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 ® . The Company’s growth over the past few years is a reflection of its unique Coach-driven approach, which stands out in a world where health and wellbeing is too often a difficult and lonely journey . Medifast is often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is different. This year, we announced that Medifast's OPTA VIA program was named the #1 weight loss program in the U.S. by revenue for 2021 1 . Our growth is demonstrated by strong financial performance over the last several years. We generated revenue of $1.599 billion in 2022, $1.526 billion in 2021 and $934.8 million in 2020, representing year-over-year increases of 4.8% in 2022 and 63.2% in 2021. Income from operations was $184.8 million in 2022, $216.2 million in 2021 and $134.2 million in 2020, representing a year-over-year decrease of 14.5% in 2022 and increase of 61.2% in 2021. 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 The program provides a more effective and satisfying alternative to outdated, quick fixes and is built around four key components: • Independent OPTA VIA Coaches: Provide individualized support and guidance to customers on the path to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 sustainable healthy lifestyle. • Products & Plans: Clinically proven plans and scientifically developed nutritional products, called “Fuelings,” backed by dietitians, scientists and physicians. We help customers achieve their health goals through a network of approximately 60,900 active earning independent OPTA VIA Coaches, about 90% of whom were customers first, and have impacted more than 2 million lives to date. OPTA VIA Coaches introduce customers to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive OPTA VIA-branded Fuelings. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with the patented probiotic BC 30 ™ cultures, vitamins and minerals, as well as other nutrients essential for good health. Our products support the process of integrating healthy habits into our customer’s day-to-day lives. The OPTA VIA coaching model is customer-centric and boasts an energized health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. OPTA VIA Coaches provide personalized support to customers and motivate them by sharing their passion for healthy living and lifestyle transformation. The entrepreneurial spirit of our OPTA VIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new customers, many of whom go on to become 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. 2 1 Source Euromonitor International Limited; based on custom research conducted in Q2 2022; value sales for structured weight loss and meal replacement programs in 2021. 2 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 Contents OPTA VIA Coaches are independent contractors, not employees, who support customers and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, 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 customers who are working with an OPTA VIA Coach. OPTA VIA Coaches do not handle or deliver merchandise to customers. This arrangement frees our OPTA VIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement. We measure our success by the results our customers are able to achieve. The more OPTA VIA Coaches we have, the more customers we can serve. The total number of active earning OPTA VIA Coaches as of December 31, 2022 was 60,900. We believe our coach-based model is scalable and drives both customer success and growth. We expect our continued investment in fostering a robust community around our 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, 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. Macroeconomic Conditions Global economic challenges including the impact of rising inflation, adverse labor market conditions, the war in Ukraine and the continuing impact of the COVID-19 pandemic have caused macroeconomic uncertainty and volatility in markets where we, our suppliers and our OPTA VIA Coaches operate. We are exposed to market risks from changes in commodity or other raw material prices. Rising inflation could impact our cost structure and put pressure on consumer spending. Increases in commodity prices or food costs, including as a result of inflation, could affect the global and U.S. economies and could also adversely impact our business, financial condition or results of operations. Our variable cost structure can be utilized to adapt to changing market conditions with potential actions including adjustments to our manufacturing, distribution and customer support infrastructure. In addition, adverse labor market conditions could constrain our ability to manufacture and deliver products or increase the associated costs. We continue to take steps to attract, train, and develop personnel. As a response, we may periodically take incremental pricing actions to offset supply chain costs, inflationary pressures, and adverse labor market conditions. In addition, beginning in February 2022, the war in Ukraine and corresponding events have had, and could continue to have, adverse effects on regional and global markets. While our operations are not directly impacted by the war in Ukraine, the duration of hostilities and the vast array of sanctions and related events (including cyberattacks) cannot be predicted. As a result, those events present uncertainty and risk. To date, the war in Ukraine has had no material impact on our business. Throughout the COVID-19 pandemic, we took and continue to take significant measures to protect our employees, OPTA VIA Coaches and business, while remaining in compliance with local and national guidelines. Our manufacturing and distribution facilities remained fully operational during the pandemic, and we have not experienced any meaningful disruption to our worldwide supply chain due to the pandemic. It is possible the COVID-19 pandemic could negatively impact our operations and the operations of our suppliers and vendors. 