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GOTHAM CITY RESEARCH LLC www.gothamcityresearch.com info@gothamcityresearch.

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GOTHAM CITY RESEARCH LLC

Medifast (NASDAQ: MED) Part II


Optavia Products Are Causing Illness:
Irrefutable Evidence
The recording of Sales Rep #1’s admission with subtitles is available at:
https://youtu.be/dDNYYwURNLA .

GOTHAM CITY RESEARCH’S NEW FINDINGS:

 Optavia products (its “Fuelings”) are unsafe + cause illness.


 10%-25%+ of clients on the flagship 5&1 Plan experience
gastrointestinal or gallbladder-related issues.
 Contaminants found in Optavia Fuelings may be causing or
exacerbating health problems.
 Optavia Fuelings should be recalled and tested carefully.
 We estimate that liability will exceed $60-$100 million.

SUPPORTING FACTS

 Optavia consumers are getting sick, according to Optavia


Sales Reps’ (so-called “Coaches”) recorded admissions.
 An 11-year certified MED veteran states that gut issues are
common.
 MED has a documented history of gastrointestinal and gall
bladder-related complaints from customers.
 10%-25% of people on diets such as Optavia 5&1 Plan
develop gallstones, according to a scientific study.
 Lead poisoning symptoms include abdominal pain.
 Optavia’s website contains no section or documents
dedicated to ‘side effects’ unlike Medifast’s website.
 Optavia packaging does not disclose any side effects.
 LOVERDI v. MEDIFAST lawsuit was filed in May 2018. It
alleges that MED products cause gastrointestinal issues.
 MED has not denied or explained away our initiation
report’s findings.
 MED is the only public company alleged to sell
contaminated foods in the last 5 years.
Disclaimer:

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Table of Contents

I. Disclaimer
II. Background: Products Contain Lead and People Are Getting Sick
III. Optavia Sales Rep Admits Optavia Fuelings Cause Illness
IV. Widespread Problems: Gallstones and Stomach Complications
V. Lead and Stevia Cause Stomach Problems
VI. Optavia’s Website: Zero Pages Dedicated to ‘Side Effects’
VII. A Recent Lawsuit: We Believe Liability Will Exceed $60 Million
VIII. The Company Did Not Deny Our Allegations
IX. APPENDIX A: Management Response to Gotham Report I
X. APPENDIX B: Healthy Stomach, Healthy Body
XI. APPENDIX C: Medifast Symptoms and Side Effects

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Background: Products Contain Lead & People Are Getting Sick
Optavia Products Contain Contaminants: So What? Are People Getting Sick?

Gotham City Research initiated coverage of Medifast/Optavia (“MED”) last Thursday, September 20, 2018
with our first report titled, Medifast (NASDAQ: MED): Like Lumber Liquidators, But With Undisclosed Toxic
Metals, and A Supply Chain Twist PART I. The report revealed that Optavia Fuelings contain toxic metals,
such as lead and cadmium. Laboratory testing revealed that the Optavia products tested contained more
lead than peer products, everyday foods, and exceeded regulatory levels:
OPTAVIA LEAD LEVELS BENCHMARK

Worse than Peer Products Optavia products contain higher levels of lead than 93% of
133 best-selling protein powder products tested by the
Clean Label Project in 2018.

Worse than Everyday Foods Optavia products contain higher lead levels than all 283
everyday foods tested by the FDA.

Exceeds Regulatory Limits 85% of Optavia samples tested by a leading lab exceeded
the maximum allowable dose level for lead, per Prop. 65.

Optavia Customers Are Getting Sick

Question: If Optavia Fuelings contain more contaminants than peer products and everyday food, so what?

Answer: Gotham City Research has obtained irrefutable evidence that Medifast/Optavia products are
causing illness, (including gastrointestinal and gallbladder problems). The Company is apparently engaging
in a cover-up of those problems and has disseminated misleading information. We have posted a recorded
conversation, containing Optavia Sales Rep #1’s admission that Optavia products are causing
gastrointestinal issues. This recording took place earlier this month. In it, Sales Rep #1 describes:

 The client’s symptoms persisted regardless of the type of Optavia fueling consumed.
 Probiotics and stomach softener did not prevent these gastrointestinal problems.
 The symptoms were so bad that the client had to get off the program.

The recording with subtitles is available at: https://youtu.be/dDNYYwURNLA . There are additional
recorded admissions of other Company reps that we plan to disclose to the public and to regulators.

In this report, we share Sales Rep #1’s admission. We then explain how this incident is not an isolated
example, and that there’s a history of gastrointestinal issues associated with MED products. Finally, we
discuss why we believe the presence of lead may explain these gastrointestinal issues.

In its attempt to refute our first Report, MED provided misleading and irrelevant information to the press,
as we discuss more fully in this report. Given the nature of the evidence in this report, Gotham City
Research believes that the Company stands to lose trust with its sales reps and customers, as well as face
significant legal liability. We therefore reduce our estimated value of MED shares to the lower end of our
previously stated price target range, i.e. we see shares worth closer to $30-$50 per share.

