MEDIFAST INC 10-K

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, 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 five years. Of equal importance, we expect our differentiated direct-to-consumer business model to continue to deliver growth in the foreseeable future. Medifast has redefined direct selling by combining the best aspects of the model, 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. 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: 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 approximately 59,800 independent OPTA VIA Coaches, about 90% of whom were clients first, and have impacted more than 2 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 our 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 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 OPTA VIA Coaches. We offer economic incentives designed to support each OPTA VIA Coach’s long-term success, which we believe plays an important role in their financial wellness, providing the 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 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. 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. 4 Table of Conte n t s 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, 2021 was 59,800. Our growth is demonstrated by strong financial performance over the last several years. We generated revenue of $1.526 billion in 2021, $934.8 million in 2020 and $713.7 million in 2019, representing year-over-year increases of 63.2% in 2021 and 31.0% in 2020. Income from operations was $216.2 million in 2021, $134.2 million in 2020 and $91.0 million in 2019, representing year-over-year increases of 61.2% in 2021 and 47.5% in 2020. We are one of the fastest growing health and wellness companies in the United States ("U.S."), with a large and growing market opportunity. We believe our coach-based model is scalable and drives both client success and growth. We expect 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 A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the U.S. In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic. In response to the pandemic, many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing guidelines, shelter-in-place orders and other measures. Nutritional supplements and health foods have been designated critical/essential infrastructure in the U.S. As a manufacturer and distributor of these products our manufacturing and distribution facilities remain fully operational to date and we have not experienced any meaningful disruption to our worldwide supply chain. 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, and we have undertaken numerous steps and instituted additional precautions to protect their safety and well-being, including: • instituting enhanced safety protocols to comply with guidelines from government and health officials, limiting visitation to our plant and distribution center and rolling out additional sick leave (crisis pay) for our onsite essential employees; • shifting to a hybrid approach for all onsite employees, enabling them to work 2-3 days from our offices with the flexibility to work 2-3 days from their home offices, in order to optimize productivity, foster strong relationships and promote health and well-being; • implementing additional health and safety precautions in our headquarters, manufacturing and distribution centers, including use of personal protective equipment and frequent hand sanitization; and • establishing controls in relation to social distancing, visitors, travel and quarantine. Although vaccines are available in various countries where we operate, it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of the potential of variant strains of the virus to cause a resumption of high levels of infection and hospitalization. Should that occur, 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 expectations. Factors that could cause actual results to differ from management’s expectations include 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. The senior management team meets regularly to review and assess the status of the Company’s operations and the health and safety of its various constituencies, and will continue to proactively respond to the situation and communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. The Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTA VIA Coaches and clients. These uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue to actively monitor the impact of COVID-19 and related developments on our business and will update our practices accordingly, as we have done throughout the pandemic. 5 Table of Conte n t s 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 most recently published data by the Center for Disease Control and Prevention (“CDC”), over 70% of all adults in the U.S. aged 20 and above were overweight or obese in 2017-2018, and is growing at approximately 2% per annum. According to a proprietary analysis, the addressable market for weight loss is large and growing. It’s worth about $20 billion today with a growth rate of approximately 6% per annum. Additionally, roughly 75% of the U.S. population above 18 wants to lose weight and is open to dieting, and approximately 65% of overweight/obese population considers paid meal plans effective. The total potential pool of OPTA VIA clients is sizable; there are about 175 million people looking to lose weight and willing to consider dieting in the U.S. 2 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 U.S., 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%; twenty-nine states had an adult obesity rate of 30% 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 2020 National Diabetes Statistics Report from CDC estimated approximately 89% of people with diabetes were overweight or had obesity. Consumers in the U.S. spend an estimated $147 billion annually on obesity-related medical conditions according to data reported by CDC's National Center for Chronic Disease Prevention and Health Prevention Division; 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 2020 study by Marketdata Enterprises, the