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 continued impact of pandemic, the emergence of variant strains, the resumption of 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 communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. In response to changing macroeconomic conditions, the Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTA VIA Coaches and customers. 5 Table of Contents These macroeconomic uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue to actively monitor the impact of the pandemic and related developments on our business and will update our practices accordingly. 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 customers is sizable; there are about 175 million people in the United States looking to lose weight and willing to consider dieting 3 . While 81% of U.S. adults have cut spending in the last six months according to the survey, 70% say they don't plan on letting their health and wellbeing falter. In fact, 57% saying they would spend more time on their health and wellbeing in the coming year 4 . We offer customers 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 customers are highly motivated to adopt a healthy lifestyle that is transformative and sustainable. Many have tried weight loss programs previously, but have been unsuccessful at maintaining a healthy weight and embracing healthy habits for the long-term. Lifestyle issues our customers often seek to address and resolve include: • physical limitations and 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 estimated 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/m 2 or greater, whereas overweight is defined as a BMI ranging between 25 and 29.9 kg/m 2 . 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 3 Consumer and OPTA VIA Customer surveys February 2020, NCHS (National Center for Health Statistics), team analysis 4 This random double-opt-in online survey of 2,000 nationally representative U.S. Adults was commissioned by Medifast and conducted by a market research company, OnePoll, between October 20 and October 24, 2022. All participants are paid an amount depending on the length and complexity of the survey. The survey was overseen and edited by the OnePoll research team, who are members of the MRS (Market Research Society) and have corporate membership to ESOMAR (European Society for Opinion and Market Research) and AAPOR (American Association of Public Opinion Research). 6 Table of Contents rate that was less than 25%; twenty-nine states had an adult obesity rate of 30% or higher. In fact, the 2020 National Diabetes Statistics Report from CDC estimated approximately 89% of people with diabetes were overweight or had obesity. Direct Sellers Our business model combines the most powerful aspects of direct selling, while eliminating those dimensions that have typically challenged other companies. Our growth does not depend on recruiting thousands of distributors who take on inventory to sell to customers. Rather, OPTA VIA Coaches help customers adopt healthy habits and learn the benefits of OPTA VIA products, which are shipped directly to the customers. We are often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is different. We support customers through independent OPTA VIA Coaches, about 90% of whom were customers first. Our competitive advantages: • OPTA VIA’s innovative model is customer-centric and has one sales price for both OPTA VIA Coaches and customers. There is no tiered pricing. • OPTA VIA Coaches focus on coaching and supporting customers. 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 customer base and have been in their customers’ shoes. They promote a holistic wellness program and are not exclusively focused on product sales. Our competitive OPTA VIA Coach compensation plan is also deliberately structured to incentivize coaching and support customer success. • The field promotes a unified training system that aligns its leaders around a common mission. 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. Geographies 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 was 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 type 2 diabetes, heart disease, certain types of cancer, stroke, arthritis, sleep apnea and depression 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 2022. 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. International Expansion Efforts We are the publicly traded market leader by revenue in the weight management industry in the U.S., and are looking to build on this position. We have seen significant advancement within the current segments of our business, but know there are new segments, markets, and communities where we have opportunities for growth. With this in mind, we will continue to invest in important growth initiatives, particularly as we explore the ways in which we can expand the markets we serve and deliver a high-quality experience for more customers. 