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Optavia Sales Rep Admits Optavia Fuelings Cause Illness
In recently recorded conversations, Optavia sales reps admitted that its customers have gotten sick from
Optavia Fuelings. Optavia customers consume 5 of these Fuelings per day, as required by Optavia’s
flagship 5 & 1 Diet Plan. The recording of Optavia Sales Rep #1 reveals the following (the full transcript is
set out below):

 A customer recently consumed Optavia Fuelings and experienced various gastrointestinal


problems.
 The sales rep thought the bars were causing the problems. The gastrointestinal problems
persisted even after the client tried other Optavia Fuelings.
 When the client stopped consuming Optavia Fuelings, all her gastrointestinal problems
disappeared, suggesting that the Optavia Fuelings caused those problems.

Consuming Optavia Consuming Normal Foods (No Optavia)

Persistent Gastrointestinal problems Normal bowel movements

Felt miserable Felt very, very good

Optavia Sales Rep #1 Transcript:

I have a client who is very very motivated, umm, doing uh what she needed to do on the program and
from the get-go she started having issues with the fuelings. Umm, you know, she became very gassy,
very constipated, umm just felt miserable. So we umm, we had ordered the On-The-Go umm starter
kit for her, which had a lot of bars so, we umm eliminated the bars and exchanged for some other
fuelings. She umm, she was so miserable she wanted to take a two-week break just to kind of get
her, what in her words: “get her gut back to normal again”. So she did that. She was having normal
bowel movements, feeling, feeling very good, but really willing to jump in again and umm we talked
about the kinds of foods she was eating and the vegetables…and maybe, you know, taking like a Senna
(laxative). Umm so she jumped in, eliminated all of the bars, and had exactly the same symptoms
again and after two weeks, she said: “I can’t do this…umm I’m really motivated and I want this work
but umm I had called nutritional support. They had given us some ideas. We did a three-way call. We
had tried absolutely everything” and umm, you know, she said: “There’s nothing more I think that I
can do. I think it has to do with something that’s in these fuelings”. So. we stopped the program.

Since Optavia itself says that all its Fuelings are “nutritionally equivalent & substitutable”, all consumer
likely suffer from the same cause (we think contamination). All Fuelings should be recalled and tested.

Questions we address in the remainder of the report:

 Is the above incident a one-off, isolated case? Or is it widespread?


 Are there other health problems, other than gastrointestinal ones associated with Optavia?
 What specific ingredients in the Optavia Fuelings may be causing these health problems?
 Does Optavia disclose these or other possible side effects?
 What financial liability may the Company face?

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Widespread Problems: Gallstones and Stomach Complications
Sales Rep #1’s Admission is Not an Isolated Case

Sale Rep #1’s recorded admission is not an isolated example of the problem, as other recorded admissions
and other evidence reveal. Rather, Gotham City Research believes over 10%-25%+ Optavia customers are
experiencing side effects, for the following reasons:

 Additional admissions from other sales reps describe similar and more severe symptoms.
 10%-25% of people on diets such as Optavia’s 5 and 1 program develop gallstones, according to a
scientific study.
 An 11-year certified MED veteran states that gut issues, and severe gut issues are common.
 There is a well-documented history of MED customers complaining about gastrointestinal and
other health problems arising from consuming MED products.
 The term ‘medifarts’ appeared often on Internet sites to describe gastrointestinal symptoms
associated with Medifast products, before the Company rebranded to Optavia.
 Optavia products contain lead and Stevia; both are associated with gastrointestinal problems.

We intend to disseminate these other sales reps’ admissions in the near future. Below are some
complaints posted on online forums:
Date Description of Symptoms
09/21/18 "He is beginning to look seriously malnourished"
09/20/18 "Lots of headaches and fatigue"
09/16/18 "Foods make me feel a bit bloated"
09/01/18 "Stomach/intestines are killing me, terrible gas, bloating"
07/29/18 "Gastrointestinal issues"
06/19/18 Has anyone had stomach issues? Im not sure if its the food we buy from Optavi) or the diet itself but im 3 weeks in and still hurting.
07/27/17 "I was having random dizzy spells....shake had 7 out of 10 ingredients that cause cancer, infertility, alzheimers"
07/17/17 "Got very constipated"
06/07/17 "Removed my gall bladder"
05/18/17 "On day 2 of the diet I had severe stomach cramps...at midnight I awoke and vomited...I hope these cramps and gas subside, they really hurt"
06/01/16 "Caused problems with my stomach"
05/18/16 "Hospitalized for gallstones"
04/29/16 "Experienced an allergic reaction and soy intolerance"
12/08/15 "Gas, stomach pain, headaches, constipation, early period that lasted 2 weeks almost, red bumpiness on her jawline"
11/23/15 "So bloated that I couldn't wear my jeans again, frequent urination and dehydration along with terrible bloating"
09/02/15 "Headaches, extreme fatigue...gassy-guggly bubble-ness started in my tummy and lasted for 5 days"
03/12/14 "I had to have my gallbladder removed"
01/27/13 "Rushed to the ER yesterday because I got light headed and dizzy and my heart started beating really fast"
01/07/13 "Headache is killing me!"
12/08/12 "Vomiting, headaches so bad I couldn't get out of bed, so dizzy I was in bed the rest of the day after I ate"
07/25/12 "Ended up with heptatitis pancreatitis gallstones"
05/21/10 "I landed in the ER, they thought I had gastritis, inflamation of stomach lining"
05/04/10 "Having major stomach issues. Cramping...other problems I don't want to put on this site. Stomach pain is unpredictable"
03/24/08 "I have had a horrible stomach ache following every shake I have had today"

