0000910329--12-31Q3falseP19MP60M0000910329us-gaap:TreasuryStockMember2020-04-012020-06-300000910329us-gaap:TreasuryStockMember2019-07-012019-09-300000910329us-gaap:TreasuryStockMember2019-04-012019-06-300000910329us-gaap:TreasuryStockMember2020-01-012020-03-310000910329us-gaap:CommonStockMember2020-04-012020-06-300000910329us-gaap:TreasuryStockMember2020-09-300000910329us-gaap:RetainedEarningsMember2020-09-300000910329us-gaap:AdditionalPaidInCapitalMember2020-09-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-09-300000910329us-gaap:TreasuryStockMember2020-06-300000910329us-gaap:RetainedEarningsMember2020-06-300000910329us-gaap:AdditionalPaidInCapitalMember2020-06-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-06-3000009103292020-06-300000910329us-gaap:RetainedEarningsMember2020-03-310000910329us-gaap:AdditionalPaidInCapitalMember2020-03-310000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-03-3100009103292020-03-310000910329us-gaap:TreasuryStockMember2019-12-310000910329us-gaap:RetainedEarningsMember2019-12-310000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-12-310000910329us-gaap:TreasuryStockMember2019-09-300000910329us-gaap:RetainedEarningsMember2019-09-300000910329us-gaap:AdditionalPaidInCapitalMember2019-09-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-300000910329us-gaap:TreasuryStockMember2019-06-300000910329us-gaap:RetainedEarningsMember2019-06-300000910329us-gaap:AdditionalPaidInCapitalMember2019-06-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-06-3000009103292019-06-300000910329us-gaap:TreasuryStockMember2019-03-310000910329us-gaap:RetainedEarningsMember2019-03-310000910329us-gaap:AdditionalPaidInCapitalMember2019-03-310000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-03-3100009103292019-03-310000910329us-gaap:TreasuryStockMember2018-12-310000910329us-gaap:RetainedEarningsMember2018-12-310000910329us-gaap:AdditionalPaidInCapitalMember2018-12-310000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2018-12-310000910329us-gaap:CommonStockMember2019-01-012019-03-310000910329us-gaap:CommonStockMember2020-09-300000910329us-gaap:CommonStockMember2020-06-300000910329us-gaap:CommonStockMember2020-03-310000910329us-gaap:CommonStockMember2019-12-310000910329us-gaap:CommonStockMember2019-09-300000910329us-gaap:CommonStockMember2019-06-300000910329us-gaap:CommonStockMember2019-03-310000910329us-gaap:CommonStockMember2018-12-310000910329srt:MaximumMember2020-01-012020-09-300000910329srt:MinimumMember2020-01-012020-09-300000910329us-gaap:EmployeeStockOptionMember2019-01-012019-09-300000910329us-gaap:CommonStockMember2020-07-012020-09-300000910329us-gaap:CommonStockMember2020-01-012020-03-310000910329us-gaap:EmployeeStockOptionMember2019-12-310000910329us-gaap:EmployeeStockOptionMember2018-12-310000910329us-gaap:EmployeeStockOptionMember2020-01-012020-09-300000910329us-gaap:EmployeeStockOptionMember2019-01-012019-09-300000910329us-gaap:EmployeeStockOptionMember2020-09-300000910329us-gaap:EmployeeStockOptionMember2019-09-300000910329srt:MaximumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-09-300000910329us-gaap:PerformanceSharesMember2019-01-012019-12-310000910329us-gaap:RestrictedStockMember2019-12-310000910329us-gaap:RestrictedStockMember2019-09-300000910329us-gaap:RestrictedStockMember2018-12-310000910329med:KeyExecutivesMemberus-gaap:PerformanceSharesMember2019-01-012019-09-300000910329srt:MinimumMemberus-gaap:EmployeeStockOptionMember2020-01-012020-09-300000910329srt:MaximumMemberus-gaap:RestrictedStockMember2020-01-012020-09-300000910329med:KeyExecutivesMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheTwoMember2020-07-012020-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2020-07-012020-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheTwoMember2020-01-012020-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2020-01-012020-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2019-07-012019-09-300000910329srt:ChiefExecutiveOfficerMemberus-gaap:PerformanceSharesMember2019-07-012019-09-300000910329med:KeyExecutivesMemberus-gaap:PerformanceSharesMember2019-07-012019-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMemberus-gaap:ShareBasedCompensationAwardTrancheOneMember2019-01-012019-09-300000910329srt:ChiefExecutiveOfficerMemberus-gaap:PerformanceSharesMember2019-01-012019-09-300000910329med:CertainKeyExecutiveMemberus-gaap:PerformanceSharesMember2019-01-012019-09-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-07-012020-09-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-04-012020-06-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-01-012020-03-310000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-07-012019-09-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-04-012019-06-300000910329us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-01-012019-03-310000910329us-gaap:FairValueInputsLevel2Memberus-gaap:MunicipalBondsMember2020-01-012020-09-300000910329med:GovernmentAgencySecuritiesMemberus-gaap:FairValueInputsLevel1Member2020-01-012020-09-300000910329us-gaap:FairValueInputsLevel1Member2020-01-012020-09-300000910329us-gaap:FairValueInputsLevel2Memberus-gaap:MunicipalBondsMember2019-01-012019-12-310000910329med:GovernmentAgencySecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-01-012019-12-310000910329us-gaap:FairValueInputsLevel1Member2019-01-012019-12-3100009103292019-01-012019-12-310000910329srt:MinimumMembermed:OperatingLeaseArrangementForRealEstateMember2020-09-300000910329srt:MinimumMembermed:OperatingLeaseArrangementForEquipmentMember2020-09-300000910329srt:MaximumMembermed:OperatingLeaseArrangementForRealEstateMember2020-09-300000910329srt:MaximumMembermed:OperatingLeaseArrangementForEquipmentMember2020-09-300000910329us-gaap:RestrictedStockMember2020-07-012020-09-300000910329us-gaap:RestrictedStockMember2019-07-012019-09-300000910329us-gaap:RestrictedStockMember2019-01-012019-09-300000910329us-gaap:RestrictedStockMember2020-09-300000910329us-gaap:PerformanceSharesMember2020-09-300000910329us-gaap:RestrictedStockMember2020-01-012020-09-300000910329us-gaap:PerformanceSharesMember2020-01-012020-09-300000910329us-gaap:EmployeeStockOptionMember2020-01-012020-09-300000910329us-gaap:EmployeeStockOptionMember2020-09-300000910329us-gaap:RetainedEarningsMember2020-07-012020-09-300000910329us-gaap:RetainedEarningsMember2020-04-012020-06-300000910329us-gaap:RetainedEarningsMember2020-01-012020-03-310000910329us-gaap:RetainedEarningsMember2019-07-012019-09-300000910329us-gaap:RetainedEarningsMember2019-04-012019-06-300000910329us-gaap:RetainedEarningsMember2019-01-012019-03-3100009103292019-09-3000009103292018-12-310000910329us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2020-09-300000910329us-gaap:FairValueInputsLevel2Memberus-gaap:MunicipalBondsMember2020-09-300000910329med:GovernmentAgencySecuritiesMemberus-gaap:FairValueInputsLevel1Member2020-09-300000910329us-gaap:FairValueInputsLevel1Member2020-09-300000910329us-gaap:CashMember2020-09-300000910329us-gaap:MoneyMarketFundsMemberus-gaap:FairValueInputsLevel1Member2019-12-310000910329us-gaap:FairValueInputsLevel2Memberus-gaap:MunicipalBondsMember2019-12-310000910329us-gaap:CertificatesOfDepositMemberus-gaap:FairValueInputsLevel1Member2019-12-310000910329med:GovernmentAgencySecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-12-310000910329us-gaap:FairValueInputsLevel1Member2019-12-310000910329us-gaap:CashMember2019-12-310000910329us-gaap:RestrictedStockMember2020-07-012020-09-300000910329us-gaap:EmployeeStockOptionMember2020-07-012020-09-300000910329us-gaap:RestrictedStockMember2020-01-012020-09-300000910329us-gaap:EmployeeStockOptionMember2020-01-012020-09-300000910329us-gaap:RestrictedStockMember2019-07-012019-09-300000910329us-gaap:EmployeeStockOptionMember2019-07-012019-09-300000910329us-gaap:RestrictedStockMember2019-01-012019-09-300000910329us-gaap:EmployeeStockOptionMember2019-01-012019-09-300000910329us-gaap:AdditionalPaidInCapitalMember2019-04-012019-06-3000009103292019-04-012019-06-300000910329us-gaap:AdditionalPaidInCapitalMember2020-07-012020-09-3000009103292020-07-012020-09-300000910329us-gaap:AdditionalPaidInCapitalMember2020-04-012020-06-3000009103292020-04-012020-06-300000910329us-gaap:AdditionalPaidInCapitalMember2020-01-012020-03-3100009103292020-01-012020-03-310000910329us-gaap:AdditionalPaidInCapitalMember2019-07-012019-09-3000009103292019-07-012019-09-300000910329us-gaap:AdditionalPaidInCapitalMember2019-01-012019-03-3100009103292019-01-012019-03-3100009103292020-09-3000009103292019-12-310000910329us-gaap:USTreasuryAndGovernmentShorttermDebtSecuritiesMember2020-01-012020-09-3000009103292019-01-012019-09-3000009103292020-10-2600009103292020-01-012020-09-30xbrli:sharesiso4217:USDiso4217:USDxbrli:sharesxbrli:pure

