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, ~~2019~~2020

☐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

~~NYSE~~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 ~~November 1, 2019~~October 26, 2020 was ~~11,615,371.~~11,769,830.

Table of Contents

Medifast, Inc. and subsidiaries

Index


Part 1 – Financial ~~Information:~~Information



Item 1 – Financial Statements


Condensed Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019		2

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019		3

Condensed Consolidated Balance Sheets (unaudited) as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019		4

Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019		5

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019		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		2123

Item 4 – Controls and Procedures		2123

Part II – Other Information:

Item 1 – Legal Proceedings		2124

Item 1A – Risk Factors		2224

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		2224

Item 6 – Exhibits		2225

Table of Contents

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts & dividend data)


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2020		2019		2020		2019

Revenue	$	190,061	$	139,239	$	543,040	$	355,159	$	271,470	$	190,061	$	669,930	$	543,040
Cost of sales		47,128		32,038		134,250		84,351		67,434		47,128		171,354		134,250
Gross profit		142,933		107,201		408,790		270,808		204,036		142,933		498,576		408,790

Selling, general, and administrative		122,671		89,734		336,458		221,548		159,477		122,671		402,385		336,458

Income from operations		20,262		17,467		72,332		49,260		44,559		20,262		96,191		72,332

Other income (expense)
Other income
Interest income, net		324		361		1,061		940		44		324		212		1,061
Other income (expense)		(3)		-		(11)		178		30		(3)		12		(11)
		321		361		1,050		1,118		74		321		224		1,050

Income from operations before income taxes		20,583		17,828		73,382		50,378		44,633		20,583		96,415		73,382

Provision for income taxes		4,681		4,047		15,347		10,242		10,180		4,681		21,550		15,347

Net income	$	15,902	$	13,781	$	58,035	$	40,136	$	34,453	$	15,902	$	74,865	$	58,035

Earnings per share - basic	$	1.36	$	1.15	$	4.91	$	3.34	$	2.93	$	1.36	$	6.36	$	4.91

Earnings per share - diluted	$	1.32	$	1.14	$	4.77	$	3.31	$	2.91	$	1.32	$	6.32	$	4.77

Weighted average shares outstanding -
Weighted average shares outstanding
Basic		11,731		11,954		11,823		12,006		11,766		11,731		11,772		11,823
Diluted		12,065		12,097		12,174		12,112		11,857		12,065		11,840		12,174

Cash dividends declared per share	$	0.75	$	0.48	$	2.25	$	1.44	$	1.13	$	0.75	$	3.39	$	2.25

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2020		2019		2020		2019

Net income	$	15,902	$	13,781	$	58,035	$	40,136	$	34,453	$	15,902	$	74,865	$	58,035
Other comprehensive income (loss), net of tax:				��
Foreign currency translation		(2)		(2)		(1)		(2)		(1)		(2)		(3)		(1)
Unrealized gains (losses) on marketable securities		18		(45)		246		(104)
Unrealized gains (losses) on investment securities										(1)		18		75		246

Other comprehensive income (loss)		16		(47)		245		(106)		(2)		16		72		245

Comprehensive income	$	15,918	$	13,734	$	58,280	$	40,030	$	34,451	$	15,918	$	74,937	$	58,280

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except par value)


			September 30,		December 31,			September 30,		December 31,
			2019		2018			2020		2019

ASSETS	ASSETS					ASSETS
Current Assets
Cash and cash equivalents		$	81,196	$	81,364		$	156,486	$	76,974
Accounts receivable-net of doubtful accounts of $1,860 and $394 at
September 30, 2019 and December 31, 2018, respectively			1,451		1,011
Inventory			51,925		38,888
Accounts receivable - net of doubtful accounts of $82 and $235 at
September 30, 2020 and December 31, 2019, respectively								647		1,437
Inventories								41,736		48,771
Investment securities			15,718		19,670			13,433		15,704
Income taxes, prepaid			3,200		-			-		5,169
Prepaid expenses and other current assets			4,817		4,586			5,158		6,096
Total current assets			158,307		145,519			217,460		154,151

Property, plant and equipment - net			26,247		19,747
Right-of-use asset			11,694		-
Property, plant and equipment - net of accumulated depreciation								26,828		26,039
Right-of-use assets								11,458		12,803
Other assets			453		1,183			3,002		353
Deferred tax assets			1,887		2,980			2,042		1,307


TOTAL ASSETS		$	198,588	$	169,429		$	260,790	$	194,653

LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses		$	75,015	$	60,323		$	108,678	$	76,220
Current lease obligation			2,507		-
Current lease obligations								3,307		3,168
Total current liabilities			77,522		60,323			111,985		79,388

Lease obligation, less current lease obligation			9,866		-
Lease obligations, less current lease obligations								8,791		10,433
Total liabilities			87,388		60,323			120,776		89,821

Stockholders' Equity
Common stock, par value $.001 per share: 20,000 shares authorized;
12,126 and 12,117 issued and 11,612 and 11,868 outstanding
at September 30, 2019 and December 31, 2018, respectively			12		12
11,817 and 12,272 issued and 11,768 and 11,764 outstanding
at September 30, 2020 and December 31, 2019, respectively								12		12
Additional paid-in capital			12,207		8,802			5,135		-
Accumulated other comprehensive income (loss)			72		(173)
Accumulated other comprehensive income								97		25
Retained earnings			162,902		131,344			139,770		168,788
Less: Treasury stock at cost, 489 and 193 shares at September 30, 2019 and December 31, 2018, respectively			(63,993)		(30,879)
Less: Treasury stock at cost, 46 and 489 shares at September 30, 2020 and December 31, 2019, respectively								(5,000)		(63,993)
Total stockholders' equity			111,200		109,106			140,014		104,832

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	198,588	$	169,429		$	260,790	$	194,653

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

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)


	Nine months ended September 30,				Nine months ended September 30,
	2019		2018		2020		2019

Operating Activities
Net income	$	58,035	$	40,136	$	74,865	$	58,035
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization		3,363		3,519		5,259		5,097
Share-based compensation		3,415		2,352		4,243		3,415
Loss on sale of disposal of property, plant and equipment		17		50		28		17
Bad debt expense		3,209		642		508		3,209
Amortization of premium on investment securities		355		434		263		355
Deferred income taxes		1,093		(2,028)		(735)		1,093
Change in operating assets and liabilities:
Accounts receivable		(3,649)		(526)		282		(3,649)
Inventory		(13,037)		(23,615)
Inventories						7,035		(13,037)
Income taxes, prepaid		(3,200)		2,272		5,169		(3,200)
Prepaid expenses and other current assets		(232)		453		938		(232)
Other assets		188		134		(2,566)		188
Accounts payable and accrued expenses		15,552		21,655		30,078		13,818
Net cash flow provided by operating activities		65,109		45,478		125,367		65,109

Investing Activities
Sale and maturities of investment securities		3,730		2,245		2,000		3,730
Sale of property and equipment		-		184
Purchase of property and equipment		(9,224)		(3,246)		(3,852)		(9,224)
Net cash flow used in investing activities		(5,494)		(817)		(1,852)		(5,494)

Financing Activities
Options exercised by executives and directors		279		220		1,424		279
Net shares repurchased for employee taxes		(289)		(249)		(532)		(289)
Cash dividends paid to stockholders		(26,658)		(17,404)		(39,892)		(26,658)
Stock repurchases		(33,114)		(19,996)		(5,000)		(33,114)
Net cash flow used in financing activities		(59,782)		(37,429)		(44,000)		(59,782)

Foreign currency impact		(1)		(2)		(3)		(1)

Increase (Decrease) in cash and cash equivalents		(168)		7,230		79,512		(168)
Cash and cash equivalents - beginning of the period		81,364		75,077		76,974		81,364
Cash and cash equivalents - end of period	$	81,196	$	82,307	$	156,486	$	81,196

