MEDIFAST INC - Quarter Report: 2020 June (Form 10-Q)

June 30, 2020

December 31, 2019

Foreign currency translation

Unrealized gains on investment securities

Accumulated other comprehensive income

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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 June 30, 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

Preferred Stock Purchase Rights

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 July 30, 2020 was 11,765,496.

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Medifast, Inc. and subsidiaries

Index


Part 1 – Financial Information



Item 1 – Financial Statements


Condensed Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019		2

Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019		3

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

Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2020 and 2019		5

Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Three and Six Months Ended June 30, 2020 and 2019		6

Notes to Condensed Consolidated Financial Statements (unaudited)		7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		22

Item 4 – Controls and Procedures		22

Part II – Other Information

Item 1 – Legal Proceedings		23

Item 1A – Risk Factors		23

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		23

Item 6 – Exhibits		24

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MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

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


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019

Revenue	$	219,999	$	187,103	$	398,460	$	352,979
Cost of sales		60,699		46,393		103,920		87,122
Gross profit		159,300		140,710		294,540		265,857

Selling, general, and administrative		131,201		113,355		242,908		213,787

Income from operations		28,099		27,355		51,632		52,070

Other income
Interest income, net		58		425		168		737
Other income (expense)		1		(2)		(18)		(8)
		59		423		150		729

Income from operations before income taxes		28,158		27,778		51,782		52,799

Provision for income taxes		6,223		6,395		11,370		10,666

Net income	$	21,935	$	21,383	$	40,412	$	42,133

Earnings per share - basic	$	1.86	$	1.80	$	3.43	$	3.55

Earnings per share - diluted	$	1.86	$	1.75	$	3.42	$	3.45

Weighted average shares outstanding
Basic		11,777		11,861		11,774		11,870
Diluted		11,821		12,218		11,822		12,229

Cash dividends declared per share	$	1.13	$	0.75	$	2.26	$	1.50

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 June 30,				Six months ended June 30,
	2020		2019		2020		2019

Net income	$	21,935	$	21,383	$	40,412	$	42,133
Other comprehensive income, net of tax:
Foreign currency translation		2		-		(2)		1
Unrealized gains on investment securities		27		102		76		228

Other comprehensive income		29		102		74		229

Comprehensive income	$	21,964	$	21,485	$	40,486	$	42,362

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)


		June 30,		December 31,
		2020		2019

ASSETS
Current Assets
Cash and cash equivalents	$	130,828	$	76,974
Accounts receivable-net of doubtful accounts of $61 and $235 at
June 30, 2020 and December 31, 2019, respectively		836		1,437
Inventories		38,580		48,771
Investment securities		14,564		15,704
Income taxes, prepaid		-		5,169
Prepaid expenses and other current assets		6,437		6,096
Total current assets		191,245		154,151

Property, plant and equipment - net of accumulated depreciation		24,574		26,039
Right-of-use assets		11,362		12,803
Other assets		2,833		353
Deferred tax assets		2,071		1,307


TOTAL ASSETS	$	232,085	$	194,653

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	103,335	$	76,220
Current lease obligations		3,270		3,168
Total current liabilities		106,605		79,388

Lease obligations, less current lease obligations		8,744		10,433
Total liabilities		115,349		89,821

Stockholders' Equity
Common stock, par value $.001 per share: 20,000 shares authorized;
11,806 and 12,272 issued and 11,756 and 11,764 outstanding
at June 30, 2020 and December 31, 2019, respectively		12		12
Additional paid-in capital		2,871		-
Accumulated other comprehensive income		99		25
Retained earnings		118,754		168,788
Less: Treasury stock at cost, 46 and 489 shares at June 30, 2020 and December 31, 2019, respectively		(5,000)		(63,993)
Total stockholders' equity		116,736		104,832

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	232,085	$	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)


	Six months ended June 30,
	2020		2019

Operating Activities
Net income	$	40,412	$	42,133
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization		3,481		3,288
Share-based compensation		2,117		2,245
Loss on sale of disposal of property, plant and equipment		-		17
Amortization of premium on investment securities		182		249
Deferred income taxes		(764)		375
Change in operating assets and liabilities:
Accounts receivable		601		33
Inventories		10,191		(9,585)
Income taxes, prepaid		5,169		(1,365)
Prepaid expenses and other current assets		(341)		(3,052)
Other assets		(2,446)		43
Accounts payable and accrued expenses		25,651		12,831
Net cash flow provided by operating activities		84,253		47,212

