MEDIFAST INC - Quarter Report: 2012 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarter period ended September 30, 2012

OR

For the transition period from_____________ to_____________ .

Commission file number

Medifast, Inc.

(Exact name of registrant as specified in its charter)

11445 Cronhill Drive
Owings Mills, MD 21117
Telephone Number: (410) 581-8042

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 16 (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 x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerate filer. See definition of “accelerated filer and large accelerated filer” in Rule 12 b-2 of the Exchange Act (Check one):

Large accelerated filer ¨                Accelerated filer x                Non-accelerated filer ¨

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

Yes ¨ No x

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

Medifast, Inc.

Index

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to unaudited condensed consolidated financial statements.

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited) 

See notes to unaudited condensed consolidated financial statements.

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Nine Months Ended September 30, 2012

(Unaudited)

See notes to unaudited condensed consolidated financial statements.

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

See notes to unaudited condensed consolidated financial statements.

Medifast, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

General

The condensed unaudited interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.

The results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012 or any other portions thereof. Certain information in footnote disclosures normally included in annual financial statements has been condensed or omitted for the interim periods presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim consolidated financial statements.

These financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 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.

The consolidated balance sheet as of December 31, 2011 is derived from the audited financial statements included in the Company’s Annual Report in Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2011 (the 2011 form 10-K), which should be read in conjunction with these consolidated financial statements.

The Company’s condensed consolidated financial statements include the accounts of Medifast, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

In July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02 Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This amendment allows the Company to assess qualitative factors in order to determine if it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. A fair value calculation is no longer required until it is determined based on the qualitative assessment, that it is more likely than not, the indefinite-lived intangible asset is impaired. Management is currently evaluating the effect that the provisions of ASU 2012-02 will have on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, which provides for enhanced disclosures that will enable users of financial statements to evaluate the effect of netting arrangements on an entity’s financial position. This includes the effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities. Management is currently evaluating the effect that the provisions of ASU 2011-11 will have on the Company’s financial statements.

In December 2011, the FASB issued ASU 2011-12 Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This amendment defers changes in Update 2011-05 relating to the presentation of reclassification adjustments out of accumulated other comprehensive income. This latest amendment will allow the FASB to redeliberate the presentation requirements for reclassifications. We will evaluate the impact of this amendment when it is issued.

Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping. Medifast Weight Control Centers’ program fees are recognized over the estimated service period.

Inventories consist principally of packaged meal replacements held in the Company’s warehouses. Inventory is stated at the lower of cost or market, 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 consist of the following at September 30, 2012 and December 31, 2011: 

The Company has acquired certain intangible assets, which include: customer lists, trademarks, patents and copyrights. The customer lists are being amortized over a 3-year period based on management’s best estimate of the expected useful life. The costs of trademarks, patents and copyrights are amortized over 2 to 7 years based on their estimated useful life.

Amortization expense for the three and nine months ended September 30, 2012 and 2011 was as follows: 

Amortization expense is included in selling, general and administrative expenses.

Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of common shares outstanding adjusted for the effect of dilutive common stock equivalents.

The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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 Company’s financial instruments include cash and cash equivalents, trade receivables, investment in available-for-sale securities, and debt. The carrying amounts of cash and cash equivalents and trade receivables approximate fair value due to their short maturities. The fair value of investment in available for-sale securities are based on quoted market rates. The carrying amount of debt approximates fair value due to the variable rate associated with the debt.

The following table represents the fair value hierarchy for those financial assets measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011:

Restricted Stock

The Company has issued restricted stock to employees and directors generally with terms ranging from one to six years. The fair value is equal to the market price of the Company’s common stock on the date of grant. Compensation expense for restricted stock is amortized ratably over the vesting period. The following table summarizes the restricted stock activity:

The total restricted stock awards vested and charged against income during the three months ended September 30, 2012 and 2011 was $360,000 and $617,000, respectively and for the nine months ended September 30, 2012 and 2011 was $1.8 million and $1.9 million, respectively. During the second quarter of 2012, approximately $440,000 of restricted stock awards were vested and expensed for the former Executive Chairman of the Board of Directors. The total income tax benefit recognized in the consolidated statement of income for these restricted stock awards was approximately $139,000 and $232,000 for the three months ended September 30, 2012 and 2011, respectively and $702,000 and $718,000 for the nine months ended September 30, 2012 and 2011, respectively. The tax benefit recognized in additional paid-in capital upon vesting of restricted stock awards was approximately $104,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively and $567,000 and $753,000 for the nine months ending September 30, 2012 and 2011, respectively. There was approximately $1.7 million of total unrecognized compensation cost related to restricted stock awards as of September 30, 2012. The cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

In September 2012, the 2012 Share Incentive Plan was approved at the 2012 Annual Meeting of Shareholders. The plan allows for an additional 1,000,000 shares of Company stock to be issued to Participants. The awards may be issued in the form of stock options, stock appreciation rights, and restricted shares.

Operating segments are components of an enterprise about which separate financial information is available that is regularly reviewed by the chief operating decision maker about how to allocate resources and in assessing performance. The Company has two reportable operating segments: Medifast, and MWCC and Wholesale. The Medifast reporting segment consists of the following distribution channels: Medifast Direct and Take Shape for Life. The MWCC and Wholesale segment consists of Medifast Corporate and Franchise Weight Control Centers as well as Medifast Wholesale Physicians and international sales.