Supplemental disclosure of cash flow information:
Income taxes paid	$	17,333	$	9,540	$	14,135	$	17,333
Dividends declared included in accounts payable	$	8,955	$	5,981	$	13,715	$	8,955

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

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MEDIFAST, INC. AND SUBSIDIARIES

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

~~(in thousands)~~

Nine months ended September 30, 2019

Number of Shares Issued

Common Stock

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Treasury Stock

Total

Balance, December 31, 2018

12,117

$
12

$
8,802

$
(173)

$
131,344

$
(30,879)

$
109,106

Net income

-

-

-

-

20,750

-

20,750
Share-based compensation

-

-

990

-

-

-

990
Options exercised by executives and directors

10

-

269

-

-

-

269
Net shares repurchased for employee taxes

(1)

-

(256)

-

-

-

(256)
Other comprehensive income

-

-

-

127

-

-

127
Cash dividends declared to stockholders

-

-

-

-

(8,918)

-

(8,918)

Balance, March 31, 2019

12,126

12

9,805

(46)

143,176

(30,879)

122,068

Net income

-

-

-

-

21,383

-

21,383
Share-based compensation

-

-

1,255

-

-

-

1,255
Options exercised by executives and directors

-

-

10

-

-

-

10
Other comprehensive income

-

-

-

102

-

-

102
Treasury stock from stock repurchases

-

-

-

-

-

(9,998)

(9,998)
Cash dividends declared to stockholders

-

-

-

-

(8,797)

-

(8,797)

Balance, June 30, 2019

12,126

12

11,070

56

155,762

(40,877)

126,023

Net income

-

-

-

-

15,902

-

15,902
Share-based compensation

-

-

1,170

-

-

-

1,170
Net shares repurchased for employee taxes

-

-

(33)

-

-

-

(33)
Other comprehensive income

-

-

-

16

-

-

16
Treasury stock from stock repurchases

-

-

-

-

-

(23,116)

(23,116)
Cash dividends declared to stockholders

-

-

-

-

(8,762)

-

(8,762)

Balance, September 30, 2019

12,126

$
12

$
12,207

$
72

$
162,902

$
(63,993)

$
111,200

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

~~Table of Contents~~

~~MEDIFAST, INC. AND SUBSIDIARIES~~

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

(in thousands)


	Nine months ended September 30, 2020
	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		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.

Table of Contents

Nine months ended September 30, 2018

Number of Shares Issued

Common Stock

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Treasury Stock

Total

Balance, January 1, 2018, as reported

12,103

$
12

$
4,967

$
(160)

$
103,762

$
-

$
108,581
Cumulative effect adjustments from changes

in accounting standards

-

-

-

-

(2,018)

-

(2,018)

Balance January 1, 2018, as adjusted

12,103

12

4,967

(160)

101,744

-

106,563

Net income

-

-

-

-

12,222

-

12,222
Share-based compensation

16

-

805

-

-

-

805
Options exercised by executives and directors

14

-

62

-

-

-

62
Net shares repurchased for employee taxes

(3)

-

(215)

-

-

-

(215)
Treasury stock from cashless options

9

-

750

-

-

(750)

-
Other comprehensive loss

-

-

-

(84)

-

-

(84)
Cash dividends declared to stockholders

-

-

-

-

(5,723)

-

(5,723)

Balance, March 31, 2018

12,139

12

6,369

(244)

108,243

(750)

$
113,630

Net income

-

-

-

-

14,133

-

14,133
Share-based compensation

-

-

830

-

-

-

830
Options exercised by executives and directors

2

-

-

-

-

-

-
Treasury stock from stock repurchases

-

-

-

-

-

(19,996)

(19,996)
Other comprehensive income

-

-

-

25

-

-

25
Cash dividends declared to stockholders

-

-

-

-

(5,759)

-

(5,759)

Balance, June 30, 2018

12,141

$
12

$
7,199

$
(219)

$
116,617

$
(20,746)

$
102,863

Net income

-

-

-

-

13,781

-

13,781
Share-based compensation

-

-

717

-

-

-

717
Options exercised by executives and directors

4

-

158

-

-

-

158
Net shares repurchased for employee taxes

-

-

(34)

-

-

-

(34)
Other comprehensive loss

-

-

-

(47)

-

-

(47)
Cash dividends declared to stockholders

-

-

-

-

(5,797)

-

(5,797)

Balance, September 30, 2018

12,145

$
12

$
8,040

$
(266)

$
124,601

$
(20,746)

$
111,641


	Nine months ended September 30, 2019
	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock		Total

Balance, December 31, 2018	12,117	$	12	$	8,802	$	(173)	$	131,344	$	(30,879)	$	109,106
Net income	-		-		-		-		20,750		-		20,750
Share-based compensation	-		-		990		-		-		-		990
Options exercised by executives and directors	10		-		269		-		-		-		269
Net shares repurchased for employee taxes	(1)		-		(256)		-		-		-		(256)
Other comprehensive income	-		-		-		127		-		-		127
Cash dividends declared to stockholders	-		-		-		-		(8,918)		-		(8,918)

Balance, March 31, 2019	12,126		12		9,805		(46)		143,176		(30,879)		122,068
Net income	-		-		-		-		21,383		-		21,383
Share-based compensation	-		-		1,255		-		-		-		1,255
Options exercised by executives and directors	-		-		10		-		-		-		10
Other comprehensive income	-		-		-		102		-		-		102
Treasury stock from stock repurchases	-		-		-		-		-		(9,998)		(9,998)
Cash dividends declared to stockholders	-		-		-		-		(8,797)		-		(8,797)

Balance, June 30, 2019	12,126		12		11,070		56		155,762		(40,877)		126,023
Net income	-		-		-		-		15,902		-		15,902
Share-based compensation	-		-		1,170		-		-		-		1,170
Net shares repurchased for employee taxes	-		-		(33)		-		-		-		(33)
Other comprehensive income	-		-		-		16		-		-		16
Treasury stock from stock repurchases	-		-		-		-		-		(23,116)		(23,116)
Cash dividends declared to stockholders	-		-		-		-		(8,762)		-		(8,762)

Balance, September 30, 2019	12,126	$	12	$	12,207	$	72	$	162,902	$	(63,993)	$	111,200

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

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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 (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, ~~2018~~2019 has been derived from the audited consolidated financial statements at that ~~date.~~date included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”).

The results of operations for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of results that may be expected for the fiscal year ending December 31, ~~2019.~~2020. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the ~~2018~~2019 audited consolidated financial statements and notes thereto, which are included in the ~~Company’s Annual Report on~~2019 Form ~~10-K for the fiscal year ended December 31, 2018 (“2018 Form 10-K”).~~10-K.

Presentation of Financial Statements - The unaudited condensed consolidated financial statements included herein include the accounts of the ~~Medifast, Inc. and its wholly-owned subsidiaries.~~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 ~~2019~~ 2020–

In ~~February~~August 2018, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“ASU”) ~~2018-02,~~2018-15, ~~Income Statement - Reporting Comprehensive Income (Topic 220)~~ to address a specific consequence of the Tax Cuts and Jobs Act (“TCJA”) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. This ASU was effective for all entities for annual periods beginning after December 15, 2018, with early adoption permitted, and was to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. The Company adopted this ASU in the first quarter of 2019. There was no material impact on the Company's condensed consolidated results of operations or cash flows. The Company's policy for releasing disproportionate income tax effects from accumulated other comprehensive income utilizes the portfolio approach.

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~, which requires an entity to recognize a right-of-use (“ROU”) asset and a lease liability on the balance sheet for all leases, including operating leases, and also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. Subsequent to the issuance of Topic 842, the FASB clarified the guidance through several ASUs; hereinafter the collection of lease guidance is referred to as “ASC 842.”

