CRITICAL ACCOUNTING POLICIES AND ESTIMATES



Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. Our significant
accounting policies are described in Note 2 to the consolidated financial
statements.

The preparation of our consolidated 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. Management considers the following accounting policies to be the
most critical in preparing our consolidated financial statements. These critical
accounting policies have been discussed with our Audit Committee, as
appropriate.

Revenue Recognition: Our revenue is derived primarily from point of sale transactions executed over an ecommerce platform for weight loss, weight management, and other consumable health and nutritional products. Revenue is



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recognized upon receipt by customer and net of discounts, rebates, promotional
adjustments, price adjustments, allocated consideration to loyalty programs and
estimated returns.

Revenue is recognized when control of the promised products is transferred to our clients, in an amount that reflects the consideration we expect to be entitled to in exchange for transferring those products. When determining whether the customer has obtained control of the products, we consider any future performance obligations.


A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer, and is the unit of account in ASC 606, Revenue from
Contracts with Customers. A contract's transaction price is allocated to each
distinct performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. Our contracts have performance obligations
to fulfill and deliver products from the point of sale transaction along with
the related customer reward programs.

Our performance obligations are satisfied at a point in time. Revenue from
products transferred to clients at a point in time accounted for substantially
all of our revenue for the years ended December 31, 2019 and 2018. Revenue on
these contracts is recognized when the obligations under the terms of the
contract with our customer are satisfied. Generally, this occurs with the
transfer of control upon receipt of products by our clients. Any consideration
received prior to the fulfillment of the Company performance obligation is
deferred and recognized as a liability.

Our return policy allows for customer returns within 30 days of purchase and
upon our authorization. We adjust revenues for the products expected to be
returned and a liability is recognized for expected refunds to clients. We
estimate expected returns based on historical levels and project this experience
into the future.

Our sales contracts may give clients the option to purchase additional products
priced at a discount. Options to acquire additional products at a discount can
come in many forms, such as customer reward programs and incentive offerings
including pricing arrangements, and promotions.

We reduce the transaction price for certain customer reward programs and
incentive offerings including pricing arrangements, promotions, incentives that
represent variable consideration and separate performance obligations. The
Company accounts for sales rewards as a separate performance obligation of the
transactions, and therefore allocates consideration between the initial sale of
products and the customer reward program and incentive offering.

Amounts billed to clients for shipping and handling activities are treated as a
promised service performance obligation and are recorded in revenue in our
Consolidated Statements of Income upon fulfillment of the performance
obligation. Shipping and handling costs incurred by the Company for the delivery
of products to clients are considered a cost to fulfill the contract and are
included in cost of sales in our Consolidated Statements of Income.

We expense sales commissions and credit card fees during the period in which the
corresponding revenue is earned. These costs are deferred along with the
revenues for goods that are in transit and not received by clients by period
end. These costs are recorded in selling, general and administrative expense in
our Consolidated Statements of Income.

Impairment of Long-lived Fixed Assets: We continually assess the impairment of
long-lived assets whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Judgments regarding the
existence of impairment indicators are based on legal factors, market conditions
and our operating performance. Future events could cause us to conclude that
impairment indicators exist and the carrying values of fixed and long-lived
assets may be impaired. Any resulting impairment loss would be limited to the
value of net fixed and long-lived assets.

Income Taxes: The benefit of a tax position is recognized in the consolidated
financial statements in the period during which, based on all available
evidence, management believes it is more-likely-than-not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than
50% likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as

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described above is reflected as a liability for unrecognized tax benefits in our
Consolidated Balance Sheets along with any associated interest and penalties
that would be payable to the taxing authorities upon examination.

We evaluated our tax positions and determined that we did not have any material
uncertain tax positions. Our policy is to recognize interest and penalties
accrued on uncertain tax positions as part of income tax expense. For the years
ended December 31, 2019, 2018 and 2017, no material estimated interest or
penalties were recognized for the uncertainty of certain tax positions. We file
income tax returns in the United States, and various states and foreign
jurisdictions. We are generally no longer subject to United States federal,
state and local income tax examinations by tax authorities for the years before
2016.

Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.

Leases: The Company determines if an arrangement is a lease at inception and
categorizes leases with contractual terms longer than twelve months as either
operating or finance. All the Company's leases are operating leases. The
right-of-use ("ROU") assets represent the Company's right to use an underlying
asset for the lease term, and lease liabilities represent an obligation to make
lease payments arising from the lease. ROU assets and lease liabilities are
recognized at the lease commencement date based on the present value of lease
payments over the lease term. As most of the Company's leases do not provide an
implicit interest rate, the Company uses its incremental borrowing rate based on
the information available at the lease commencement date in determining the
present value of lease payments. The ROU asset also consists of any prepaid
lease payments and lease incentives received. The lease terms used to calculate
the ROU asset and related lease liability include options to extend or terminate
the lease when it is reasonably certain that the Company will exercise that
option. Lease expense for operating leases is recognized on a straight-line
basis over the lease term as an operating expense.

