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Item 8. Financial Statements and Supplementary Data

2024-02-20 compared with 2023-02-21 · 150 added, 98 removed, 517 unchanged (32% of the section changed)

13 unchanged sentences

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.

We have audited Medifast, Inc.’s (the Company) internal control over financial reporting as of December 31, 2023, 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, 2023, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

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

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

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

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

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

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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).

(the Company) as of December 31, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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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.

As described in Notes 2 and 11 of the consolidated financial statements, the Company operates in multiple markets in the U.S.

(1) relate 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 separate opinions on the critical audit matter or on the accounts or disclosures to which they relate.

As described in Notes 2 and 11 of the 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.

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We identified the evaluation of the Company’s provision for income taxes as a critical audit matter due to the significant judgments made by management when assessing the complex provisions of the tax laws and regulations.

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.

Auditing the matter required significant auditor judgment and increased audit effort, including 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.

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

18 unchanged sentences

Income from operations 126,402 184,806 216,241

Other (expense) income

Interest (expense) income ( 701 ) ( 231 ) 246

Other income (expense)

Interest income (expense)

2,490 ( 701 ) ( 231 )

Other (expense) income ( 95 ) ( 46 ) 119

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Net income $ 99,415 $ 143,568 $ 164,031

Other comprehensive (loss) income, net of tax:

Other comprehensive income (loss), net of tax:

Foreign currency translation ( 72 ) ( 67 ) 112

Unrealized (losses) gains on investment securities ( 20 ) ( 42 ) 37

Other comprehensive (loss) income ( 87 ) 70 16

Unrealized gains (losses) on investment securities

296 ( 20 ) ( 42 )

Other comprehensive income (loss)

224 ( 87 ) 70

Comprehensive income $ 99,639 $ 143,481 $ 164,101

8 unchanged sentences

Inventories 54,591 118,856

Investment securities — 5,361

Income taxes, prepaid 8,727 —

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Loss on sale or disposal of property, plant and equipment 1,172 2,130 2

Amortization of premium on investment securities 14 89 320

Amortization of (discount) premium on investment securities

( 169 ) 14 89

Deferred income taxes 1,211 ( 924 ) ( 3,715 )

Unrealized gain on equity investment securities

Change in operating assets and liabilities:

6 unchanged sentences

Investing Activities

Purchase of investment securities ( 54,564 ) — —

Sale and maturities of investment securities — 5,267 5,145

8 unchanged sentences

Foreign currency impact ( 72 ) ( 67 ) 112

(Decrease) Increase in cash and cash equivalents ( 16,492 ) ( 59,540 ) 86,749

Increase (Decrease) in cash and cash equivalents

6,749 ( 16,492 ) ( 59,540 )

Cash and cash equivalents - beginning of the period 87,691 104,183 163,723

28 unchanged sentences

Share-based compensation 20 — 11,053 — — — 11,053

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

Net shares repurchased for taxes ( 9 ) — ( 1,516 ) — — — ( 1,516 )

7 unchanged sentences

Share-based compensation 76 — 8,188 — — — 8,188

Options exercised by executives and directors 7 — 188 — — — 188

Net shares repurchased for taxes ( 31 ) — ( 3,358 ) — — ( 3,358 )

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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.

Medifast is the health and wellness company known for its habit-based and coach-guided lifestyle solution OPTA VIA.

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 sells a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the OPTA VIA, OPTA VIA ACTIVE, and Optimal Health brands.

The Company’s product line includes more than 65 consumable options, including, but not limited to, bars, puffs, cereal, crunchers, drinks, hearty choices, oatmeal, pancakes, pudding, soft serve, shakes, smoothies, soft bakes, and soups.

Medifast’s nutritional products are formulated with high-quality ingredients.

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The Company’s fiscal year ends on December 31.

Reclassification - Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation.

No reclassification in the consolidated financial statements had a material impact on the presentation.

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.

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The amounts due from banks for these transactions classified as cash and cash equivalents totaled $ 3.7 million as of December 31, 2023, and $ 7.4 million as of December 31, 2022.

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.

Concentration of Credit Risk - Our cash and cash equivalents and available-for-sale debt 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.

Fair Value of Financial Instruments - Our financial instruments include cash and cash equivalents, and investments in debt and equity 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.

The fair value of investments in available-for-sale debt securities are based on third-party pricing services provided by the Company’s investment advisory firm.