Investing Activities
Sale and maturities of investment securities		1,000		2,430
Purchase of property and equipment		(583)		(6,972)
Net cash flow provided by (used in) investing activities		417		(4,542)

Financing Activities
Options exercised by executives and directors		1,250		279
Net shares repurchased for employee taxes		(496)		(256)
Cash dividends paid to stockholders		(26,568)		(17,749)
Stock repurchases		(5,000)		(9,998)
Net cash flow used in financing activities		(30,814)		(27,724)

Foreign currency impact		(2)		1

Increase in cash and cash equivalents		53,854		14,947
Cash and cash equivalents - beginning of the period		76,974		81,364
Cash and cash equivalents - end of period	$	130,828	$	96,311

Supplemental disclosure of cash flow information:
Income taxes paid	$	120	$	11,338
Dividends declared included in accounts payable	$	13,604	$	9,102

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)


	Six months ended June 30, 2020
	Number of Shares Issued		Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive Income		Retained Earnings		Treasury Stock		Total

Balance, December 31, 2019	12,272	$	12	$	-	$	25	$	168,788	$	(63,993)	$	104,832
Net income	-		-		-		-		18,477		-		18,477
Share-based compensation	7		-		981		-		-		-		981
Net shares repurchased for employee taxes	(5)		-		(487)		-		-		-		(487)
Treasury stock retired from stock repurchases	(489)		-		-		-		(63,993)		63,993		-
Other comprehensive income	-		-		-		45		-		-		45
Cash dividends declared to stockholders	-		-		-		-		(13,099)		-		(13,099)

Balance, March 31, 2020	11,785		12		494		70		110,173		-		110,749
Net income	-		-		-		-		21,935		-		21,935
Share-based compensation	-		-		1,136		-		-		-		1,136
Options exercised by executives and directors	21		-		1,250		-		-		-		1,250
Net shares repurchased for employee taxes	-		-		(9)		-		-		-		(9)
Other comprehensive income	-		-		-		29		-		-		29
Treasury stock from stock repurchases	-		-		-		-		-		(5,000)		(5,000)
Cash dividends declared to stockholders	-		-		-		-		(13,354)		-		(13,354)

Balance, June 30, 2020	11,806	$	12	$	2,871	$	99	$	118,754	$	(5,000)	$	116,736


	Six months ended June 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

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, 2019 has been derived from the audited consolidated financial statements at that date.

The results of operations for the three and six months ended June 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (“2019 Form 10-K”).

Presentation of Financial Statements - The unaudited condensed consolidated financial statements included herein include the accounts of Medifast, Inc. and its wholly-owned subsidiaries. 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 $1.9 million during the quarter ended March 31, 2020 as a result of adoption, principally related to the configuration and development of the Company’s new hosted enterprise resource planning tool (“ERP”). The Company capitalized $2.6 million in total for the six months ended June 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, 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):


	June 30, 2020		December 31, 2019

Raw materials	$	9,168	$	10,880
Packaging		2,246		4,109
Non-food finished goods		4,514		4,421
Finished goods		24,580		31,314
Reserve for obsolete inventory		(1,928)		(1,953)
Total	$	38,580	$	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.

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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 June 30,				Six months ended June 30,
	2020		2019		2020		2019

Numerator:
Net income	$	21,935	$	21,383	$	40,412	$	42,133

Denominator:
Weighted average shares of common stock outstanding		11,777		11,861		11,774		11,870
Effect of dilutive common stock equivalents		44		357		48		359
Weighted average shares of common stock outstanding		11,821		12,218		11,822		12,229

Earnings per share - basic	$	1.86	$	1.80	$	3.43	$	3.55

Earnings per share - diluted	$	1.86	$	1.75	$	3.42	$	3.45

The calculation of diluted EPS excluded 934 and 611 antidilutive options outstanding for the three months ended June 30, 2020 and 2019, respectively, and 965 and 752 antidilutive options outstanding for the six months ended June 30, 2020 and 2019, respectively. The calculation of diluted EPS also excluded 5,774 and 350 antidilutive restricted stock awards for the three months ended June 30, 2020 and 2019, respectively, and 10,626 and 705 antidilutive restricted stock awards for the six months ended June 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 June 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 six months ended June 30, 2020 and 2019, the Company did not grant stock options.