Total assets and operating expense not identified with a specific segment are listed as “Other” and include items such as auditors’ fees, attorney’s fees, stock compensation expense and corporate governance related to NYSE, Sarbanes Oxley and SEC regulations. Evaluation of the performance of operating segments is based on their respective income from operations before taxes. The accounting policies of the segments are the same as those of the Company. The presentation and allocation of assets, liabilities and results of operations may not reflect the actual economic costs of the segments as stand-alone businesses. If a different basis of allocation were utilized, the relative contributions of the segments might differ, but management believes that the relative trends in segments would likely not be impacted.

The following tables present segment information for the three and nine months ended September 30, 2012 and 2011:

On July 20, 2012, Jason Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company signed a proposed consent decree with the Federal Trade Commission (“FTC”), in response to the FTC’s investigation of certain statements in the Company’s advertising for its weight-loss programs. The new agreement replaces a previous consent order entered into by Jason Pharmaceuticals, Inc. and the FTC in 1992. The FTC expressed concern that some of the Company’s advertising contained claims which were not compatible with current standards for substantiation. Pursuant to the consent decree, the Company has agreed to modify certain advertising claims in this regard and has agreed to ensure that its clinical studies meet the protocol contained in the proposed consent agreement. The Company paid a civil penalty of $3.7 million to resolve the FTC’s concerns and avoid protracted legal proceedings.

The Company has assessed certain non-income tax contingencies in accordance with ASC 450, Accounting for Contingencies, that management believes could be challenged by tax authorities. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. These potential exposures result from the varying application of statutes, rules, regulations and interpretations. Our assessment reflects assumptions and judgments about potential actions by taxing jurisdictions. We believe these assumptions and judgments are reasonable; however, our assessment of tax exposures in the future due to new developments may alter our current position on loss contingencies. A successful assertion by one or more states regarding taxes could result in substantial tax liabilities and have a material impact on operating results or cash flows in the periods for which that determination is made.

The Company from time to time is involved in legal proceedings and claims arising in the ordinary course of business. Although it is not possible to determine the outcome of these matters, it is management’s opinion that settlement of such claims will not have a material adverse effect on the Company’s financial condition or results in operations.

On April 1, 2011, a shareholder derivative complaint titled Shane Rothenberger, derivatively on behalf of Medifast, Inc., v Bradley T. MacDonald et al. (Civil Action 2011-CV 863 [BEL]); and on April 11, 2011, a shareholder derivative complaint titled James A. Thompson, derivatively on behalf of Medifast, Inc., v Bradley T. MacDonald et al. (Civil Action 2011-CV934 [BEL]) were filed in the US District Court, District of Maryland. The identically worded complaints allege breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Each complaint requests an unspecified amount of damages, a Court Order directing reformation of corporate governance, restitution to the Company and payment of costs and disbursements. The Company is named as a nominal defendant. On July 19, 2011, the US District Judge ordered consolidation of the two cases, appointment of co-lead counsel, and the filing of a consolidated complaint, among other matters. No response is due from the Company at this time. After the consolidated complaint is filed, the Company intends to take whatever action it deems necessary to protect its interests.

On March 17, 2011, a class action complaint titled Oren Proter et al. v. Medifast, Inc. et al. (Civil Action 2011-CV-720[BEL]), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the Exchange Act), and Rule 10b-5 promulgated under the Exchange Act, was filed for an unspecified amount of damages in the US District Court, District of Maryland. The complaint alleges that the defendants made false and/or misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects. On March 24, 2011, a class action complaint titled Fred Greenberg v Medifast, Inc., et al (Civil Action 2011-CV776 [BEL], alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act, was filed for an unspecified amount of damages in the US District Court, District of Maryland. The complaint alleges that the defendants made false and/or misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects. On July 19, 2011, the US District Judge ordered the consolidation of the cases and appointment of co-lead counsel among other matters. The Greenberg case was dismissed without prejudice. The Plaintiffs subsequently filed an Amended Complaint. The Company has reviewed its allegations, subsequently filed its Motion to Dismiss which is currently pending; and intends to vigorously defend against that Complaint.

In early 2010, the Chapter 7 Bankruptcy Trustee for Go Fig, Inc. et al., Debtors, filed an adversary civil proceeding in the US Bankruptcy Court (ED, Missouri) against Jason Pharmaceuticals, Inc., a subsidiary of Medifast, Inc. (MED-NYSE), and other unrelated entities seeking to recover, as to each, alleged preferential payments. Jason Pharmaceuticals sold product received by the Debtors and has previously filed a pending claim in the same bankruptcy. Medifast disputed the Trustee’s allegations. This action was by Court order placed on hold while the Trustee litigated similar issues against another Party. This matter was recently settled by Jason Pharmaceuticals, Inc. for $6,500. Upon court approval of the settlement, all matters related to this case will be resolved.

Since 2010, Jason Pharmaceuticals has received seven Notices of Charge of Discrimination filed with the US EEOC alleging discrimination suffered by 2 current employees, 3 former employees, and 2 employment applicants. The EEOC dismissed three of those charges in 2011. As reported in 2011 Q3, the two Claimants whose charge claims were dismissed during the second quarter filed suit to pursue those claims in US District Court. One of those claims has been resolved through mediation. The Court in the second claim recently issued an order granting the Company’s motion for summary judgment. The Claimant has filed an appeal with the Court of Appeals for the 5^th Circuit, and the Company will continue to defend against this claim. In addition, the complaints by the 2 employment applicants were recently dismissed.