The fair value of investments in equity securities with readily determinable fair values are based on the closing price on the last trading day of the period from the applicable exchange.

Inventories - Inventories consist principally of raw materials and packaged meal replacements held in the Company’s warehouses and outsourced distribution center.

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.

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.

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.

Investments - The Company’s investments consist of debt securities classified as available-for-sale securities and equity investments with readily determinable fair values.

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.

1 unchanged sentence

Realized gains and losses, if any, are included in income.

Equity investments with readily determinable fair values are those securities in which the Company has no control or significant influence and is not the primary beneficiary.

The securities are stated at fair value based on a quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs (Level 1).

Gains and losses are recorded in other income (expense), net on the consolidated statement of operations.

Property, Plant, and Equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization.

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

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

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 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 Accounting Standards Codification ("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.

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Revenue from products transferred to customers at a point in time accounted for substantially all of our revenue for the years ended December 31, 2023, 2022, and 2021.

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.

Revenue on these contracts is recognized when the obligations under the terms of the contract with our customer are satisfied.

Sales returns

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

Our return policy allows for customer returns of consumable products from the time of order until 30 days following the date of receipt, and upon our authorization.

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

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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.

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

The fair value of the incentive stock options and non-qualified

stock options is calculated using the Black-Scholes option pricing model as of the grant date and recognized over the service period.

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.

Market and performance-based share awards that are tied to the Company's total stockholder return ("TSR") are valued using the Monte Carlo method.

The fair value of the incentive stock options and non-qualified stock options is calculated using the Black-Scholes option pricing model as of the grant date and recognized over the service period.

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 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.

4 unchanged sentences

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.

1 unchanged sentence

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.

Comprehensive income consists of net income, unrealized gains and losses on available-for-sale debt securities, and foreign currency translation adjustments.

Accounting Pronouncements - Adopted in 2023

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.

The Company has not adopted any new accounting standards during the year ended December 31, 2023.

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 .

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") 2022-03—Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions to (1) to clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820.

For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.

Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

The Company did not early adopt the standard, but is in compliance with the provisions as of December 31, 2023.

In December 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09—Income Taxes (Topic 740):

Improvements to Income Tax Disclosures to enhance the transparency and decision usefulness of income tax disclosures, including jurisdictional information, by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disclosures.

The ASU is effective for public business entities for annual periods beginning after December 15, 2024, and for all other entities for annual periods beginning after December 15, 2025.

Prospective application is required, though retrospective application is permitted.

Entities are permitted to early adopt the standard.

The Company did not early adopt for the 2023 reporting period.

The Company is currently evaluating the impact of adopting the ASU on its consolidated financial statements.

Inventories consisted of the following (in thousands):

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Land $ 565 $ 565

Building and leasehold improvements 25,905 23,518

Building and improvements and leasehold improvements

24,499 25,905

Equipment and fixtures 50,344 49,260

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Trade payables and accrued expenses $ 39,193 $ 53,120

Accrued payroll and related taxes 17,184 13,581

OPTA VIA Coach compensation payable

13,277 23,633

Dividends payable 19,641 17,186

Accrued payroll and related taxes 13,581 24,940

Gross unrecognized tax liability, including interest and penalties

Promotional sales incentive accruals

Deferred revenue 7,357 8,050

Dividends payable

Sales tax payable

Deferred revenue 574 7,357

Total $ 86,415 $ 134,690

8 unchanged sentences

Earnings per share - diluted $ 9.10 $ 12.73 $ 13.89

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.

The calculation of diluted earnings per share for the years ended December 31, 2023, 2022 and 2021 excluded 24 thousand, 5 thousand and less than 1 thousand antidilutive restricted stock awards, respectively.

Authorized Shares

4 unchanged sentences

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

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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

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 fair value of these options were estimated on the date of grant using the Black-Scholes option pricing model, which required 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 dividend yield.

Options outstanding as of December 31, 2023 generally vested 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.

Due to the Company’s lack of option

exercise history on the date of grant, the expected term was 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 was based on the U.S.

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

The expected volatility was 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 was 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, 2023 and 2022, the Company did no t grant stock options.

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Exercisable at end of the period 25 $ 62.20 28 $ 52.76

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.

As of December 31, 2023, the weighted-average remaining contractual life was 45 months with an aggregate intrinsic value of $ 0.1 million for both outstanding and exercisable stock options.