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On January 1, 2019, the Company adopted ASC 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under ASC 842, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 840, Leases. The standard had a material impact on the Company’s Condensed Consolidated Balance Sheets, but did not have a significant impact on the Company’s consolidated net earnings and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For leases that commenced before the effective date of ASC 842, the Company elected the permitted practical expedients that do not require the Company to reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. The Company also elected to exclude leases with a term of 12 months or less in the recognized ROU assets and lease liabilities.

As a result of the cumulative impact of adopting ASC 842, the Company recorded ROU assets of $11.9 million, net of $686 thousand of accrued rent, and lease liabilities of $12.6 million as of January 1, 2019, primarily related to office and warehouse space and certain equipment, based on the present value of the future lease payments on the date of adoption.

The Company determines if an arrangement is a lease at inception. The ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The ROU asset also consists of any prepaid lease payments and lease incentives received. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense. See Note 5 “LEASES” for additional information about this adoption.

~~Recently Issued Accounting Pronouncements –~~ ~~In August 2018, the FASB issued ASU 2018-15,~~ Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), which addresses the accounting for implementation costs associated with a hosted service. The standard provides amendments to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).

On January 1, 2020, the Company adopted ASU 2018-15. The Company capitalized $2.9 million in total for the nine months ended September 30, 2020, principally related to the configuration and development of the Company’s new hosted enterprise resource planning tool (“ERP”). The amortization expense associated with the capitalized costs was $0.1 million for the nine months ended September 30, 2020.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which institutes a new model for recognizing credit losses on financial instruments that are not measured at fair value. On January 1, 2020, the Company adopted ASU 2016-13. There was no material impact on the Company's condensed consolidated financial statements.

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Recently Issued Accounting Pronouncements –Pending Adoption

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The standard also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating consolidated income taxes to separate financial statements of entities not subject to income tax. This ASU is effective for fiscal years beginning after December 15, ~~2019,~~2020, with early adoption permitted. Upon adoption, the Company must apply certain aspects of this standard retrospectively for all periods presented while other aspects are applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. Management ~~is currently evaluating~~has determined the effect that the provisions of ASU ~~2018-15~~2019-12 will have on the Company’s condensed consolidated financial ~~statements.~~statements is immaterial.

2. INVENTORIES

Inventories consist principally of packaged meal replacements held in the Company’s warehouses. Inventory is 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 inventory for unsalable or obsolete inventory.

Inventories consisted of the following (in thousands):


	September 30, 2019		December 31, 2018		September 30, 2020		December 31, 2019

Raw materials	$	12,680	$	11,156	$	13,702	$	10,880
Packaging		3,592		1,563		2,761		4,109
Non-food finished goods		5,102		2,391		6,031		4,421
Finished goods		33,766		25,509		20,650		31,314
Reserve for obsolete inventory		(3,215)		(1,731)		(1,408)		(1,953)
Total	$	51,925	$	38,888	$	41,736	$	48,771

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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.

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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,				Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2020		2019		2020		2019

Numerator:
Net income	$	15,902	$	13,781	$	58,035	$	40,136	$	34,453	$	15,902	$	74,865	$	58,035

Denominator:
Weighted average shares of common stock outstanding		11,731		11,954		11,823		12,006		11,766		11,731		11,772		11,823
Effect of dilutive common stock equivalents		334		143		351		106		91		334		68		351
Weighted average shares of common stock outstanding		12,065		12,097		12,174		12,112		11,857		12,065		11,840		12,174

Earnings per share - basic	$	1.36	$	1.15	$	4.91	$	3.34	$	2.93	$	1.36	$	6.36	$	4.91

Earnings per share - diluted	$	1.32	$	1.14	$	4.77	$	3.31	$	2.91	$	1.32	$	6.32	$	4.77

The calculation of diluted EPS excluded ~~1,100~~88 and 01,100 antidilutive options outstanding for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~876~~545 and ~~214~~876 antidilutive options outstanding for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The calculation of diluted EPS also excluded ~~1,374~~0 and 431,374 antidilutive restricted stock awards for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~709~~3,620 and ~~297~~709 antidilutive restricted stock awards for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, 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.

4. SHARE-BASED COMPENSATION

Stock ~~Options:~~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, ~~2019~~2020, 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 ~~$171.68.~~$171.68. Due to the Company’s lack of option exercise history, 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. For the nine months ended September 30, 2020 and 2019, the Company did not grant stock options. ~~For the nine months ended September 30, 2018, the weighted average input assumptions used were as follows:~~

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


	Nine months ended September 30,
	2020			2019
	Awards	Weighted-Average Exercise Price		Awards	Weighted-Average Exercise Price
(awards in thousands)
Outstanding at beginning of period	97	$	52.53	107	$	49.26
Exercised	(24)		58.80	(10)		28.21
Forfeited	(6)		68.84	-		-
Outstanding at end of the period	67	$	48.71	97	$	52.53
Exercisable at end of the period	48	$	40.83	52	$	40.96

~~2018~~

~~Expected term (in years)~~

~~6.4~~

~~Risk-free interest rate~~

~~2.64%~~

~~Expected volatility~~

~~33.30%~~

~~Dividend yield~~

~~2.87%~~

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

Nine months ended September 30,

2019

2018

Shares

Weighted-Average Exercise Price

Shares

Weighted-Average Exercise Price
(shares in thousands)

Outstanding at beginning of period
107

$
49.26

106

$
31.18
Granted
-

-

51

67.50
Exercised
(10)

28.21

(23)

28.87
Forfeited
-

-

(8)

31.09
Outstanding at end of the period
97

$
52.53

126

$
46.51
Exercisable at end of the period
52

$
40.96

54

$
30.21

As of September 30, ~~2019,~~2020, the weighted-average remaining contractual life for outstanding stock options was ~~7.36~~6.0 years with an aggregate intrinsic value of ~~$5.1~~$7.8 million and the weighted-average remaining contractual life for exercisable stock options was ~~6.59~~5.5 years with an aggregate intrinsic value of ~~$3.3~~$5.9 million. For the nine months ended September 30, 2019, the Company did not grant stock options. The weighted-average grant date fair value of options granted during the nine months ended September 30, 2018 was $18.08. The unrecognized compensation expense calculated under the fair value method for stock options expected to vest as of September 30, ~~2019~~2020 was ~~$0.6~~$0.2 million and is expected to be recognized over a weighted average period of ~~2.76~~2.2 years. ~~The~~For the nine months ended September 30, 2020, the Company received ~~$279 thousand and $220 thousand~~$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, ~~2019 and 2018, respectively. Upon exercising of stock options, the Company withheld shares of the Company’s common stock for employee taxes of 1 thousand and 3 thousand for~~2020 was $1.1 million. For the nine months ended September 30, 2019, ~~and 2018, respectively.~~the Company received $0.3 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, 2019 ~~and 2018~~ was $1.0 ~~million and $1.4 million, respectively.~~million.

Restricted ~~Stock:~~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,						Nine months ended September 30,
	2019			2018			2020			2019
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
(shares in thousands)
Outstanding at beginning of period	57	$	50.55	129	$	32.15	46	$	98.28	57	$	50.55
Granted	28		130.89	18		79.80	43		113.68	28		130.89
Vested	(32)		47.14	(86)		31.61	(30)		86.79	(32)		47.14
Forfeited	(2)		167.48	-		-	(7)		108.81	(2)		167.48
Outstanding at end of the period	51	$	91.98	61	$	46.90	52	$	116.29	51	$	91.98

The Company withheld 0.0 million 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, 2020 and 2019. The total fair value of restricted stock awards vested during the nine months ended September 30, 2020 and 2019 was $3.4 million and ~~2018 was~~ $4.1 million, ~~and $7.5 million,~~ respectively.

