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Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-26 · 202 added, 148 removed, 427 unchanged (45% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Income

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Notes to Consolidated Financial Statements

Table of Conte n t s

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

and Subsidiaries

Opinion on the Internal Control Over Financial Reporting

We have audited Medifast, Inc.

and Subsidiaries' (the Company) 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 audited Medifast, Inc.’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 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.

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, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements of the Company and our report dated February 23, 2022 expressed an unqualified opinion.

Basis for Opinion

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A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

A company's internal control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

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February 23, 2022

Table of Conte n t s

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 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).

and its subsidiaries (the Company) as of December 31, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 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.

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, 2021, based on criteria established in I nternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 23, 2022 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 audit 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 audits 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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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.

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.

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.

Table of Conte n t s

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

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February 23, 2022

Table of Conte n t s

MEDIFAST, INC.

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

2021 2020 2019

Revenue $ 1,526,087 $ 934,842 $ 713,672

Cost of sales 398,490 237,027 176,814

Gross profit 1,127,597 697,815 536,858

Selling, general, and administrative 911,356 563,656 445,819

Income from operations 216,241 134,159 91,039

Interest income, net

Other (expense) income

Interest (expense) income ( 231 ) 246 1,295

Other income (expense) 119 ( 140 ) 29

( 112 ) 106 1,324

Income from operations before income taxes 216,129 134,265 92,363

Provision for income taxes 52,098 31,406 14,447

Net income $ 164,031 $ 102,859 $ 77,916

Earnings per share - basic $ 14.01 $ 8.74 $ 6.62

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Weighted average shares outstanding

Basic 11,705 11,771 11,771

Diluted 11,813 11,850 12,117

Cash dividends declared per share $ 5.68 $ 4.52 $ 3.38

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

Table of Conte n t s

MEDIFAST, INC.

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dollars in thousands)

Other comprehensive income (loss), net of tax:

2021 2020 2019

Net income $ 164,031 $ 102,859 $ 77,916

Other comprehensive income, net of tax:

Foreign currency translation 112 ( 21 ) 1

Unrealized gains (losses) on investment securities

Other comprehensive income (loss)

Unrealized (losses) gains on investment securities ( 42 ) 37 197

Other comprehensive income 70 16 198

Comprehensive income $ 164,101 $ 102,875 $ 78,114

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

Table of Conte n t s

MEDIFAST, INC.

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Cash and cash equivalents $ 104,183 $ 163,723

Accounts receivable - net of doubtful accounts of $ 219 and $ 235 at

December 31, 2020 and 2019, respectively

Inventories 180,043 53,392

Investment securities 5,361 10,752

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Right-of-use assets 24,457 10,508

Other assets 6,468 2,937

Deferred tax assets 4,404 692

TOTAL ASSETS 398,326 276,084

LIABILITIES AND STOCKHOLDERS' EQUITY

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Total liabilities 195,852 118,838

Commitments (Note 12)

Stockholders' Equity

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Retained earnings 190,333 154,351

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

December 31, 2019, respectively

treasury stock at cost, 0 and 46 shares at December 31, 2021 and December 31, 2020, respectively

Total stockholders' equity 202,474 157,246

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

M EDIFAST, INC.

Table of Conte n t s

MEDIFAST, INC.

AND SUBSIDIARIES

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dollars in thousands)

2021 2020 2019

Operating Activities

Net income $ 164,031 $ 102,859 $ 77,916

Adjustments to reconcile net income to cash provided by operating activities

Depreciation and amortization 6,812 4,316 4,624

Non-cash lease expense 5,069 3,189 2,624

Share-based compensation 9,903 6,796 4,520

Loss on sale of disposal of property, plant and equipment 2 212 17

Bad debt expense

Amortization of premium on investment securities 89 320 454

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Change in operating assets and liabilities:

Accounts receivable

Inventories ( 126,651 ) ( 4,621 ) ( 9,883 )

Income taxes, prepaid ( 945 ) 5,169 ( 5,169 )

Prepaid expenses and other current assets ( 9,887 ) 1,086 ( 1,936 )

Other assets ( 4,543 ) ( 2,741 ) ( 2,615 )