U.S. weight loss market itself is estimated to be a roughly $61.9 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 2 Consumer and OPTA VIA Client surveys February 2020, NCHS, team analysis 6 Table of Conte n t s 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 Our business model combines the most powerful aspects of direct selling, while eliminating those dimensions that have typically challenged other companies. Our growth does not depend on recruiting thousands of distributors who take on inventory to sell to clients. Rather, OPTA VIA Coaches help clients adopt healthy habits and learn the benefits of OPTA VIA products, which are shipped directly to the clients. We are often compared to diet and 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% of whom were clients first. Our competitive advantages: • OPTA VIA’s innovative model is client-centric and has one sales price to both OPTA VIA Coaches and clients. There is no tiered pricing. • 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% 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 OPTA VIA Coach compensation plan is 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. Markets United States The U.S. 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% 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% 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 2021. OPTA VIA Coaches are focusing on word of mouth and social media marketing toward increasingly younger demographics, reaching out to important and increasingly diverse communities of health and wellness consumers, and identifying and marketing to consumers who are in varying stages of optimal well-being. 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. 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. We outsource a distribution center in Hong Kong to provide adequate product distribution capacity for the foreseeable future in these markets. 7 Table of Conte n t s Like the U.S., 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 2020. PRODUCTS AND PROGRAMS We take pride in our scientific heritage. We have authored 18 peer-reviewed publications over the past 10 years. Most recently, we conducted a double blind study that shows the effects that OPTA VIA Coaching has on the program; the results suggested that speaking with their OPTA VIA Coach more often may help clients 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 clients 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. Our exclusive OPTA VIA-branded nutritional products, fuelings, are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. 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 BC30™ 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. Clients purchase kits tailored to their individual needs on the advice and counsel of their OPTA VIA Coach. Kits, ranging in price from approximately $428.20 to $472.95, include up to a 30-day supply of Fuelings and are purchased by our clients through our e-commerce website, their OPTA VIA Coach’s personalized replicated website or our call center. • 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 below 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 clients 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 clients with like-minded goals and objectives regarding their health. We offer clients incentives to join the OPTA VIA Community, including support calls with a caring 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. 8 Table of Conte n t s 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 and became OPTA VIA Coaches for a number of reasons, including to pay it forward and help others through their transformation journey. Optimal Weight and Health plans we market to clients are: • The Optimal Weight 5 & 1 Plan ® . Our proven Optimal Weight 5 & 1 Plan encourages clients to eat six small meals a day, an important habit that helps maintain healthy weight. Five daily meals are OPTA VIA Fuelings, offering clients 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 clients 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 clients 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. Clients are counseled by their OPTA VIA Coaches to eat three Optimal Health Fuelings and three balanced meals they prepare themselves daily. 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 clients to replace unhealthy habits with healthy ones that contribute to their long-term success. THE MEDIFAST BRAND Consistent with business and brand strategy, the Company has completed the sunset of the Medifast Direct channel and Medifast-branded product line during the second quarter of 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, 2021. SEASONALITY Demand for weight management products and programs are typically seasonal. Traditionally, the predisposition of clients not to initiate a weight loss or management program during the holiday season impacts the fourth quarter with fewer sales of weight 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. 9 Table of Conte n t s 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, client-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 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., Simply Good Foods Co., The Hain Celestial Group, Inc., BellRing Brands, Inc., and Beyond Meat, Inc. 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 more than 2 million lives. We also have an advantage over traditional direct selling companies: • OPTA VIA’s innovative model is client-centric and has one sales price to both OPTA VIA Coaches and clients. There is no tiered pricing. • OPTA VIA boasts a health and wellness community, where about 90% of OPTA VIA 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. 10 Table of Conte n t s 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 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 one of the primary manufacturers of our powder-based products, which account for approximately 17% of our powder-based 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 83% of our powder-based 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 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 domestic markets, regulations are subject to discretionary interpretation by regulators and judicial authorities. There is often ambiguity and uncertainty with respect to the state of direct selling and anti-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 11 Table of Conte n t s 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. 