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The total share-based compensation charged against income was ~~$1.2~~$2.1 million and ~~$717 thousand~~$1.2 million during the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$3.4~~$4.2 million and ~~$2.4~~$3.4 million during the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. The total costs of the options and restricted stock awards charged against income was ~~$723 thousand~~$1.0 million and ~~$488 thousand~~$0.7 million during the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$2.2~~$2.5 million and ~~$1.7~~$2.2 million during the nine months ended September 30, ~~2019~~2020 and 2018, respectively. Also included for the three months ended September 30, 2019 and 2018 was $77 thousand, respectively, and for the nine months ended September 30, 2019 and 2018 was $228 thousand and $229 thousand, respectively, for 63,300 ~~performance-based deferred shares in expense for certain key executives.~~2019. Included for the three and nine months ended September 30, ~~2019~~2020 was $0.5 million and ~~2018,~~$0.8 million, respectively, ~~was $152 thousand and $455~~ ~~thousand, respectively, in expense~~ for ~~210,000~~16,637 performance-based contingent shares ~~granted to our CEO that will vest based on the achievement of certain Company performance targets. Included~~and for the three and nine months ended September 30, 2019 was ~~$205 thousand~~$0.2 million and ~~$497~~ ~~thousand,~~$0.5 million, respectively, for 17,780 performance-based contingent shares for certain ~~other~~ key executives granted in 2019. Also included for the three and nine months ended September 30, 2020 was $0.6 million and $0.9 million 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, 2019 was $0.1 million and $0.2 million, respectively, for 63,300 performance-based deferred shares for certain key executives, and $0.2 million and $0.5 million, respectively, for 210,000 performance-based contingent shares granted to our Chief Executive Officer. These 273,300 performance-based shares were fully vested on December 31, 2019.

The total income tax benefit recognized in the Condensed Consolidated Statements of Income for restricted stock awards was ~~$249 thousand~~$0.3 million and ~~$167 thousand~~$0.2 million for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and was ~~$1.5~~$0.9 million and ~~$1.6~~$1.5 million for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

There was ~~$3.3~~$4.6 million of total unrecognized compensation cost related to restricted stock awards as of September 30, ~~2019,~~2020, which is expected to be recognized over a weighted-average period of ~~2.01~~1.8 years. There was ~~$2.1~~$4.8 million of

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unrecognized compensation cost related to the ~~291,080~~44,162 performance-based shares discussed above as of September 30, ~~2019,~~2020, which is expected to be recognized over ~~a weighted-average period of 2.15~~2.0 years.

5. LEASES AND CONTINGENCIES

Operating Leases

The Company has operating leases for office and warehouse space and certain equipment. In certain of the Company’s lease agreements, the rental payments are adjusted periodically based on defined terms within the lease. The Company did ~~not~~0t have any finance leases as of September 30, 2020 and 2019, ~~and~~respectively, or for the nine-month ~~period~~periods then ~~ended.~~ended, respectively.

Our leases relating to office and warehouse space have terms of ~~63 months~~19 to 122 months. Our leases relating to equipment have lease terms of 60 to 203 months, with some of them having clauses relating to automatic renewal.

The Company’s warehouse agreement also contains 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.

~~For~~The operating lease expense was $0.9 million and $0.7 million for the three months ended September 30, 2020 and 2019, respectively, and was $2.6 million and $2.1 million for the nine months ended September 30, ~~2019, the operating lease expense was $726 thousand~~2020 and ~~$2.1 million,~~2019, respectively.

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


	Three months ended September 30,		Nine months ended September 30,		Nine months ended September 30,
	2019		2019		2020		2019

Cash paid for amounts included in the measurements of lease liabilities
Operating cash flow from operating leases	$	729	$	2,121
Operating cash flow used in operating leases					$	2,778	$	2,121

Right-of-use assets obtained in exchange for lease obligations
Operating leases	$	-	$	1,490	$	887	$	1,490

As of September 30, ~~2019,~~2020, the weighted average remaining lease term was ~~5.0~~3.9 years and the weighted average discount rate was ~~3.9%~~3.5%.

The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2020 (in thousands):


2020 (excluding the nine months ended September 30, 2020)	$	1,052
2021		3,991
2022		3,397
2023		1,851
2024		1,234
Thereafter		1,452
Total lease payments	$	12,977
Less: imputed interest		(879)
Total	$	12,098

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6. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

~~The following table presents the maturity of the Company’s operating lease liabilities as of September 30, 2019 (in thousands):~~

2019 (excluding the nine months ended September 30, 2019)

$
733
2020

2,951
2021

2,985
2022

2,641
2023

1,665
Thereafter

2,686
Total lease payments

$
13,661
Less: imputed interest

(1,288)
Total

$
12,373

As previously disclosed in our 2018 Form 10-K and under the previous lease accounting standard, future minimum lease commitments under non-cancelable operating leases with terms in excess of one year would have been as follows (in thousands):

2019

$
1,496
2020

1,528
2021

1,562
2022

1,222
2023

1,155
Thereafter

2,582
Total minimum lease payments

$
9,545

~~6. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)~~

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

September 30, 2019

December 31, 2018

Foreign currency translation

$
(3)

$
(2)
Unrealized gains (losses) on marketable securities

75

(171)
Accumulated other comprehensive income (loss)

$
72

$
(173)

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:

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.

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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 represent cash and the available-for-sale securities adjusted cost, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or investment securities (in thousands):


	September 30, 2019												September 30, 2020
		Cost		Unrealized Gains (Losses)		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities		Cost		Unrealized Gains		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities

Cash	$	75,930	$	-	$	-	$	75,930	$	75,930	$	-	$	155,210	$	-	$	-	$	155,210	$	155,210	$	-

Level 1:
Certificate of deposit		-		-		-		-		-		-
Money market accounts		5,266		-		-		5,266		5,266		-		1,276		-		-		1,276		1,276		-
Government & agency securities		2,832		(1)		11		2,842		-		2,842		2,829		55		12		2,896		-		2,896
		8,098		(1)		11		8,108		5,266		2,842		4,105		55		12		4,172		1,276		2,896

Level 2:
Municipal bonds		12,709		11		156		12,876		-		12,876		10,350		56		131		10,537		-		10,537

Total	$	96,737	$	10	$	167	$	96,914	$	81,196	$	15,718	$	169,665	$	111	$	143	$	169,919	$	156,486	$	13,433

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	December 31, 2018												December 31, 2019
		Cost		Unrealized Losses		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities		Cost		Unrealized Gains		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities

Cash	$	35,436	$	-	$	-	$	35,436	$	35,436	$	-	$	36,593	$	-	$	-	$	36,593	$	36,593	$	-

Level 1:
Certificate of deposit		40,000		-		-		40,000		40,000		-		35,000		-		-		35,000		35,000		-
Money market accounts		5,928		-		-		5,928		5,928		-		5,381		-		-		5,381		5,381		-
Government & agency securities		2,835		(72)		-		2,763		-		2,763		2,832		2		-		2,834		-		2,834
		48,763		(72)		-		48,691		45,928		2,763		43,213		2		-		43,215		40,381		2,834

Level 2:
Municipal bonds		16,791		(164)		280		16,907		-		16,907		12,610		34		226		12,870		-		12,870

Total	$	100,990	$	(236)	$	280	$	101,034	$	81,364	$	19,670	$	92,416	$	36	$	226	$	92,678	$	76,974	$	15,704

The Company had 0 realized ~~loss~~losses or gains for the three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. As of September 30, ~~2019~~2020 and ~~2018,~~2019, gross unrealized losses and gains related to individual securities that had been in a continuous loss position for 12 months or longer were not significant. The maturities of the Company’s investment securities generally range up to 53 years for municipal bonds and for government and agency securities.

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

Note Regarding Forward-Looking Statements

This report contains information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” and similar expressions, which are not historical in nature, identify forward-looking statements. However, the absence of these words or expressions does not necessarily mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to future operating results, are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in our ~~2018~~2019 Form 10-K, the Form 10-Q for the Quarter ended March 31, 2020 and the Form 10-Q for the Quarter ended June 30, 2020, and those described from time to time in our future reports filed with the SEC.