Online complaints and the examples shared by sales reps understate the true frequency of the underlying
problem. Far too many cases go unreported. While we believe that a significant percentage of Optavia
users experience gastrointestinal problems, we conservatively do not add these contributions to our 10%-
25% range when we say “widespread problem affecting 10-25%+ Optavia customers”. The table above
sufficiently shows that the stomach issues are not one-off cases.

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Between 10% and 25% of Customers On the Optavia 5&1 Plan May Develop Gallstones

According to scientific studies:

 Between 10% and 25% of obese men and women may develop gallstones within a few months of
beginning a very low calorie diet, and perhaps one third of these will develop gallstones.
 Persons with the highest body mass index before weight loss and those who lose weight most
rapidly appear to be at the greatest risk for gallstones.
 Despite the potential health benefits of weight reduction, very-low-calorie diets appear to
increase the risk for cholesterol crystal and gallstone formation.
 Obesity is a strong risk factor for gallstones, and this risk is increased during weight loss. During
active weight loss, newly formed gallstones occur within 4 weeks and with incidence rates 15 to
25-fold higher than in the general obese population.
 The risk for cholecystectomy (Cholecystectomy is the surgical removal of the gallbladder)
associated with Yo-yo dieting was substantial, independent of attained relative body weight.

Sources:

1. Contributions of obesity and weight loss to gallstone disease


https://www.ncbi.nlm.nih.gov/pubmed/8214980
2. Gallstone formation and weight loss
https://www.ncbi.nlm.nih.gov/pubmed/16350561
3. Long-term weight patterns and risk for cholecystectomy in women
https://www.ncbi.nlm.nih.gov/pubmed/10075614/

Despite these problems, MED Claims “Safe & effective”, “contain all of the good stuff, none of the bad”

The Company is apparently engaging in a cover-up of all these described health problems, as evidenced
by the deceptive and misleading claims shown below, including “Medifast is safe and effective”, “Optavia
Fuelings contain all of the good stuff and none of the bad”:

The Company stands to lose trust with its sales reps and customers.

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Consumers Coined the Term “Medifarts” to Describe MED Products’ Defects

Some consumers coined the term ‘Medifarts’ to describe gastrointestinal symptoms associated with
consuming Medifast products, before the company rebranded itself to Optavia (perhaps customers will
refer to these same problems as ‘Optafarts’, going forward):

#Medifarts used to be hashtagged, and discussed on various forums online:

Medifast appears to have rebranded to OPTAVIA to cover up past regulatory scrutiny, toxicity concerns,
‘medifart’ references, and most importantly: a long list of undesirable side effects associated with use
of its products from prospective consumers and coaches.

Questions we address in the remainder of the report:

 What specific ingredients in the Optavia Fuelings may be causing these health problems?
 Given how prevalent these problems can be, does Optavia disclose these side effects?
 What financial liability may the Company face?

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Lead and Stevia Cause Stomach Problems
Contaminants – Such As Lead – In Optavia Fuelings May Be Causing Abdominal Problems

Lead may be causing and/or exacerbating stomach problems for Optavia users for the following reasons:

 Optavia Fuelings contain lead, and many Optavia customers consume 5 Fuelings per day.
 Lab testing revealed that Optavia Fuelings contain more lead than found in nearly all other protein
powders and everyday foods (see our initiation report).
 MED did not deny that Optavia Fuelings contain lead, in its response to our report.
 Abdominal pain, vomiting, and constipation are known symptoms of lead poisoning in children
and adults.

Lead Poisoning Symptoms In Children and In Adults

The following tables list signs and symptoms of lead poisoning in children and adults:

Source: https://www.mayoclinic.org/diseases-conditions/lead-poisoning/symptoms-causes/syc-20354717

Artificial Sweeteners Contained in MED Products Have Historically Caused Gastrointestinal Problems

One sales rep states that artificial sweeteners found in Medifast-branded products have historically
caused gastrointestinal problems among consumers. We examined the side effects associated with
artificial sweeteners listed as ingredients in Medifast-branded products. Indeed, Gastrointestinal
problems are listed as side effects in all these sweeteners:
May Cause
Name of Sweetener Medifast Product Gastrointestinal Issues? Side Effects
Sucralose Peanut Butter Crunch Bar (SKU 65005) Yes Alters glucose and insulin levels, may trigger migraines, decreases beneficial gut flora, may cause cancer
Acesulfame Potassium Strawberry Shake (SKU 52510) Yes Headaches, visual disturbances, mental confusion, nausea, depression, liver and kidney damage, alters gut microbiome
Maltitol Syrup S'more Crunch Bar (SKU 65455) Yes Stomach pains, gas, diarrhea
Polydextrose Strawberry Crunch Bar (SKU 65520) Yes Intestinal gas, bloating, stomach cramps, diarrhea
Maltodextrin Chocolate Pudding (SKU 57400) Yes Weight gain, gas, flatulence, bloating
Glycerine Lemon Meringue Crunch Bar (SKU 65205) Yes Headaches, dizziness, bloating, nausea, vomiting, thirst, and diarrhea
Rebiana Chocolate Chip Pancakes (SKU 57710) Yes Nausea, bloating, dizziness, muscle pain, numbness, feeling of fullness
Erythritol Original Pancakes (SKU 57700) Yes Gastrointestinal upset, gas, bloating