BACKGROUND

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
reliable growth year after year. 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 product sales
accounted for 98% of our revenues in 2019, 2018, and 2017, respectively.

We review and analyze a number of key operating and financial metrics to manage
our business, including the number of active earning OPTAVIA Coaches and average
quarterly revenue generated per OPTAVIA Coach in the OPTAVIA business unit.

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

Our OPTAVIA business unit accounted for approximately 96.4%, 92.9%, and 85.1% of
our revenues in 2019, 2018 and 2017, respectively. In March 2018, we announced a
change in how our business is managed, operating performance is reviewed and
resources are allocated. As a result, beginning in the first quarter of 2018, we
changed how we report financial performance to align with changes in the way we
now manage the business and now operate and report as a single sales segment,
OPTAVIA. We previously disclosed entity-wide financial information for multiple
segments (e.g. OPTAVIA, Medifast Direct, Franchise Medifast Weight Control
Centers and Medifast Wholesale). Although we have

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one reportable segment, we continue to market our products and programs through
our Medifast Direct ecommerce platform and our Franchise Medifast Weight Control
Center channels.

CONSOLIDATED RESULTS OF OPERATIONS - 2019 COMPARED TO 2018

The following table reflects our consolidated statements of income for the years ended December 31, 2019 and 2018 (in thousands, except percentages):






                                               2019        2018       $ Change     % Change

Revenue                                      $ 713,672   $ 501,003   $   212,669      42.4%
Cost of sales                                  176,814     121,104      (55,710)     -46.0%
Gross Profit                                   536,858     379,899       156,959      41.3%

Selling, general, and administrative           445,819     310,836     (134,983)     -43.4%

Income from operations                          91,039      69,063        21,976      31.8%

Other income
Interest income, net                             1,295       1,306          (11)      -0.8%
Other income                                        29         179         (150)     -83.8%
                                                 1,324       1,485         (161)     -10.8%

Income from operations before income taxes      92,363      70,548        21,815      30.9%

Provision for income taxes                      14,447      14,759           312       2.1%

Net income                                   $  77,916   $  55,789   $    22,127      39.7%

% of revenue
Gross Profit                                     75.2%       75.8%

Selling, general, and administrative costs 62.5% 62.0% Income from Operations

                           12.8%       13.8%

Income from Operations before income taxes 12.9% 14.1%






Revenue: Revenue increased $212.7 million, or 42.4%, to $713.7 million in 2019
from $501.0 million in 2018. The total number of active earning OPTAVIA Coaches
for the three months ended December 31, 2019 increased to 31,800 from 24,100 for
the corresponding period in 2018, an increase of 32.0%. The average revenue per
active earning OPTAVIA Coach decreased 9.2% to $5,229 for the three months ended
December 31, 2019 from $5,756 for the three months ended December 31, 2018. This
year-over-year growth in revenue resulted from business initiatives accelerating
new OPTAVIA Coach conversions, increased OPTAVIA client acquisition rates and
the transition of clients to higher priced OPTAVIA branded products.

Costs of Sales: Cost of sales increased $55.7 million, or 46.0%, to $176.8 million in 2019 from $121.1 million in 2018. This increase in cost of sales was primarily driven by an increase in product sales.


Gross Profit: In 2019, gross profit increased $157.0 million, or 41.3%, to
$536.9 million from $379.9 million in 2018. As a percentage of sales, gross
profit decreased 60 basis points to 75.2% for 2019 from 75.8% for 2018. The
decrease in gross profit as a percentage of sales was primarily driven by higher
shipping expenses and higher product returns related to disruptions to normal
business operations during the year.

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Selling, General and Administrative: Selling, general and administrative
("SG&A") expenses were $445.8 million in 2019, an increase of $135.0 million, or
43.4%, as compared to $310.8 million in 2018. As a percentage of sales, SG&A
expenses were 62.5% for 2019 as compared to 62.0% for 2018. The $135.0 million
increase was primarily a result of higher variable costs such as OPTAVIA
commission expense and credit card processing fees as a result of higher sales.
In addition, SG&A expenses increased as a result of increased consulting costs
related to technology projects, along with higher salaries and benefits related
expenses. SG&A expenses included $3.3 million of cost incurred in Q3 2019, which
were related to a highly organized automated scheme using stolen credit cards
from outside the Company's systems, to transact business on the Company's
ecommerce sites. Each of these transactions was pre-approved, prior to shipment,
by the payment processor and subsequently reported to the Company as utilizing a
stolen card. These expenses were $2.9 million higher than the corresponding
period in 2018 and were primarily comprised of higher bad debt and credit card
fees. Bad debt levels have returned to historical levels throughout the fourth
quarter of 2019 as a result of software and new processes implemented in the
third quarter of 2019. SG&A expenses included research and development costs of
$2.7 million and $2.2 million for 2019 and 2018, respectively.