Some of the information presented in this quarterly report constitutes forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995.  Statements that are not historical facts, including statements about management’s expectations for fiscal year 2012 and beyond, are forward-looking statements and involve various risks and uncertainties.  Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge, there can be no assurance that actual results will not differ materially from the Company’s expectations.  The Company cautions investors not to place undue reliance on forward-looking statements which speak only to management’s experience on this data.

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

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements filed on Form 10-K.

The preparation of these 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 estimates to be the most critical in preparing our consolidated financial statements. These critical accounting estimates have been discussed with our Audit Committee.

Revenue Recognition:  Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer of title and risk to the customer which occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping. Medifast Weight Control Centers program fees are recognized over the estimated service period.

Impairment of Fixed Assets and Intangible 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 intangible assets may be impaired. Any resulting impairment loss would be limited to the value of net fixed and intangible assets.

Income Taxes: The benefit of a tax position is recognized in the 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 percent 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 described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet 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 nine months ended September 30, 2012 and 2011, 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 jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before 2008.

Reserves for Returns: We review the reserves for customer returns at each reporting period and adjust them to reflect data available at that time. To estimate reserves for returns, we consider actual return rates in preceding periods. To the extent the estimate of returns changes, we will adjust the reserve, which will impact the amount of product sales revenue recognized in the period of the adjustment. Our estimates for returns have not differed materially from our actual returns. The provisions for estimated returns as of September 30, 2012 and December 31, 2011 were $336,000 and $234,000, respectively.

Operating leases: Medifast leases retail stores, distribution facilities, and office space under operating leases. Many lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and contingent rent provisions. The Company recognizes incentives and minimum rental expenses on a straight-line basis over the terms of the leases. We commence recording rent expense on the date of initial possession, which is generally when we enter the space and begin to make improvements to properties for our intended use. For tenant improvement allowances and rent holidays, we record a deferred rent liability on the consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of income.

For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of income. Several leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability on the consolidated balance sheets and the corresponding rent expense when we determine achieving specified levels is probable.

Background:

The Company is engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products. The Company’s product lines include meal replacements and vitamins. Our products and services are sold to weight loss program participants primarily via the internet, telephone, and brick and mortar clinics. Customers of our Health Coaches in the Take Shape for Life person-to-person direct sales channel are directed to order our products through either the internet or through the Company’s in-house call center. Our meal food items accounted for 95% of our revenues in the first nine months of 2012 and 94% of our revenues for the same period of 2011. Program sales in our Medifast Weight Control Center channel accounted for 3% of revenues in the first nine months of 2012 and 2011. Shipping revenue and other accounted for 2% in the first nine months of 2012 and 3% in the first nine months of 2011. In the first nine months of 2012, revenue increased to $273.5 million as compared to $228.6 million in the first nine months of 2011, an increase of $44.9 million or 20%. The Take Shape for Life sales channel accounted for 60.1% of total revenue, direct response marketing 24.2%, and Medifast Weight Control Centers and Medifast Wholesale Physicians 15.7%.

We review and analyze a number of key operating and financial metrics to manage our business, including revenue to advertising spend in the Medifast Direct channel, number of active Health Coaches, and average monthly revenue generated per health coach in the Take Shape for Life channel, and average same store sales improvement for the Medifast Weigh Control Center channel.

In the first nine months of 2012, we continued to see sales growth and improvement in the Take Shape for Life, Medifast Direct and Medifast Weight Control Centers and Medifast Wholesale Physicians businesses. Take Shape for Life revenue increased 15% to $164.3 million compared with $142.9 million in 2011. Growth in revenues for the segment was driven by increased customer product sales as a result of an increase in the average revenue per health coach per month. The average revenue per health coach per month increased from $1,585 in the third quarter of 2011 to $1,634 in the third quarter of 2012. The increase is attributable to our Trilogy Training website launched July 2011, offering easier access to training materials. Take Shape for Life introduced monthly incentives in 2012, increasing its monthly revenue per health coach. The number of active Health Coaches at the end of the third quarter of 2012 increased to 10,800 compared to 10,300 in the prior year, an increase of 5%.

The Company is currently working on additional content for the training website and simplifying existing printed materials to maximize the effectiveness of the Health Coaches by emphasizing the competencies required to be a successful health coach, business coach and business leader. The Company also hosts regional events throughout the country to ensure participating Health Coaches receive actionable and relevant content to grow their businesses. As the number of active Health Coaches increases, the Company receives additional sales proceeds from product referrals.

The Medifast Direct division increased sales 16% to $66.3 million as compared with $57.4 million in 2011, an increase of $8.9 million. The Company experienced a revenue to spend ratio of 3.0 to 1 return on advertising spend in the first nine months of 2012 and a 2.8 to 1 return on advertising spend in 2011.

The Medifast Weight Control Centers and Medifast Wholesale Physicians experienced revenue growth of 52% to $42.9 million compared with $28.3 million in 2011. Revenue increased due to the opening of thirty-one new centers in 2011, nineteen new centers in the first nine months of 2012, a 9% increase in the same store sales for Centers open for greater than one year, and the increased success of franchise centers. The Company opened one new center and closed one existing center during the quarter. The Company’s key focus the remainder of 2012 is to increase the number of franchise centers and continue to enhance the customer experience through additional offerings such as metabolic testing and the support of a dietitian. In order to improve profitability, the Company has reduced advertising spend as a percentage of sales for each Corporate Center, and is realigning the four-wall staffing strategy of each Corporate Center, rationalizing the level of corporate expenses required to support the centers.