7 Table of Contents As we previously disclosed, global expansion is an important component of our long-term growth strategy and our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time. In July 2019, we 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. Like the U.S., we believe healthy lifestyles have increasingly become a priority to consumers around the world, but particularly 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. The Company’s 2022 OPTA VIA Convention offered a Coach-led educational session in Spanish, marked by a 100% increase in the number of participants in the session, compared to the prior year. To support our growing Hispanic Coach community, our customer support call-center network has a global footprint with infrastructure providing multi-lingual support from the United States, Guatemala, and Colombia. This has set the groundwork for both our expansion into other Spanish-speaking communities and our aspirations of developing other markets around the world. We can clearly see the growth potential outside the U.S. domestic market and this will be a foundational aspect of our long-term growth for many years to come, as we look to further our impact and advance the global health movement. PRODUCTS AND PROGRAMS We take pride in our scientific heritage. We have authored 19 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 customers lose up to twice as much weight. 5 Our clinically proven plans and our scientifically developed products were developed by physicians, dietitians, and scientists to help customers 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 health journey toward a sustainable, healthy lifestyle. OPTA VIA- BRANDED COACH SUPPORT • 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 and product information and 12 months of free access to a personalized OPTA VIA replicated website. OPTA VIA- BRANDED PRODUCTS : • 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 customers 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. Customers purchase kits tailored to their individual needs on the advice and counsel of their OPTA VIA Coach. Kits, ranging in price from approximately $395.25 to $511.50, include up to a 5 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 Contents 30-day supply of Fuelings and are purchased by our customers 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. As the Company continues to optimize and enhance its product offerings, OPTA VIA Select Fuelings will be discontinued in 2023. OPTA VIA- BRANDED PLANS Our OPTA VIA-branded health and wellness plans help customers 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 customers with like-minded goals and objectives regarding their health. We offer customers incentives to join the OPTA VIA Community, including access to the corporate "Nutrition Support" team made up of subject matter experts that provide assistance to our Coaches and customers, and exclusive offers through our OPTA VIA Premier service that help our customers stay on plan, as well as qualifies them for discounts on purchased products and free or discounted shipping. We encourage our customers to embrace our Six Steps to Optimal Health: • prepare for your journey. • achieve a healthy weight. • transition to healthy eating. • live the Habits of Health. • optimize health for your age. • the potential to live a longer healthier life. 6 The majority of our OPTA VIA Coaches began as customers and became OPTA VIA Coaches for a number of reasons, including to pay it forward and help others through their transformation journey. The Optimal Weight and Health plans we market to customers are: • Optimal Weight 5 & 1 Plan ® . Our proven Optimal Weight 5 & 1 Plan encourages customers to eat six small meals a day, an important habit that helps maintain healthy weight. Five daily meals are OPTA VIA Fuelings, offering customers a choice from more than 50 delicious, convenient, nutritionally interchangeable, scientifically-designed products, including shakes, soups, bars, hot beverages, hearty choices, pudding and brownies. OPTA VIA Coaches counsel their customers on which Fuelings to select. OPTA VIA Coaches also counsel their customers on how to develop healthy habits, such as preparing lean and green meals and choosing healthy snacks. • Optimal Weight 4 & 2 & 1 Plan ® . The Optimal Weight 4 & 2 & 1 Plan is designed for customers who want to continue eating all food groups or want a flexible meal plan to help them achieve a healthy weight. Under this plan, OPTA VIA Coaches counsel their customers 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 customers who want to sustain a healthy weight. This plan focuses on nutritionally balanced, small meals eaten every two or three hours, similar to our Optimal Weight plans, while integrating more food choices in the right portions. Customers are 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 customer is on, they learn the Habits of Health through the Habits of Health Transformational System which is a crucial tool for customer success and provides the foundation for our community to learn and adopt healthy habits. The Habits of Health Transformational System is an innovative, mind and body lifestyle approach that encourages and educates customers to replace unhealthy habits with healthy ones that contribute to their long-term success. 