Medifast (MED) 10-Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-31573

Medifast, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-3714405
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

100 International Drive

Baltimore, Maryland 21202

Telephone Number: (410) 581-8042

(Address of Principal Executive Offices, Zip Code and Telephone Number, Including Area Code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ⌧	Accelerated filer ◻	Non-accelerated filer ◻	Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ⌧

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common Stock, par value $0.001 per share	MED	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The number of shares of the registrant’s common stock outstanding at October 28, 2021 was 11,616,233.

Medifast, Inc. and subsidiaries

Index

Part 1 – Financial Information
Item 1 – Financial Statements
Condensed Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	2
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	3
Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2021 and December 31, 2020	4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2021 and 2020	5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	6
Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3 – Quantitative and Qualitative Disclosures about Market Risk	21
Item 4 – Controls and Procedures	22
Part II – Other Information
Item 1 – Legal Proceedings	22
Item 1A – Risk Factors	22
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6 – Exhibits	24

1

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(U.S. dollars in thousands, except per share amounts & dividend data)

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Revenue	$	413,395	$	271,470	$	1,148,253	$	669,930
Cost of sales		106,338		67,434		298,942		171,354
Gross profit		307,057		204,036		849,311		498,576
Selling, general, and administrative		251,886		159,477		679,907		402,385
Income from operations		55,171		44,559		169,404		96,191
Other income (expense)
Interest (expense) income		(94)		44		(138)		212
Other income		115		30		112		12
		21		74		(26)		224
Income from operations before income taxes		55,192		44,633		169,378		96,415
Provision for income taxes		13,210		10,180		39,370		21,550
Net income	$	41,982	$	34,453	$	130,008	$	74,865
Earnings per share - basic	$	3.59	$	2.93	$	11.07	$	6.36
Earnings per share - diluted	$	3.56	$	2.91	$	10.98	$	6.32
Weighted average shares outstanding
Basic		11,692		11,766		11,739		11,772
Diluted		11,785		11,857		11,840		11,840
Cash dividends declared per share	$	1.42	$	1.13	$	4.26	$	3.39

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

2

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(U.S. dollars in thousands)

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Net income	$	41,982	$	34,453	$	130,008	$	74,865
Other comprehensive income (loss), net of tax:
Foreign currency translation		63		(1)		130		(3)
Unrealized (losses) gains on investment securities		(16)		(1)		(49)		75
Other comprehensive income (loss)		47		(2)		81		72
Comprehensive income	$	42,029	$	34,451	$	130,089	$	74,937

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

3

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(U.S. dollars in thousands, except par value)

		September 30,		December 31,
		2021		2020
ASSETS
Current Assets
Cash and cash equivalents	$	154,516	$	163,723
Inventories		129,614		53,392
Investment securities		5,379		10,752
Prepaid expenses and other current assets		11,541		6,447
Total current assets		301,050		234,314
Property, plant and equipment - net of accumulated depreciation		46,451		27,633
Right-of-use assets		16,736		10,508
Other assets		6,439		2,937
Deferred tax assets		692		692
TOTAL ASSETS	$	371,368	$	276,084
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	155,506	$	107,677
Current lease obligations		5,402		3,673
Total current liabilities		160,908		111,350
Lease obligations, net of current lease obligations		14,221		7,488
Total liabilities		175,129		118,838
Stockholders' Equity
Common stock, par value $.001 per share: 20,000 shares authorized;
11,618 and 11,822 issued and 11,616 and 11,772 outstanding
at September 30, 2021 and December 31, 2020, respectively		12		12
Additional paid-in capital		12,950		7,842
Accumulated other comprehensive income		122		41
Retained earnings		183,155		154,351
Less: treasury stock at cost, 0 and 46 shares at September 30, 2021 and December 31, 2020, respectively		-		(5,000)
Total stockholders' equity		196,239		157,246
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	371,368	$	276,084

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

4

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(U.S. dollar in thousands)

	Nine months ended September 30,
	2021		2020
Operating Activities
Net income	$	130,008	$	74,865
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization		7,275		5,259
Share-based compensation		6,613		4,243
Loss on sale of disposal of property, plant and equipment		-		28
Amortization of premium on investment securities		70		263
Deferred income taxes		-		(735)
Change in operating assets and liabilities:
Inventories		(76,222)		7,035
Income taxes, prepaid		-		5,169
Prepaid expenses and other current assets		(5,094)		1,728
Other assets		(3,393)		(2,566)
Accounts payable and accrued expenses		42,747		30,078
Net cash flow provided by operating activities		102,004		125,367
Investing Activities
Sale and maturities of investment securities		5,145		2,000
Purchase of property and equipment		(22,585)		(3,852)
Net cash flow used in investing activities		(17,440)		(1,852)
Financing Activities
Options exercised by executives and directors		811		1,424
Net shares repurchased for employee taxes		(1,867)		(532)
Cash dividends paid to stockholders		(46,845)		(39,892)
Stock repurchases		(46,000)		(5,000)
Net cash flow used in financing activities		(93,901)		(44,000)
Foreign currency impact		130		(3)
(Decrease) Increase in cash and cash equivalents		(9,207)		79,512
Cash and cash equivalents - beginning of the period		163,723		76,974
Cash and cash equivalents - end of period	$	154,516	$	156,486
Supplemental disclosure of cash flow information:
Income taxes paid	$	41,302	$	14,135
Dividends declared included in accounts payable	$	17,351	$	13,715

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

5

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

(U.S. dollars in thousands)