The compensation expense calculated under the fair value method as of December 31, 2023 was less than $ 0.1 million and was fully recognized during the period.

The Company received $ 0.2 million, $ 0.0 million , and $ 0.8 million in cash proceeds from the exercise of stock options during the years ended December 31, 2023, 2022, and 2021, respectively.

The total intrinsic value of options exercised during the years ended December 31, 2023, 2022, and 2021 was $ 0.4 million, $ 0.0 million , and $ 5.9 million, respectively.

Restricted Stock:

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Market and Performance-based Share Awards:

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 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 TSR and the Company's performance against predetermined performance goals over a three-year performance period after the date of grant.

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.

In the event that management determines that the Company will not reach the lower threshold of the predetermined performance goals established in the grant agreement, any previously recognized expense is reversed in the period in which such a determination is made.

Management determined that the market and performance-based share awards granted in 2022 would not reach the lower threshold of the predetermined performance goal resulting in a $ 1.4 million decrease in the Company’s share-based compensation expense for the year ended December 31, 2023.

Share-based compensation expense is recorded in selling, general, and administrative expense in the accompanying Consolidated Statements of Income.

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Market and performance-based share awards granted in 2023 47 1,536 — — — —

Market and performance-based share awards granted in 2022

24 ( 1,388 ) 25 1,389 — —

Performance-based share awards granted in 2021 14 2,005 15 2,595 15 1,986

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There was $ 7.5 million of total unrecognized compensation cost related to restricted stock awards as of December 31, 2023, which is expected to be recognized over a weighted-average period of 21 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 .

There was $ 4.0 million of unrecognized compensation cost related to th e 85 thousand p erformance-based shares discussed above as of December 31, 2023, which is expected to be recognized ove r 20 months .

ACCUMULATED OTHER COMPREHENSIVE INCOME

4 unchanged sentences

Accumulated other comprehensive income $ 248 $ 24

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.

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Equivalents Investment

Cash and cash equivalents $ 87,691 $ — $ — $ 87,691 $ 87,691 $ —

Cash and cash equivalents, excluding money market accounts

$ 88,778 $ — $ — $ 88,778 $ 88,778 $ —

Money market accounts 5,662 — — 5,662 5,662 —

Government & agency securities 15,282 126 40 15,448 — 15,448

Equity securities

10,000 150 — 10,150 — 10,150

30,944 276 40 31,260 5,662 25,598

Corporate bonds

29,440 293 270 30,003 — 30,003

Total $ 149,162 $ 569 $ 310 $ 150,041 $ 94,440 $ 55,601

6 unchanged sentences

Cash and cash equivalents $ 87,691 $ — $ — $ 87,691 $ 87,691 $ —

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

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

10,760 12 — 10,772 9,359 1,413

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

Total $ 87,691 $ — $ — $ 87,691 $ 87,691 $ —

The Company had no realized losses or gains for the years ended December 31, 2023, 2022 and 2021.

During the fourth quarter of 2023, the Company entered into an agreement to purchase common stock of LifeMD (Nasdaq:

LFMD), a leading provider of virtual primary care.

The securities are subject to a registration rights agreement which stipulates that the registration of the securities is to be made as soon as practicable, but not later than 90 days, following written demand

by the Company.

Written notice of demand for registration was submitted to LifeMD on December 12, 2023.

In addition, the shares are subject to a 180-day lock-up period from the closing date of the agreement, December 11, 2023.

The fair value of the investment is recorded within the investment securities of the consolidated balance sheet.

The gains related to the Company's LifeMD investment for the year ended December 31, 2023, 2022 and 2021 are summarized in the table below (in thousands):

December 31, 2023 December 31, 2022 December 31, 2021

Net gains recognized during the period on equity securities

$ 150 $ — $ —

Net gains recognized on equity securities sold

Unrealized gains recognized during the reporting period on equity securities still held at the reporting date

$ 150 $ — $ —

The Company concurrently entered into an agreement in which LifeMD would provide services to stand-up the collaboration between LifeMD and the Company.

The agreement stipulated an initial milestone payment of $ 5 million due upon execution of the agreement for these services.

The services under the initial milestone were completed prior to December 31, 2023, and this amount was included in the Company's selling, general, and administrative expenses on the consolidated statement of income.

The agreement between the Company and LifeMD has two additional milestones aggregating to $ 5.0 million for which work began in 2024, and that will be recognized in the consolidated statement of income as the services are rendered.