Accounts payable and accrued expenses 54,380 28,010 12,111

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Sale and maturities of investment securities 5,145 4,605 3,730

Sale of property and equipment

Purchase of property and equipment ( 34,209 ) ( 5,887 ) ( 10,058 )

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Options exercised by executives and directors 811 1,597 278

Net shares repurchased for employee taxes

Net shares repurchased for taxes ( 6,089 ) ( 551 ) ( 14,092 )

Cash dividends paid to stockholders ( 63,856 ) ( 53,190 ) ( 35,396 )

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Foreign currency impact 112 ( 21 ) 1

Increase (Decrease) in cash and cash equivalents

(Decrease) Increase in cash and cash equivalents ( 59,540 ) 86,749 ( 4,390 )

Cash and cash equivalents - beginning of the period 163,723 76,974 81,364

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

Table of Conte n t s

MEDIFAST, INC.

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dollars in thousands)

Number of Shares Issued

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Treasury Stock

Issued Common

Stock Additional

Capital Accumulated

Comprehensive

Income (Loss) Retained

Earnings Treasury

Balance, January 1, 2019 12,117 $ 12 $ 8,802 $ ( 173 ) $ 131,344 $ ( 30,879 ) $ 109,106

Net income — — — — 77,916 — 77,916

Share-based compensation 273 — 4,520 — — — 4,520

Options exercised by executives and directors 10 — 278 — — — 278

Net shares repurchased for employee taxes

Restricted shares forfeitures

Treasury stock from cashless options

Net shares repurchased for taxes ( 128 ) — ( 13,600 ) — ( 492 ) — ( 14,092 )

Treasury stock from stock repurchases — — — — — ( 33,114 ) ( 33,114 )

Other comprehensive loss

Other comprehensive income — — — 198 — — 198

Cash dividends declared to stockholders — — — — ( 39,980 ) — ( 39,980 )

Balance, December 31, 2019

12,272 $ 12 $ — $ 25 $ 168,788 $ ( 63,993 ) $ 104,832

Net income — — — — 102,859 — 102,859

Share-based compensation 17 — 6,796 — — — 6,796

Options exercised by executives and directors 28 — 1,597 — — — 1,597

Net shares repurchased for employee taxes

Net shares repurchased for taxes ( 6 ) — ( 551 ) — — — ( 551 )

Treasury stock from stock repurchases — — — — — ( 5,000 ) ( 5,000 )

Treasury stock retired from stock repurchases ( 489 ) — — — ( 63,993 ) 63,993 —

Other comprehensive income — — — 16 — — 16

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Balance, December 31, 2020

11,822 $ 12 $ 7,842 $ 41 $ 154,351 $ ( 5,000 ) $ 157,246

Net income — — — — 164,031 — 164,031

Share-based compensation 55 — 9,454 — 142 — 9,596

Options exercised by executives and directors 29 — 811 — — — 811

Net shares repurchased for employee taxes

Retirement of treasury stock

Net shares repurchased for taxes ( 28 ) — ( 6,089 ) — — — ( 6,089 )

Treasury stock from stock repurchases — — — — — ( 55,999 ) ( 55,999 )

Treasury stock retired from stock repurchases ( 284 ) — — — ( 60,999 ) 60,999 —

Other comprehensive income — — — 70 — — 70

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Balance, December 31, 2021

11,594 $ 12 $ 12,018 $ 111 $ 190,333 $ — $ 202,474

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

Table of Conte n t s

MEDIFAST, INC.

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The Company has one modern, United States Food and Drug Administration (the “FDA”) approved manufacturing facility located in Owings Mills, Maryland.

Medifast sells a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the Medifast ® , OPTA VIA ® , Thrive by Medifast, Optimal Health by Take Shape for Life, and Flavors of Home ® brands.

Medifast sells a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the OPTA VIA, Optimal Health by Take Shape for Life, and Flavors of Home ® brands.

The Company’s product line includes more than 95 consumable options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups.

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Historically, we have not experienced any losses due to such concentration of credit risk.

Fair Value of Financial Instruments - Our financial instruments include cash and cash equivalents, 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.