	Three and Nine months ended September 30, 2021
	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock		Total
Balance, December 31, 2020	11,822	$	12	$	7,842	$	41	$	154,351	$	(5,000)	$	157,246
Net income	-		-		-		-		41,063		-		41,063
Share-based compensation	13		-		2,198		-		-		-		2,198
Options exercised by executives and directors	11		-		481		-		-		-		481
Net shares repurchased for employee taxes	(7)		-		(1,807)		-		-		-		(1,807)
Treasury stock from stock repurchases	-		-		-		-		-		(7,500)		(7,500)
Other comprehensive income	-		-		-		62		-		-		62
Cash dividends declared to stockholders	-		-		-		-		(16,852)		-		(16,852)
Balance, March 31, 2021	11,839		12		8,714		103		178,562		(12,500)		174,891
Net income	-		-		-		-		46,963		-		46,963
Share-based compensation	10		-		1,697		-		142		-		1,839
Options exercised by executives and directors	3		-		221		-		-		-		221
Net shares repurchased for employee taxes	-		-		(26)		-		-		-		(26)
Other comprehensive loss	-		-		-		(28)		-		-		(28)
Treasury stock from stock repurchases	-		-		-		-		-		(12,230)		(12,230)
Treasury stock retired from stock repurchases	(114)		-		-		-		(23,383)		23,383		-
Cash dividends declared to stockholders	-		-		-		-		(16,941)		-		(16,941)
Balance, June 30, 2021	11,738		12		10,606		75		185,343		(1,347)		194,689
Net income	-		-		-		-		41,982		-		41,982
Share-based compensation	1		-		2,269		-		-		-		2,269
Options exercised by executives and directors	3		-		109		-		-		-		109
Net shares repurchased for employee taxes	(1)		-		(34)		-		-		-		(34)
Other comprehensive Income	-		-		-		47		-		-		47
Treasury stock from stock repurchases	-		-		-		-		-		(26,270)		(26,270)
Treasury stock retired from stock repurchases	(123)		-		-		-		(27,617)		27,617		-
Cash dividends declared to stockholders	-		-		-		-		(16,553)		-		(16,553)
Balance, September 30, 2021	11,618	$	12	$	12,950	$	122	$	183,155	$	-	$	196,239

(Continued on page 7)

6

	Three and Nine months ended September 30, 2020
	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock		Total
Balance, December 31, 2019	12,272	$	12	$	-	$	25	$	168,788	$	(63,993)	$	104,832
Net income	-		-		-		-		18,477		-		18,477
Share-based compensation	7		-		981		-		-		-		981
Net shares repurchased for employee taxes	(5)		-		(487)		-		-		-		(487)
Treasury stock retired from stock repurchases	(489)		-		-		-		(63,993)		63,993		-
Other comprehensive income	-		-		-		45		-		-		45
Cash dividends declared to stockholders	-		-		-		-		(13,099)		-		(13,099)
Balance, March 31, 2020	11,785		12		494		70		110,173		-		110,749
Net income	-		-		-		-		21,935		-		21,935
Share-based compensation	-		-		1,136		-		-		-		1,136
Options exercised by executives and directors	21		-		1,250		-		-		-		1,250
Net shares repurchased for employee taxes	-		-		(9)		-		-		-		(9)
Other comprehensive income	-		-		-		29		-		-		29
Treasury stock from stock repurchases	-		-		-		-		-		(5,000)		(5,000)
Cash dividends declared to stockholders	-		-		-		-		(13,354)		-		(13,354)
Balance, June 30, 2020	11,806		12		2,871		99		118,754		(5,000)		116,736
Net income	-		-		-		-		34,453		-		34,453
Share-based compensation	9		-		2,126		-		-		-		2,126
Options exercised by executives and directors	2		-		174		-		-		-		174
Net shares repurchased for employee taxes	-		-		(36)		-		-		-		(36)
Other comprehensive loss	-		-		-		(2)		-		-		(2)
Cash dividends declared to stockholders	-		-		-		-		(13,437)		-		(13,437)
Balance, September 30, 2020	11,817	$	12	$	5,135	$	97	$	139,770	$	(5,000)	$	140,014

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

7

MEDIFAST, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of Medifast, Inc. and its wholly-owned subsidiaries (“Medifast,” the “Company,” “we,” “us,” or “our”) included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and notes that are normally required by GAAP have been condensed or omitted. However, in the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair presentation of the financial position and results of operations have been included and management believes the disclosures that are made are adequate to make the information presented not misleading. The condensed consolidated balance sheet at December 31, 2020 has been derived from the audited consolidated financial statements at that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Form 10-K”).

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, 2021. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the 2020 audited consolidated financial statements and notes thereto, which are included in the 2020 Form 10-K.

Presentation of Financial Statements - The unaudited condensed consolidated financial statements included herein include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated.

Reclassification - Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation. No reclassification in the condensed consolidated financial statements had a material impact on the presentation.

Use of Estimates - The preparation of financial statements in conformity with GAAP 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.

Accounting Pronouncements Adopted in 2021

On January 1, 2021, the beginning of the Company’s fiscal year, the Company adopted Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is designed to simplify the accounting for income taxes by eliminating certain exceptions to the general principles in Topic 740. There was no material impact on the Company’s condensed consolidated financial statements upon adoption of this ASU. 

Recently Issued Accounting Pronouncements – Pending Adoption

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying accounting principles under GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met and to other derivative instruments if there is a change to the interest rates used for discounting, margining or contract price alignment. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the optional expedients provided by the new standard as it pertains to the credit agreement disclosed in Note 8.