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

Overview

~~We are a leading health and wellness~~Medifast is the company that empowers people to transform their lives one healthy habit at a time. Through our rapidly growing community of independent wellness coaches, we seek to enrich the lives of our clients through programs that promote healthy living and through the manufacture and distribution of our proprietary health and wellness products. We believe we are buildingbehind one of the ~~most trusted, transparent and effective direct-sales~~fastest-growing health and wellness communities called OPTAVIA^®, which offers Lifelong Transformation, One Healthy Habit at a Time^®. Reflecting the success of its approach to health and wellness for its clients, Medifast has consistently grown revenue for the past three years. Of equal importance, our business model is expected to deliver long-term growth in the ~~world.~~ 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 very different. The Company supports clients through independent OPTAVIA Coaches, the majority of whom were clients first.

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

~~Since our founding, we have been an innovator in the development of nutritional weight-management products and programs.~~ We sell a variety of weight loss, weight management and healthy living products all based on our proprietary formulas under the Medifast^®,OPTAVIA,^®, Thrive by Medifast, Optimal Health byTake Shape for Life, and Flavors of Home^®~~, and Essential 1~~ brands. Our product line includes more than 145 consumable options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, ~~pudding,~~puddings, soft serve, shakes, smoothies, soft bakes, and soups. The Thrive by Medifast and Optimal Health byTake Shape for Life lines include a variety of specially formulated bars, shakes, and smoothies for those who are maintaining their weight for long-term healthy living. We identify opportunities to expand our product line by regularly surveying our clients and studying industry and consumer trends. This allows us to introduce new, high quality products that we expect to meet consumer demand.

Our nutritional products are formulated with high-quality ~~low-calorie, and low-fat~~ ingredients. Products include individually portioned, calorie- and carbohydrate-controlled meal replacements that share a similar nutritional footprint and provide a balance of protein and good carbohydrates. Our meal replacements are also fortified to contain vitamins and minerals, as well as other

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nutrients essential for good health. We offer ourOPTAVIA clients exclusiveOPTAVIA-branded nutritional products, or “Fuelings,” and also offer a variety of other weight loss, weight management, and healthy living products under other brands.OPTAVIA Fuelings come in a variety of flavors that appeal to a broad variety of tastes. Our products are nutrient-dense, portion-controlled, nutritionally interchangeable and simple to use. ~~They are formulated with high-quality, low-calorie, and low-fat ingredients.~~

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In March 2018, we announced a change in how our business is managed, operating performance is reviewed and resources are allocated. As a result, beginning in the first quarter of 2018, we changed how we report financial performance to align with changes in the way we now manage the business and now operate and report as a single sales segment, ~~OPTA~~~~VIA. We previously disclosed entity-wide financial information for multiple segments (e.g.~~ ~~OPTA~~VIA, Medifast Direct, Franchise Medifast Weight Control Centers and Medifast Wholesale). Although we have one reportable segment, we continue to market our products and programs through our Medifast Direct ecommerce platform and our Franchise Medifast Weight Control Center channels.

OPTAVIA is a highly effective lifestyle solution for people for whom diets alone have failed. Habits of Health^®, encompasses our community ofOPTAVIA Coaches, ourOPTAVIA health and wellness programs, and our proprietaryOPTAVIA-branded products. ~~The~~This approach developed by OPTAVIA ~~Integrated Coaching Model~~co-founder and independent OPTAVIA Coach, Dr. Wayne Scott Andersen, combines clinically proven plans with scientifically developed products and the ongoing support of OPTAVIA Coaches. The OPTAVIA integrated coaching model is centered around providing focused, individualized attention to our clients. OurOPTAVIA Coaches provide the support and encouragement for clients to successfully learn and adopt a more healthy lifestyle. This clinically-proven ~~model~~plan translates into better client results when compared to programs that leave individuals to adopt and maintain healthy habits on their own. Our clients receive personalized attention from ourOPTAVIA Coaches who share, educate, motivate and pass along their passion for healthy living. We believe this personal, direct-sales and service strategy is optimal for activating and supporting our clients.

In a clinical study published in Obesity Science and Practice in 2018, the OPTAVIA model’s effectiveness was validated when its meal plan was combined with education and support from OPTAVIA Coaches.

OurOPTAVIA Coaches are independent contractors, not employees, who support our clients and market our products and services primarily through word of mouth, email ~~direct mail~~ and via social media channels such as Facebook, Instagram, Twitter ~~or Zoom.~~and video conferencing platforms. As direct-sales entrepreneurs,OPTAVIA Coaches market our products to friends, family and other acquaintances with whom they have established strong relationships.

The entrepreneurial success of ourOPTAVIA Coaches is the key to our success. We are focused on scaling ourOPTAVIA Integrated Coaching Model by offering economic incentives that are attractive to independent entrepreneurs and reflective of the new “gig economy.” Our successful clients frequently become enthusiastic health and wellness advocates themselves and may choose to becomeOPTAVIA Coaches. This process of clients becomingOPTAVIA Coaches underpins our growth.

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. The Company outsources a distribution center in Hong Kong to give the Company adequate product distribution capacity for the foreseeable future. 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.

COVID-19 Update

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified in Asia. Over the next several months, COVID-19 quickly spread across the world. In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic. As of October 2020, the virus continues to spread, infecting more than 40 million people worldwide, and impacting worldwide economic activity. In response to the pandemic, many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing and shelter-in-place orders. This has resulted in the temporary closure of schools and non-essential businesses. Because the Company sells products that are essential to the daily lives of consumers, the COVID-19 pandemic has not had a material impact to our consolidated operating results for the nine-month period ended September 30, 2020.

While the duration and severity of this COVID-19 pandemic is uncertain, 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 estimates. The difference is due to 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. These uncertainties make it challenging for our management to estimate our future business performance. However, we continue to actively monitor the impact of COVID-19 and related developments on our business.

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Although the COVID-19 pandemic has impacted our business operations in multiple ways, our manufacturing facility remains fully operational to date and we have not experienced any meaningful disruption to our worldwide supply chain. Additionally, nutritional supplements and health foods have been designated critical/essential infrastructure in the U.S. and, as such, we have continued to actively manufacture and distribute our products in our markets around the world. We will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. While our manufacturing and distribution employees continue to work on site, they are following additional health and safety guidelines. In response to the public health crisis posed by COVID-19, we took numerous actions, including:

●

successfully implementing a work-from-home plan for all non-essential employees to comply with guidelines from government and health officials;

●

changing this year’s OPTAVIA convention from a live event in July to a virtual event;

●

prioritizing production to our highest volume products limiting our stock keeping unit (“SKU”) assortment to ensure that we are able to meet anticipated product demand across core items;

●

employing incentives and promotions to help OPTAVIA Coaches adjust to the adverse effect of overall economic conditions and the nationwide actions taken to control the spread of the virus;

●

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

●

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

The Company’s priorities during the COVID-19 pandemic continue to be protecting the health and safety of our employees and their families, OPTAVIA Coaches; maximizing the availability of products that help consumers with their needs; and the use of our employees’ talents and our resources to help society meet and overcome the current challenges. 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 may take further actions that alter the Company’s 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.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. Our significant accounting policies are described in Note 1 to the unaudited condensed consolidated financial statements included in this report. We consider all of our significant accounting policies and estimates to be critical.

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.