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


	Six months ended June 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	(21)		57.91	(10)		28.21
Forfeited	(6)		68.84	-		-
Outstanding at end of the period	70	$	49.36	97	$	52.53
Exercisable at end of the period	51	$	42.15	52	$	40.96

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As of June 30, 2020, the weighted-average remaining contractual life for outstanding stock options was 6.3 years with an aggregate intrinsic value of $6.3 million and the weighted-average remaining contractual life for exercisable stock options was 5.8 years with an aggregate intrinsic value of $4.9 million. The unrecognized compensation expense calculated under the fair value method for stock options expected to vest as of June 30, 2020 was $0.3 million and is expected to be recognized over a weighted average period of 2.3 years. For the six months ended June 30, 2020, the Company received $1.3 million in cash proceeds from the exercise of stock options. The total intrinsic value for stock options exercised during the six months ended June 30, 2020 was $0.9 million. For the six months ended June 30, 2019, 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 six months ended June 30, 2019 was $1.0 million.

Restricted Stock

The Company has issued restricted stock to employees and nonemployee directors generally with vesting terms up to five years after the date of grant. The fair value of the restricted stock is equal to the market price of the Company’s common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table summarizes our restricted stock activity:


	Six months ended June 30,
	2020			2019
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
(shares in thousands)
Outstanding at beginning of period	46	$	98.28	57	$	50.55
Granted	41		111.94	28		130.89
Vested	(29)		82.99	(31)		45.30
Forfeited	(4)		107.50	(2)		167.48
Outstanding at end of the period	54	$	116.00	52	$	92.36

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 six months ended June 30, 2020 and 2019. The total fair value of restricted stock awards vested during the six months ended June 30, 2020 and 2019 was $3.2 million and $4.0 million, respectively.

The total share-based compensation charged against income was $1.1 and $1.3 million during the three months ended June 30, 2020 and 2019, respectively, and $2.1 million and $2.2 million during the six months ended June 30, 2020 and 2019, respectively. The total costs of the options and restricted stock awards charged against income was $0.7 million and $0.8 million during the three months ended June 30, 2020 and 2019, respectively, and $1.5 million during the six months ended June 30, 2020 and 2019. Included for the three and six months ended June 30, 2020 was $0.2 million and $0.3 million, respectively, for 15,821 performance-based contingent shares and for the three and six months ended June 30, 2019 was $0.2 million and $0.3 million, respectively, for 17,780 performance-based contingent shares for certain key executives granted in 2019. Also included for the three and six months ended June 30, 2020 was $0.2 million and $0.3 million for 25,531 performance-based contingent shares for certain key executives granted in 2020. Additionally, included for the three and six months ended June 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 $0.3 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 $0.5 million and $0.4 million for the three months ended June 30, 2020 and 2019, respectively, and was $0.7 million and $1.2 million for the six months ended June 30, 2020 and 2019, respectively.

There was $5.6 million of total unrecognized compensation cost related to restricted stock awards as of June 30, 2020, which is expected to be recognized over a weighted-average period of 1.9 years. There was $3.4 million of unrecognized compensation cost related to the 41,352 performance-based shares discussed above as of June 30, 2020, which is expected to be recognized over 2.2 years.

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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 have any finance leases as of June 30, 2020 and 2019, respectively, or for the six-month periods then ended, respectively.

Our leases relating to office and warehouse space have terms of 36 months 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.

The operating lease expense was $0.9 million and $0.7 million for the three months ended June 30, 2020 and 2019, respectively, and was $1.7 million and $1.4 million for the six months ended June 30, 2020 and 2019, respectively.

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


	Six months ended June 30,
	2020		2019

Cash paid for amounts included in the measurements of lease liabilities
Operating cash flow used in operating leases	$	1,814	$	1,392

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

As of June 30, 2020, the weighted average remaining lease term was 4.1 years and the weighted average discount rate was 3.7%.

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


2020 (excluding the six months ended June 30, 2020)	$	1,822
2021		3,670
2022		3,154
2023		1,665
2024		1,234
Thereafter		1,452
Total lease payments	$	12,997
Less: imputed interest		(983)
Total	$	12,014

Other Contingencies

On or about April 30, 2020, the Company became aware that one of its products contained an undeclared milk allergen in the product. The sale of this product occurred during the first quarter of 2020 and the first part of the second quarter of 2020. The Company has completed a voluntary recall of the specific lots of this product that were impacted and notified the U.S. Food and Drug Administration, as required. The Company has considered the impact of the recall to our six-month period ended June 30, 2020 to be immaterial to the financial statements. As of June 30, 2020, the Company has concluded the recall program and responded to all government requests. The Company does not expect any significant future financial impact to result from this matter.