8

2. INVENTORIES

Inventories consist principally of raw materials, non-food finished goods 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.

Inventories consisted of the following (in thousands):

	September 30, 2021		December 31, 2020
Raw materials	$	13,840	$	13,428
Packaging		3,395		4,071
Non-food finished goods		15,407		8,078
Finished goods		100,688		29,858
Reserve for obsolete inventory		(3,716)		(2,043)
Total	$	129,614	$	53,392

3. EARNINGS PER SHARE

Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of shares of the Company’s common stock outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of shares of the Company’s common stock outstanding adjusted for the effect of dilutive common stock equivalents.

The following table sets forth the computation of basic and diluted EPS (in thousands, except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Numerator:
Net income	$	41,982	$	34,453	$	130,008	$	74,865
Denominator:
Weighted average shares of common stock outstanding		11,692		11,766		11,739		11,772
Effect of dilutive common stock equivalents		93		91		101		68
Weighted average shares of common stock outstanding		11,785		11,857		11,840		11,840
Earnings per share - basic	$	3.59	$	2.93	$	11.07	$	6.36
Earnings per share - diluted	$	3.56	$	2.91	$	10.98	$	6.32

The calculation of diluted EPS excluded 0 and 88 antidilutive options outstanding for the three months ended September 30, 2021 and 2020, respectively, and 0 and 545 antidilutive options outstanding for the nine months ended September 30, 2021 and 2020, respectively.  The calculation of diluted EPS also excluded 218 and 0 antidilutive restricted stock awards for the three months ended September 30, 2021 and 2020, respectively, and 306 and 3,620 antidilutive restricted stock awards for the nine months ended September 30, 2021 and 2020, respectively. EPS is computed independently for each of the periods presented above, and accordingly, the sum of the quarterly earnings per common share may not equal the year-to-date total computed.

9

4. SHARE-BASED COMPENSATION

Stock Options

The Company has issued non-qualified and incentive stock options to employees and nonemployee 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 September 30, 2021 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 nine months ended September 30, 2021 and 2020, the Company did not grant stock options.

The following table is a summary of our stock option activity:

	Nine months ended September 30,
	2021			2020
	Awards	Weighted-Average Exercise Price		Awards	Weighted-Average Exercise Price
(awards in thousands)
Outstanding at beginning of period	61	$	48.19	97	$	52.53
Exercised	(16)		49.69	(24)		58.80
Forfeited	-		-	(6)		68.84
Outstanding at end of the period	45	$	47.66	67	$	48.71
Exercisable at end of the period	35	$	42.00	48	$	40.83

As of September 30, 2021, the weighted-average remaining contractual life for outstanding stock options was 5.0 years with an aggregate intrinsic value of $6.7 million and the weighted-average remaining contractual life for exercisable stock options was 4.6 years with an aggregate intrinsic value of $5.3 million. The unrecognized compensation expense calculated under the fair value method for stock options expected to vest as of September 30, 2021 was $0.1 million and is expected to be recognized over a weighted average period of 1.4 years. For the nine months ended September 30, 2021, the Company received $0.8 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the nine months ended September 30, 2021 was $3.3 million. For the nine months ended September 30, 2020, the Company received $1.4 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the nine months ended September 30, 2020 was $1.1 million. 

10

Restricted Stock

The Company has issued restricted stock to employees and nonemployee 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.  

The following table summarizes our restricted stock activity:

	Nine months ended September 30,
	2021			2020
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
(shares in thousands)
Outstanding at beginning of period	50	$	116.06	46	$	98.28
Granted	21		266.99	43		113.68
Vested	(26)		116.62	(30)		86.79
Forfeited	(3)		166.02	(7)		108.81
Outstanding at end of the period	42	$	183.04	52	$	116.29

The Company withheld 7,226 and 5,432 shares of the Company’s common stock to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock for the nine months ended September 30, 2021 and 2020, respectively. The total fair value of restricted stock awards vested during the nine months ended September 30, 2021 and 2020 was $6.9 million and $3.4 million, respectively.

The total share-based compensation charged against income was $2.3 million and $2.1 million during the three months ended September 30, 2021 and 2020, respectively, and $6.6 million and $4.2 million during the nine months ended September 30, 2021 and 2020, respectively. The total costs of the options and restricted stock awards charged against income was $1.1 million and $1.0 million during the three months ended September 30, 2021 and 2020, respectively, and $3.2 million and $2.5 million during the nine months ended September 30, 2021 and 2020. Included for the three and nine months ended September 30, 2021 was $0.4 million and $1.4 million, respectively, for 15,834 performance-based contingent shares and for the three and nine months ended September 30, 2020 was $0.5 million and $0.8 million, respectively, for 16,637 performance-based contingent shares for certain key executives granted in 2019. Also included for the three and nine months ended September 30, 2021 was $0.5 million and $1.3 million, respectively, for 25,999 performance-based contingent shares and for the three and nine months ended September 30, 2020 was $0.6 million and $0.9 million, respectively, for 27,525 performance-based contingent shares for certain key executives granted in 2020. Additionally, included for the three and nine months ended September 30, 2021 was $0.3 million and $0.7 million, respectively, for 13,512 performance-based contingent shares for certain key executives granted in 2021.

The total income tax benefit recognized in the Condensed Consolidated Statements of Income for restricted stock awards was $0.1 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively, and was $2.3 million and $0.9 million for the nine months ended September 30, 2021 and 2020, respectively.

