MEDIFAST INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MEDIFAST, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) 38 Consolidated Statements of Income 41 Consolidated Statements of Comprehensive Income 42 Consolidated Balance Sheets 43 Consolidated Statements of Cash Flows 44 Consolidated Statements of Changes in Stockholders’ Equity 45 Notes to Consolidated Financial Statements 46 37 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Medifast, Inc. Opinion on the Internal Control Over Financial Reporting We have audited Medifast, Inc.’s and its subsidiaries (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements of the Company and our report dated February 21, 2023 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Baltimore, Maryland February 21, 2023 38 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Medifast, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Medifast, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in I nternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated February 21, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Income Taxes As described in Notes 2 and 11 of the consolidated financial statements, the Company operates in multiple markets in the U.S. and internationally using an e‑commerce platform and a direct selling network of OPTA VIA Coaches. The Company’s provision for income taxes is impacted based on interpretations of U.S. federal and various state and local income tax laws. Management prepared the Company’s provision for income taxes using significant judgment when interpreting the provisions of Treasury and state and local tax regulations and assessing the positions taken as a result of these considerations as to whether or not the amount of benefit recorded would be more‑likely‑than‑not to be sustained upon examination. We identified the evaluation of the Company’s provision for income taxes as a critical audit matter due to the significant judgments made by management when assessing the complex provisions of the tax laws and regulations. Auditing the matter required significant auditor judgment and use of our tax specialists, in evaluating the recorded results of management’s tax positions and their assessment of the sustainability of these tax positions. 39 Table of Contents Our audit procedures related to the Company’s provision for income taxes included the following, among others: • We obtained an understanding of the relevant controls related to the determination of current and deferred taxes and tested such controls for design and operating effectiveness, including controls related to the interpretation and application of tax laws. • We involved our specialized tax professionals to assist in evaluating the application of Treasury Regulations and state and local tax regulations. Our specialists considered the interpretations of Treasury Regulations, state and local tax positions, and other tax positions requiring significant judgement, made an independent assessment of such positions and related calculations and then compared them to the Company’s recorded positions. • We tested the accuracy and completeness of the data and inputs used to calculate the effective federal and state tax rate, current provision calculations and deferred tax assets/liabilities. /s/ RSM US LLP We have served as the Company's auditor since 2010. Baltimore, Maryland February 21, 2023 40 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2022, 2021 and 2020 (U.S. dollars in thousands, except per share amounts & dividend data) 2022 2021 2020 Revenue $ 1,598,577 $ 1,526,087 $ 934,842 Cost of sales 458,163 398,490 237,027 Gross profit 1,140,414 1,127,597 697,815 Selling, general, and administrative 955,608 911,356 563,656 Income from operations 184,806 216,241 134,159 Other (expense) income Interest (expense) income ( 701 ) ( 231 ) 246 Other (expense) income ( 46 ) 119 ( 140 ) ( 747 ) ( 112 ) 106 Income before provision for income taxes 184,059 216,129 134,265 Provision for income taxes 40,491 52,098 31,406 Net income $ 143,568 $ 164,031 $ 102,859 Earnings per share - basic $ 12.82 $ 14.01 $ 8.74 Earnings per share - diluted $ 12.73 $ 13.89 $ 8.68 Weighted average shares outstanding Basic 11,195 11,705 11,771 Diluted 11,276 11,813 11,850 Cash dividends declared per share $ 6.56 $ 5.68 $ 4.52 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2022, 2021 and 2020 (U.S. dollars in thousands) 2022 2021 2020 Net income $ 143,568 $ 164,031 $ 102,859 Other comprehensive (loss) income, net of tax: Foreign currency translation ( 67 ) 112 ( 21 ) Unrealized (losses) gains on investment securities ( 20 ) ( 42 ) 37 Other comprehensive (loss) income ( 87 ) 70 16 Comprehensive income $ 143,481 $ 164,101 $ 102,875 The accompanying notes are an integral part of these consolidated financial statements. 