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

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

The fair value of investments in available-for-sale 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.

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.

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

Table of Conte n t s

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

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The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows:

Building and building improvements

10 - 35 years

Building and building improvements 10 - 35 years

Leasehold Improvements (1)

Equipment and fixtures

Equipment and fixtures 3 - 15 years

Software 5 years

Vehicles 5 years

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

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If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Revenue Recognition - Our revenue is derived primarily from point of sale transactions executed over an ecommerce platform for weight loss, weight management, and other consumable health and nutritional products.

Revenue Recognition - Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight management, and other consumable health and nutritional products.

Revenue is recognized upon receipt by customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns.

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Sales returns

Our return policy allows for customer returns within 30 days of purchase and upon our authorization.

Our return policy allows for customer returns of consumable products within 30 days of purchase and upon our authorization.

We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to clients.

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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.

Table of Conte n t s

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.

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Contract costs

We expense sales commissions and credit card fees during the period in which the corresponding revenue is earned.

We expense OPTA VIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned.

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

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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.

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, 2021, 2020 and 2019, amounted to $ 1.6 million, $ 4.4 million and $ 5.3 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.

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

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

The Company incurred $ 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.

Share-Based Compensation - Share-based compensation consists primarily of restricted stock awards, market and performance-based share awards, and stock options granted to employees and directors.

The Company incurred $ 4.4 million, $ 2.8 million, $ 2.7 million in research and development expense for the years ended December 31, 2021, 2020 and 2019, respectively.

Share-Based Compensation - Share-based compensation consists primarily of restricted stock awards, performance-based share awards, and stock options granted to employees and directors.

Restricted stock awards are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the requisite service period.

Performance-based share awards are measured based on the grant-date market price of the Company's common stock adjusted by expected level of achievement over the performance period.

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 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.

The Company issues new shares upon the exercise of stock options, the granting of restricted stock awards, and the achieved performance against pre-determined performance goals over the performance period for performance-based share awards.

Income Taxes - Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.

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Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Table of Conte n t s

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.

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The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

We evaluated our tax positions and determined that we did not have any material uncertain tax positions.

Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.

For the years ended December 31, 2020, 2019 and 2018, no material estimated interest or penalties were recognized for the uncertainty of certain tax positions.

We file income tax returns in the United States and various states and foreign jurisdictions.

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

We evaluated our tax positions and determined that we did not have any material uncertain tax positions.

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.

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Accounting Pronouncements - Adopted in 2021

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).

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.

On January 1, 2021, the beginning of the Company’s fiscal year, the Company adopted Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes, which is designed to simplify the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740.

There was no material impact on the Company’s consolidated financial statements upon adoption of this ASU.

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):

Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes.

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.

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform.

The new guidance provides optional expedients and exceptions for applying accounting principles under GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and to other derivative instruments if there is a change to the interest rates used for discounting, margining or contract price alignment.

These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We are currently evaluating our contracts and the optional expedients provided by the new standard as it pertains to the credit agreement disclosed in Note 13.

Inventories consisted of the following (in thousands):

December 31, 2020

December 31, 2019

December 31, 2021 December 31, 2020

Raw materials $ 15,196 $ 13,428

Packaging 3,641 4,071

Non-food finished goods 15,991 8,078

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Reserve for obsolete inventory ( 7,472 ) ( 2,043 )

Total $ 180,043 $ 53,392

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PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment consisted of the following (in thousands):

December 31, 2020

December 31, 2019

December 31, 2021 December 31, 2020

Land $ 565 $ 565

Building and leasehold improvements 23,518 13,013

Equipment and fixtures 42,708 20,955

Software 21,894 20,047

Vehicles 145 145

Property, plant and equipment - gross 88,830 54,725

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Accounts payable and accrued expenses consisted of the following (in thousands):

December 31, 2020

December 31, 2019

December 31, 2021 December 31, 2020

Trade payables and accrued expenses $ 70,894 $ 36,092

Sales commissions payable

OPTA VIA Coach compensation payable

28,733 22,598

Dividends payable 17,186 13,831

Accrued payroll and related taxes 24,940 16,948

Coach incentive accruals

Promotional sales incentive accruals 10,935 7,621

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Sales tax payable 2,571 2,981