As our sales divisions grow, there are increasing demands placed upon our infrastructure. Increased demand could cause long hold times in the call center, as well as delays on our website. There could also be delays in order processing, packaging and shipping. We could run out of a majority of our inventory if product sales growth exceeds our production capacity. In order to mitigate these risks, in 2012, a key focus for infrastructure growth is expanding the Company’s in-house manufacturing capacity and warehouse management systems in order to handle increased sales volumes. The Company expanded the Texas distribution center in 2011 and added a call center to that location in 2012 in order to meet increased customer demands. The Company also launched a new web platform for its sales divisions in 2011 to improve the overall customer experience.

Overview of the Company

Distribution Channels

Medifast Direct – The direct-to-consumer channel (“Medifast Direct”), allows customers to order Medifast product directly through the Company’s websites, www.choosemedifast.com and www.medifastnow.com or through our in-house call center. The product is shipped directly to the customer’s home. This channel is driven by an aggressive multi-media customer acquisition strategy utilizing national and regional print, radio, web advertising, direct mail, television, as well as public relations, word of mouth referrals, and social media initiatives. The Medifast Direct division focuses on targeted marketing initiatives and provides customer support through its in-house call center and nutrition support team of registered dietitians. In addition, Medifast continues to use leading web technology featuring customized meal planning and web community components. MyMedifast is a robust online community which provides a library of support articles, scheduled weekly medical support calls, support forums, meal-planning tools, and social media functions. See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.

Take Shape For Life™®–Take Shape For Life is the personal coaching division of Medifast. Take Shape for Life is led by its co-founder, a physician with a background in critical care. The coaching network consists of independent contractor Health Coaches (“Health Coaches”), who are trained to provide coaching and support to clients on the Medifast weight-loss program. Health Coaches mentor their clients and work with them to reach healthy weight goals. Take Shape For Life provides a road map to empower the individual to take control of their health by changing behavior. Take Shape for Life offers the exclusive BeSlim® philosophy, which encourages long-term weight maintenance. Take Shape For Life also moves beyond the scope of weight loss to teach customers how to achieve optimal health through the balance of body, mind, and finances. Take Shape For Life uses the high-quality, medically validated products of Medifast that have been proven safe and effective in clinical studies. Health Coaches and their clients follow the Habits of Health book and companion workbook written by the Take Shape For Life co-founder to create a lifelong health optimization program. In addition to the encouragement and support of a Health Coach, clients of Take Shape For Life are offered a bio-network of support including website information, scheduled program medical and general support calls, and access to registered dietitians via toll-free telephone, email, and web chats.

Program entrants are encouraged to consult with their primary care physician to determine the Medifast program that is right for them. Health Coaches are required to become qualified based upon testing of their knowledge on Medifast products and programs. Health Coaches may also become certified by The Health Institute, a proprietary training program developed by Medifast professionals. Our Health Coaches provide coaching and support to their Clients throughout the weight-loss and weight-maintenance process. Most new Health Coaches are recruited by an existing Health Coach. The vast majority of our new Health Coaches started as weight-loss clients of a Health Coach, had success on the Medifast product and program, and become a Health Coach to help others through the weight-loss process and are paid for the support services that they provide to their clients. In the Take Shape For Life network, approximately 20% of active Health Coaches are health care providers.

Health Coaches can earn compensation in two ways:

Health Coaches do not earn a commission or bonus when they recruit a new Health Coach into the Take Shape For Life network. Fees paid by new Health Coaches for start-up materials are at the Company’s approximate cost and no commissions are paid thereon.

Take Shape For Life is a member of the Direct Selling Association (DSA), a national trade association representing over 200 direct selling companies doing business in the United States. To become a member of the DSA, Take Shape For Life, like other active DSA member companies, underwent a comprehensive and rigorous one-year Company review by DSA legal staff that included a detailed analysis of its Company business-plan materials. This review is designed to ensure that a Company’s business practices do not contravene DSA’s Code of Ethics. Compliance with the requirements of the Code of Ethics is paramount to become and remain a member in good standing of DSA. Accordingly, we believe membership in DSA by Take Shape For Life demonstrates its commitment to the highest standards of ethics and a pledge not to engage in any deceptive, unlawful, or unethical business practices. Among those Code of Ethics proscriptions are pyramid schemes or endless chain schemes as defined by federal, state, or local laws. Moreover, Take Shape For Life, like other DSA member companies in good standing, has pledged to provide consumers with accurate and truthful information regarding the price, grade, quality, and performance of its products. See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.

Medifast Weight Control Centers – The Medifast Weight Control Center is the brick and mortar clinic channel of Medifast with locations in Delaware, Florida, Maryland, New Jersey, North Carolina, Pennsylvania, Texas, and Virginia. In the third quarter of 2012, the Company opened one Medifast Weight Control Center and closed one existing center, resulting in a total of eighty-eight locations in operation at September 30, 2012. The centers offer a high-touch model including comprehensive Medifast programs for weight loss and maintenance, customized patient counseling, and Inbody^TM composition analysis. Medifast Weight Control Centers conduct local advertising including radio, print, television and web initiatives. The centers also benefit from the nationally advertised brand which encourages walk-ins and referrals from its customers and other Medifast business channels.