42 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2022 and 2021 (U.S. dollars in thousands, except par value) 2022 2021 ASSETS Current Assets Cash and cash equivalents $ 87,691 $ 104,183 Inventories 118,856 180,043 Investment securities — 5,361 Income taxes, prepaid — 945 Prepaid expenses and other current assets 16,237 16,334 Total current assets 222,784 306,866 Property, plant and equipment - net of accumulated depreciation 57,185 56,131 Right-of-use assets 18,460 24,457 Other assets 12,456 6,468 Deferred tax assets 5,328 4,404 TOTAL ASSETS $ 316,213 $ 398,326 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable and accrued expenses $ 134,690 $ 163,309 Income taxes payable 428 — Current lease obligations 5,776 6,523 Total current liabilities 140,894 169,832 Lease obligations, net of current lease obligations 20,275 26,020 Total liabilities 161,169 195,852 Commitments (Note 12) Stockholders' Equity Common stock, par value $ .001 per share: 20,000 shares authorized; 10,928 and 11,594 issued and 10,873 and 11,593 outstanding at December 31, 2022 and December 31, 2021, respectively 11 12 Additional paid-in capital 21,555 12,018 Accumulated other comprehensive income 24 111 Retained earnings 139,852 190,333 Less: treasury stock at cost, 54 and 0 shares at December 31, 2022 and December 31, 2021, respectively ( 6,398 ) — Total stockholders' equity 155,044 202,474 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 316,213 $ 398,326 The accompanying notes are an integral part of these consolidated financial statements. 43 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2022, 2021 and 2020 (U.S. dollars in thousands) 2022 2021 2020 Operating Activities Net income $ 143,568 $ 164,031 $ 102,859 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization 10,980 6,812 4,316 Non-cash lease expense 6,098 5,069 3,189 Share-based compensation 11,053 9,903 6,796 Loss on sale or disposal of property, plant and equipment 2,130 2 212 Amortization of premium on investment securities 14 89 320 Deferred income taxes ( 924 ) ( 3,715 ) 601 Change in operating assets and liabilities: Inventories 61,187 ( 126,651 ) ( 4,621 ) Income taxes 1,373 ( 945 ) 5,169 Prepaid expenses and other current assets 97 ( 9,887 ) 1,086 Other assets ( 3,412 ) ( 4,543 ) ( 2,741 ) Accounts payable and accrued expenses ( 37,594 ) 54,380 28,010 Net cash flow provided by operating activities 194,570 94,545 145,196 Investing Activities Sale and maturities of investment securities 5,267 5,145 4,605 Purchase of property and equipment ( 16,681 ) ( 34,209 ) ( 5,887 ) Net cash flow used in investing activities ( 11,414 ) ( 29,064 ) ( 1,282 ) Financing Activities Options exercised by executives and directors — 811 1,597 Net shares repurchased for taxes ( 1,516 ) ( 6,089 ) ( 551 ) Cash dividends paid to stockholders ( 71,620 ) ( 63,856 ) ( 53,190 ) Stock repurchases ( 126,445 ) ( 55,999 ) ( 5,000 ) Net cash flow used in financing activities ( 199,581 ) ( 125,133 ) ( 57,144 ) Foreign currency impact ( 67 ) 112 ( 21 ) (Decrease) Increase in cash and cash equivalents ( 16,492 ) ( 59,540 ) 86,749 Cash and cash equivalents - beginning of the period 104,183 163,723 76,974 Cash and cash equivalents - end of period $ 87,691 $ 104,183 $ 163,723 Supplemental disclosure of cash flow information Income taxes paid $ 37,212 $ 56,758 $ 24,636 Dividends declared included in accounts payable $ 19,641 $ 17,186 $ 13,831 The accompanying notes are an integral part of these consolidated financial statements. 44 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Years Ended December 31, 2022, 2021 and 2020 (U.S. dollars in thousands) Number of Shares Issued Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Treasury Stock Total Balance, January 1, 2020 12,272 $ 12 $ — $ 25 $ 168,788 $ ( 63,993 ) $ 104,832 Net income — — — — 102,859 — 102,859 Share-based compensation 17 — 6,796 — — — 6,796 Options exercised by executives and directors 28 — 1,597 — — — 1,597 Net shares repurchased for taxes ( 6 ) — ( 551 ) — — — ( 551 ) Treasury stock from stock repurchases — — — — — ( 5,000 ) ( 5,000 ) Treasury stock retired from stock repurchases ( 489 ) — — — ( 63,993 ) 63,993 — Other comprehensive income — — — 16 — — 16 Cash dividends declared to stockholders — — — — ( 53,303 ) — ( 53,303 ) Balance, December 31, 2020 11,822 $ 12 $ 7,842 $ 41 $ 154,351 $ ( 5,000 ) $ 157,246 Net income — — — — 164,031 — 164,031 Share-based compensation 55 — 9,454 — 142 — 9,596 Options exercised by executives and directors 29 — 811 — — — 811 Net shares repurchased for taxes ( 28 ) — ( 6,089 ) — — — ( 6,089 ) Treasury stock from stock repurchases — — — — — ( 55,999 ) ( 55,999 ) Treasury stock retired from stock repurchases ( 284 ) ( 60,999 ) 60,999 — Other comprehensive income — — — 70 — — 70 Cash dividends declared to stockholders — — — — ( 67,192 ) — ( 67,192 ) Balance, December 31, 2021 11,594 $ 12 $ 12,018 $ 111 $ 190,333 $ — $ 202,474 Net income — — — — 143,568 — 143,568 Share-based compensation 20 — 11,053 — — — 11,053 Net shares repurchased for taxes ( 9 ) — ( 1,516 ) — — — ( 1,516 ) Treasury stock from stock repurchases — — — — — ( 126,445 ) ( 126,445 ) Treasury stock retired from stock repurchases ( 677 ) ( 1 ) — — ( 120,047 ) 120,047 ( 1 ) Other comprehensive income — — — ( 87 ) — — ( 87 ) Cash dividends declared to stockholders — — — — ( 74,002 ) — ( 74,002 ) Balance, December 31, 2022 10,928 $ 11 $ 21,555 $ 24 $ 139,852 $ ( 6,398 ) $ 155,044 The accompanying notes are an integral part of these consolidated financial statements. 