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Overview of Results of Operations

Our product sales accounted for 98% of our revenues for the three months and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

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


	Three months ended September 30,							Three months ended September 30,
	2019		2018		$ Change		% Change	2020		2019		$ Change		% Change

Revenue	$	190,061	$	139,239	$	50,822	36.5%	$	271,470	$	190,061	$	81,409	42.8%
Cost of sales		47,128		32,038		(15,090)	-47.1%		67,434		47,128		(20,306)	(43.1%)
Gross profit		142,933		107,201		35,732	33.3%		204,036		142,933		61,103	42.7%

Selling, general, and administrative		122,671		89,734		(32,937)	-36.7%		159,477		122,671		(36,806)	(30.0%)

Income from operations		20,262		17,467		2,795	16.0%		44,559		20,262		24,297	119.9%

Other income
Interest income, net									44		324		(280)	(86.4%)
Other income (expense)									30		(3)		33	(1100.0%)
Interest income, net		324		361		(37)	-10.2%
Other expense		(3)		-		(3)
		321		361		(40)	-11.1%		74		321		(247)	(76.9%)

Income from operations before income taxes		20,583		17,828		2,755	15.5%		44,633		20,583		24,050	116.8%

Provision for income tax		4,681		4,047		(634)	-15.7%		10,180		4,681		(5,499)	(117.5%)

Net income	$	15,902	$	13,781	$	2,121	15.4%	$	34,453	$	15,902	$	18,551	116.7%

% of revenue
Gross profit		75.2%		77.0%					75.2%		75.2%
Selling, general, and administrative costs		64.5%		64.4%					58.7%		64.5%
Income from operations		10.7%		12.5%					16.4%		10.7%
Income from operations before income taxes		10.8%		12.8%					16.4%		10.8%

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	Nine months ended September 30,							Nine months ended September 30,
	2019		2018		$ Change		% Change	2020		2019		$ Change		% Change

Revenue	$	543,040	$	355,159	$	187,881	52.9%	$	669,930	$	543,040	$	126,890	23.4%
Cost of sales		134,250		84,351		(49,899)	-59.2%		171,354		134,250		(37,104)	(27.6%)
Gross Profit		408,790		270,808		137,982	51.0%		498,576		408,790		89,786	22.0%

Selling, general, and administrative		336,458		221,548		(114,910)	-51.9%		402,385		336,458		(65,927)	(19.6%)

Income from operations		72,332		49,260		23,072	46.8%		96,191		72,332		23,859	33.0%

Other income (expense)
Other income
Interest income, net		1,061		940		121	12.9%		212		1,061		(849)	(80.0%)
Other income (expense)		(11)		178		(189)	-106.2%		12		(11)		23	(209.1%)
		1,050		1,118		(68)	-6.1%		224		1,050		(826)	(78.7%)

Income from operations before income taxes		73,382		50,378		23,004	45.7%		96,415		73,382		23,033	31.4%

Provision for income taxes		15,347		10,242		(5,105)	-49.8%		21,550		15,347		(6,203)	(40.4%)

Net income	$	58,035	$	40,136	$	17,899	44.6%	$	74,865	$	58,035	$	16,830	29.0%

% of revenue
Gross Profit		75.3%		76.2%					74.4%		75.3%
Selling, general, and administrative costs		62.0%		62.4%					60.1%		62.0%
Income from Operations		13.3%		13.9%					14.4%		13.3%
Income from operations before income taxes		13.5%		14.2%					14.4%		13.5%

Revenue: Revenue increased ~~$50.9~~$81.4 million, or ~~36.5%~~42.8%, to $271.5 million for the three months ended September 30, 2020 from $190.1 million for the three months ended September 30, 2019 from $139.2 million for the three months ended September 30, 2018. This is the tenth consecutive quarter of year-over-year revenue growth and the eleventh consecutive quarter of sequential revenue improvement.2019. The total number of active earning OPTAVIA Coaches for the three months ended September 30, ~~2019~~2020 increased to ~~32,200~~42,100 from ~~22,600~~32,200 for the corresponding period in ~~2018,~~2019, an increase of ~~42.5%~~30.7%. The ~~quarterly~~average revenue per active earning OPTAVIA Coach ~~decreased 1.1%~~was $6,329 for the three months ended September 30, 2020 compared to $5,715 for the three months ended September 30, ~~2019 from $5,781~~2019. Increase in the productivity per active earning OPTAVIA Coach for the ~~three~~quarter was 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 $126.9 million, or 23.4%, to $669.9 million for the nine months ended September 30, ~~2018. Revenue increased $187.8 million, or 52.9%, to~~2020 from $543.0 million for the nine months ended September 30, ~~2019 from $355.2 million for the nine months ended September 30, 2018.~~2019. This ~~growth~~increase in revenue for the quarter and nine months ended September 30, ~~2019~~2020 resulted ~~in part~~ from ~~business~~temporary program initiatives ~~accelerating new~~ ~~OPTA~~~~VIA Coach conversions and new~~which drove more clients ~~starting~~to be on our plans, aided by the ongoing transition of clients to higher priced OPTA~~VIA branded~~VIA-branded products. OPTAVIA-branded products represented ~~78%~~83.0% of consumable units sold for the three months ended September 30, ~~2019~~2020 compared to ~~70%~~78.0% for the corresponding period in ~~2018~~2019 and ~~76%~~82.0% of consumable units sold for the nine months ended September 30, ~~2019~~2020 compared to ~~73%~~76.0% for the corresponding period in ~~2018.~~2019.

Costs of sales: Cost of sales increased ~~$15.1~~$20.3 million, or ~~47.1%~~43.1%, to ~~$47.1~~$67.4 million for the three months ended September 30, ~~2019~~2020 from the corresponding period in ~~2018~~2019 and increased ~~$49.9~~$37.1 million, or ~~59.2%~~27.6%, to ~~$134.3~~$171.4 million for the nine months ended September 30, ~~2019~~2020 from the corresponding period in ~~2018.~~2019. The increase in cost of sales ~~for the three and nine months ended September 30, 2019~~ was primarily driven by ~~increased~~an increase in product sales.

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Gross profit: For the three months ended September 30, ~~2019,~~2020, gross profit increased ~~$35.7~~$61.1 million, or ~~33.3%~~42.7%, to ~~$142.9~~$204.0 million from the corresponding period in ~~2018.~~2019. As a percentage of sales, gross margin ~~decreased 180 basis points to~~remained flat at 75.2% for the three months ended September 30, ~~2019 from 77.0% for~~2020 as compared to the corresponding period in ~~2018.~~2019. For the nine months ended September 30, ~~2019,~~2020, gross profit increased ~~$138.0~~$89.8 million, or ~~51.0%~~22.0%, to ~~$408.8~~$498.6 million from the corresponding period in ~~2018.~~2019. As a percentage of sales, gross margin decreased 90 basis points to ~~75.3%~~74.4% for the nine months ended September

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30, ~~2019~~2020 from ~~76.2%~~75.3% for the corresponding period in ~~2018.~~2019. The decrease in gross ~~profit~~margin percentage for the ~~quarter and~~ year-to-date periods ~~were driven~~was primarily bythe result of promotional activity as well as higher ~~shipping expenses and higher product returns related to disruptions to normal business operations.~~production costs in 2020.

Selling, general and administrative: Selling, general and administrative (“SG&A”) expenses were ~~$122.7~~$159.5 million for the three months ended September 30, ~~2019,~~2020, an increase of ~~$33.0~~$36.8 million, or ~~36.7%~~30.0%, as compared to ~~$89.7~~$122.7 million from the corresponding period in ~~2018.~~2019. As a percentage of sales, SG&A expenses were ~~64.5%~~58.7% as compared to ~~64.4%~~64.5% for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. SG&A expenses included research and development (“R&D”) costs of ~~$619 thousand~~$0.8 million and ~~$621 thousand~~$0.6 million for the three months ended September 30, 2020 and 2019, respectively. The $36.8 million increase in SG&A for the quarter was primarily due to higher OPTAVIA commission expense as a result of growth in OPTAVIA sales, increased salaries and ~~2018, respectively.~~benefits related expenses partially offset by a decrease in sales and marketing expenses. For the nine months ended September 30, ~~2019,~~2020, SG&A expenses increased ~~$115.0~~$65.9 million, or ~~51.9%~~19.6%, to ~~$336.5~~$402.4 million from ~~$221.5~~$336.5 million for the corresponding period in ~~2018.~~2019. SG&A expenses included $1.9 million and $1.8 million ~~and $1.6 million~~ in ~~research and development~~R&D costs for the nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. As a percentage of sales, SG&A expenses were ~~62.0%~~60.1% for the nine months ended September 30, ~~2019~~2020 as compared to ~~62.4%~~62.0% for the corresponding period in ~~2018.~~2019. The $65.9 million increase in SG&A for the ~~quarter and year-to-date were~~nine months ended September 30, 2020 was primarily ~~a result of~~due to higher ~~variable costs such as~~ OPTAVIA commission expense ~~and credit card processing fees~~ as a result of ~~higher sales. In addition,~~growth in OPTAVIA sales, incremental professional service costs in connection with the Schedule 13D filing and increased salaries and benefits related expenses partially offset by sales and marketing expenses. For the nine months ended September 30, 2020, Non-GAAP adjusted SG&A expenses increased $58.9 million to $395.3 million and Non-GAAP adjusted SG&A as a ~~result~~percentage of ~~increased consulting costs related~~revenue decreased 300 basis points year-over-year to ~~information technology projects, along with higher cost for the Company’s annual convention held in July 2019.~~59.0%. Non-GAAP adjusted SG&A excludes expenses in connection with the Schedule 13D filing of $5.8 million and severance related costs of $1.2 million resulting from the departure of the Company's previous Chief Financial Officer.