Table of Contents

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, 2020

OR

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

For the transition period from to .

Commission File Number: 001-31573

Medifast, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

13-3714405

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 International Drive

Baltimore, Maryland 21202

Telephone Number: (410) 581-8042

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

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

Yes No

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

Yes No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

Yes No

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common Stock, par value $0.001 per share

MED

New York Stock Exchange

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

The number of shares of the registrant’s common stock outstanding at October 26, 2020 was 11,769,830.

Table of Contents

Medifast, Inc. and subsidiaries

Index

Part 1 – Financial Information

    

Item 1 – Financial Statements

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

2

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

3

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

4

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

5

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

23

Item 4 – Controls and Procedures

23

Part II – Other Information

Item 1 – Legal Proceedings

24

Item 1A – Risk Factors

24

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

24

Item 6 – Exhibits

25

1

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,

2020

2019

2020

2019

Revenue

$

271,470

$

190,061

$

669,930

$

543,040

Cost of sales

67,434

47,128

171,354

134,250

Gross profit

204,036

142,933

498,576

408,790

Selling, general, and administrative

159,477

122,671

402,385

336,458

Income from operations

44,559

20,262

96,191

72,332

Other income

Interest income, net

44

324

212

1,061

Other income (expense)

30

(3)

12

(11)

74

321

224

1,050

Income from operations before income taxes

44,633

20,583

96,415

73,382

Provision for income taxes

10,180

4,681

21,550

15,347

Net income

$

34,453

$

15,902

$

74,865

$

58,035

Earnings per share - basic

$

2.93

$

1.36

$

6.36

$

4.91

Earnings per share - diluted

$

2.91

$

1.32

$

6.32

$

4.77

Weighted average shares outstanding

Basic

11,766

11,731

11,772

11,823

Diluted

11,857

12,065

11,840

12,174

Cash dividends declared per share

$

1.13

$

0.75

$

3.39

$

2.25

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

2

Table of Contents

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in thousands)

Three months ended September 30,

Nine months ended September 30,

2020

2019

2020

2019

Net income

$

34,453

$

15,902

$

74,865

$

58,035

Other comprehensive income (loss), net of tax:

Foreign currency translation

(1)

(2)

(3)

(1)

Unrealized gains (losses) on investment securities

(1)

18

75

246

Other comprehensive income (loss)

(2)

16

72

245

Comprehensive income

$

34,451

$

15,918

$

74,937

$

58,280

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

3

Table of Contents

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except par value)