45 Table of Contents MEDIFAST, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2022, 2021, and 2020 1. NATURE OF THE BUSINESS Medifast, Inc. (the “Company” or “Medifast”) is a Delaware corporation, incorporated in 1989. The Company’s operations are primarily conducted through its wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTA VIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Seven Crondall Associates, LLC, Corporate Events, Inc., OPTA VIA (Hong Kong) Limited, OPTA VIA (Singapore) PTE. LTD and OPTA VIA Health Consultation (Shanghai) Co., Ltd. Medifast is the company behind one of the fastest-growing health and wellness communities called OPTA VIA. OPTA VIA is a highly effective lifestyle solution for people for whom diets alone have failed. The Company has one modern, United States Food and Drug Administration (the “FDA”) approved manufacturing facility located in Owings Mills, Maryland. Medifast sells a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the OPTA VIA, Optimal Health by Take Shape for Life, and Flavors of Home ® brands. The Company’s product line includes more than 65 consumable options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups. Medifast’s nutritional products are formulated with high-quality ingredients. The processing, formulation, packaging, labeling and advertising of the Company’s products are subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission (the “FTC”), the Consumer Product Safety Commission, the United States Department of Agriculture, and the United States Environmental Protection Agency. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on December 31. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates. Cash and Cash Equivalents - Cash and cash equivalents consist of cash on deposit in financial institutions, institutional money funds and other short-term investments with a maturity of 90 days or less at the time of purchase. All credit card and debit card transactions that process in less than seven days are classified as cash and cash equivalents. The amounts due from banks for these transactions classified as cash and cash equivalents totaled $ 7.4 million as of December 31, 2022, and $ 12.2 million as of December 31, 2021. Concentration of Credit Risk - Our cash and cash equivalents and available-for-sale securities are maintained at several financial institutions and the balances with these financial institutions often exceed the amount of insurance provided on such accounts by the Federal Deposit Insurance Corporation. The cash and cash equivalents generally are maintained with financial institutions with reputable credit, and therefore bear minimal credit risk. Historically, we have not experienced any losses due to such concentration of credit risk. Fair Value of Financial Instruments - Our financial instruments include cash and cash equivalents, and investment in available-for-sale securities. The carrying amounts of cash and cash equivalents approximate fair value due to their short maturities. The fair value of investments in available-for-sale securities are based on third-party pricing services provided by the Company’s investment advisory firm. Inventories - Inventories consist principally of raw materials and packaged meal replacements held in the Company’s warehouses and outsourced distribution centers. Inventories are stated at the lower of cost or net realizable value, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor, and other indirect manufacturing costs. On a quarterly basis, management reviews inventories for unsalable or obsolete inventories. 46 Table of Contents The Company donated inventory with an aggregate cost of $ 19.0 million to Ukrainian refugees and those in need in Ukraine, which is included in selling, general and administrative expenses during the year ended December 31, 2022. The donations were made to two 501(c)(3) organizations that are coordinating the distribution throughout refugee camps in Europe and in Ukraine. The Company incurred approximately $ 12.2 million of costs in connection with the restructuring of certain external manufacturing agreements to optimize its supply chain, which is included in cost of sales during the year ended December 31, 2022. Investment Securities - The Company’s investments consist of debt securities classified as available-for-sale securities. Available-for-sale debt securities are stated at fair value and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Interest and dividends on marketable debt securities are recognized in income when declared. Realized gains and losses, if any, are included in income. Property, Plant, and Equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets acquired as follows: Building and building improvements 10 - 35 years Leasehold Improvements (1) Lease term Equipment and fixtures 3 - 15 years Software (2) 3 - 5 years Vehicles 5 years (1) The depreciation life for leasehold improvements is the lesser of the estimated useful life of the addition or the term of the related lease. (2) Capitalized costs of cloud software are reported in Other assets on the balance sheet and are amortized over an estimated useful life of 3 to 5 years. Long-lived Asset Impairment - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Revenue Recognition - Our revenue is derived primarily from point of sale transactions executed over an e-commerce platform for weight loss, weight management, and other consumable health and nutritional products. Revenue is recognized upon receipt by customer and net of discounts, rebates, promotional adjustments, price adjustments, allocated consideration to loyalty programs, and estimated returns. Revenue is recognized when control of the promised products is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products. When determining whether the customer has obtained control of the products, we consider any future performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in ASC 606, Revenue from Contracts with Customers . A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied. Our contracts have performance obligations to fulfill and deliver products from the point of sale transaction along with the related customer reward programs. Our performance obligations are satisfied at a point in time. Revenue from products transferred to customers at a point in time accounted for substantially all of our revenue for the years ended December 31, 2022, 2021 and 2020. Revenue on these contracts is recognized when obligations under the terms of the contract with our customer are satisfied. Generally, this occurs with the transfer of control upon receipt of products by our customers. Any consideration received prior to the fulfillment of the Company’s performance obligation is deferred and recognized as a liability. 