OPTAVIA commission expense, which is a variable expense, increased $37.7 million, or 48.8%, to $114.9 million for the three months ended September 30, ~~2019 included $3.2~~2020 from $77.2 million of cost related to a highly organized automated scheme using stolen identities and credit cards from outside the Company’s systems, to transact business on the Company’s e-commerce sites. Each of these transactions was pre-approved, prior to shipment, by the payment processor and subsequently reported to the Company as utilizing a stolen card. These expenses were $2.8 million, or $0.18 EPS, higher thanfor the corresponding period in ~~2018 and were primarily comprised of higher bad debt and credit card fees.~~

~~OPTA~~VIA commission expense, which is variable based upon product sales, increased $20.8 million, or 36.8%, for the three months ended September 30, 2019 from the corresponding period in 2018 and increased $83.8 million, or 59.9%, for2019. For the nine months ended September 30, ~~2019~~2020, OPTAVIA commission expense increased $57.5 million, or 25.7%, to $281.2 million from $223.7 million for the corresponding period in ~~2018. These increases were~~2019. The increase was primarily the result of increased product ~~sales and number of active earning~~ ~~OPTA~~~~VIA Coaches.~~sales. As OPTAVIA revenue increased as a portion of the Company’s total sales mix, the commission rate as a percentage of revenue increased 10170 basis points to ~~40.6%~~42.3% for the third quarter of ~~2019~~2020 compared to ~~40.5%~~40.6% for the third quarter last year and increased ~~180~~80 basis points to ~~41.2%~~42.0% for the nine months ended September 30, ~~2019~~2020 compared to ~~39.4%~~41.2% for the corresponding period in ~~2018.~~2019. This is an outcome of the success we are experiencing with our OPTAVIA ~~Integrated Coach Model.~~integrated coach model.

Income from operations: For the three months ended September 30, ~~2019,~~2020, income from operations increased ~~$2.8~~$24.3 million to ~~$20.3~~$44.6 million from ~~$17.5~~$20.3 million for the corresponding period in ~~2018~~2019 primarily as a result of increased gross ~~profits~~profit partially offset by increased SG&A expenses. Income from operations as a percentage of sales was ~~10.7%~~16.4% and ~~12.5%~~10.7% for the three months ended September 30, ~~2019~~2020 and ~~2018,~~2019, respectively. For the nine months ended September 30, ~~2019,~~2020, income from operations increased ~~$23.0~~$23.9 million to ~~$72.3~~$96.2 million from ~~$49.3~~$72.3 million for the corresponding period in ~~2018~~2019 primarily as a result of increased gross ~~profits~~profit partially offset by increased SG&A expenses. Income from operations as a percentage of sales was ~~13.3%~~14.4% and ~~13.9%~~13.3% for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020, Non-GAAP adjusted income from operations increased $30.9 million to $103.2 million and ~~2018, respectively.~~Non-GAAP adjusted income from operations as a percentage of revenue increased 210 basis points year-over-year to 15.4%.

~~Interest income, net:~~Other income: For the three and nine months ended September 30, ~~2019,~~2020, other income (including interest ~~income~~income) was ~~$324 thousand~~$0.1 million and ~~$1.1~~$0.2 million, respectively, and for the three and nine months ended September 30, ~~2018, interest income was $361 thousand and $940 thousand, respectively.~~

~~Other income (expense):~~ ~~For the three months ended September 30,~~ 2019, ~~and 2018,~~ other income ~~(expense)~~(including interest income) was ~~an expense of $3 thousand~~$0.3 million and ~~$0,~~$1.1 million, respectively. ~~For the nine months ended September 30, 2019 and 2018, other income (expense) was an expense of $11 thousand and income of $178 thousand, respectively.~~

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Income from operations before income taxes: Income from operations before income taxes was $44.6 million for the three months ended September 30, 2020 as compared to $20.6 million for the three months ended September 30, 2019, ~~as compared to $17.8 million for the three months ended September 30, 2018,~~ an increase of ~~$2.8~~$24.0 million. Income from operations before income taxes as a percentage of sales ~~decreased~~increased to 16.4% for the three months ended September 30, 2020 from 10.8% for the three months ended September 30, ~~2019 from 12.8% for the three months ended September 30, 2018.~~2019. Income from operations before income taxes was $96.4 million for the nine months ended September 30, 2020 as compared to $73.4 million for the nine months ended September 30, ~~2019~~2019. Income from operations before income taxes as ~~compared~~a

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percentage of sales increased to ~~$50.4 million~~14.4% for the nine months ended September 30, ~~2018, an increase of $23.0 million. Income~~2020 from ~~operations before income taxes as a percentage of sales decreased to~~ 13.5% for the nine months ended September 30, ~~2019 from 14.2% for the nine months ended September 30, 2018.~~2019.

Provision for income tax: For the three months ended September 30, ~~2019,~~2020, the Company recorded $10.2 million in income tax expense, an effective tax rate of 22.8%, as compared to $4.7 million in income tax expense, an effective ~~rate of 22.7%, as compared to $4.0 million in income~~ tax ~~expense, an effective~~ rate of 22.7%, for the three months ended September 30, ~~2018.~~2019. The slight increase in the effective tax rate was primarily driven by an increase in state income tax rate and a decrease in tax benefit of stock compensation, partially offset by an increase in R&D tax credit and a decrease in meals and entertainment. For the nine months ended September 30, 2020, the Company recorded $21.6 million in income tax expense, an effective tax rate of 22.4%, as compared to $15.3 million in income tax expense, an effective tax rate of 20.9%, for the nine months ended September 30, 2019. The effective tax rate was negatively impacted by ~~the tax effects of foreign operating results offset by favorable effects of~~an increase in state income taxes. For the nine months ended September 30, 2019, the Company recorded $15.3 million in income tax expense, an effective rate of 20.9%, as compared to $10.2 million in income tax expense, an effective rate of 20.3%, for the nine months ended September 30, 2018. The increase in the effective tax rate ~~for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 was primarily driven by the~~and a decrease in tax ~~effects~~benefit of ~~foreign operating results~~stock compensation and in R&D tax credit, partially offset by a decrease in ~~the excess tax benefits for share-based compensation~~meals and a decrease in state income taxes. The Company anticipates a full year tax rate of 21.0% to 22.0% in 2019, exclusive of any discrete tax benefits from share-based compensation awards vesting in the fourth ~~quarter.~~entertainment.