There was $5.8 million of total unrecognized compensation cost related to restricted stock awards as of September 30, 2021, which is expected to be recognized over a weighted-average period of 1.8 years. There was $5.6 million of unrecognized compensation cost related to the 55,345 performance-based contingent shares discussed above as of September 30, 2021, which is expected to be recognized over 1.7 years.

5. LEASES

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 0t have any finance leases as of September 30, 2021 and 2020, respectively, or for the nine-month periods then ended, respectively.

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Our leases relating to office and warehouse space have lease terms of 19 to 122 months. Our leases relating to equipment have lease terms of 24 to 203 months, with certain leases 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 $1.4 million and $0.9 million for the three months ended September 30, 2021 and 2020, respectively, and was $3.8 million and $2.6 million for the nine months ended September 30, 2021 and 2020, respectively.

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

	Nine months ended September 30,
	2021		2020
Cash paid for amounts included in the measurements of lease liabilities
Operating cash flow used in operating leases	$	3,175	$	2,778
Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	9,745	$	887

As of September 30, 2021, the weighted average remaining lease term was 4.3 years and the weighted average discount rate was 2.3%.

The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2021 (in thousands):

2021 (excluding the nine months ended September 30, 2021)	$	1,482
2022		5,540
2023		4,080
2024		3,515
2025		3,591
Thereafter		2,324
Total lease payments	$	20,532
Less: imputed interest		(909)
Total	$	19,623

6. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	September 30, 2021		December 31, 2020
Foreign currency translation	$	108	$	(22)
Unrealized gains on investment securities		14		63
Accumulated other comprehensive income	$	122	$	41

7. 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:

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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):

	September 30, 2021
		Cost		Unrealized Gains		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities
Cash	$	145,166	$	-	$	-	$	145,166	$	145,166	$	-
Level 1:
Money market accounts		9,350		-		-		9,350		9,350		-
Government & agency securities		1,402		19		8		1,429		-		1,429
		10,752		19		8		10,779		9,350		1,429
Level 2:
Municipal bonds		3,901		18		31		3,950		-		3,950
Total	$	159,819	$	37	$	39	$	159,895	$	154,516	$	5,379

	December 31, 2020
		Cost		Unrealized Gains		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities
Cash	$	159,754	$	-	$	-	$	159,754	$	159,754	$	-
Level 1:
Money market accounts		3,969		-		-		3,969		3,969		-
Government & agency securities		2,829		45		-		2,874		-		2,874
		6,798		45		-		6,843		3,969		2,874
Level 2:
Municipal bonds		7,689		42		147		7,878		-		7,878
Total	$	174,241	$	87	$	147	$	174,475	$	163,723	$	10,752

The Company had 0 realized losses or gains for the three and nine months ended September 30, 2021 and 2020, respectively. The maturities of the Company’s investment securities generally range less than 1 year for municipal bonds and for government and agency securities.

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8. 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. The Credit Agreement provides for a $125.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit. The Credit Agreement also provides for an uncommitted incremental facility that permits the Company, subject to certain conditions, to increase the senior secured revolving credit facility by up to $100.0 million. The Credit Agreement matures on April 13, 2026.

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

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

Revolving borrowings under the Credit Agreement bear interest at a rate per annum equal to (i) the Adjusted LIBOR Rate for the interest period plus the Applicable Rate (as defined in the Credit Agreement) based on the Company’s Total Net Leverage Ratio (with customary provisions under the Credit Agreement providing for the replacement of LIBOR with a successor rate) or (ii) the Alternate Base Rate (as defined in the Credit Agreement) as in effect from time to time plus the Applicable Rate based on the Company’s Total Net Leverage Ratio. As of September 30, 2021, the Applicable Rate for Eurodollar Loans is 1.25% per annum and the Applicable Rate for ABR Loans is 0.25% per annum.

The Credit Agreement contains affirmative and negative covenants customarily applicable to senior secured credit facilities, including covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries, subject to negotiated exceptions, to incur additional indebtedness and additional liens on their assets, engage in mergers or acquisitions or dispose of assets, pay dividends or make other distributions, voluntarily prepay other indebtedness, enter into transactions with affiliated persons, make investments and change the nature of their businesses. The Credit Agreement also contains customary events of default, subject to thresholds and grace periods, including, among others, payment default, covenant default, cross default to other material indebtedness and judgment default. In addition, the Credit Agreement requires the Company to maintain a Total Net Leverage Ratio of no more than 3.00 to 1.00 and an Interest Coverage Ratio of at least 3.50 to 1.00.

The Company has 0 borrowings under the Credit Agreement as of the date of this report.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

Certain information in this report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally can be identified by use of phrases or terminology such as "intend," “anticipate,” “expects” or other similar words or the negative of such terminology. Similarly, descriptions of Medifast's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. These statements are based on the current expectations of the management of Medifast and are subject to certain events, risks, uncertainties and other factors. These risks and uncertainties include, but are not limited to, those described in our 2020 Form 10-K and those described from time to time in our future reports filed with the SEC. Although Medifast believes that the expectations, statements and assumptions reflected in these forward-looking statements are reasonable, it cautions readers to always consider all of the risk factors and any other cautionary statements carefully in evaluating each forward-looking statement in this report. All of the forward-looking statements contained herein speak only as of the date of this report.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

Overview

Medifast is the global company behind one of the fastest-growing health and wellness communities, OPTAVIA^®, which offers Lifelong Transformation, One Healthy Habit at a Time^®. Reflecting the success of our holistic approach to health and wellness, we have consistently grown revenue over the past five years. Of equal importance, we expect our differentiated business model to continue to deliver growth in the foreseeable future.