Total $ 163,309 $ 107,677

EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2021, 2020 and 2019 (in thousands, except per share data):

2021 2020 2019

Net income $ 164,031 $ 102,859 $ 77,916

Weighted average shares of common stock outstanding 11,705 11,771 11,771

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Earnings per share - diluted $ 13.89 $ 8.68 $ 6.43

Table of Conte n t s

The calculation of diluted earnings per share excluded 0 , 358 and 984 antidilutive options outstanding for the years ended December 31, 2021, 2020 and 2019, respectively.

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Treasury yield curve in effect on the date of grant that most closely corresponds to the expected term of the option.

The expected volatility is based on the historical volatility of the Company’s common stock over the period of time equivalent to the expected term for each award.

The expected volatility is based on the historical volatility of the Company’s common stock over the period of time equivalent to the expected

Table of Conte n t s

term for each award.

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 years ended December 31, 2021 and 2020, 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)

Risk-free interest rate

Expected volatility

Dividend yield

The number of stock options and weighted-average exercise prices as of December 31, 2021 and 2020 are as follows:

Weighted-Average Exercise Price

Awards Weighted-Average Exercise Price Awards Weighted-Average Exercise Price

(awards in thousands)

Outstanding at beginning of period 61 $ 48.19 97 $ 52.53

Exercised ( 29 ) 40.53 ( 28 ) 57.79

Forfeited — — ( 8 ) 68.45

Outstanding at end of the period 32 $ 54.98 61 $ 48.19

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A summary of outstanding restricted stock activity as of December 31, 2021 and 2020 are as follows:

Weighted-Average Grant Date Fair Value

Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value

(shares in thousands)

Outstanding at beginning of period 50 $ 116.06 46 $ 98.28

Granted 22 264.58 43 113.87

Vested ( 26 ) 116.68 ( 32 ) 88.71

Forfeited ( 3 ) 169.47 ( 7 ) 108.86

Outstanding at end of the period 43 $ 183.51 50 $ 116.06

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 Company withheld approximately 22,000 , 6,000 and 128,000 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, 2021, 2020 and 2019, respectively.

The total fair value of restricted stock awards vested during the years ended December 31, 2021, 2020 and 2019 was $ 7.0 million, $ 3.7 million and $ 4.7 million, respectively.

Performance-based Share Awards:

The Company has issued performance-based share awards to certain key executives who were granted a target number of deferred shares and may earn between 0% and 200% of the target number depending upon achieved performance against pre-determined performance goals over a three-year performance period after the date of grant.

The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date of grant adjusted by expected level

Table of Conte n t s

of achievement over the performance period.

Expense for performance-based share awards is amortized ratably over the performance period.

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 expenses during the years ended December 31, 2021, 2020 and 2019 are as follows (in thousands):

2021 2020 2019

Shares Share-Based Compensation Expense Shares Share-Based Compensation Expense Shares Share-Based Compensation Expense

Options and restricted stock 75 $ 4,302 111 $ 3,493 143 $ 3,817

Performance-based share awards granted in 2021 15 1,986 — — — —

Performance-based share awards granted in 2020 26 1,807 28 1,662 — —

Performance-based share awards granted in 2019 — 1,808 17 1,641 18 703

Total share-based compensation 116 $ 9,903 156 $ 6,796 161 $ 4,520

The total income tax benefit recognized in the accompanying Consolidated Statements of Income for restricted stock awards was $ 2.4 million, $ 1.4 million and $ 7.5 million for the years ended December 31, 2021, 2020 and 2019, 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 $ 4.8 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2021, which is expected to be recognized over a weighted-average period of 1.7 years.

There was $ 7.3 million of unrecognized compensation cost related to the 40,610 performance-based shares discussed above as of December 31, 2021, which is expected to be recognized over 1.8 years .

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

December 31, 2020

December 31, 2019

December 31, 2021 December 31, 2020

Foreign currency translation $ 90 $ ( 22 )

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These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.