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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):

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.

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):


	June 30, 2020
		Cost		Unrealized Gains		Accrued Interest		Estimated Fair Value		Cash & Cash Equivalents		Investment Securities

Cash	$	130,733	$	-	$	-	$	130,733	$	130,733	$	-

Level 1:
Certificate of deposit		-		-		-		-		-		-
Money market accounts		95		-		-		95		95		-
Government & agency securities		2,830		63		-		2,893		-		2,893
		2,925		63		-		2,988		95		2,893

Level 2:
Municipal bonds		11,429		50		192		11,671		-		11,671

Total	$	145,087	$	113	$	192	$	145,392	$	130,828	$	14,564

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

Cash	$	36,593	$	-	$	-	$	36,593	$	36,593	$	-

Level 1:
Certificate of deposit		35,000		-		-		35,000		35,000		-
Money market accounts		5,381		-		-		5,381		5,381		-
Government & agency securities		2,832		2		-		2,834		-		2,834
		43,213		2		-		43,215		40,381		2,834

Level 2:
Municipal bonds		12,610		34		226		12,870		-		12,870

Total	$	92,416	$	36	$	226	$	92,678	$	76,974	$	15,704

The Company had no realized losses or gains for the three and six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020 and 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 3 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 2019 Form 10-K, the Form 10-Q for the Quarter ended March 31, 2020 and this Form 10-Q 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

Medifast is the company behind one of the 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 ahead of peers and competitors. Of equal importance, our business model is expected to deliver long-term growth. 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, majority of whom were clients first.

Our operations are 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, OPTAVIA (Singapore) PTE. LTD and OPTAVIA Health Consultation (Shanghai) Co., Ltd.

OPTAVIA is a highly effective lifestyle solution for people for whom diets alone have failed. Habits of Health^®, the approach developed by OPTAVIA Co-founder and independent OPTAVIA Coach, Dr. Wayne Scott Andersen, combines clinically proven plans with scientifically developed products and the ongoing support of Coaches. 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 by Take Shape for Life, and Flavors of Home^® brands. Our product line includes more than 165 consumable options, including, but not limited to, bars, bites, pretzels, puffs, cereal crunch, drinks, hearty choices, oatmeal, pancakes, puddings, soft serve, shakes, smoothies, soft bakes, and soups. The Thrive by Medifast and Optimal Health by Take 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 meet consumer demand.

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Our nutritional products are formulated with high-quality 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 nutrients essential for good health. We offer our OPTAVIA clients exclusive OPTAVIA-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.

OPTAVIA encompasses our community of OPTAVIA Coaches, our OPTAVIA health and wellness programs, and our proprietary OPTAVIA-branded products. The OPTAVIA integrated coaching model is centered around providing focused, individualized attention to our clients. Our OPTAVIA Coaches provide the support and encouragement for clients to successfully learn and adopt a more healthy lifestyle. This clinically-proven 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 our OPTAVIA 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.

Our OPTAVIA Coaches are independent contractors, not employees, who support our clients and market our products and services primarily through word of mouth, email and via social media channels such as Facebook, Instagram, Twitter and Zoom. 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 our OPTAVIA Coaches is the key to our success. We are focused on scaling our OPTAVIA 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 choose to become OPTAVIA Coaches. This process of clients becoming OPTAVIA 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 oursources 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 June 30, 2020, the virus continues to spread, infecting more than 10 million people worldwide, and impacting worldwide economic activity. No vaccine is currently available. Many governments implemented policies intended to stop or slow the further spread of the disease, such as social distancing and shelter-in-place orders, resulting in the temporary closure of schools and non-essential businesses, and these measures remain in place and may continue for a significant period of time. 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 six-month period ended June 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 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

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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.

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 world-wide 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. 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, in March 2020 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;

●

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 are 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 Company 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 the Company determines are in the best interests of its 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.

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 six months ended June 30, 2020 and 2019, respectively.