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 12 Table of Conte n t s distribution of products produced by others, the Company’s principal form of insurance consists of arrangements with each of its suppliers of those products to name the Company a covered entity under each of such vendor’s product liability insurance policies. The Company does not buy products from suppliers who do not maintain such coverage. WORKING CAPITAL PRACTICES We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our 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, 2021, the Company employed 984 team members, of whom 624 were engaged in manufacturing, logistics and supply chain support, and 360 in marketing, administrative and corporate support functions. None of our team members are subject to a collective bargaining agreement with the Company. We actively foster an organizational culture centered around strong cross-functional relationships and are focused on driving an excellent employee experience. Of our total team members, 974 are employed in the United States and 10 are employed in Asia Pacific. At Medifast, we nurture a one team mindset that celebrates strong cross-functional teaming and partnering. Our culture emphasizes the importance of building community and strong relationships 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 Our Community (Coach Community & our team members) is united by our values – we are one team with one mission, guided by clear, shared behaviors that help us stay aligned as we grow and enable us to prioritize our work, plan for the future and harness our combined energy to accomplish our company objectives. Our Compass is fully embedded in our core human capital processes to ensure our team members understand how their success translates to the success of the greater team and ultimately to an amazing Coach & Client Experience. 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 from Meta 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 and Client Experience, help them understand our business model, get them engaged in opportunities to learn and increase empathy across functional teams. In 2021, we established a new recognition program (#AcedIt!), to provide team members and people leaders a platform to recognize excellent work that supports our business strategy and applaud behaviors that reinforce our cultural values. We believe fostering a sense of gratitude is a key component to nurturing strong relationships and building tight-knit communities. Our #AcedIt! program allows for both social and point-based recognition as well as celebrates team members for achieving important milestones in service. 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. On a regular basis, 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. In 2021, we piloted a listening initiative we call “The Loop”. The Loop is enabled by a technology platform that will allow us to institutionalize our listening program and have a way to promote communication transparency and ultimately allow us to monitor and improve our organizational health. We plan to deploy The Loop organization wide in 2022. 13 Table of Conte n t s We regularly review our team members’ feedback to better align our human capital initiatives to their needs. In 2020, the company established a relationship with an external partner to assess our work environment and identify opportunities in the area of Diversity, Equity & Inclusion (“DEI”). Based on the results of this assessment, in 2021, we planned and deployed leadership training for our executive and senior leadership team and identified the cultural elements most critical for us to nurture in order to strengthen inclusion within our company. As part of our focus on inclusion and to foster community in a time of 100% remote work, we established a new initiative called Culture Club. Culture Club is open to all team members and is intended to give team members a platform to connect and learn together as well as socialize and build stronger bonds. Nurturing growth and learning are also key elements of our culture. In 2021, we hosted 11 focus groups to understand the capabilities needed by our team members and identified key competencies that will be at the center of future learning and development initiatives. Our executive leaders also expanded their talent review and succession planning process to reach deeper into the organization and gain an understanding of opportunities and strength areas to further inform development plans and accelerate the learning of top talent. 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 2021, we continued to prioritize the health and well-being of our team members. All onsite-essential teams continued to adhere to our enhanced safety protocols and had access to additional sick time. For our onsite-flexible teams, effective October 2021, we rolled out a hybrid work plan that allowed team members to work 2 to 3 days from the office. We developed and deployed a Hybrid Playbook to assist people leaders in formulating a plan that enables flexibility and allows them to optimize collaboration across their teams. We will continue to listen and adjust our plans as we continue on this hybrid work journey. In addition to our team members, 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 more information about our OPTA VIA Coaches, see 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, 14 Table of Conte n t s code of conduct and other material that we are required to file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available free of charge through our investor relations page at https://ir.medifastinc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our 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.