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Despite How Stevia Is Promoted By Optavia As “Natural”, Stevia Causes Gastrointestinal Problems

Optavia touts its use of Stevia in its Fuelings, claiming that Stevia is a “natural” sweetener. Whether it is
natural or not (there is a healthy dose of skepticism regarding Stevia being “natural”), here’s what an
actual scientific study says about Stevia’s impact on the gut:

A 2015 study reported a possible link between nonnutritive sweeteners, including stevia, and
disruption in beneficial intestinal flora. The same study also suggested nonnutritive sweeteners
may induce glucose intolerance and metabolic disorders.

Source: https://www.healthline.com/health/food-nutrition/stevia-side-effects#side-effects

In fact, the following symptoms are associated with Stevia:

 Some people who take stevia or stevioside can experience bloating or nausea. Other people
have reported feelings of dizziness, muscle pain, and numbness.
 Allergy to ragweed and related plants: Stevia is in the Asteraceae/Compositae plant family. This
family includes ragweed, chrysanthemums, marigolds, daisies, and many other plants. In theory,
people who are sensitive to ragweed and related plants may also be sensitive to stevia.
 Pregnancy and breast-feeding: There is not enough reliable information about the safety of taking
Stevia if you are pregnant or breast feeding. Stay on the safe side and avoid use.

Source: https://www.webmd.com/vitamins/ai/ingredientmono-682/stevia

Gut Problems Are Common Under the Optavia Plan, According to An 11-Year MED Veteran

A senior Optavia sales rep, who has been with the Company for 11 years (selling both Medifast and
Optavia branded products), stated that stomach issues are quite common (the following transcript is an
excerpt from a phone recording within the last 3 months):

Question (paraphrased): “I just started the program and have been having gut issues. Severe gut
issues. Has anyone else experienced this?"

Answer from an 11-year MED-veteran: “I would say yes. It's a common thing that our gut can
get very upset. It is very common that when we change our dietary habits, that our digestive tract
is going to go through a kind of turmoil. Not uncommon to experience stomach upset, diarrhea,
sometimes its constipation.”

Optavia Touts The Addition of Probiotics in Its Products Yet Stomach Problems Persist

Optavia has been promoting its use of “GanedenBC30® Probiotic in its OPTAVIA Essential Fuelings since
2016. The Company makes the following claims:

 OPTAVIA Essential Fuelings contain a proprietary probiotic to aid in the digestion of protein and
support your immune health.
 Ganeden BC30® supports digestive and immune health*.
 * denotes “As part of a balanced diet and healthy lifestyle” (with no further explanation of what
that means!). Perhaps consuming 5 highly processed foods per day is not balanced nor healthy.

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Optavia consumers experience gastrointestinal problems, despite the addition of these probiotics
products. The following facts may explain why:

 Recent Scientific research indicates that Probiotics are mostly useless and can actually hurt you.
 Lead and Stevia cause stomach problems. These negative effects may exceed and overpower any
possible positive effects arising from these probiotics.

Sources:

1. Optavia marketing:

https://optavia.configio.com/post/new-optavia-fuelings

https://www.tsflmedia.com/pdfs/optavia_guide.pdf

2. Probiotics are mostly useless and can actually hurt you, supporting sources:

https://www.newscientist.com/article/2178860-probiotics-are-mostly-useless-and-can-actually-
hurt-you/

https://www.cell.com/cell/fulltext/S0092-8674(18)31102-4

https://www.cell.com/cell/fulltext/S0092-8674(18)31108-5

Optavia Causes Stomach Problems; Stomach Problems Lead to Overall Health Problems

A healthy stomach corresponds with, and contributes to, a healthy body. Optavia Fuelings have been
shown to cause harm to the stomach, which means they cause harm to the entire body.

Optavia consumers may lose weight while on the plan (since it’s a starvation diet) but suffer serious and
lasting health problems in exchange – a classic Faustian bargain.

We’ve summarized the following findings, from scientific research (See the appendix for a more detailed
exploration on these points):

 A Healthy Stomach is vital for overall health.


 A Healthy Stomach is vital for mental health. A person's stomach or intestinal distress can be the
cause of anxiety, stress, or depression.
 An Unhealthy stomach leads to an unhealthy body and impedes long-term weight
loss/maintenance.

Optavia diets, and similar starvation diets can disrupt the gut; this disruption can impair a person’s
health and long term weight loss and/or maintenance abilities.