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


	Three months ended June 30,
	2020		2019		$ Change		% Change

Revenue	$	219,999	$	187,103	$	32,896	17.6%
Cost of sales		60,699		46,393		(14,306)	-30.8%
Gross profit		159,300		140,710		18,590	13.2%

Selling, general, and administrative		131,201		113,355		(17,846)	-15.7%

Income from operations		28,099		27,355		744	2.7%

Other income
Interest income, net		58		425		(367)	-86.4%
Other income (expense)		1		(2)		3	-150.0%
		59		423		(364)	-86.1%

Income from operations before income taxes		28,158		27,778		380	1.4%

Provision for income tax		6,223		6,395		172	2.7%

Net income	$	21,935	$	21,383	$	552	2.6%

% of revenue
Gross profit		72.4%		75.2%
Selling, general, and administrative costs		59.6%		60.6%
Income from operations		12.8%		14.6%
Income from operations before income taxes		12.8%		14.8%

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	Six months ended June 30,
	2020		2019		$ Change		% Change

Revenue	$	398,460	$	352,979	$	45,481	12.9%
Cost of sales		103,920		87,122		(16,798)	-19.3%
Gross Profit		294,540		265,857		28,683	10.8%

Selling, general, and administrative		242,908		213,787		(29,121)	-13.6%

Income from operations		51,632		52,070		(438)	-0.8%

Other income
Interest income, net		168		737		(569)	-77.2%
Other expense		(18)		(8)		(10)	125.0%
		150		729		(579)	-79.4%

Income from operations before income taxes		51,782		52,799		(1,017)	-1.9%

Provision for income taxes		11,370		10,666		(704)	-6.6%

Net income	$	40,412	$	42,133	$	(1,721)	-4.1%

% of revenue
Gross Profit		73.9%		75.3%
Selling, general, and administrative costs		61.0%		60.6%
Income from Operations		13.0%		14.8%
Income from operations before income taxes		13.0%		15.0%

Revenue: Revenue increased $32.9 million, or 17.6%, to $220.0 million for the three months ended June 30, 2020 from $187.1 million for the three months ended June 30, 2019. The total number of active earning OPTAVIA Coaches for the three months ended June 30, 2020 increased to 36,500 from 30,600 for the corresponding period in 2019, an increase of 19.3%. The average revenue per active earning OPTAVIA Coach was $5,851 for the three months ended June 30, 2020 compared to $5,863 for the three months ended June 30, 2019. Revenue increased $45.5 million, or 12.9%, to $398.5 million for the six months ended June 30, 2020 from $353.0 million for the six months ended June 30, 2019. This increase in revenue for the quarter and six months ended June 30, 2020 resulted from business initiatives which drove more clients to be on our plans, aided by the ongoing transition of clients to higher priced OPTAVIA-branded products. OPTAVIA-branded products represented 83% of consumable units sold for the three months ended June 30, 2020 compared to 75% for the corresponding period in 2019 and 81% of consumable units sold for the six months ended June 30, 2020 compared to 74% for the corresponding period in 2019.

Costs of sales: Cost of sales increased $14.3 million, or 30.8%, to $60.7 million for the three months ended June 30, 2020 from the corresponding period in 2019 and increased $16.8 million, or 19.3%, to $103.9 million for the six months ended June 30, 2020 from the corresponding period in 2019. The increase in cost of sales was primarily driven by an increase in product sales.

Gross profit: For the three months ended June 30, 2020, gross profit increased $18.6 million, or 13.2%, to $159.3 million from the corresponding period in 2019. As a percentage of sales, gross margin decreased 280 basis points to 72.4% for the three months ended June 30, 2020 from 75.2% for the corresponding period in 2019. For the six months ended June 30, 2020, gross profit increased $28.7 million, or 10.8%, to $294.5 million from the corresponding period in 2019. As a percentage of sales, gross margin decreased 140 basis points to 73.9% for the six months ended June 30, 2020 from 75.3% for the corresponding period in 2019.The decrease in gross margin percentage for the quarter and year-to-date periods was primarily the result of promotional activity as well as higher production costs in 2020.