Net income: Net income was $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 as compared to $15.9 million and $58.0 million, or $1.32 and $4.77 per diluted share, for the three months and nine months ended September 30, ~~2019 as compared to $13.8 million and $40.1 million, or $1.14 and $3.31 per diluted share, for the three and nine months ended September 30, 2018.~~2019. The period-over-period changes were driven by the factors described ~~above.~~above in the explanations from operations. Non-GAAP adjusted net income was $80.3 million or $6.78 per diluted share for the nine months ended September 30, 2020.

Non-GAAP Financial Measures

In an effort to provide investors with additional information regarding our results, we disclose various Non-GAAP financial measures in this Form 10-Q, our quarterly earnings press release and other public disclosures. The following GAAP financial measures have been presented on an as adjusted basis: SG&A expenses, income from operations, net income and diluted earnings per share. Each of these as Non-GAAP financial measures excludes the impact of certain amounts as further identified below that the Company believes are not indicative of its core ongoing operational performance. A reconciliation of each of these Non-GAAP financial measures to its most comparable GAAP financial measure is included below. These Non-GAAP financial measures are not intended to replace GAAP financial measures.

We use these Non-GAAP financial measures internally to evaluate and manage the Company’s operations because we believe they provide useful supplemental information regarding the Company’s on-going economic performance. We have chosen to provide this information to investors to enable them to perform more meaningful comparisons of operating results and as a means to emphasize the results of on-going operations.

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The following tables reconcile the Non-GAAP financial measures included in this report (in thousands):


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Selling, general, and administrative	$	159,477	$	122,671	$	402,385	$	336,458
Adjustments
Professional services for 13D Filing		-		-		5,811		-
Incremental severance costs		-		-		1,237		-
Non-GAAP Adjusted selling, general, and administrative	$	159,477	$	122,671	$	395,337	$	336,458


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Income from operations	$	44,559	$	20,262	$	96,191	$	72,332
Adjustments
Professional services for 13D Filing		-		-		5,811		-
Incremental severance costs		-		-		1,237		-
Non-GAAP Adjusted income from operations	$	44,559	$	20,262	$	103,239	$	72,332


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019

Net income	$	34,453	$	15,902	$	74,865	$	58,035
Adjustments, net of tax
Professional services for 13D Filing		-		-		4,512		-
Incremental severance costs		-		-		961		-
Non-GAAP Adjusted net income	$	34,453	$	15,902	$	80,338	$	58,035

Diluted earnings per share (1)	$	2.91	$	1.32	$	6.32	$	4.77
Impact for adjustments (1)		-		-		0.46		-
Non-GAAP Adjusted diluted earnings per share (1)	$	2.91	$	1.32	$	6.78	$	4.77

(1) The weighted-average diluted shares outstanding used in the calculation of these Non-GAAP financial measures are the same as the weighted-average shares outstanding used in the calculation of the reported per share amounts.

Liquidity and Capital Resources

The Company had stockholders’ equity of ~~$111.2~~$140.0 million and working capital of ~~$80.8~~$105.5 million at September 30, ~~2019~~2020 as compared with ~~$109.1~~$104.8 million and ~~$85.2~~$74.8 million at December 31, ~~2018,~~2019, respectively. The ~~$2.1~~$35.2 million net increase in ~~stockholder’s~~stockholders’ equity reflects ~~$58.0~~$74.9 million in net income for the nine months ended September 30, ~~2019~~2020 offset by ~~$33.1~~$5.0 million spent on repurchases ~~of 296,230 shares~~ of the Company’s common stock, and ~~$26.5~~$39.9 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 dividend of ~~$8.8~~$13.4 million, or ~~$0.75~~$1.13 per share, to holders of the Company’s common ~~stockholders~~stock as of September ~~27, 2019~~22, 2020 that will be paid in the fourth quarter of ~~2019.~~2020. 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~~increased from ~~$101.0~~$92.7 million at December 31, ~~2018~~2019 to ~~$96.9~~$169.9 million at September 30, ~~2019.~~2020.

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Net cash provided by operating activities increased ~~$19.6~~$60.3 million to $125.4 million for the nine months ended September 30, 2020 from $65.1 million for the nine months ended September 30, 2019 ~~from $45.5~~as a result of a $16.8 million increase in net income and $47.0 million increase in operating assets and liabilities.

Net cash used in investing activities was $1.9 million for the nine months ended September 30, ~~2018 primarily~~2020 as ~~a result of increased net income.~~

~~Net cash used in investing activities was~~compared to $5.5 million for the nine months ended September 30, ~~2019 as compared to $817 thousand for the nine months ended September 30, 2018.~~2019. This change resulted from ~~an increase~~a $5.4 million decrease in cash used in capital expenditures for the nine months ended September 30, ~~2019~~2020 from the corresponding period in ~~2018~~2019 partially offset by a ~~$1.5~~$1.7 million ~~increase~~decrease in sale and maturities of investment securities.

Net cash used in financing activities ~~increased $22.4~~decreased $15.8 million to $44.0 million for the nine months ended September 30, 2020 from $59.8 million for the nine months ended September 30, ~~2019 from $37.4 million for the nine months ended September 30, 2018.~~2019. This ~~increase~~decrease was due to a ~~$13.1~~$28.1 million ~~increase~~decrease in stock repurchases ~~and~~partially offset by a ~~$9.3~~$13.2 million increase in cash dividends paid to stockholders.

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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.

The Company evaluates acquisitions from time to time as presented.

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, and high-grade corporate~~ 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 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, ~~2019,~~2020, 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, ~~2018.~~2019.

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, ~~2019.~~2020. 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:~~Reporting

We rely extensively on information systems and technology to manage our business and summarize operating results. We have completed the implementation of a new global ERP system in the second quarter of 2020, which replaces our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to

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the operation of the business. The transition did not result in significant changes in our 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, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We implemented additional internal controls to ensure we properly assessed and accounted for the impact of the new accounting standard related to leases on our financial statements which became effective on January 1, 2019. There were no significant changes to our internal control over financial reporting related to the adoption of the new standard.

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.

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Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the ~~2018~~2019 Form ~~10-K.~~10-K and the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020.

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

Issuer Purchases of Equity Securities


2019	Total Number of Shares Purchased	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
July 1 - July 31	-	$	-	-	593,587
2020						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 30						64	$	167.13	-	2,322,512
August 1 - August 31	205,193		102.84	205,000	388,587	-		-	-	2,322,512
September 1 - September 30	20,110		101.52	20,000	368,587	160		160.44	-	2,322,512

(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, 2020, there were 2,322,512 shares of the Company's common stock eligible for repurchase under the repurchase authorization dated September 16, 2014 (the "Stock Repurchase Plan").

The Company, in accordance with, and as part of, the Stock Repurchase Plan implemented a Rule 10b5-1 repurchase plan to facilitate repurchases of the Company’s common stock under the Stock Repurchase Plan. As of September 30, ~~2019,~~2020, there were ~~368,587~~2,322,512 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 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 ~~June 13,~~December 4, 2019).

10.1		Amendment to Medifast, Inc. Executive ~~Severence~~Severance Plan (filed herewith).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~2002 (filed herewith).

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002.~~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, ~~2019~~2020 filed November ~~8, 2019,~~3, 2020, 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 ~~Datra~~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 ~~8, 2019~~3, 2020


	/s/ ~~TIMOTHY G. ROBINSON~~JAMES P. MALONEY
	~~Timothy G. Robinson~~James P. Maloney
	Chief Financial Officer
	(Principal Financial ~~and Accounting~~ Officer)

Dated:	November ~~8, 2019~~3, 2020

2325


2019 (excluding the nine months ended September 30, 2019)	$	733
2020		2,951
2021		2,985
2022		2,641
2023		1,665
Thereafter		2,686
Total lease payments	$	13,661
Less: imputed interest		(1,288)
Total	$	12,373


2019	$	1,496
2020		1,528
2021		1,562
2022		1,222
2023		1,155
Thereafter		2,582
Total minimum lease payments	$	9,545

September 30, 2020

December 31, 2019

Foreign currency translation

Unrealized gains on investment securities

Accumulated other comprehensive income