Table of Conte n t s

The following tables present the Company’s cash and financial assets that are measured at fair value on a recurring basis for each of the hierarchy levels (in thousands):

December 31, 2021

Unrealized Gains

Accrued Interest

Estimated Fair Value

Cash & Cash Equivalents

Investment Securities

Cost Unrealized

Gains Accrued

Interest Estimated

Fair Value Cash & Cash

Equivalents Investment

Cash and cash equivalents $ 94,824 $ — $ — $ 94,824 $ 94,824 $ —

Money market accounts 9,359 — — 9,359 9,359 —

Government & agency securities 1,401 12 — 1,413 — 1,413

10,760 12 — 10,772 9,359 1,413

Municipal bonds 3,880 9 59 3,948 — 3,948

Total $ 109,464 $ 21 $ 59 $ 109,544 $ 104,183 $ 5,361

December 31, 2020

Unrealized Gains

Accrued Interest

Estimated Fair Value

Cash & Cash Equivalents

Investment Securities

Certificate of deposit

Cost Unrealized

Gains Accrued

Interest Estimated

Fair Value Cash & Cash

Equivalents Investment

Cash and cash equivalents $ 159,754 $ — $ — $ 159,754 $ 159,754 $ —

Money market accounts 3,969 — — 3,969 3,969 —

Government & agency securities 2,829 45 — 2,874 — 2,874

6,798 45 — 6,843 3,969 2,874

Municipal bonds 7,689 42 147 7,878 — 7,878

Total $ 174,241 $ 87 $ 147 $ 174,475 $ 163,723 $ 10,752

The Company had no realized losses or gains for the years ended December 31, 2021, 2020 and 2019, respectively.

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

As of December 31, 2021, the maturities of the Company’s investment securities were less than 1 year for all the municipal bonds, government and agency securities.

Table of Conte n t s

Income tax expense for the years ended December 31, 2021, 2020 and 2019 consisted of the following (in thousands):

2021 2020 2019

Federal $ 49,433 $ 28,520 $ 11,024

State 6,380 2,285 1,825

Total current 55,813 30,805 12,849

Federal ( 3,424 ) 477 2,323

State ( 291 ) ( 77 ) ( 729 )

Foreign — 201 4

Total deferred ( 3,715 ) 601 1,598

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Those amounts have been allocated to the following financial statement items:

2021 2020 2019

Income from operations $ 52,098 $ 31,406 $ 14,447

Stockholders' equity, unrealized gains on

investment securities & foreign currency

Stockholders' equity, unrealized gains on investment securities & foreign currency 66 14 75

Total provision for income taxes $ 52,164 $ 31,420 $ 14,522

The reconciliation of the United States federal statutory tax provision to the Company’s provision for income taxes for the years ended December 31, 2021, 2020 and 2019 (in thousands, except percentages):

2021 2020 2019

Statutory federal tax $ 45,405 21.0 % $ 28,196 21.0 % $ 19,396 21.0 %

State income taxes, net of federal benefit 4,980 2.3 % 1,470 1.1 % 864 0.9 %

Foreign taxes

Hong Kong 91 0.0 % 94 0.1 % 1 0.0 %

Singapore 32 0.0 % 107 0.1 % 3 0.0 %

Share-based compensation - windfall ( 1,835 ) - 0.8 % ( 415 ) - 0.3 % ( 6,424 ) - 7.0 %

Research and development and jobs credits ( 503 ) - 0.2 % ( 370 ) - 0.3 % ( 579 ) - 0.6 %

Executive compensation 2,652 1.2 % 966 0.7 % 442 0.4 %

Valuation allowance 468 0.2 % 1,342 1.0 % — 0.0 %

Other permanent differences 808 0.4 % 16 0.0 % 744 0.9 %

Provision for income taxes $ 52,098 24.1 % $ 31,406 23.4 % $ 14,447 15.6 %

Table of Conte n t s

Significant components of the Company’s deferred tax assets (liabilities) consisted of the following (in thousands):

December 31, 2020

December 31, 2019

December 31, 2021 December 31, 2020

Reserves on inventory and sales $ 2,022 $ 753

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Prepaid expenses ( 1,175 ) ( 1,022 )