47 Table of Contents Sales returns Our return policy allows for customer returns of consumable products within 30 days of purchase and upon our authorization. We adjust revenues for the products expected to be returned and a liability is recognized for expected refunds to customers. We estimate expected returns based on historical levels and project this experience into the future. Customer reward programs and sales incentives Our sales contracts may give customers the option to purchase additional products priced at a discount. Options to acquire additional products at a discount can come in many forms, such as customer reward programs and incentive offerings including pricing arrangements and promotions. We reduce the transaction price for certain customer reward programs and incentive offerings including pricing arrangements, promotions, and incentives that represent variable consideration and separate performance obligations. The Company accounts for sales rewards that provide the customer with a material right as a separate performance obligation of the transactions, and therefore allocates consideration between the initial sale of products and the customer reward program and incentive offering. Shipping and handling costs Amounts billed to customers for shipping and handling activities are treated as a promised service performance obligation and are recorded in revenue in the accompanying Consolidated Statements of Income upon fulfillment of the performance obligation. Shipping and handling costs incurred by the Company for the delivery of products to customers are considered a cost to fulfill the contract and are included in cost of sales in the accompanying Consolidated Statements of Income. Contract costs We expense OPTA VIA Coach compensation and credit card fees during the period in which the corresponding revenue is earned. These costs are deferred along with the revenues for goods that are in transit and not received by customers by period end. These costs are recorded in selling, general and administrative expense in the accompanying Consolidated Statements of Income. Leases - The Company determines if an arrangement is a lease at inception and categorizes leases with contractual terms longer than twelve months as either operating or finance. All the Company’s leases are operating leases. The right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The ROU asset also consists of any prepaid lease payments and lease incentives received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. Advertising Costs - Advertising costs are expensed as incurred, except for the preparation, layout, design and production of advertising costs which are expensed when the advertisement is first used. They are recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income. Advertising expense, excluding broker fees, for the years ended December 31, 2022, 2021 and 2020, amounted to $ 1.7 million, $ 1.6 million and $ 4.4 million, respectively. Research and Development - The Company incurs research and development costs in connection with the development of new products and programs and clinical research activities, which are expensed as incurred. They are recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income. The Company incurred $ 4.5 million, $ 4.4 million, $ 2.8 million in research and development expense for the years ended December 31, 2022, 2021 and 2020, respectively. Share-Based Compensation - Share-based compensation consists primarily of restricted stock awards, performance-based share awards, and stock options granted to employees and directors. Restricted stock awards are measured at the grant date, based on the calculated fair value of the award, and are recognized as an expense over the requisite service period. Performance-based share awards are measured based on the grant-date market price of the Company's common stock adjusted by expected level of achievement over the performance period. The fair value of the incentive stock options and non-qualified 48 Table of Contents stock options is calculated using the Black-Scholes option pricing model as of the grant date and recognized over the service period. The Company issues new shares upon the exercise of stock options, the granting of restricted stock awards, and the achieved performance against pre-determined performance goals over the performance period for performance-based share awards. Income Taxes - Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying Consolidated Balance Sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. We evaluated our tax positions and determined that we did not have any material uncertain tax positions. Earnings Per Share - Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of common stock outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of common stock outstanding adjusted for the effect of dilutive common stock equivalents. Comprehensive Income - Other comprehensive income refers to revenues, expenses, and gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity. Comprehensive income consists of net income, unrealized gains and losses on available-for-sale securities, and foreign currency translation adjustments. Accounting Pronouncements - Adopted in 2022 In March 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying accounting principles under GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and to other derivative instruments if there is a change to the interest rates used for discounting, margining or contract price alignment. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We adopted Topic 848 beginning in the first quarter of fiscal 2022 without any material impact on the Company's financial position and results of operations. Recently Issued Accounting Pronouncements - Pending Adoption We have considered all new accounting pronouncements and have concluded that there are no new pronouncements that have the potential for a material impact on our results of operations, financial condition, or cash flows, based on current information . 49 Table of Contents 3. INVENTORIES Inventories consisted of the following (in thousands): December 31, 2022 December 31, 2021 Raw materials $ 12,670 $ 15,196 Packaging 3,611 3,641 Non-food finished goods 8,738 15,991 Finished goods 97,675 152,687 Reserve for obsolete inventory ( 3,838 ) ( 7,472 ) Total $ 118,856 $ 180,043 4. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment consisted of the following (in thousands): December 31, 2022 December 31, 2021 Land $ 565 $ 565 Building and leasehold improvements 25,905 23,518 Equipment and fixtures 49,260 42,708 Software 21,278 21,894 Vehicles 118 145 Property, plant and equipment - gross 97,126 88,830 Less: accumulated depreciation ( 39,941 ) ( 32,699 ) Property, plant and equipment - net $ 57,185 $ 56,131 Depreciation expense for the years ended December 31, 2022, 2021 and 2020 was $ 7.9 million, $ 5.7 million and $ 4.1 million, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following (in thousands): December 31, 2022 December 31, 2021 Trade payables and accrued expenses $ 58,667 $ 70,894 OPTA VIA Coach compensation payable 23,633 28,733 Dividends payable 19,641 17,186 Accrued payroll and related taxes 13,581 24,940 Promotional sales incentive accruals 10,240 10,935 Deferred revenue 7,357 8,050 Sales tax payable 1,571 2,571 Total $ 134,690 $ 163,309 50 Table of Contents 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted EPS for the years ended December 31, 2022, 2021 and 2020 (in thousands, except per share data): 2022 2021 2020 Numerator: Net income $ 143,568 $ 164,031 $ 102,859 Denominator: Weighted average shares of common stock outstanding 11,195 11,705 11,771 Effect of dilutive common stock equivalents 81 108 79 Weighted average shares of common stock outstanding 11,276 11,813 11,850 Earnings per share - basic $ 12.82 $ 14.01 $ 8.74 Earnings per share - diluted $ 12.73 $ 13.89 $ 8.68 The calculation of diluted earnings per share excluded 0 , 0 and less than 1 thousand antidilutive options outstanding for the years ended December 31, 2022, 2021 and 2020, respectively. The calculation of diluted earnings per share for the years ended December 31, 2022, 2021 and 2020 also excluded 5 thousand, less than 1 thousand and 3 thousand antidilutive restricted stock awards, respectively. 7. EQUITY Authorized Shares Pursuant to the Company’s Restated and Amended Certificate of Incorporation, the Company has the authority to issue 21.5 million capital shares consisting of: (i) 20.0 million shares of common stock having a par value of $ 0.001 per share and (ii) 1.5 million shares of preferred stock having a par value $ 0.001 per share. As of December 31, 2022, there were approximately 10.9 million and 0 shares of common stock and preferred stock issued, respectively. Issuance of Additional Common Stock On May 18, 2017, the stockholders of the Company approved the Medifast, Inc. Amended and Restated 2012 Share Incentive Plan (the “Amended and Restated 2012 Plan”) that increased the number of shares of the Company’s common stock that may be awarded under the Amended and Restated 2012 Plan by 600 thousand, to an aggregate of 1.6 million. Stock Repurchase Plan The Company implemented a stock repurchase plan on September 16, 2014 (the “Stock Repurchase Plan”). On September 12, 2019, the Company's Board of Directors authorized an additional 2.0 million shares for repurchase under the Stock Repurchase Plan. The Company repurchased approximately 739 thousand and 238 thousand shares during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there were approximately 1.4 million shares of common stock remaining under the Company’s Stock Repurchase Plan. There is no guarantee as to the exact number of shares of the Company’s common stock, if any, that will be repurchased under the Stock Repurchase Plan. 8. SHARE-BASED COMPENSATION Stock Options: The Company has issued non-qualified and incentive stock options to employees and non-employee directors. The fair value of these options are estimated on the date of grant using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the risk-free interest rate, the expected volatility of the price of the Company’s common stock, and 51 Table of Contents dividend yield. Options