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Selling, general and administrative: Selling, general and administrative (“SG&A”) expenses were $131.2 million for the three months ended June 30, 2020, an increase of $17.8 million, or 15.7%, as compared to $113.4 million from the corresponding period in 2019. As a percentage of sales, SG&A expenses were 59.6% as compared to 60.6% for the three months ended June 30, 2020 and 2019, respectively. SG&A expenses included research and development (“R&D”) costs of $0.5 million for the three months ended June 30, 2020 and 2019. For the six months ended June 30, 2020, SG&A expenses increased $29.1 million, or 13.6%, to $242.9 million from $213.8 million for the corresponding period in 2019. SG&A expenses included $1.1 million and $1.2 million in R&D costs for the six months ended June 30, 2020 and 2019, respectively. As a percentage of sales, SG&A expenses were 61.0% for the six months ended June 30, 2020 as compared to 60.6% for the corresponding period in 2019. The $17.8 million and $29.1 million increases in SG&A for the quarter and six months ended June 30, 2020 were primarily due to higher OPTAVIA commission expense as a result of our growth in OPTAVIA sales, incremental professional service costs in connection with the Schedule 13D filing and additional coach incentives. For the three months ended June 30, 2020, Non-GAAP adjusted SG&A expenses increased $16.4 million to $129.8 million and Non-GAAP adjusted SG&A as a percentage of revenue decreased 160 basis points year-over-year to 59.0%. Non-GAAP adjusted SG&A excludes expenses in connection with the Schedule 13D filing of $1.2 million and severance related costs of $0.2 million resulting from organizational change with the Company's Chief Financial Officer (“CFO”). For the six months ended June 30, 2020, Non-GAAP adjusted SG&A expenses increased $22.1 million to $235.9 million and Non-GAAP adjusted SG&A as a percentage of revenue decreased 140 basis points year-over-year to 59.2%. 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 organizational change with the Company's CFO.

OPTAVIA commission expense, which is variable expense, increased $14.0 million, or 18.0%, to $92.0 million for the three months ended June 30, 2020 from $78.0 million for the corresponding period in 2019. For the six months ended June 30, 2020, OPTAVIA commission expense increased $19.8 million, or 13.5%, to $166.3 million from $146.5 million for the corresponding period in 2019. The increase was primarily the result of increased product sales. As OPTAVIA revenue increased as a portion of the Company’s total sales mix, the commission rate as a percentage of revenue increased 10 basis points to 41.8% for the second quarter of 2020 compared to 41.7% for the second quarter last year and increased 20 basis points to 41.7% for the six months ended June 30, 2020 compared to 41.5% for the corresponding period in 2019. This is an outcome of the success we are experiencing with our OPTAVIA integrated coach model.

Income from operations: For the three months ended June 30, 2020, income from operations increased $0.7 million to $28.1 million from $27.4 million for the corresponding period in 2019 primarily as a result of increased gross profits partially offset by increased SG&A expenses. Income from operations as a percentage of sales was 12.8% and 14.6% for the three months ended June 30, 2020 and 2019, respectively. For the six months ended June 30, 2020, income from operations decreased $0.5 million to $51.6 million from $52.1 million for the corresponding period in 2019 primarily as a result of increased SG&A expenses partially offset by increased gross profits. Income from operations as a percentage of sales was 13.0% and 14.8% for the six months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020, Non-GAAP adjusted income from operations increased $2.2 million to $29.5 million and Non-GAAP adjusted income from operations as a percentage of revenue decreased 120 basis points year-over-year to 13.4%. For the six months ended June 30, 2020, Non-GAAP adjusted income from operations increased $6.6 million to $58.7 million and Non-GAAP adjusted income from operations as a percentage of revenue decreased 10 basis points year-over-year to 14.7%.

Other income: For the three and six months ended June 30, 2020, other income (including interest income), was $0.1 million and $0.2 million, respectively, and for the three and six months ended June 30, 2019, other income (including interest income), was $0.4 million and $0.7 million, respectively.

Income from operations before income taxes: Income from operations before income taxes was $28.2 million for the three months ended June 30, 2020 as compared to $27.8 million for the three months ended June 30, 2019, an increase of $0.4 million. Income from operations before income taxes as a percentage of sales decreased to 12.8% for the three months ended June 30, 2020 from 14.8% for the three months ended June 30, 2019. Income from operations before income taxes was $51.8 million for the six months ended June 30, 2020 as compared to $52.8 million for the six months

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ended June 30, 2019. Income from operations before income taxes as a percentage of sales decreased to 13.0% for the six months ended June 30, 2020 from 15.0% for the six months ended June 30, 2019.

Provision for income tax: For the three months ended June 30, 2020, the Company recorded $6.2 million in income tax expense, an effective rate of 22.1%, as compared to $6.4 million in income tax expense, an effective rate of 23.0%, for the three months ended June 30, 2019. The decrease in the effective tax rate was primarily driven by a decrease in state income tax rate, and an increase in tax benefit of stock compensation partially offset by a decrease in R&D tax credit. For the six months ended June 30, 2020, the Company recorded $11.4 million in income tax expense, an effective rate of 22.0%, as compared to $10.7 million in income tax expense, an effective rate of 20.2%, for the six months ended June 30, 2019. The effective tax rate was negatively impacted by an increase in state income tax rate and a decrease in tax benefit of stock compensation.