OPTAVIA commission expense, which is a variable expense, increased $95.3
million, or 47.8%, to $294.7 million in 2019 from $199.4 million in 2018. 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 150 basis points to 41.3% in 2019 compared to
39.8% in 2018. This is an outcome of the success we are experiencing with our
growing OPTAVIA Integrated Coach Model.

Income from operations: Income from operations in 2019 increased $21.9 million
to $91.0 million from $69.1 million in 2018 primarily as a result of increased
gross profits partially offset by increased SG&A expenses. Income from
operations as a percentage of sales decreased to 12.8% for 2019 as compared to
13.8% for 2018.

Other income: In 2019 and 2018, other income, including interest income, was $1.3 million and $1.5 million, respectively.

Income from operations before income taxes: Income from operations before income taxes was $92.4 million in 2019 as compared to $70.5 million in 2018, an increase of $21.9 million. Income from operations before income taxes as a percentage of sales decreased to 12.9% for 2019 from 14.1% for 2018.


Provision for income taxes: For 2019, the Company recorded $14.4 million in
income tax expense, an effective tax rate of 15.6%, as compared to $14.8 million
in income tax expense and an effective tax rate of 20.9%, for 2018. The decrease
in the effective tax rate for 2019 as compared to 2018 was primarily driven by
an increase in the share-based compensation benefit of 4.3%. The Company
anticipates a full year tax rate of 22.5% to 23.5% in 2020.

Net income: Net income was $77.9 million, or $6.43 per diluted share, in 2019 as
compared to $55.8 million, or $4.62 per diluted share, in 2018. The
period-over-period changes were driven by the factors described above in the
explanations from operations.

Additionally, refer to Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2018 for management's discussion and analysis of
financial condition and results of operations for the fiscal year 2018 compared
to fiscal year 2017.

Liquidity and Capital Resources


The Company had stockholders' equity of $104.8 million and working capital of
$74.8 million at December 31, 2019 compared with $109.1 million and $85.2
million at December 31, 2018. The $4.3 million net decrease in stockholder's
equity reflects $77.9 million in net income for 2019 offset by $33.1 million
spent on repurchases of common stock, and $40.0 million for declared dividends
paid to our common stock holders as well as the other equity transactions
described in the Consolidated Statements of Changes in Stockholders' Equity
included in our consolidated financial statements included in this report. The
Company declared a dividend of $1.13 per share on December 3, 2019, to
stockholders of record as of December 27, 2019 that was paid on February 6,
2020. While we intend to continue the dividend program and believe we will have
sufficient liquidity to do so, we can provide no assurance we will be able

to
continue the

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declaration and payment of dividends. The Company's cash, cash equivalents and investment securities decreased from $101.0 million at December 31, 2018 to $92.7 million at December 31, 2019.

Net cash provided by operating activities increased $23.5 million to $84.3 million for 2019 from $60.8 million for 2018 primarily as a result of increased net income.


Net cash used in investing activities was $6.3 million for 2019 as compared to
$1.2 million for 2018. This year-over-year change resulted primarily from an
increase in cash used in capital expenditures for 2019 as compared to 2018.

Net cash used in financing activities increased $29.0 million to $82.3 million
for 2019 from $53.3 million for 2018. This increase was primarily due to
increases in the net shares repurchased for employee taxes, cash dividends paid
to stockholders, and stock repurchases for 2019 from 2018.

In pursuing its business strategy, the Company may require additional cash for
operating and investing activities. The Company expects future cash
requirements, including its expansion of its operations into the Asia Pacific
Markets of Hong Kong and Singapore, to be funded from operating cash flow.

The Company evaluates acquisitions from time to time.

Contractual Obligations and Commercial Commitments



The Company had the following contractual obligations as of December 31, 2019
(in thousands):


                                            2020       2021 - 2022       2023 - 2024       Thereafter      Total
Operating leases (a)                     $    3,636   $       6,824     $       2,899     $      1,452   $   14,811
Unconditional purchase obligations (b)        2,403           2,018               424                -        4,845
Total contractual obligations            $    6,039   $       8,842     $

3,323 $ 1,452 $ 19,656

(a) The Company has operating leases in place for leased corporate offices,

warehouses, and certain equipment.

(b) The Company has unconditional purchase obligations primarily for outsourced

information technology and Coach events.

INFLATION

To date, inflation has not had a material effect on the Company's business.

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