outstanding as of December 31, 2022 generally vest over a period of three years and expire ten years from the date of grant. The exercise price of these options ranges from $ 26.52 to $ 66.68 . Due to the Company’s lack of option exercise history on the date of grant, the expected term is calculated using the simplified method defined as the midpoint between the vesting period and the contractual term of each option. The risk free interest rate is based on the U.S. Treasury yield curve in effect on the date of grant that most closely corresponds to the expected term of the option. The expected volatility is based on the historical volatility of the Company’s common stock over the period of time equivalent to the expected term for each award. The dividend yield is computed as the annualized dividend rate at the grant date divided by the strike price of the stock option. For the years ended December 31, 2022 and 2021, the Company did no t grant stock options. The number of stock options and weighted-average exercise prices as of December 31, 2022 and 2021 are as follows: 2022 2021 Awards Weighted-Average Exercise Price Awards Weighted-Average Exercise Price (awards in thousands) Outstanding at beginning of period 32 $ 54.98 61 $ 48.19 Exercised — — ( 29 ) 40.53 Forfeited — — — — Outstanding at end of the period 32 $ 54.98 32 $ 54.98 Exercisable at end of the period 28 $ 52.76 23 $ 49.50 As of December 31, 2022, the weighted-average remaining contractual life was 51 months with an aggregate intrinsic value of $ 2.0 million for outstanding stock options and the weighted-average remaining contractual life was 51 months with an aggregate intrinsic value of $ 1.7 million for exercisable options. The unrecognized compensation expense calculated under the fair value method for shares expected to vest as of December 31, 2022 was less than $ 0.1 million and is expected to be recognized over a weighted average period of 1 month. No stock options were exercised in 2022. The Company received $ 0.8 million and $ 1.6 million in cash proceeds from the exercise of stock options during the years ended December 31, 2021 and 2020, respectively. The total intrinsic value of options exercised during the years ended December 31, 2021 and 2020 was $ 5.9 million and $ 1.5 million, respectively. Restricted Stock: The Company has issued restricted stock to employees and non-employee directors generally with vesting terms up to five years after the date of grant. The fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. A summary of outstanding restricted stock activity as of December 31, 2022 and 2021 are as follows: 2022 2021 Shares Weighted-Average Grant Date Fair Value Shares Weighted-Average Grant Date Fair Value (shares in thousands) Outstanding at beginning of period 43 $ 183.51 50 $ 116.06 Granted 38 176.60 22 264.58 Vested ( 20 ) 156.68 ( 26 ) 116.68 Forfeited ( 1 ) 188.60 ( 3 ) 169.47 Outstanding at end of the period 60 $ 187.94 43 $ 183.51 The Company withheld approximately 9 thousand, 22 thousand and 6 thousand shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of restricted stock awards vested during the years ended December 31, 2022, 2021 and 2020 was $ 3.5 million, $ 7.0 million and $ 3.7 million, respectively. Market and Performance-based Share Awards: 52 Table of Contents The Company has issued market and performance-based share awards to certain key executives who were granted deferred shares and may earn between 0 % and 250 % of the target number depending upon both the Company's total stockholder return ("TSR") and the Company's performance against predetermined performance goals over a three-year performance period after the date of grant. Market and performance-based share awards that are tied to the Company's TSR are valued using the Monte Carlo method and recognized ratably as expense over the award's performance period. The fair value of the performance-based share awards is equal to the market price of the Company’s common stock on the date of grant adjusted by expected level of achievement over the performance period. Expense for performance-based share awards is amortized ratably over the performance period. Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income. The total expenses during the years ended December 31, 2022, 2021 and 2020 are as follows (in thousands): 2022 2021 2020 Shares Share-Based Compensation Expense Shares Share-Based Compensation Expense Shares Share-Based Compensation Expense Options and restricted stock 92 $ 5,167 75 $ 4,302 111 $ 3,493 Market and performance-based share awards granted in 2022 25 1,389 — — — — Performance-based share awards granted in 2021 15 2,595 15 1,986 — — Performance-based share awards granted in 2020 52 1,902 26 1,807 28 1,662 Performance-based share awards granted in 2019 — — — 1,808 17 1,641 Total share-based compensation 184 $ 11,053 116 $ 9,903 156 $ 6,796 The total income tax benefit recognized in the accompanying Consolidated Statements of Income for restricted stock awards was $ 1.2 million, $ 2.4 million and $ 1.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was $ 6.2 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2022, which is expected to be recognized over a weighted-average period of 20 months. There was $ 6.3 million of unrecognized compensation cost related to the 92 thousand performance-based shares discussed above as of December 31, 2022, which is expected to be recognized over 21 months . 9. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table sets forth the components of accumulated other comprehensive income, net of tax where applicable (in thousands): December 31, 2022 December 31, 2021 Foreign currency translation $ 24 $ 90 Unrealized gains on investment securities — 21 Accumulated other comprehensive income $ 24 $ 111 53 Table of Contents 10. FINANCIAL INSTRUMENTS Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant. The following tables present the Company’s cash and financial assets that are measured at fair value on a recurring basis for each of the hierarchy levels (in thousands): December 31, 2022 Cost Unrealized Gains Accrued Interest Estimated Fair Value Cash & Cash Equivalents Investment Securities Cash and cash equivalents $ 87,691 $ — $ — $ 87,691 $ 87,691 $ — Total $ 87,691 $ — $ — $ 87,691 $ 87,691 $ — December 31, 2021 Cost Unrealized Gains Accrued Interest Estimated Fair Value Cash & Cash Equivalents Investment Securities Cash and cash equivalents $ 94,824 $ — $ — $ 94,824 $ 94,824 $ — Level 1: Money market accounts 9,359 — — 9,359 9,359 — Government & agency securities 1,401 12 — 1,413 — 1,413 10,760 12 — 10,772 9,359 1,413 Level 2: Municipal bonds 3,880 9 59 3,948 — 3,948 Total $ 109,464 $ 21 $ 59 $ 109,544 $ 104,183 $ 5,361 The Company had no realized losses or gains for the years ended December 31, 2022, 2021 and 2020. 54 Table of Contents 11. INCOME TAXES Income tax expense for the years ended December 31, 2022, 2021 and 2020 consisted of the following (in thousands): 2022 2021 2020 Current Federal $ 35,857 $ 49,433 $ 28,520 State 5,558 6,380 2,285 Total current 41,415 55,813 30,805 Deferred Federal ( 738 ) ( 3,424 ) 477 State ( 186 ) ( 291 ) ( 77 ) Foreign — — 201 Total deferred ( 924 ) ( 3,715 ) 601 Provision for income taxes $ 40,491 $ 52,098 $ 31,406 The total provision for income taxes for the years ended December 31, 2022, 2021 and 2020 was $ 40.5 million, $ 52.2 million and $ 31.4 million, respectively. Those amounts have been allocated to the following financial statement items: 2022 2021 2020 Income before provision for income taxes $ 40,491 $ 52,098 $ 31,406 Stockholders' equity, unrealized (losses) gains on investment securities & foreign currency ( 27 ) 66 14 Total provision for income taxes $ 40,464 $ 52,164 $ 31,420 The reconciliation of the United States federal statutory tax provision to the Company’s provision for income taxes for the years ended December 31, 2022, 2021 and 2020 (in thousands, except percentages): 2022 2021 2020 Statutory federal tax $ 38,621 21.0 % $ 45,405 21.0 % $ 28,196 21.0 % State income taxes, net of federal benefit 4,635 2.5 % 4,980 2.3 % 1,470 1.1 % Foreign taxes Hong Kong 75 0.0 % 91 0.0 % 94 0.1 % Singapore 28 0.0 % 32 0.0 % 107 0.1 % Share-based compensation - windfall ( 26 ) 0.0 % ( 1,835 ) ( 0.8 ) % ( 415 ) ( 0.3 ) % Research and development and jobs credits ( 819 ) ( 0.4 ) % ( 503 ) ( 0.2 ) % ( 370 ) ( 0.3 ) % Executive compensation 1,470 0.8 % 2,652 1.2 % 966 0.7 % Charitable donations ( 4,316 ) ( 2.3 ) % — 0.0 % — 0.0 % Valuation allowance 396 0.2 % 468 0.2 % 1,342 1.0 % Other permanent differences 427 0.2 % 808 0.4 % 16 0.0 % Provision for income taxes $ 40,491 22.0 % $ 52,098 24.1 % $ 31,406 23.4 % Significant components of the Company’s deferred tax assets (liabilities) consisted of the following (in thousands): 55 Table of Contents December 31, 2022 December 31, 2021 Reserves on inventory and sales $ 1,069 $ 2,022 Credit and loss carryforwards 3,713 3,052 Stock compensation 2,374 420 Accrued expenses and deferred costs 5,153 4,240 Inventory capitalization 1,781 3,514 Lease obligations 5,773 7,191 Capitalized research costs 2,502 — Charitable donations 1,862 — Other 190 — Valuation allowance ( 2,523 ) ( 1,904 ) Total deferred tax assets 21,894 18,535 Right-of-use assets ( 4,089 ) ( 5,375 ) Unrealized loss on investment securities ( 23 ) ( 6 ) Prepaid expenses ( 1,289 ) ( 1,175 ) Depreciation ( 11,165 ) ( 7,575 ) Other — — Total deferred tax liabilities ( 16,566 ) ( 14,131 ) Net deferred tax assets $ 5,328 $ 4,404 On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). It amends the Internal Revenue Code to provide relief and supportive measures for taxpayers impacted by the outbreak of COVID-19 virus. The key components of the Act are as follows: eliminating taxable income limitation for certain net operating losses (“NOL”) and permitting carry back NOLs arising in 2019 , 2020 and 2021 to five prior tax years; accelerating refunds of previously generated Alternative Minimum Tax credit; increasing business interest limitation from 30 percent to 50 percent of adjusted taxable income; amending depreciation for qualified improvement property (“QIP”) to 15- year property for QIP placed in service after December 31, 2018. The Company's income tax provision provided under the CARES Act did not have a material impact on the year ended December 31, 2022, 2021 and 2020. On August 12, 2022, the President of the United States signed into law the Inflation Reduction Act. The two primary tax implications for corporations are a 15% alternative minimum tax (“AMT”) that applies to corporations with at least one billion of pretax income and a one percent surtax on share buybacks. The AMT will not apply to the Company since the Company’s pretax income does not exceed the threshold. The one percent surtax on share repurchases will apply to the Company when it comes into force in 2023. The Company's income tax provision provided under the Inflation Reduction Act did not have a material impact on the year ended December 31, 2022. The Company has separate state and foreign net operating loss carry forwards totaling $ 31.6 million that start expiring in 2029. The Company has recorded a valuation allowance for the portion of the net operating loss carry forwards which is not expected to be realized. We file income tax returns in the United States and various states and foreign jurisdictions. We are generally no longer subject to United States federal, state and local income tax examinations by tax authorities for the years before 2019. 