Questions we address in the remainder of the report:

 Given how prevalent gastrointestinal and gallbladder related problems can be, does Optavia
disclose these side effects?
 What financial liability may the Company face?

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Optavia’s Website: Zero Pages Dedicated to ‘Side Effects’
The Medifast Website Clearly Discloses Side Effects While the Optavia Website Does Not

If one conducts a Google search for “Medifast side effects”, the first few search results originate from
Medifast domains (recall that MED has been distancing itself away from The Medifast brand):

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If one searches for “Optavia side effects” on Google, one will find no results tied to the Optavia website:

It’s almost as if Optavia is trying to hide symptoms and side effects from the public. We find this
behavior highly suspect, given that gallstones and stomach complications are widespread problems!

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Medifast Clearly Discloses Possible Side Effects and Symptoms

In a document clearly labeled ‘POTENTIAL SYMPTOMS AND SIDE EFFECTS’ (both in the title of the
document, as well as within the file name), MED lists 4 pages of symptoms and side effects, including:

Leg cramps, dizziness, lightheadedness, fatigue, women’s issues (estrogen and menstrual cycle
side effects), headache, loose skin, feeling cold, hair loss, rash, gas, diarrhea, bad breath,
constipation, hunger that doesn’t go away

For the full 4 page list of POTENTIAL SYMPTOMS AND SIDE EFFECTS’, see our appendix.

Medifast also provides a separate webpage dedicated to Medical Conditions that may prohibit or limit a
consumer’s participation, in addition to its easy found Side Effects and Symptoms document:

http://www.medifast1.com/faqs/contraindications.jsp

Optavia Does Not Clearly Disclose Possible Side Effects and Symptoms

If one searches for “side effects” or “symptoms” on Optavia.com internal search engine, the search results
do not lead to any documents or sections dedicated to “side effects” or “symptoms”:

http://www.optavia.com/index.jsp?ss360Query=side%20effects

The “Program Guides & Information Sheets” section does not contain anything on side effects either

https://answers.optavia.com/help/program-guides

In fact, none of the clickable fields on the main page immediately leads to side effects or symptoms:

Medifast – the brand MED has been distancing itself from – clearly discloses possible side effects.
Optavia – the brand MED has been heavily promoting – does not clearly disclose possible side effects.

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Optavia Listed Side Effects: Listed Where You Can’t See

Three short sentences describe side effects (Medifast provides 4 pages of them!) buried in fine print in a
page describing the 5&1 Plan. We were unable read the fine print without magnification, and we did not
see this fine print unless we scrolled all the way to the bottom of the page, which readers may overlook:

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Optavia Listed Side Effects: Misleading and Deceptive

We find Optavia’s description of side effects highly misleading and deceptive for the following reasons:

 There is an absence of the words “Side Effects” or “Symptoms” describing these conditions;
Medifast’s website, in contrast, clearly refer to these (and other) conditions as “Side Effects” and
“Symptoms”.
 These side effects are buried within three other paragraphs of unrelated disclosures.
 Optavia qualifies the “may cause gallstones or gallbladder disease” warning with “for those at
high risk”. That latter qualifier is highly deceptive, given that Optavia’s historical and target
audience are overweight and obese people (i.e. “high risk”).
 Many Medifast and Optavia users have historically experienced gastrointestinal problems.
 Many Medifast and Optavia users have historically experienced gall bladder related problems;
moreover, gallstones are a common symptom of crash diets like Optavia’s, per scientific study.

Disclosures about those side effects are buried within the third paragraph of an already unreadable four
paragraph fine print section on the bottom of a very long webpage!

Optavia Side Effects: Listed Where You Wouldn’t Be Looking

The only other place we saw those symptoms listed: Under “what medical conditions would prohibit my
use of the OPTAVIA program” (under FAQs), MED sneaks in these three short sentences of side effects:

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A Recent Lawsuit: We Believe Liability Will Exceed $60 Million
In what we believe is a sign of what’s to come for the company, a former Optavia client sued Optavia’s
parent company, Medifast, on May 25, 2018 (LOVERDI et al v. MEDIFAST, INC. et al) alleging:

 “Defendants’ products and dietary program cause gastrointestinal issues, including, but no limited to,
stomach cramps, diarrhea, constipation, and heart burn”
 “Defendants’ product and dietary program cause the following symptoms, including but not limited to,
malnutrition, lethargy, irritability, insomnia, decreased concentration, anemia, lightheadedness, and
thyroid issues”
 The complaint against Medifast (Jason, Take Shape, and Optavia) includes 6 counts of wrongdoing. For
each count, the following $ request is included at the end: an amount in excess of One Hundred and Fifty
Thousand ($150,000.00) Dollars.”