Income tax expense for the years ended December 31, 2023, 2022 and 2021 consisted of the following (in thousands):

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Singapore ( 199 ) ( 0.2 ) % 28 0.0 % 32 0.0 %

Share-based compensation - windfall ( 26 ) 0.0 % ( 1,835 ) ( 0.8 ) % ( 415 ) ( 0.3 ) %

Share-based compensation

143 0.1 % ( 26 ) 0.0 % ( 1,835 ) ( 0.8 ) %

Research and development and jobs credits ( 1,258 ) ( 1.0 ) % ( 819 ) ( 0.4 ) % ( 503 ) ( 0.2 ) %

2 unchanged sentences

Valuation allowance ( 613 ) ( 0.5 ) % 396 0.2 % 468 0.2 %

Intercompany loan restructuring 1,167 0.9 % — — % — — %

Other permanent differences 106 0.1 % 427 0.2 % 808 0.4 %

10 unchanged sentences

Charitable donations 114 1,862

State taxes 1,520 —

Other 164 190

Valuation allowance ( 1,680 ) ( 2,523 )

1 unchanged sentence

Right-of-use assets ( 3,938 ) ( 4,089 )

Unrealized loss on investment securities ( 23 ) ( 6 )

Prepaid expenses ( 2,084 ) ( 1,289 )

Depreciation ( 10,321 ) ( 11,165 )

Other — ( 23 )

Total deferred tax liabilities ( 16,343 ) ( 16,566 )

Net deferred tax assets $ 4,117 $ 5,328

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.

The AMT will not apply to the Company in 2023 since the Company’s 2023 pretax income does not exceed the threshold.

The share buyback surtax will not apply to the Company as its share issuances exceed its share buybacks in 2023.

The Inflation Reduction Act did not have a material impact on the Company’s tax provision for the years ended December 31, 2023 and 2022.

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.

The Company has separate state and foreign net operating loss carry forwards totaling $ 28.7 million that start expiring in 2029.

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

As of December 31, 2023, the Company had $ 7.5 million of gross unrecognized tax benefits, which would have a net $ 6.2 million impact on the effective tax rate, if recognized.

As of December 31, 2022, the Company had $ 6.0 million of gross unrecognized tax benefits, which would have a net $ 4.8 million impact on the effective tax rate, if recognized.

The change for both 2023 and 2022 primarily relates to additional gross unrecognized benefits for current and prior year tax positions.

The amounts of unrecognized tax benefits were as follows:

December 31, 2023 December 31, 2022

Unrecognized tax benefit at the beginning of the period

$ 6,011 $ 2,714

Increase for current year tax positions

Increase for prior period tax positions 38 2,487

Reduction due to lapse in statute of limitations ( 291 ) ( 50 )

Unrecognized tax benefit at the end of the period

$ 7,502 $ 6,011

The Company recognizes interest and penalty expenses related to unrecognized tax positions as a component of the income tax provision.

As of December 31, 2023, and 2022, interest and penalties accrued were $ 1.3 million and $ 0.9 million, respectively.

For 2023 and 2022, the Company recorded expenses (benefits) related to interest and penalties of $ 0.3 million and $ 0.2 million, respectively.

As of December 31, 2023, the current year reduction primarily relates to the expiration of federal, state, and foreign statutes of limitation.

The Company cannot reasonably project the change in its uncertain tax positions over the next twelve months.

Our tax returns are subject to examination by various federal, state, and local tax authorities.

The Company believes that it has adequately provided for all tax positions;

however, amounts asserted by taxing authorities could be greater than our accrued position.

Pending the resolution of one examination, and specific to jurisdictions where the Company has filed tax returns and examination of such returns is constrained by a statute of limitations, we are no longer subject to United States federal, state, and local income tax examinations by tax authorities for years prior to 2020.

LEASES AND COMMITMENTS

20 unchanged sentences

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.

At December 31, 2023, the Company had $ 72.2 million in unconditional purchase obligations with a remaining term in excess of one year primarily for inventories, outsourced information technology and Coach events.

Credit Agreement

8 unchanged sentences

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.

plus the Applicable Rate based on the Company’s Total Net Leverage Ratio.

As of December 31, 2023, the Applicable Rate for SOFR Loans is 1.25 % per annum and the Applicable Rate for ABR Loans is 0.25 % per annum.

7 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data