Medifast has redefined direct selling by combining the best aspects of the model, while eliminating those dimensions that have typically challenged other companies. Medifast is often compared to diet and weight loss-only companies or to multi-level marketing companies, but our model is different. We employ a differentiated direct-to-consumer sales model in which 91.9% of our revenue comes from subscription-based meal-plan orders.

Our OPTAVIA brand offers a highly competitive and effective lifestyle solution centered on developing new healthy habits through smaller, foundational changes called micro-habits. The program is built around four key components:

● Independent OPTAVIA Coaches: Provide individualized support and guidance to clients on the path to optimal health and wellbeing.

● OPTAVIA Community: A Community of like-hearted people providing each other with real-time connection and support.

● The Habits of Health® Transformational System: A proprietary system which offers easy steps to a sustainably healthy lifestyle.

● Products & Plans: Clinically proven plans and scientifically developed OPTAVIA-branded nutritional products, called “Fuelings,” backed by dietitians, scientists and physicians.

We help clients achieve their health goals through a network of more than 61,000 independent OPTAVIA Coaches, 91.1% of whom were clients first, and have impacted 2.0 million lives to date. OPTAVIA Coaches introduce clients to a set of healthy habits, in most cases starting with the habit of healthy eating, and offer exclusive OPTAVIA-branded nutritional products, or Fuelings. Fuelings are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. They are formulated with high-quality ingredients and are fortified with probiotic cultures, vitamins and minerals, as well as other nutrients essential for good health. Our products support the process of integrating healthy habits into our clients’ day-to-day lives.

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The OPTAVIA coaching model is client-centric, and boasts an energized health and wellness community. It promotes holistic health and wellness and positions healthy weight as a catalyst to greater lifestyle changes. OPTAVIA Coaches provide personalized support to clients and motivate them by sharing their passion for healthy living and lifestyle transformation. We believe this personal coaching is an essential factor in client success based on findings from a clinical study published in Obesity Science and Practice in 2018, which validated the OPTAVIA model when its meal plan was combined with education and support consistent with that provided by OPTAVIA Coaches.

The entrepreneurial spirit of our OPTAVIA Coaches is another key to our success, as they create a continuous cycle of growth, activating new clients, many of whom go on to become OPTAVIA Coaches. We offer economic incentives designed to support each OPTAVIA Coach’s long-term success, which we believe plays an important role in their financial wellness, providing the opportunity to improve their finances while changing the health trajectory of families, communities and generations.¹

OPTAVIA Coaches are independent contractors, not employees, who support clients and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, Twitter and video conferencing platforms. As entrepreneurs, OPTAVIA Coaches market our products to friends, family and other acquaintances. OPTAVIA products are shipped directly to OPTAVIA clients who are working with an OPTAVIA Coach. OPTAVIA Coaches do not handle or deliver merchandise to clients. This arrangement frees our OPTAVIA Coaches from having to manage inventory and allows them to maintain an arms-length transactional relationship while focusing their attention on support and encouragement.

We are one of the fastest growing health and wellness companies in the United States, with a large and growing market opportunity. We believe our coach-based model is scalable and drives both client success and growth. We expect our continued investment in fostering a robust community around our OPTAVIA brand and our OPTAVIA Coaching Model will continue to drive a sustainable, repeatable business rhythm focused on our mission of offering the world Lifelong Transformation, One Healthy Habit at a Time.

Our operations are conducted through our wholly owned subsidiaries, Jason Pharmaceuticals, Inc., OPTAVIA, LLC, Jason Enterprises, Inc., Jason Properties, LLC, Medifast Franchise Systems, Inc., Seven Crondall Associates, LLC, Corporate Events, Inc., OPTAVIA (Hong Kong) Limited, OPTAVIA (Singapore) PTE. LTD and OPTAVIA Health Consultation (Shanghai) Co., Ltd.  

As we previously disclosed, global expansion is an important component of our long-term growth strategy. In July 2019, we commenced our international operations, entering into the Asia Pacific markets of Hong Kong and Singapore. Our decision to enter these markets was based on industry market research that reflects a dynamic shift in how health care is being prioritized and consumed in those countries. The Company outsources a distribution center in Hong Kong to give the Company adequate product distribution capacity for the foreseeable future in these markets.

COVID-19 Update

A novel strain of coronavirus (“COVID-19”) surfaced in late 2019 and has spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic.

In response to the pandemic, many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing guidelines, shelter-in-place orders and other measures in response to the COVID-19 pandemic. Nutritional supplements and health foods have been designated critical/essential infrastructure in the U.S.  As a manufacturer and distributer of these products our manufacturing and distribution facilities remain fully operational to date and we have not experienced any meaningful disruption to our worldwide supply chain.  The Company’s priorities

¹ OPTAVIA makes no guarantee of financial success. Success with OPTAVIA results from successful sales efforts, which require hard work, diligence, skill, persistence, competence, and leadership.  Please see the OPTAVIA Income Disclosure Statement (http://bit.ly/idsOPTAVIA) for statistics on actual earnings of Coaches.

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during the COVID-19 pandemic continue to be protecting the health and safety of our employees and OPTAVIA Coaches, and their families and we have undertaken numerous steps and instituted additional precautions to protect their safety and well-being, including:

● instituting enhanced safety protocols to comply with guidelines from government and health officials, limited visitation to our plant and distribution center and rolling out additional sick leave (crisis pay) for our onsite essential employees;

● successfully shifted to a hybrid approach for all onsite employees, enabling them to work 2-3 days from our offices with the flexibility to work 2-3 days from their home offices, in order to optimize productivity, foster strong relationships and keep health and wellbeing in mind; Crisis pay continues to be available for employees;

● providing additional health and safety precautions in our headquarters, manufacturing and distribution centers, including use of personal protective equipment and frequent hand sanitization; and

● process controls in relation to social distancing, visitors, travel and quarantine.