September 30,

December 31,

2020

2019

ASSETS

Current Assets

Cash and cash equivalents

$

156,486

$

76,974

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

13,433

15,704

Income taxes, prepaid

-

5,169

Prepaid expenses and other current assets

5,158

6,096

Total current assets

217,460

154,151

Property, plant and equipment - net of accumulated depreciation

26,828

26,039

Right-of-use assets

11,458

12,803

Other assets

3,002

353

Deferred tax assets

2,042

1,307

TOTAL ASSETS

$

260,790

$

194,653

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

Accounts payable and accrued expenses

$

108,678

$

76,220

Current lease obligations

3,307

3,168

Total current liabilities

111,985

79,388

Lease obligations, less current lease obligations

8,791

10,433

Total liabilities

120,776

89,821

Stockholders' Equity

Common stock, par value $.001 per share: 20,000 shares authorized;

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

5,135

-

Accumulated other comprehensive income

97

25

Retained earnings

139,770

168,788

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

140,014

104,832

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

260,790

$

194,653

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

4

Table of Contents

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

Nine months ended September 30,

2020

2019

Operating Activities

Net income

$

74,865

$

58,035

Adjustments to reconcile net income to cash provided by operating activities

Depreciation and amortization

5,259

5,097

Share-based compensation

4,243

3,415

Loss on sale of disposal of property, plant and equipment

28

17

Bad debt expense

508

3,209

Amortization of premium on investment securities

263

355

Deferred income taxes

(735)

1,093

Change in operating assets and liabilities:

Accounts receivable

282

(3,649)

Inventories

7,035

(13,037)

Income taxes, prepaid

5,169

(3,200)

Prepaid expenses and other current assets

938

(232)

Other assets

(2,566)

188

Accounts payable and accrued expenses

30,078

13,818

Net cash flow provided by operating activities

125,367

65,109

Investing Activities

Sale and maturities of investment securities

2,000

3,730

Purchase of property and equipment

(3,852)

(9,224)

Net cash flow used in investing activities

(1,852)

(5,494)

Financing Activities

Options exercised by executives and directors

1,424

279

Net shares repurchased for employee taxes

(532)

(289)

Cash dividends paid to stockholders

(39,892)

(26,658)

Stock repurchases

(5,000)

(33,114)

Net cash flow used in financing activities

(44,000)

(59,782)

Foreign currency impact

(3)

(1)

Increase (Decrease) in cash and cash equivalents

79,512

(168)

Cash and cash equivalents - beginning of the period

76,974

81,364

Cash and cash equivalents - end of period

$

156,486

$

81,196

Supplemental disclosure of cash flow information:

Income taxes paid

$

14,135

$

17,333

Dividends declared included in accounts payable

$

13,715

$

8,955

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

5

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.

6

Table of Contents

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.

7

Table of Contents

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

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

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

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

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those estimates.

Accounting Pronouncements Adopted in 2020

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 InstrumentsCredit 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.

8

Table of Contents

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, 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 has determined the effect that the provisions of ASU 2019-12 will have on the Company’s condensed consolidated financial 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, 2020

December 31, 2019

Raw materials

$

13,702

$

10,880

Packaging

2,761

4,109

Non-food finished goods

6,031

4,421

Finished goods

20,650

31,314

Reserve for obsolete inventory

(1,408)

(1,953)

Total

$

41,736

$

48,771

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.

9

Table of Contents

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,

2020

2019

2020

2019

Numerator:

Net income

$

34,453

$

15,902

$

74,865

$

58,035

Denominator:

Weighted average shares of common stock outstanding

11,766

11,731

11,772

11,823

Effect of dilutive common stock equivalents

91

334

68

351

Weighted average shares of common stock outstanding

11,857

12,065

11,840

12,174

Earnings per share - basic

$

2.93

$

1.36

$

6.36

$

4.91

Earnings per share - diluted

$

2.91

$

1.32

$

6.32

$

4.77

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

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, 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. 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.

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)