In 2008, the Company began offering the clinic model as a franchise opportunity. The Company currently has franchisee centers located in Alabama, Arizona, California, Louisiana, Minnesota, Maryland, Wisconsin and Pennsylvania. At September 30, 2012, thirty-two franchise locations were in operation.

Medifast currently offers the Medifast Weight Control Center franchise opportunity in all States except Hawaii, North Dakota, South Dakota, and Wisconsin under an approved franchise disclosure document (FDD). The FDD requires a successful applicant to develop a minimum of three Medifast Weight Control Centers within a defined geographic area in the time frame set forth in the area development agreement. A franchisee’s initial fee covers the cost of Company resources provided to train applicant and staff, and determine territory for development. If an applicant desires to open more than three centers in the designated territory, there is an additional fee for each location.

Prior to the opening of each Medifast Center franchise established under the area development agreement, the Company will do the following:

No products or equipment are provided at a discounted purchase price. In addition, the Company does not offer direct or indirect financing. We do not guarantee franchisee’s notes, leases or obligations.

Medifast Wholesale Physicians - Medifast physicians have been implementing the Medifast Program within their practice or clinic since 1980. These physicians carry an inventory of wholesale Medifast products and resell them to patients. They also provide appropriate medical monitoring, testing, and support for patients on the Medifast Program. Many Medifast physicians take advantage of the Medifast Direct or the Take Shape For Life program to support their patient base.

The Company offers an additional in-house support program to assist customers consulting with their primary care physician. Registered dietitians provide program support and advice via a toll-free telephone help line, by email, and online chats. See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.

Overview of Financial Results

Revenue: Revenue increased 20% to $91.0 million and $273.5 million for both the three and nine months ended September 30, 2012, respectively, as compared to $76.1 million and $228.6 million for the three and nine months ended September 30, 2011. For the three months ended September 30, 2012, the Take Shape for Life sales channel accounted for 61.1% of total revenue, the Medifast Direct channel accounted for 23.3% of total revenue and the Weight Control Centers and Medifast Wholesale Physicians accounted for 15.6% of total revenue. For the nine months ended September 30, 2012, the Take Shape for Life sales channel accounted for 60.1% of total revenue, the Medifast Direct channel accounted for 24.2% of total revenue, and the Weight Control Centers and Medifast Wholesale Physicians accounted for 15.7% of total revenue. The Company reduced several discount programs in September 2012, resulting in higher sales and margin for the quarter.

Take Shape for Life revenue increased 20% to $55.6 million for the three months ended September 30, 2012 and 15% to $164.3 million for the nine months ended September 30, 2012, in comparison to 2011. Growth in revenues for the segment was driven by higher customer product sales as a result of an increase in the number of active health coaches, as well as an increase in the monthly revenue per active health coach. The number of active health coaches increased 5% from 10,300 as of September 30, 2011 to 10,800 as of September 30, 2012. The average monthly revenue per health coach increased 3% from $1,585 in the third quarter of 2011 to $1,634 in the third quarter of 2012. The Company attributes the increase to additional incentives offered during 2012, and investments made to health coach training programs.

The Medifast Direct Response division sales increased 10% to $21.2 million for the three months ended September 30, 2012, and 16% to $66.3 million for the nine months ended September 30, 2012 compared to the same periods in 2011. Sales in this channel are driven primarily by targeted customer advertising on-line and in local radio spots, and by highlighting customer successes in large national publications and television. The revenue to spend for the three months ended September 30, 2012 was 3.2 to 1. The revenue to spend ratio for the first nine months of 2012 was 3.0 to 1. The Company spent approximately $22.4 million on direct response advertising during this period, an increase of 9% from the first nine months of 2011.

The Medifast Weight Control Centers and Medifast Wholesale Physicians channel revenues increased 37% and 52% for the three and nine months ended September 30, 2012, respectively. The increase was driven by the opening of new corporate and franchise locations and year-over-year improvement in same store sales. At September 30, 2012, Medifast Weight Control Centers were operating in eighty-eight locations in Delaware, Florida, Maryland, New Jersey, North Carolina, Pennsylvania, Texas, and Virginia. Thirty-two franchise centers were also in operation. Same store sales for corporate centers open greater than one year increased by 9% and 15% for the three and nine months ended September 30, 2012, respectively, in comparison to 2011. There were sixty corporate centers in the comparative same-store sales base.

Cost of Sales: Cost of sales increased $3.0 million and $11.8 million to $22.6 million and $68.2 million for the three and nine months ended September 30, 2012, respectively as compared to $19.6 million and $56.5 million for the year prior. Gross margin for the third quarter increased $11.9 million, or 0.9% as a percentage of sales. Margin improvement during the quarter was a result of the Company reducing discounts in its sales channels, and a slight improvement in manufacturing overhead costs. As a percentage of sales, year to date gross margin decreased to 75.0% from 75.3% for the first nine months of 2011. This decline was due to increases in commodity costs during the first half of the year, more customer orders qualifying for reduced shipping charges, and more customers taking advantage of additional promotional offerings introduced during the first half of 2012.