If LOVERDI et al v. MEDIFAST, INC. et al Triggers More Litigation, Liability Can Easily Exceed $100,000,000

This Loverdi lawsuit reminds us of the personal injury lawsuits that contributed to Jason Pharmaceuticals’ bankruptcy
filing in 1994. History does not repeat, but it may rhyme. In our Base Case, Gotham City Research estimates that
liability of future litigation will exceed $60 million, assuming all parties settle. If litigation were to go to trial, the
liability could easily exceed $200 million, requiring a large capital raise or leading to bankruptcy:

Base Case Severe Case Benign Case


2018E Total Revenue $475.0 $475.0 $475.0
Optavia Revenue as % of Total Revenue 89% 89% 89%
2018E Optavia Revenue $422.8 $422.8 $422.8
Average cost per user (per year) $4,800.0 $4,800.0 $4,800.0
Implied # of Customers 88,073 160,000 88,073
Affected % of Customers 5.0% 10.0% 2.5%
Affected # of Customers 4,404 16,000 2,202
Liability Per Customer $150,000 $150,000 $100,000
Total Liability $660.5 $2,400.0 $220.2
Settlement Value (assume @ 10%) $66.1 $240.0 $22.0

Assumptions and Comments:

 All $ amounts are in millions of $s, except for Average Cost Per User and Liability Per Customer.
 Average Cost Per User: The plan costs between $350-$450 per month. We use the average and annualize.
 Implied # of Customers: For the ‘Base Case’ and ‘Benign Case’, the # of Customers is a calculation, derived
from the 2018E Optavia Revenue divided by Average cost per user. For the ‘Severe Case’ we roughly double
the customer count, to factor in customers from prior 3-4 years.
 Affected % of Customers: we assume that only a fraction of those experiencing problems will participate in
litigation. In the Base Case, we assume that only 1 out of 3 customers experiencing gastrointestinal or
gallbladder related problems will participate. We assume only 15% experience problems, viz. 5%. In the
Severe Case, we assume 40% of 25% experiencing problems participate.
 Liability per Customer: we assume other affected individuals will seek similar amounts as Loverdi on average.
 Settlement Value: We assume all parties seek to settle, and that the settlement value is only 10% of total
liability.

While we’re not expecting it, bankruptcy is not a far-fetched outcome for MED, as historical precedent shows,
and as the above calculations show.

Page 17 of 27
The Company Did Not Deny Our Allegations
Medifast’s Public Statement Support Gotham City Research Thesis

According to Bloomberg News, in a story titled Medifast Shares Are Volatile After Gotham Releases Short
Report released last Thursday night, at 6:13 PM EST, MED issued the following statements (MED issued
similar statements to Business Insider; see the appendix for both articles):

 “We take consumer health and safety seriously”


 “Our ingredients are regularly analyzed to ensure we meet and exceed all public safety regulations.
This is why Medifast has provided safe products for nearly 40 years.”

MED did not dispute any of our previously released findings: that the Optavia products contain toxic
metals, the products require independent testing and/or a recall, and the cause of these quality and safety
issues originate from a suspect supply chain. Specifically:

MED STATEMENTS FACTS

“We take consumer health and safety seriously.” Optavia products contain toxic metals.

“Our ingredients are regularly analyzed to ensure Gotham retained an independent lab to test
we meet and exceed all public safety regulations” Optavia products, and it found lead levels above
regulatory levels.

“Medifast has provided safe products for nearly 40 Optavia products have only been sold for 2 years.
years.”

WHAT MED DID NOT SAY

MED did not say Optavia products are safe.

MED did not say Optavia products do not contain toxic metals.

MED did not say the toxic metal content or lack of disclosures meet public safety requirements.

MED did not comment about its supply chain.

MED is the only public company alleged to sell contaminated foods in the last 5 years

Linda Weiser, a D.A. Davidson & Co analyst who rates Medifast buy, claimed: “To claim contamination or
mislabeling is common for short sellers to do with food stocks”

In fact, we have seen exactly zero US public companies in the last 5 years, alleged to sell contaminated
food products. MED is the only one. The closest comparable situations: (1) Tile Shop and (2) Lumber
Liquidators. Like MED, both companies were alleged to sell unsafe/dubious products. Yet neither Tile Shop
nor Lumber Liquidators sold food products, and neither companies’ customers were getting sick from
using the products.

Page 18 of 27
Appendix A: Management Response to Gotham Report I
An influential short seller is taking aim at weight loss firm Medifast, and says lead levels in some of its
diet products exceed FDA recommendations
By Trista Kelley, Business Insider

 Short seller says shares are worth $30 to $79


 Gotham arranged lab tests of Optavia brand weight loss products
 Lead levels in some products exceed FDA maximum intake recommendation

Short-selling firm Gotham City Research is questioning the quality and safety of products sold by weight-loss firm
Medifast.

In a report today, Gotham says the shares are worth between $30 to $79 dollars, a fraction of the $208 price at the
close of trading yesterday. The short seller alleges that some of Baltimore-based Medifast's Optavia-branded
products contain unsafe levels of lead and cadmium. Optavia prices "will face downward pressure" because they're
up to four times more expensive than those of competitors', and the products may require warning labels, recalls,
or third-party testing, Gotham said in the report. The firm has a short position in Medifast shares, meaning it is
betting they will go down.