12. LEASES AND COMMITMENTS Operating Leases: The Company has operating leases for office and warehouse space and certain equipment. In certain of the Company’s lease agreements, the rental payments are adjusted periodically based on defined terms within the lease. The Company did not have any finance leases as of December 31, 2022 and 2021, respectively, or for the years then ended. 56 Table of Contents Our leases relating to office and warehouse space have terms of 18 months to 126 months. Our leases relating to equipment have lease terms of 24 months to 203 months, with certain of them having clauses relating to automatic renewal. The Company’s warehouse agreements also contain non-lease components, in the form of payments towards variable logistics services and labor charges, which the Company is obligated to pay based on the services consumed by it. Such amounts are not included in the measurement of the lease liability but will be recognized as expense when they are incurred. The operating lease expense was $ 6.7 million, $ 5.6 million and $ 3.6 million for the years ended December 31, 2022, 2021 and 2020, respectively. Supplemental cash flow information related to the Company’s operating leases were as follows (in thousands): 2022 2021 Cash paid for amounts included in the measurements of lease liabilities Operating cash flow used in operating leases $ 7,199 $ 4,504 Right-of-use assets obtained in exchange for lease obligations Operating leases $ 101 $ 18,872 As of December 31, 2022, the weighted average remaining lease term was 58 months and the weighted average discount rate was 2.1 %. The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2022 (in thousands): 2023 $ 6,243 2024 5,693 2025 5,825 2026 4,160 2027 2,553 Thereafter 2,858 Total lease payments $ 27,332 Less: imputed interest ( 1,281 ) Total $ 26,051 Unconditional purchase obligations: At December 31, 2022, the Company had $ 215.7 million in unconditional purchase obligations primarily for inventories, outsourced information technology and Coach events. 13. DEBT Credit Agreement On April 13, 2021, the Company and certain of its subsidiaries (collectively, the “Guarantors”) entered into a credit agreement (the “Credit Agreement”) among the Company, the Guarantors, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent. On May 31, 2022, the Credit Agreement was amended to increase the borrowing capacity and convert the interest rate to be based on Secured Overnight Financing Rate ("SOFR"), from London Inter-Bank Offered Rate (LIBOR) ("the "Amended Credit Agreement"). The Amended Credit Agreement provides for a $ 225.0 million senior secured revolving credit facility with a $ 20.0 million letter of credit sublimit. The Amended Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $ 100.0 million. The Credit Agreement matures on April 13, 2026. 57 Table of Contents The Company’s obligations under the Amended Credit Agreement are guaranteed by the Guarantors. The obligations of the Company and the Guarantors are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. Under the Amended Credit Agreement, the Company will pay to the administrative agent for the account of each revolving lender a commitment fee on a quarterly basis based on amounts committed but unused under the revolving facility from 0.20 to 0.40 % per annum depending on the Company’s Total Net Leverage Ratio (as defined in the Amended Credit Agreement). The Company is also obligated to pay the administrative agent customary fees for credit facilities of this size and type. Revolving borrowings under the Amended Credit Agreement bear interest at a rate per annum equal to (i) the Term SOFR Rate for the interest period plus the Applicable Rate (as defined in the Amended Credit Agreement) based on the Company’s Total Net Leverage Ratio or (ii) the Alternate Base Rate (as defined in the Amended Credit Agreement) as in effect from time to time plus the Applicable Rate based on the Company’s Total Net Leverage Ratio. As of December 31, 2022, the Applicable Rate for SOFR Loans is 1.25 % per annum and the Applicable Rate for ABR Loans is 0.25 % per annum. SOFR based loans also include a Credit Spread Adjustment based on the duration of the borrowing. The Amended Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Amended Credit Agreement also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default. In addition, the Amended Credit Agreement requires the Company to maintain a Total Net Leverage Ratio of no more than 2.75 to 1.00 and an Interest Coverage Ratio of at least 3.50 to 1.00. The Company had no borrowings under the Amended Credit Agreement as of December 31, 2022 and December 31, 2021. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES There were no disagreements with the Company’s independent auditors, regarding accounting and financial disclosures for the fiscal year ended December 31, 2022.