Selling, General and Administrative Costs: Selling, general, and administrative expenses were $59.4 million in the third quarter of 2012 compared to $49.7 million in the third quarter of 2011, an increase of $9.7 million. For the first nine months ended September 30, 2012, selling, general, and administrative expenses were $185.6 million compared to $146.3 million for the prior year, an increase of $39.3 million. As a percentage of sales, selling, general, and administrative expenses decreased to 65.3% from 65.4% for the three months ended September 30, 2012 and increased to 67.9% for nine months ended September 30, 2012, versus 64.0% for the prior year.

Salaries and benefits increased by approximately $1.4 million and $8.9 million for the three and nine months ended September 30, 2012, respectively, in comparison to the prior year. The increase in the quarter was due to higher medical insurance premiums and new hires in our information technology, finance, Take Shape for Life, and legal departments. These additions as well as the new hires to support the opening of 49 Medifast Weight Control Centers since the beginning of 2011 led to the nine month period increase.

In March 2012, the Company recorded restructuring charges of $723,000 to facilitate a workforce reduction in the Medifast Weight Control Centers and its Corporate offices. Approximately seventy positions were either eliminated or re-aligned in order to reduce operating costs of the MWCC and Wholesale segment. Several additional positions were also eliminated during the second quarter, increasing the total restructuring charges by $80,000 to $803,000. As of September 30, 2012, the Company paid $763,000 of these restructuring charges. The remaining $40,000 in restructuring charges is expected to be paid prior to December 31, 2012. The workforce reduction and staffing re-alignment will result in approximately $3 million in annualized savings.

The rollforward of the restructuring charges is as follows:

Take Shape for Life commission expense which is variable based upon product sales, and increases as a percentage of sales as health coaches attain higher sales levels, increased by approximately $5.2 million. Take Shape for Life sales grew 20% compared to the third quarter of 2011. Take Shape for Life Health Coaches are independent contractors that are paid commissions on product sales referred to the Company. Commissions increased $11.9 million during the nine months ended September 30, 2012.

Sales and marketing expense increased by $0.5 million and $5.0 million for the three and nine months ended September 30, 2012, respectively, as compared to last year. The year to date increase consisted of $1.0 million of additional advertising in the Medifast Direct channel in the first and second quarters of 2012, and $1.2 million of branding investments in the first quarter of 2012. The remaining increase was related to advertising spend for the Medifast Weight Control Centers.

Office expenses increased $1.0 million for the three months ended September 30, 2012 and $7.5 million for the nine months ended September 30, 2012, in comparison to 2011. The increase for both periods was due to higher rent for the Medifast Weight Control Centers and information technology related costs to support our core operating systems. Legal expenses in the nine month period were also impacted by the $3.7 million settlement with the Federal Trade Commission related to prior advertising practices. Other expenses consisting primarily of depreciation increased $1.5 million and $5.6 million for the three and nine months ended September 30, 2012, respectively, in comparison to the same periods in 2011. The increase for both periods was a result of the Company’s investment in its Medifast Weight Control Centers, and technology infrastructure.

Pre-tax profit increased as a percent of sales from 8.9% for the three months ended September 30, 2011, to 9.9% for the three months ended September 30, 2012 primarily due to higher margins on sales driven by lower customer discounts. Pre-tax profit decreased as a percent of sales from 11.5% for the three months ended September 30, 2011, to 7.6% for the same period in 2012. The Medifast segment declined from 14.8% and 15.3% in the three and nine months ended September 30, 2011 to 12.5% and 12.4% in three and nine months ended September 30, 2012, respectively. The decline in pre-tax profit was a result of discounting products to our customers, increased commodity costs in the first half of 2012, the $3.7 million increase in legal expenses due to the FTC settlement, and costs related to the MWCC expansion. The decrease was partially offset by a one-time $0.8 million gain in other income from insurance proceeds.

Income Taxes: In the third quarter of 2012, the Company recorded $1.8 million in income tax expense resulting in an effective tax rate of 19.7%. For the same period in 2011, income tax expense was $1.7 million, resulting in an effective tax rate of 25.5%. The decrease in the effective tax rate was the result of state restructuring planning to take advantage of the Maryland single sales factor apportionment methodology. For the nine months ended September 30, 2012, income tax expense was $6.8 million, an effective rate of 32.7% compared to $8.9 million in 2011 with an effective rate of 33.8%. The decrease in the effective tax rate was the result of the state restructuring discussed above, however, the majority of this tax benefit was offset by the non-deductibility of the costs associated with the FTC settlement in the quarter ended June 30, 2012. The Company anticipates a full year tax rate of approximately 33% in 2012.

Net Income: Net income increased $2.1 million from $5.1 million to $7.2 million for the three months ended September 30, 2012. Net income decreased $3.4 million from $17.4 million to $14.0 million for the nine months ended September 30, 2012.

Non-GAAP Financial Measures

In addition to providing results that are determined in accordance with accounting principles generally accepted in the United States, referred to as GAAP, the Company has provided certain financial measures that are not in accordance with GAAP. The Company’s non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share exclude the charges the Company incurred in relation to the anticipated non-tax deductible FTC settlement. Because the FTC settlement is a unique event, not directly related to the Company’s normal operations, the Company believes these non-GAAP financial measures may help investors better understand and compare our quarterly operating results and trends by eliminating this component.

The reconciliations of these non-GAAP financial measures are as follows: 

The weighted-average diluted shares outstanding used in the calculation of theses non-GAAP financial measures are the same as the weighted-average shares outstanding used in the calculation of the reported per share amounts.

