify
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opportunities in the area of Diversity, Equity & Inclusion (“DEI”). We have also planned leadership training and workshops, to occur in 2021, that will establish the future framework for our DEI program.
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 the pay of our team members to ensure we are paying competitively, applying a consistent market pricing approach and ensure we are considering internal equity. Our variable pay targets are performance based and tied to organizational results.
In 2020, in response to COVID-19, we immediately prioritized the health and wellbeing of our employees. For our onsite essential employees, we instituted enhanced safety protocols, limited visitation to our plant and distribution center and rolled out additional sick leave (crisis pay) to allow our team members the time needed to cope should they get sick or have a sick family member. For our non-essential employees, we successfully implemented a work-from-home plan and also extended crisis pay. We leveraged our collaboration tools and continued to nurture our Medifast community.
In addition to our employees, our Human Capital also includes our independent contractor OPTA VIA Coaches. They support our clients and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. For information about our OPTA VIA Coaches, see “Summary” section in this Item 1. Business.
INFORMATION SYSTEMS TECHNOLOGY
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. Our information systems and infrastructure are monitored continuously, 24x7. Redundant carrier-diverse networks are also used to interconnect our corporate locations. SSAE 18 compliance of key service organizations is evaluated annually by reviewing relevant System and Organization Controls (SOC) reports. Where applicable, service provider PCI-DSS compliance is also reviewed annually.
A variety of information security methods are used to protect confidential customer and corporate data against unauthorized access, including periodic network and website penetration testing. Network intrusion detection and prevention technologies are in use to prevent unauthorized access and distributed denial of service (DDOS) attacks, including bot mitigation. Industry standard multi-factor authentication (MFA) and encryption secure customer and corporate data in transit and at rest.
As our operations grow in both size and scope, we will continue to improve and upgrade our information systems and infrastructure while maintaining their reliability and integrity.
INTELLECTUAL PROPERTY
Products manufactured by and programs marketed by the Company are sold primarily under its own trademarks and trade names. 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, 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
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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 Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Report.
The SEC maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file such information electronically with the SEC.