6 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 Contents INCENTIVES We believe our business is most successful when our Coaches can maintain a continuous cycle of growth: Coaches activate new and successful customers, many of whom go on to become OPTA VIA Coaches themselves, who activate new customers, and so on. We offer economic incentives designed to support each OPTA VIA Coach’s and Customer’s success. Once a Coach has successfully attracted a new customer, the Coach uses personalized coaching, enhanced health and wellness education and effective digital tools to drive engagement. As part of this work, in the fourth quarter of 2022, the Company established a “Commit To Health” program, which started on December 26, 2022 and ran through January 31, 2023, and was aimed to encourage and incentivize each new OPTA VIA customer to make a second order. Programs like these are an important driver of our ongoing customer acquisition efforts, focusing on fostering alignment of the Coach network around customer sponsoring through the creation of attractive price points for both first and second food orders. The aim is not just to encourage first-time OPTA VIA customers to sign up, but also to reactivate lapsed Customers who have already had a positive experience with the brand. Keeping customers engaged for longer and ensuring that OPTA VIA becomes a part of each customer’s every day life is a primary focus for the team right now, as the catalyst for reestablishing our customer and Coach tenure and enhancing future revenue growth. Additionally, at the end of 2022, the Company established an “Accelerator For All” compensation plan bonus, which offered an incentive for Coaches to bring new Customers into OPTA VIA. This bonus is now a part of the 2023 new Coach compensation structure reflecting our ongoing focus on new Customer acquisition in addition to other important business building initiatives. We understand that Customer acquisition is important to our growth as Customer cohorts going on the OPTA VIA program today form future Coach cohorts, which in turn drive optimization of the Customer and Coach tenure mix and the associated improvements in efficiency and productivity. Optimizing incentivization and compensation remains important to drive growth, retention, and engagement. We are investing substantial time and resources in carefully learning from our existing and prospective customers, listening to what our Coaches are hearing and finding efficient solutions to challenges, along with building programs that deliver connection, engagement and retention. We’re consistently adapting and focusing our efforts on where we believe they will have the most impact. All of this work is aimed at building important momentum in both acquisition and tenure. The programs that we are putting in place in the first half of 2023 will be important drivers of reestablishing our repeatable business rhythm. CUSTOMERS Sales are made to individual customers. No single customer accounted for 10% or more of our consolidated revenue for the year ended December 31, 2022. SEASONALITY Demand for weight management products and programs are typically seasonal. Traditionally, the predisposition of customers not to initiate a weight loss or management program during the holiday season impacts the fourth quarter with fewer sales of weight management products and services during these months. January and February generally show increases in sales, as these months are considered the commencement of the “diet season” and "resolution season." We believe our sales pattern does not follow the seasonality of our industry, but rather is predicated on the growth of our OPTA VIA Coach network. SCIENTIFIC ADVISORY BOARD Our Scientific Advisory Board consists of a group of multi-disciplinary, internationally recognized scientific experts that serves as the foundation for scientifically valid, evidence based, customer-centric, high quality innovations for lasting health. Its mission is to help guide us in making informed decisions regarding medical, nutritional, food service and scientific matters by providing expertise and information on research and emerging trends. In 2022, the Company announced the addition of three new members to its long-standing Scientific Advisory Board: Dr. Nikhil Dhurandhar, Dr. Graham Thomas and Dr. Jessica Unick. Medifast's Scientific Advisory Board is now comprised of seven internationally recognized experts who provide objective insights to guide the Company in making informed decisions based on the latest scientific developments in health and wellness. The cross-disciplinary panel was established in 2008 in service of the Company's commitment to providing an evidence-based, safe and effective health and wellness program that meets consumer needs. The work of this cross-disciplinary group builds on our scientific heritage and incorporates leading-edge clinical research into the development of our products, plans and programs. 10 Table of Contents 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, surgical interventions, books, self-help diets, dietary meal replacements, and appetite suppressants, as well as, digital tools, app-based health and wellness monitoring solutions and wearable trackers. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to 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.), Herbalife Nutrition Ltd., The 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 customers’ 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 customer-centric and has one sales price for both OPTA VIA Coaches and customers. There is no tiered pricing. • OPTA VIA boasts a health and wellness community, where about 90% of OPTA VIA Coaches come from the customer base and have been in their customers’ shoes. They promote a holistic health and wellness program and are not focused on product sales. • OPTA VIA Coaches promote a unified training system that aligns its leaders around a common mission. • OPTA VIA offers a differentiated direct-to-consumer model, with 100% of products shipped directly to customers. We believe our scientific and clinical heritage and commitment to evaluating programs, plans and products 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 and are fortified with vitamins, minerals and probiotics. Our OPTA VIA Integrated Coaching Model offers the personal support of an OPTA VIA