Excluding the impact of the $3.7 million expense for the FTC settlement recognized during the second quarter of 2012, income from operations for the nine months ended September 30, 2012, decreased $2.5 million to $23.4 million from $25.9 million income from operations for the nine months ended September 30, 2011. Adjusted net income for the nine months ended September 30, 2012 increased to $17.7 million from $17.4 million for the nine months ended September 30, 2011. The costs associated with the FTC settlement are non-deductible for tax purposes and resulted in an increased effective tax rate for the nine months ended September 30, 2012. The increase was offset by state restructuring planning performed during the quarter, resulting in a year to date effective tax rate of 33.8%. Adjusted diluted earnings per share for the nine months ended September 30, 2012 increased to $1.29 as compared to diluted earnings per share of $1.22 for same period in 2011.

SEGMENT RESULTS OF OPERATIONS

Sales by Segment

Medifast Segment: The Medifast segment consists of the sales from Medifast Direct Marketing and Take Shape for Life. As this represents the majority of our business, this is discussed in the Overview of the Financial Results above.

The MWCC and Wholesale segment consists of the sales of Medifast Corporate and Franchise Weight Control Centers as well as Medifast Wholesale Physicians and international sales. Sales increased by $3.7 million, or 36% in the third quarter of 2012 and by $14.6 million, or 52% for the nine months ended September 30, 2012 as compared to 2011. Revenue increased due to the opening of forty-three new corporate centers since September 30, 2011, nineteen of which were opened during the first nine months of 2012. The company closed one of the existing centers during the third quarter. The company had thirty-two franchise centers in operation as of September 30, 2012, as compared to twenty-six franchise centers in the prior year. The Company’s expects to expand the number of franchise clinics and continue to enhance the customer experience at corporate clinics through additional offerings such as metabolic testing and dietician support.

Operating Profit by Segment

Medifast Segment: The Medifast reporting segment consists of the activity of Medifast Direct Marketing and Take Shape for Life. This represents the majority of our business and is discussed in the Overview of the Financial Results above. See Note 11, “Business Segments” of the financial statements for a detailed breakout of expenses.

MWCC and Wholesale Segment: Profitability of this segment increased $1.9 million for the third quarter of 2012 in comparison to the third quarter of 2011. The increase was the result of savings from the staffing re-alignment completed in the first quarter, increased customer sales, and reduced advertising spend as a percentage of sales for each corporate center. Profitability decreased $0.9 million in the first nine months of 2012 as compared to the first nine months of 2011. The decrease in net profitability is due to the hiring of expertise in key areas to build the internal infrastructure to open Medifast Weight Control Centers. Results included a charge of $388,000 during the first quarter related to workforce reductions in the Centers and Corporate offices. Approximately seventy positions were either eliminated or re-aligned to enhance the profitability of the MWCC and Wholesale segment. Approximately $2.5 million of annualized savings from restructuring and re-alignment are expected for this segment.

All Other Segment: The All other segment consists of corporate expenses related to the parent Company operations. Year-over-year parent company expenses decreased by $442,000 for the three months ended September 30, 2012 and increased $3.4 million for the nine months ended September 30, 2012. The nine month increase was caused by the FTC settlement for $3.7 million in the second quarter. Corporate expenses include items such as auditors’ fees, attorney’s fees, stock compensation expense and corporate governance related to NYSE, Sarbanes Oxley, and SEC regulations. See footnote 11, “Business Segments”, for additional detail.

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 has limited exposure to market risks related to changes in interest rates. The principal risks of loss arising from adverse changes in market rates and prices to which the Company and its subsidiaries are exposed relate to interest rates on debt. Since nearly all of our debt is variable rate based, any changes in market interest rates will cause a similar change in our net interest expense. At September 30, 2012, there was $3.4 million of variable interest loans outstanding which is subject to interest rate risk. Interest rates on our variable rate loans were 1.52% for the period ended September 30, 2012. Each 100 basis point increase in the bank’s LIBOR rates relative to these borrowings would impact interest expense by $34,000 over a 12-month period.

We are exposed to market risk related to changes in interest rates and market pricing impacting our investment portfolio. Our current investment policy is to maintain an investment portfolio consisting mainly of U.S. money market and high-grade corporate securities, directly or through managed funds. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to interest rate risk and market pricing risk and will fall in value if market interest rates increase or if market pricing decreases. If market interest rates were to increase and market pricing were to decrease immediately and uniformly by 10% from levels at September 30, 2012, we estimate that the fair value of our investment portfolio would decline by an immaterial amount and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a change in market conditions on our investments.

Item 4. Controls and Procedures

Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of September 30, 2012. 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 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that the Company’s internal control over financial reporting was effective as of September 30, 2012.

Changes in Internal Control over Financial Reporting:

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

On July 20, 2012, Jason Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company signed a proposed consent decree with the Federal Trade Commission (“FTC”), in response to the FTC’s investigation of certain statements in the Company’s advertising for its weight-loss programs. The new agreement replaces a previous consent order entered into by Jason Pharmaceuticals, Inc. and the FTC in 1992. The FTC expressed concern that some of the Company’s advertising contained claims which were not compatible with current standards for substantiation. Pursuant to the consent decree, the Company has agreed to modify certain advertising claims in this regard and has agreed to ensure that its clinical studies meet the protocol contained in the proposed consent agreement. The Company paid a civil penalty of $3.7 million to resolve the FTC’s concerns and avoid protracted legal proceedings.