Net income: Net income was $21.9 million and $40.4 million, or $1.86 and $3.42 per diluted share, for the three and six months ended June 30, 2020 as compared to $21.4 million and $42.1 million, or $1.75 and $3.45 per diluted share, for the three months and six months ended June 30, 2019. The period-over-period changes were driven by the factors described above in the explanations from operations. Non-GAAP adjusted net income was $23.1 million and $45.9 million, or $1.96 and $3.89 per diluted share, for the three and six months ended June 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 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 June 30,				Six months ended June 30,
	2020		2019		2020		2019

Selling, general, and administrative	$	131,201	$	113,355	$	242,908	$	213,787
Adjustments
Professional services for 13D Filing		1,203		-		5,811		-
Incremental severance costs		239		-		1,237		-
Non-GAAP Adjusted selling, general, and administrative	$	129,759	$	113,355	$	235,860	$	213,787


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019

Income from operations	$	28,099	$	27,355	$	51,632	$	52,070
Adjustments
Professional services for 13D Filing		1,203		-		5,811		-
Incremental severance costs		239		-		1,237		-
Non-GAAP Adjusted income from operations	$	29,541	$	27,355	$	58,680	$	52,070


	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019

Net income	$	21,935	$	21,383	$	40,412	$	42,133
Adjustments, net of tax
Professional services for 13D Filing		937		-		4,535		-
Incremental severance costs		186		-		965		-
Non-GAAP Adjusted net income	$	23,058	$	21,383	$	45,912	$	42,133

Diluted earnings per share (1)	$	1.86	$	1.75	$	3.42	$	3.45
Impact for adjustments (1)		0.10		-		0.47		-
Non-GAAP Adjusted diluted earnings per share (1)	$	1.96	$	1.75	$	3.89	$	3.45

(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 $116.7 million and working capital of $84.6 million at June 30, 2020 as compared with $104.8 million and $74.8 million at December 31, 2019, respectively. The $11.9 million net increase in stockholders’ equity reflects $40.4 million in net income for the six months ended June 30, 2020 offset by $5.0 million spent on repurchases of common stock, and $26.5 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 $13.4 million, or $1.13 per share, to common stockholders as of June 30, 2020 that will be paid in the third quarter of 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 increased from $92.7 million at December 31, 2019 to $145.4 million at June 30, 2020.

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Net cash provided by operating activities increased $37.1 million to $84.3 million for the six months ended June 30, 2020 from $47.2 million for the six months ended June 30, 2019 as a result of a $39.9 million increase in operating assets and liabilities partially offset by a $1.7 million decrease in net income.

Net cash provided by investing activities was $0.4 million for the six months ended June 30, 2020 as compared to net cash used in investing activities of $4.5 million for the six months ended June 30, 2019. This change resulted from a $6.4 million decrease in cash used in capital expenditures for the six months ended June 30, 2020 from the corresponding period in 2019 partially offset by a $1.4 million decrease in sale and maturities of investment securities.

Net cash used in financing activities increased $3.1 million to $30.8 million for the six months ended June 30, 2020 from $27.7 million for the six months ended June 30, 2019. This increase was due to a $8.8 million increase in cash dividends paid to stockholders partially offset by a $5.0 million decrease in stock repurchases.

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, 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 June 30, 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, 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 June 30, 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

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 June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Part I, Item 1A of the 2019 Form 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


2020	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 ²
April 1 - April 30	134¹	$	68.80	-	2,368,587
May 1 - May 31	-		-	-	2,368,587
June 1 - June 30	46,075		108.50	46,075	2,322,512

(1)	134 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.

(2)	At the outset of the quarter ended June 30, 2020, there were 2,368,587 shares of the Company's common stock eligible for repurchase under the repurchase authorization dated September 16, 2014 (the "Stock Repurchase Plan").

As of June 30, 2020, there were 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 December 4, 2019).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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 June 30, 2020 filed August 6, 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 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.

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:	August 6, 2020


	/s/ JAMES P. MALONEY
	James P. Maloney
	Chief Financial Officer
	(Principal Financial Officer)

Dated:	August 6, 2020