"We take consumer health and safety seriously," Medifast spokeswoman Jessica Oring said in an emailed response
to Gotham's report. "Our ingredients are regularly analyzed to ensure we meet and exceed all public safety
regulations. This is why Medifast has provided safe products for nearly 40 years."

Gotham said it arranged lab testing of Medifast products bought in the open market, and found that lead levels in
85% of Optavia samples exceeded the maximum allowable dose per California's Safe Drinking Water and Toxic
Enforcement Act, enacted in 1986. Up to 23% of the products tested exceeded the Food and Drug Administration's
maximum daily intake levels for lead, Gotham said. Business Insider was unable to verify the results of the lab
findings.

In addition, Medifast's research and development expenses and its capital expenditure — spending on plant and
equipment — as a percentage of revenue is less than half its peers, "suggesting underinvestment," Gotham said.
Medifast shares have surged about 185% this year, lifting the market cap to about $2.6 billion as of the close of
trading yesterday.

Medifast's products are "clinically proven" and of the "highest quality" according to its website, which says:
"Developed by a physician, it's the brand recommended by more than 20,000 doctors since its founding."

"We develop and manufacture most of our foods in our wholly owned manufacturing facility just steps from our
corporate offices in Baltimore," Medifast says on its website.

Gotham, founded by Daniel Yu, has made waves in the market before. The New York firm went public with skepticism
about U.S. "adtech" firm Criteo last year and in 2016 took on MDC Partners, an advertising and communication
company. Last year Gotham also sent AAC Technologies shares tumbling after questioning the Hong Kong-based
Apple supplier's accounting practices.

A short seller makes money by borrowing a company's shares and selling them, with the aim of buying them back at
a lower price and returning them, pocketing the difference. Notable "activist" short sellers, or those who go public
with their skeptical research, include Jim Chanos of Kynikos Associates, Bill Ackman of Pershing Square, and Carson
Block of Muddy Waters.

Page 19 of 27
Medifast Shares Are Volatile After Gotham Releases Short Report

By Kriti Gupta — With assistance by Joshua Fineman, and Cristin Flanagan

Medifast Inc., the weight-loss program provider whose shares have tripled this year, was whipsawed
Thursday by a short-seller’s report claiming the company hasn’t disclosed contaminants in its supplements.

The shares fell about 13 percent before rising 3.1 percent at the close of trading in New York. Volume was
more than six times the three-month average. The stock had fallen 19 percent over the prior five sessions
but is still up 207 percent on the year.

The new short report from Gotham City Research claims that Medifast was aware of elevated levels of
lead and other toxic metals in its Optavia product line. Gotham also criticizes the company’s supply chain
and aggressive pricing. The firm sees as much as 86 percent downside for Medifast shares.

“We take consumer health and safety seriously,” Medifast said in an emailed statement. “Our ingredients
are regularly analyzed to ensure we meet and exceed all public safety regulations. This is why Medifast
has provided safe products for nearly 40 years.”

The report says 85 percent of Optavia samples Gotham City had tested last month exceeded the maximum
allowable dose level for lead as per California’s Proposition 65, while 23 percent exceeded the maximum
daily intake levels for lead set by the U.S. Food and Drug Administration.

The FDA wasn’t immediately able to provide a comment.

“To claim contamination or mislabeling is common for short sellers to do with food stocks that have
appreciated significantly in a short period of time,” Linda Weiser, an analyst at D.A. Davidson & Co. who
rates Medifast buy, said by email. “Medifast’s business fundamentals and growth are very strong.”

Criteo SA, Gotham’s most recent short idea, has fallen 41 percent since the short report was published
last September. MDC Partners Inc. is down 80 percent since Gotham issued a short report on the stock in
April 2016.

https://www.bloomberg.com/news/articles/2018-09-20/medifast-shares-are-volatile-after-gotham-
releases-short-report

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Appendix B: Healthy Stomach, Healthy Body
Healthy Stomach is vital for overall health

“According to Dr. E. M. Quigley in his study on gut bacteria in the Journal of Gastroenterology and
Hepatology, having a wide variety of these good bacteria in your gut can enhance your immune system
function, improve symptoms of depression, help combat obesity, and provide numerous other benefits.”

“Many facets of modern life such as high stress levels, too little sleep, eating processed and high-sugar
foods, and taking antibiotics can all damage our gut microbiome. This in turn may affect other aspects of
our health, such as the brain, heart, immune system, skin, weight, hormone levels, ability to absorb
nutrients, and even the development of cancer.”

Source: Healthline - What’s an Unhealthy Gut? How Gut Health Affects You

https://www.healthline.com/health/gut-health

"Having a healthy gut is so important," accredited practising dietitian and sports dietitian Chloe McLeod
told HuffPost Australia.

"It's linked to a number of different medical conditions. When your gut isn't healthy it can have an impact
on mental health, weight, mood and a number of other digestive disorders. Keeping your gut nice and
healthy can help keep the rest of your body healthy."