Although vaccines are available in various countries where we operate, it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of the potential of variant strains of the virus to cause a resumption of high levels of infection and hospitalization. Should that occur, the extent to which the pandemic ultimately impacts the Company’s business, financial condition, results of operations, cash flows, and liquidity may differ from management’s current expectations. Factors that could cause actual results to differ from management’s expectations include inherent uncertainties regarding the duration and further spread of the outbreak, its severity, government actions taken to contain the virus or treat its impact, changes in consumer behavior resulting from the pandemic and how quickly and to what extent normal economic and operating conditions can resume. The senior management team meets regularly to review and assess the status of the Company’s operations and health and safety of its various constituencies, and will continue to proactively respond to the situation and communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. The Company may take further actions that alter its business operations as may be required by governmental authorities, or that are determined to be in the best interests of employees, OPTAVIA Coaches and consumers.

These uncertainties make it challenging for our management to estimate our future business performance. However, we intend to continue to actively monitor the impact of COVID-19 and related developments on our business and will update our practices accordingly, as we have done throughout the pandemic.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies were described in Note 2 to the audited consolidated financial statements included in the 2020 Form 10-K. We consider all of our significant accounting policies and estimates to be critical. There were no significant changes in our critical accounting policies during the third quarter of 2021.

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes in our critical estimates during the third quarter of 2021.

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Overview of Results of Operations

Our product sales accounted for approximately 98.0% of our revenues for each of the three and nine months ended September 30, 2021 and 2020, respectively.

The following tables reflect our income statements (in thousands, except percentages):

	Three months ended September 30,
	2021		2020		$ Change		% Change
Revenue	$	413,395	$	271,470	$	141,925	52.3%
Cost of sales		106,338		67,434		(38,904)	(57.7)%
Gross profit		307,057		204,036		103,021	50.5%
Selling, general, and administrative		251,886		159,477		(92,409)	(57.9)%
Income from operations		55,171		44,559		10,612	23.8%
Other income
Interest (expense) income		(94)		44		(138)	(313.6)%
Other income		115		30		85	283.3%
		21		74		(53)	(71.6)%
Income from operations before income taxes		55,192		44,633		10,559	23.7%
Provision for income tax		13,210		10,180		(3,030)	(29.8)%
Net income	$	41,982	$	34,453	$	7,529	21.9%
% of revenue
Gross profit		74.3%		75.2%
Selling, general, and administrative costs		60.9%		58.7%
Income from operations		13.3%		16.4%
Income from operations before income taxes		13.4%		16.4%

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	Nine months ended September 30,
	2021		2020		$ Change		% Change
Revenue	$	1,148,253	$	669,930	$	478,323	71.4%
Cost of sales		298,942		171,354		(127,588)	(74.5)%
Gross Profit		849,311		498,576		350,735	70.3%
Selling, general, and administrative		679,907		402,385		(277,522)	(69.0)%
Income from operations		169,404		96,191		73,213	76.1%
Other (expense) income
Interest (expense) income		(138)		212		(350)	(165.1)%
Other income		112		12		100	833.3%
		(26)		224		(250)	(111.6)%
Income from operations before income taxes		169,378		96,415		72,963	75.7%
Provision for income taxes		39,370		21,550		(17,820)	(82.7)%
Net income	$	130,008	$	74,865	$	55,143	73.7%
% of revenue
Gross Profit		74.0%		74.4%
Selling, general, and administrative costs		59.2%		60.1%
Income from Operations		14.8%		14.4%
Income from operations before income taxes		14.8%		14.4%

Revenue:  Revenue increased $141.9 million, or 52.3%, to $413.4 million for the three months ended September 30, 2021 from $271.5 million for the three months ended September 30, 2020. The average revenue per active earning OPTAVIA Coach was $6,773 for the three months ended September 30, 2021 compared to $6,329 for the three months ended September 30, 2020. Increase in the productivity per active earning OPTAVIA Coach for the quarter continued to be driven by an increase in both the number of clients supported by each Coach as well as an increase in average client spend. Revenue increased $478.3 million, or 71.4%, to $1.1 billion for the nine months ended September 30, 2021 from $669.9 million for the nine months ended September 30, 2020. This increase in revenue for the quarter and nine months ended September 30, 2021 was primarily driven by the continued growth in active earning OPTAVIA Coach count and increase in the productivity per active earning OPTAVIA Coach. 

Cost of sales:  Cost of sales increased $38.9 million, or 57.7%, to $106.3 million for the three months ended September 30, 2021 from the corresponding period in 2020 and increased $127.6 million, or 74.5%, to $298.9 million for the nine months ended September 30, 2021 from the corresponding period in 2020. The increase in cost of sales was primarily driven by an increase in OPTAVIA product sales, higher product costs and shipping costs resulting from inflation in raw ingredient, freight and labor costs. In addition, acceleration of demand in OPTAVIA-branded products led to the increase in the Company’s use of co-manufacturers, which further increased cost of sales.  