Coach, who is often a person who has achieved success with OPTA VIA and has turned their success into a business opportunity. MARKETING We continue to build and leverage our brands through multiple marketing strategies. Customer acquisition and retention strategies include word-of-mouth, digital marketing, public relations, social media, email marketing, events and other means. These mediums are used to target new customers by stressing 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 customers 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 products, which account for approximately 20% of our total unit sales. We purchased the facility in July 2002 and have gradually increased production capacity and improved overall efficiencies with additional investments in blending and packaging equipment. Our Owings Mills manufacturing facility is regulated and inspected by the United States Food and Drug Administration (the “FDA”), the United States Department of Agriculture (the “USDA”), the 11 Table of Contents Maryland State Department of Health and Mental Hygiene and Office of Food Protection. It is certified by the Safe Qualified Food Institute as a Safe Quality Food Program Level 2 facility compliant with the Global Food Safety Initiative, a global non-profit collaboration to advance food safety. The remaining 80% of our total unit sales are manufactured by third-party vendors in accordance with Medifast proprietary formulas and manufacturing standards. 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 consumer sales. These developments have created a level of ambiguity as to the proper interpretation of the law and related court decisions. For example, in 2016, the FTC entered into a settlement with another multi-level marketing company, requiring the company to modify its business model, including basing sales compensation and qualification only on sales to retail and preferred customers and on purchases by a distributor for personal consumption within allowable limits. Although this settlement does not represent judicial precedent or a new FTC rule, the FTC has indicated that the industry should look at this settlement, and the principles underlying its specific measures, for guidance. If the requirements in this settlement lead to new industry standards or new rules, our business could be impacted and we may need to amend our compensation plan. In 2018, the FTC released its nonbinding Business Guidance Concerning Multi-Level Marketing (“MLM Guidance”). The MLM Guidance explains, among other things, the FTC’s views concerning lawful and unlawful compensation structures, whether personal consumption by participants can be used in determining a MLM organization’s compensation structure, and how a MLM organization should approach representations to current and prospective participants. We believe our current business practices comply with the MLM Guidance. In 2019, the FTC took aggressive actions against a multi-level marketing company, alleging that the company operated an illegal pyramid scheme that deceived consumers into believing that they could earn significant income as distributors of its health and wellness products. The company eventually entered into a consent order with the FTC, pursuant to which the company was permanently prohibited from using a multi-level compensation plan in the United States. We have taken additional steps to educate our Coaches on proper earnings claims. If our Coaches make improper claims, or if regulators determine we are making any improper claims, this could lead to an FTC investigation and could harm our business. Additionally, in 2009 the FTC promulgated nonbinding Guides Concerning the Use of Endorsements and Testimonials in Advertising (“Endorsement Guides”) which explained what endorsement practices the FTC views as being unfair or deceptive acts or practices. In 2020, the FTC sought public comments on whether the Endorsement Guides should be amended. The last time the FTC sought similar public comments led to a major revision of the Endorsement Guides. Consequently, the FTC could bring an enforcement action based on practices that are inconsistent with the current Endorsement Guides as it considers 12 Table of Contents 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. Environmental Regulations We are not aware of any instance in which we have contravened federal, state, or local laws relating to protection of the environment or in which we otherwise may be subject to liability for environmental conditions that could materially affect operations. Other Regulations A number of laws and regulations govern our advertising and marketing, services, products, operations and relations with consumers, other service providers and government authorities in the countries in which we operate. The formulation, processing, packaging, labeling, marketing, advertising and selling of the Company’s products is subject to regulation by federal, state and local agencies. Products must comply with the Federal Food Drug and Cosmetic Act, the Food Safety Modernization Act, the Federal Trade Commission Act, State Consumer Protection laws and several other federal, state and local statutes and regulations applicable in localities in which the Company products are made or are sold. The FDA, USDA and state and local health departments are the major agencies whose regulatory mission is to assure that products are made using approved ingredients, labeling, manufacturing procedures and testing to ensure that safe quality products are delivered to consumers. Laws and regulations directly applicable to data protection and communications, operations or commerce