Source: Huffington Post - 6 Ways To Start Improving Your Gut Health Today

https://www.huffingtonpost.com.au/2017/09/24/6-ways-to-start-improving-your-gut-health-
today_a_23218661/

“Though it sounds gross and even unhealthy, gut bacteria perform many important functions in the body,
including aiding the immune system, producing the feel-good brain chemical serotonin, making energy
available to the body from the food we eat, and disposing of foreign substances and toxins, according to
Lisa Fischer, MS, RDN, LDN, registered dietitian at the UltraWellness Center in Lenox, Massachusetts.”

Source: Reader’s digest - 7 Clear Signs You Have an Unhealthy Gut

https://www.rd.com/health/wellness/gut-health/

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“Research suggests the gut bacteria in healthy people are different from those with certain diseases.
People who are sick may have too little or too much of a certain type. Or they may lack a wide variety of
bacteria. It’s thought some kinds may protect against ailments, while others may raise the risk.”

“Your gut bacteria affect your body’s metabolism. They determine things like how many calories you get
from food and what kinds of nutrients you draw from it. Too much gut bacteria can make you turn fiber
into fatty acids. This may cause fat deposits in your liver, which can lead to something called “metabolic
syndrome” -- a condition that often leads to type 2 diabetes, heart disease, and obesity.”

Source: WebMD - What Your Gut Bacteria Say About You

https://www.webmd.com/digestive-disorders/what-your-gut-bacteria-say-your-health#1

Healthy Stomach = Healthy Brain

“The brain has a direct effect on the stomach and intestines. For example, the very thought of eating can
release the stomach's juices before food gets there. This connection goes both ways. A troubled intestine
can send signals to the brain, just as a troubled brain can send signals to the gut. Therefore, a person's
stomach or intestinal distress can be the cause or the product of anxiety, stress, or depression. That's
because the brain and the gastrointestinal (GI) system are intimately connected.”

Source: Harvard Medical School Healthbeat - The gut-brain connection

https://www.health.harvard.edu/diseases-and-conditions/the-gut-brain-connection

“The enteric nervous system doesn’t seem capable of thought as we know it, but it communicates back
and forth with our big brain—with profound results.” – Jay Pasricha, M.D.

The ENS may trigger big emotional shifts experienced by people coping with irritable bowel syndrome (IBS)
and functional bowel problems such as constipation, diarrhea, bloating, pain and stomach upset. “For
decades, researchers and doctors thought that anxiety and depression contributed to these problems.
But our studies and others show that it may also be the other way around,”– Jay Pasricha, M.D.

Source: Johns Hopkins Medicine - The Brain-Gut Connection

https://www.hopkinsmedicine.org/health/healthy_aging/healthy_body/the-brain-gut-connection

Unhealthy stomach = not healthy weight loss conditions

“They also found that the obesity-related metabolites were linked to four different intestinal bacteria
(Blautia, Dorea and Ruminococcus in the Lachnospiraceae family, and SHA98).

"The differences in BMI were largely explained by the differences in the levels of glutamate and BCAA.
This indicates that the metabolites and gut bacteria interact, rather than being independent of each
other," says Marju Orho-Melander, professor of genetic epidemiology at Lund University.”

Source: Lund University - New link between gut bacteria and obesity

Page 22 of 27
https://www.sciencedaily.com/releases/2018/02/180223092441.htm

“Multiple studies have shown that obese individuals have very different intestinal bacteria than slim
individuals. Two studies supporting this theory – one looking at mice, the other using humans – found
that a family of bacteria known as firmicutes (species of bacteria) was more plentiful in the obese (20
percent more), whereas another bacteria called bacteroidetes (more bacteria) was almost 90 percent
lower in obese subjects. “

Source: Gut Health Project - 8 Warning Signs Of An Unhealthy Gut!

https://www.guthealthproject.com/8-common-health-issues-caused-by-an-unhealthy-gut/

“Then scientists took bacteria from the guts of human identical twins, one of whom was obese and one
of whom was lean, and transferred those bacteria into the guts of lean, germ-free mice. Bacteria from the
obese twin made the mice become fat, but bacteria from the lean twin did not.”

Source: Harvard Medical School Health Letter - Do gut bacteria inhibit weight loss?

https://www.health.harvard.edu/staying-healthy/do-gut-bacteria-inhibit-weight-loss

“The mice ate the same diet in equal amounts, yet the animals that received bacteria from an obese twin
grew heavier and had more body fat than mice with microbes from a thin twin. As expected, the fat mice
also had a less diverse community of microbes in the gut.”

Source: Scientific American - How Gut Bacteria Help Make Us Fat and Thin

https://www.scientificamerican.com/article/how-gut-bacteria-help-make-us-fat-and-thin/

“Dietary habits are the main contributors to the diversity of the human gut microbiota by altering its
composition. Short-term changes in diet profile can shift the gut microbiota.”

“Obese patients have a lesser diversity and richness in the bacterial component of gut microbiota than
eutrophic subjects”

Source: Clinical Nutrition Experimental (volume 20) - Gut microbiota and obesity

https://www.sciencedirect.com/science/article/pii/S2352939318300162

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Appendix C: Medifast Symptoms and Side Effects
Medifast Website – Symptoms and Side Effects – 4 Pages!

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Source: http://www.medifastmedia.com/shared/docs/symptoms_side_effects.pdf

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