Gross profit:  For the three months ended September 30, 2021, gross profit increased $103.0 million, or 50.5%, to $307.1 million from the corresponding period in 2020. For the nine months ended September 30, 2021, gross profit increased $350.7 million, or 70.3%, to $849.3 million from the corresponding period in 2020. The increase in gross profit for the quarter and nine months ended September 30, 2021 was primarily attributable to higher revenue partially offset by increased cost of sales. For the three months ended September 30, 2021, as a percentage of revenue, gross profit decreased 90 basis points to 74.3% for 2021 from 75.2% for 2020. For the nine months ended September 30, 2021, as a percentage of revenue, gross profit decreased 40 basis points to 74.0% for 2021 from 74.4% for 2020. The decrease in gross profit percentage for the quarter and nine months ended September 30, 2021 was primarily the result of promotional activity and higher product and shipping costs resulting from inflation in raw ingredient, freight and labor costs. 

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Selling, general, and administrative:  Selling, general, and administrative (“SG&A”) expenses were $251.9 million for the three months ended September 30, 2021, an increase of $92.4 million, or 57.9%, as compared to $159.5 million from the corresponding period in 2020. As a percentage of revenue, SG&A expenses were 60.9% as compared to 58.7% for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, SG&A expenses increased $277.5 million, or 69.0%, to $679.9 million from $402.4 million for the corresponding period in 2020. As a percentage of revenue, SG&A expenses were 59.2% for the nine months ended September 30, 2021 as compared to 60.1% for the corresponding period in 2020. The increase in SG&A for the quarter and nine months ended September 30, 2021 were primarily due to higher OPTAVIA commission expense, increased salaries and benefits related expenses for employees, incremental consulting costs related to information technology, increased credit card fees resulting from higher sales, as well as costs for the Company’s annual convention held in July 2021. As the OPTAVIA convention in July 2020 was a virtual event in response to the COVID-19 pandemic, the costs were significantly lower. SG&A expenses included research and development (“R&D”) costs of $1.2 million and $0.8 million for the three months ended September 30, 2021 and 2020, respectively, and $3.3 million and $1.9 million for the nine months ended September 30, 2021 and 2020, respectively. 

OPTAVIA commission expense, which is a variable expense, increased $67.2 million, or 58.5%, to $182.1 million for the three months ended September 30, 2021 from $114.9 million for the corresponding period in 2020. For the nine months ended September 30, 2021, OPTAVIA commission expense increased $219.5 million, or 78.1%, to $500.7 million from $281.2 million for the corresponding period in 2020. The increase was primarily the result of increased OPTAVIA product sales. This trend is the result of the success we are experiencing with our growing OPTAVIA Integrated Coach Model. The total number of active earning OPTAVIA Coaches for the three months ended September 30, 2021 increased to 61,000 from 42,100 for the corresponding period in 2020, an increase of 44.9%. As OPTAVIA revenue increased as a portion of the Company’s total sales mix, the commission rate as a percentage of revenue increased 170 basis points to 44.0% for the third quarter of 2021 compared to 42.3% for the third quarter last year and increased 160 basis points to 43.6% for the nine months ended September 30, 2021 compared to 42.0% for the corresponding period in 2020.

Income from operations:  For the three months ended September 30, 2021, income from operations increased $10.6 million to $55.2 million from $44.6 million for the corresponding period in 2020 primarily as a result of increased gross profit partially offset by increased SG&A expenses. Income from operations as a percentage of revenue was 13.3% and 16.4% for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, income from operations increased $73.2 million to $169.4 million from $96.2 million for the corresponding period in 2020 primarily as a result of increased gross profits partially offset by increased SG&A expenses. Income from operations as a percentage of revenue was 14.8% and 14.4% for the nine months ended September 30, 2021 and 2020, respectively.

Provision for income tax:  For the three months ended September 30, 2021, the Company recorded $13.2 million in income tax expense, an effective tax rate of 23.9%, as compared to $10.2 million in income tax expense, an effective tax rate of 22.8%, for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the Company recorded $39.4 million in income tax expense, an effective rate of 23.2%, as compared to $21.6 million in income tax expense, an effective rate of 22.4%, for the nine months ended September 30, 2020. The increase in the effective tax rate for the quarter and nine months ended September 30, 2021 was primarily driven by an increase in the state income tax rate and limitations on the deductibility of officer compensation along with the tax benefit of stock compensation.

Net income: Net income was $42.0 million and $130.0 million, or $3.56 and $10.98 per diluted share, for the three and nine months ended September 30, 2021 as compared to $34.5 million and $74.9 million, or $2.91 and $6.32 per diluted share, for the three and nine months ended September 30, 2020. The period-over-period changes were driven by the factors described above in the explanations from operations.

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Liquidity and Capital Resources

The Company had stockholders’ equity of $196.2 million and working capital of $140.1 million at September 30, 2021 as compared with $157.2 million and $123.0 million at December 31, 2020, respectively. The $39.0 million net increase in stockholders’ equity reflects $130.0 million in net income for the nine months ended September 30, 2021 offset by $46.0 million spent on repurchases of the Company’s common stock and $50.3 million for declared dividends paid to holders of the Company’s common stock as well as the other equity transactions described in the “Condensed Consolidated Statements of Changes in Stockholders’ Equity” included in our condensed consolidated financial statements included in this report. The Company declared a quarterly dividend of $1.42 per share on September 9, 2021, to stockholders of record as of September 21, 2021 that will be paid on November 8, 2021. While we intend to continue the dividend program and believe we will have sufficient liquidity to do so, we can provide no assurance that we will be able to continue to declare and pay dividends. The Company’s cash, cash equivalents and investment securities decreased from $174.5 million at December 31, 2020 to $159.9 million at September 30, 2021.  