over the Internet, such as those governing intellectual property, privacy and taxation, continue to evolve. Our operations are subject to these laws and regulations and we continue to monitor their development and our compliance. In addition, we are subject to other laws and regulations in the United States and internationally. The FTC has principal regulatory authority over the Company’s advertising and trade practices, its enforcement powers are aimed at protecting the consumer from being deceived by unfair marketing and trading practices. During the mid-1990s, the FTC filed complaints against a number of commercial weight management providers alleging violations of federal law in connection with the use of advertisements that featured testimonial claims for program success and program costs. In 2012, Jason Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company, entered into a consent decree with the FTC regarding certain statements included in the advertising for the Company’s weight-loss programs. The consent decree requires us to comply with certain procedures and disclosures in connection with our advertisements of products and services. PRODUCT LIABILITY AND INSURANCE The Company, like other producers and distributors of ingested products, faces an inherent risk of exposure to product liability claims in the event that, among other things, the use of its products results in injury or death. The Company maintains insurance against product liability claims with respect to the products it manufactures. With respect to the retail and direct marketing distribution of products produced by others, the Company’s principal form of insurance consists of arrangements with each of its suppliers of those products to name the Company a covered entity under each of such vendor’s product liability insurance policies. The Company does not buy products from suppliers who do not maintain such coverage. WORKING CAPITAL PRACTICES We maintain sufficient amounts of inventory in stock in order to provide a high level of service to our customers. Substantial inventories are required to meet the needs of our dual role as manufacturer and distributor. 13 Table of Contents HUMAN CAPITAL MANAGEMENT As of December 31, 2022, the Company employed 874 team members, of whom 507 were engaged in manufacturing, logistics and supply chain support, and 367 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 on strong cross-functional relationships and collaborating as one team to support the transformation journey of our customers. As we continue to grow as a company, ensuring that our cultural tenets are consistently understood and practiced will be important in enabling our talent strategy and delivering an excellent employee experience. Of our total team members, 867 are employed in the United States and 7 are employed in Asia Pacific. At Medifast, we nurture a one team mindset that celebrates strong cross-functional teaming and partnering. We believe as one team, we are transforming together, leveraging our Community and strong relationships to facilitate trust, understanding and empathy. We also emphasize the importance of learning and supporting our team members’ growth and development which is critical to moving our business strategy forward. As part of reinforcing our culture we have several resources we use to frame what is most important. We have a Culture Compass that expresses: • Our Mission … why we exist • Our Vision…what we aspire to achieve • Our Focus … on Coaches and customers • Our Core Values … what we believe • Our Success Drivers … how we lead • Our Operating Principles … how we make choices In 2022, we released our Culture Contract and Culture Contract Toolkit. Our Culture Contract lays out the explicit behaviors that underly our Core Values. It details the commitments we make to one another when we join Medifast and the commitments the Company makes to deliver an excellent work experience to all our team members. The Culture Contract enables new team members to quickly understand who we are as a company and what’s most important in how we show up for each other. The Toolkit is a companion piece that provides many tools and activities that team members can bring into their daily work to improve in forming bonds, establishing healthy work/life balance, inclusive leadership, reflecting and learning, conflict and resilience practices, activities to inspire creativity and innovation and much more. Our Community (independent Coach Community and 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 culture narrative is fully embedded in our core human capital processes to ensure our team members understand how their success translates to the success of the greater team and ultimately to an amazing Coach and customer 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, and incite conversations around topics that matter to us (like wellness), foster greater comradery, celebrate our successes and build trust among peers. We also have a weekly Pulse newsletter to ensure important initiatives or events are communicated to our team members in a timely matter. We also leverage our communication channels to remind team members of the significant impact they have on the Coach and customer experience, help them understand our business model, get them engaged in opportunities to learn and increase empathy across functional teams. Recognition is another key component of our culture. Our #AcedIt program provides 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 2022, we launched a listening initiative, “The Loop”, which is enabled by a technology platform that allows us to promote communication transparency and monitor and improve our organizational health. This tool empowers our team leaders to review their employee engagement results and facilitate candid conversations to shape and improve the work experience of their teams. 