Depreciation ( 7,575 ) ( 4,680 )

Total deferred tax liabilities ( 14,131 ) ( 7,758 )

Net deferred tax assets $ 4,404 $ 692

The reconciliation of the United States federal statutory tax provision to the Company’s provision for income taxes for the years ended December 31, 2020, 2019 and 2018 (in thousands, except percentages):

Statutory federal tax

State income taxes, net of federal benefit

Foreign taxes

Share-based compensation - windfall

Other permanent differences

Research and development and jobs credits

Valuation allowance

Provision for income taxes

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

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accelerating refunds of previously generated Alternative Minimum Tax credit;

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

increasing 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, 2018.

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 Company's income tax provision provided under the CARES Act did not have a material impact on the year ended December 31, 2021 and 2020.

The impact to the Company’s 2021 earnings per common share was immaterial.

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The company continues to utilize the net operating loss carry forwards in 2022.

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.

The Company has recorded a valuation allowance for the portion of the net operating loss carry forwards which is not expected to be realized.

We file income tax returns in the United States and various states and foreign jurisdictions.

We are generally no longer subject to United States federal, state and local income tax examinations by tax authorities for the years before 2018.

LEASES AND COMMITMENTS

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Our leases relating to office and warehouse space have terms of 19 months to 126 months.

Our leases relating to equipment have lease terms of 24 to 203 months , with certain of them having clauses relating to automatic renewal.

Our leases relating to equipment have lease terms of 24 months to 203 months, with certain of them having clauses relating to automatic renewal.

The Company’s warehouse agreements also contain non-lease components, in the form of payments towards variable logistics services and labor charges, which the Company is obligated to pay based on the services consumed by it.

Such amounts are not included in the measurement of the lease liability but will be recognized as expense when they are incurred.

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

Table of Conte n t s

The operating lease expense was $ 5.6 million, $ 3.6 million and $ 3.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

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The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2021 (in thousands):

Thereafter 5,412

Total lease payments $ 34,427

imputed interest ( 1,884 )

Total $ 32,543

Unconditional purchase obligations:

At December 31, 2021, the Company had $ 198.9 million in unconditional purchase obligations primarily for inventories, outsourced information technology and Coach events.

SELECTED QUARTERLY FINANCIAL DATA (unaudited)

(in thousands, except per share amounts)

Income from operations before income taxes

Basic earnings per share

Diluted earnings per share

Income from operations before income taxes

Basic earnings per share

Diluted earnings per share

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.

Credit Agreement

On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent.

The Credit Agreement provides for a $ 125.0 million senior secured revolving credit facility with a $ 20.0 million letter of credit sublimit.

The Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $ 100.0 million.

The Credit Agreement matures on April 13, 2026.

The Company’s obligations under the Credit Agreement are guaranteed by the Guarantors.

The obligations of the Company and the Guarantors are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

Under the Credit Agreement, the Company will pay to the administrative agent for the account of each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the revolving facility from 0.20 to 0.40 % per annum depending on the Company’s Total Net Leverage Ratio (as defined in the Credit Agreement).

The Company is also obligated to pay the administrative agent customary fees for credit facilities of this size and type.

Table of Conte n t s

Revolving borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Adjusted LIBOR Rate for the interest period plus the Applicable Rate (as defined in the Credit Agreement) based on the Company’s Total Net Leverage Ratio (with customary provisions under the Credit Agreement providing for the replacement of LIBOR with a successor rate) or (ii) the Alternate Base Rate (as defined in the Credit Agreement) as in effect from time to time plus the Applicable Rate based on the Company’s Total Net Leverage Ratio.

As of December 31, 2021, the Applicable Rate for Eurodollar Loans is 1.25 % per annum and the Applicable Rate for ABR Loans is 0.25 % per annum.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses.

The Credit Agreement also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default.

In addition, the Credit Agreement requires the Company to maintain a Total Net Leverage Ratio of no more than 3.00 to 1.00 and an Interest Coverage Ratio of at least 3.50 to 1.00.

The Company has no borrowings under the Credit Agreement as of the date of this report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

1 unchanged sentence

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