Net cash provided by operating activities decreased $23.4 million to $102.0 million for the nine months ended September 30, 2021 from $125.4 million for the nine months ended September 30, 2020 primarily driven by a $55.1 million increase in net income offset by a $83.3 million increase in inventories.

Net cash used in investing activities increased $15.6 million to $17.4 million for the nine months ended September 30, 2021 from $1.9 million for the nine months ended September 30, 2020. This change resulted from an $18.7 million increase in cash used in capital expenditures for the nine months ended September 30, 2021 from the corresponding period in 2020 partially offset by a $3.1 million increase in sale and maturities of investment securities. Cash used in capital expenditures for the nine months ended September 30, 2021 expanded our technology and supply chain capabilities to support our planned growth.

Net cash used in financing activities increased $49.9 million to $93.9 million for the nine months ended September 30, 2021 from $44.0 million for the nine months ended September 30, 2020. This increase was primarily due to a $41.0 million increase in stock repurchases, a $7.0 million increase in cash dividends paid to stockholders and a $1.3 million increase in net shares repurchased for employee taxes.

In pursuing its business strategy, the Company may require additional cash for operating and investing activities. The Company expects future cash requirements, if any, to be funded from operating cash flow and financing activities.

From time to time the Company evaluates potential acquisitions that complement our business. If consummated, any such transactions may use a portion of our working capital or require the issuance of equity. We have no present understandings, commitments or agreements with respect to any material acquisitions..

As of September 30, 2021, the Company maintained a credit facility, which provides for a $125.0 million senior secured revolving credit facility with a $20.0 million letter of credit sublimit and 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 facility contains affirmative and negative covenants customarily applicable to credit facilities. As of September 30, 2021, the Company was in compliance with all of its debt covenants and there were no borrowings outstanding under the credit facility.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates and a decline in the stock market. The Company does not enter into derivatives, foreign exchange transactions or other financial instruments for trading or speculative purposes.

The Company is exposed to market risk related to changes in interest rates and market pricing impacting our investment portfolio. Its current investment policy is to maintain an investment portfolio consisting of municipal bonds and U.S. money market securities directly or through managed funds. Its cash is deposited in and invested through highly rated financial institutions in North America. Its marketable securities are subject to interest rate risk and market pricing risk

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and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at September 30, 2021, the Company estimates that the fair value of its investment portfolio would decline by an immaterial amount and therefore it would not expect its operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments.

There have been no material changes to our market risk exposure since December 31, 2020.

Item 4. Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2021. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on a timely basis. Based on this evaluation performed in accordance with the criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s disclosure controls and procedures are effective at the reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the fiscal quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1.  Legal Proceedings

The Company is, from time to time, subject to a variety of litigation and similar proceedings that arise out of the ordinary course of its business. Based upon the Company’s experience, current information and applicable law, it does not believe that these proceedings and claims will have a material adverse effect on its results of operations, financial position or liquidity. However, the results of legal actions cannot be predicted with certainty. Therefore, it is possible that the Company’s results of operations, financial condition or cash flows could be materially adversely affected in any particular period by the unfavorable resolution of one or more legal actions.

Item 1A.  Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the 2020 Form 10-K.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

2021	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 - July 31	1,062	$	284.14	947	2,248,419
August 1 - August 31	77,436		226.73	77,436	2,170,983
September 1 - September 30	39,478		214.88	39,294	2,131,689

(1) Shares of common stock were surrendered by employees to the Company to cover minimum tax liability withholding obligations upon the vesting of shares of restricted stock previously granted to such employees.

(2) At the outset of the quarter ended September 30, 2021, there were 2,249,366 shares of the Company's common stock eligible for repurchase under the stock repurchase authorization dated September 16, 2014 (the "Stock Repurchase Plan").

As of September 30, 2021, there were 2,131,689 shares of the Company’s common stock eligible for repurchase under the Stock Repurchase Plan. There can be no assurances as to the amount, timing or prices of repurchases, which may vary based on market conditions and other factors. The Stock Repurchase Plan does not have an expiration date and can be modified or terminated by the Board of Directors at any time.

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Item 6. Exhibits

Exhibit Number	Description of Exhibit
3.1	Restated and Amended Certificate of Incorporation of Medifast, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K (File No. 001-31573) filed on February 27, 2015).
3.2	Amended and Restated Bylaws of Medifast, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Amendment No. 1 Current Report on Form 8-K (File No. 001-31573) filed on December 4, 2019).
10.1	Credit Agreement, dated as of April 13, 2021, among Medifast, Inc., certain of its subsidiaries party thereto, the lenders party thereto and Citibank, N.A., in its capacity as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8 K (File No. 001-31573) filed on April 19, 2021).
10.2	Medifast, Inc. Directors’ Deferred Compensation Plan (Amended and Restated) (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 001-31573) filed on August 4, 2021).
10.3	Separation Agreement dated August 26, 2021 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A (File No. 001-31573) filed on September 1, 2021).
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial statements from Medifast, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 filed November 4, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity, and (vi) Notes to the Condensed Consolidated Financial Statements (filed herewith).
104	Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

In accordance with SEC Release No. 33-8238, Exhibit 32.1 is being furnished and not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medifast, Inc.

By:	/s/ DANIEL R. CHARD
	Daniel R. Chard
	Chief Executive Officer
	(Principal Executive Officer)
Dated:	November 4, 2021
	/s/ JAMES P. MALONEY
	James P. Maloney
	Chief Financial Officer
	(Principal Financial Officer)
Dated:	November 4, 2021

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