14 Table of Contents Annually we repeat leadership training for our senior leaders to foster inclusive leadership and build their leadership toolkits as they foster diversity and inclusion among their teams. Our Culture Club program, established in 2020, gives team members from any part of our company, whether onsite, hybrid or fully remote, the opportunity to come together to connect, build bonds and learn together in a virtual environment. Culture Club covers a learning topic typically related to our culture or ways of working, and always includes a fun element to give team members a moment to relax and deepen bonds. Nurturing growth and learning are also key elements of our culture. In 2022, we began to pilot a new learning management system to provide team members access to online courses aligned to their development plans. In progress is a Culture Journey learning path to further integrate an understanding of our culture journey for new team members. We also revamped our Mentoring program which is open to all employees. The Mentoring program gives team members an opportunity to learn, reflect and build connections with other leaders in the organization. It also provides an opportunity for peer mentoring through a cohort model. Lastly, within our Supply Chain we piloted a shadow program called Level Up to create opportunities for our supply chain team members to be cross trained in other areas of the supply chain and learn new skills. This program is geared towards enabling greater sponsorship of junior talent and an increase of internal mobility. Medifast is focused on attracting and retaining top talent who are eager to participate in our mission. Our Total Rewards Program is intended to deliver competitive compensation and benefits that align with our company mission and values. Annually, we review our market reference ranges and 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. We say to our team members, wellness is not just what we do, it’s who we are. Our commitment to being a best-in-class wellness company starts with providing team members equal access to all our programs. It also means ensuring that the programs we are providing truly work for our team members. To support health and wellness among our employee population, we established a Wellness Committee that oversees a host of programming throughout the year to integrate healthy habits into the lives of our team members. We offer incentives through our newly launched Wellness platform, LiveWell, for taking on a step challenge, doing a biometric screening or attending a wellness event among a host of other activities. As our team members earn points in LiveWell, they can be transferred and redeemed through our #AcedIt recognition program each year. By leveraging LiveWell, all our team members can take advantage of not only our wellness incentives, but also helpful resources to aid in their personal health journey. In 2022, we have also updated our Hybrid Playbook and now call it our Work Playbook. Our Work Playbook enables our team members to integrate work principles aligned to our culture that will help us optimize, productivity, accountability, flexibility and wellbeing. The Work Playbook is a tool used to empower our team members to do their best work while sustaining strong collaboration, trust and effectiveness. We will continue to listen and adjust our plans as we continue on our hybrid work journey. In addition to our team members, our business also depends on our independent contractor OPTA VIA Coaches. They support our customers and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. Our OPTA VIA Coaches help customers adopt healthy habits and learn the benefits of OPTAVIA products, which are shipped directly to customers. For more information about our OPTA VIA Coaches, see the Summary section of 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. We continuously monitor our information systems and infrastructure. 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 vulnerability/penetration testing. Network intrusion detection and prevention technologies are in use to alert and mitigate unauthorized access and distributed denial of service attacks. Industry standard multi-factor authentication solutions and encryption methods are used to protect 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. 15 Table of Contents INTELLECTUAL PROPERTY Products manufactured by and programs marketed by the Company are sold under their own trademarks and trade names. Our policy is to protect our products and programs through trademark registrations both in the United States and in significant international markets. The Company carefully monitors trademark use and strongly promotes enforcement and protection of all of its trademarks. AVAILABLE INFORMATION Our principal office is located at 100 International Drive, 18 th Floor, Baltimore, Maryland 21202. Our telephone number at this office is (410) 581-8042. Our corporate website is http://www.medifastinc.com. All periodic and current reports, registration statements, code of conduct and other material that we are required to file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available free of charge through our investor relations page at https://ir.medifastinc.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Report. The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file such information electronically with the SEC.