On April 1, 2011, a shareholder derivative complaint titled Shane Rothenberger, derivatively on behalf of Medifast, Inc., v Bradley T. MacDonald et al. (Civil Action 2011-CV 863 [BEL]); and on April 11, 2011, a shareholder derivative complaint titled James A. Thompson, derivatively on behalf of Medifast, Inc., v Bradley T. MacDonald et al. (Civil Action 2011-CV934 [BEL]) were filed in the U.S. District Court, District of Maryland. The identically worded complaints allege breach of fiduciary duties, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. Each complaint requests an unspecified amount of damages, a Court Order directing reformation of corporate governance, restitution to the Company and payment of costs and disbursements. The Company is named as a nominal defendant. On July 19, 2011, the U.S. District Judge ordered consolidation of the two cases, appointment of co-lead counsel, and the filing of a consolidated complaint, among other matters. No response is due from the Company at this time. After the consolidated complaint is filed, the Company intends to take whatever action it deems necessary to protect its interests.

On March 17, 2011, a class action complaint titled Oren Proter et al. v. Medifast, Inc. et al. (Civil Action 2011-CV-720[BEL]), alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated under the Exchange Act, was filed for an unspecified amount of damages in the U.S. District Court, District of Maryland. The complaint alleges that the defendants made false and/or misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects. On March 24, 2011, a class action complaint titled Fred Greenberg v Medifast, Inc., et al (Civil Action 2011-CV776 [BEL], alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated under the Exchange Act, was filed for an unspecified amount of damages in the U.S. District Court, District of Maryland. The complaint alleges that the defendants made false and/or misleading statements and failed to disclose material adverse facts regarding the Company’s business, operations and prospects. On July 19, 2011, the U.S. District Judge ordered the consolidation of the cases and appointment of co-lead counsel among other matters. The Greenberg case was dismissed without prejudice. The Plaintiffs subsequently filed an Amended Complaint. The Company has reviewed these allegations, and subsequently filed a Motion to Dismiss which is currently pending. The Company intends to vigorously defend against this amended complaint.

The Company filed a civil complaint on February 17, 2010 in the U.S. District Court (SD, Cal) against Barry Minkow, his Fraud Discovery Institute, Inc., its subsidiary iBusiness Reporting, its editor William Lobdell, as well as Tracy Coenen, her Sequence, Inc., “Zee Yourself”, and Robert L. Fitzpatrick for defamation and violations of California Corporation Code Sections 25400 et seq and 17200 et seq, alleging a scheme of market manipulation of  Medifast stock for Defendants’ monetary gain, by damaging the business reputation of Medifast and its meal replacement weight loss products. Bradley T. MacDonald, former Executive Chairman of Medifast, who was also a large shareholder of the Company, joined the lawsuit individually. The suit seeks at least $270 million in compensatory damages, punitive damages, and ancillary relief. The Company continues prosecution of this civil suit. This matter is pending before the 9^th Circuit Court of Appeals on appeals from the District Court’s judgment rendered in March, 2011 regarding SLAPP Motions previously filed by all Defendants. The Company also continues to pursue its pending complaints filed in March, 2009 with the SEC, Maryland Securities Commissioner, and the U.S. Attorney against most of these same named defendants with respect to the related matter.

In early 2010, the Chapter 7 Bankruptcy Trustee for Go Fig, Inc. et al., Debtors, filed an adversary civil proceeding in the US Bankruptcy Court (ED, Missouri) against Jason Pharmaceuticals, Inc., a subsidiary of Medifast, Inc. (MED-NYSE), and other unrelated entities seeking to recover, as to each, alleged preferential payments. Jason Pharmaceuticals sold product received by the Debtors and has previously filed a pending claim in the same bankruptcy. Medifast disputed the Trustee’s allegations. This action was by Court order placed on hold while the Trustee litigated similar issues against another Party. This matter was recently settled by Jason Pharmaceuticals, Inc. for $6,500. Upon court approval of the settlement, all matters related to this case will be resolved.

Since 2010, Jason Pharmaceuticals has received seven Notices of Charge of Discrimination filed with the US EEOC alleging discrimination suffered by 2 current employees, 3 former employees, and 2 employment applicants. The EEOC dismissed three of those charges in 2011. As reported in 2011 Q3, the two Claimants whose charge claims were dismissed during the second quarter filed suit to pursue those claims in US District Court. One of those claims has been resolved through mediation. The Court in the second claim recently issued an order granting the Company’s motion for summary judgment. The Claimant has filed an appeal with the Court of Appeals for the 5^th Circuit, and the Company will continue to defend against this claim. In addition, the complaints by the 2 employment applicants were recently dismissed.

Item 1A. Risk Factors

Information about risk factors for the nine months ended September 30, 2012, does not differ materially from those in set forth in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 5. Other Information

The Board of Directors of Medifast, Inc. authorized the repurchase of up to 1,000,000 shares of the Company’s common stock as approved by Board consent on May 29, 2012. The authorization remains open for a period of 24 months ending on May 29, 2014. This authorization is in addition to the previously reported share repurchase authorizations on May 18, 2011 and on July 21, 2011.

Stock repurchases under this program may be made by the broker through open market and privately negotiated transactions at times and in such amounts as management shall deem appropriate pursuant to Rule 10b-18 of the Exchange Act. The timing and actual number of shares which may be  repurchased will depend on a variety of factors including price, corporate authorization provisions, above noted regulatory requirements, and other market conditions.

We are not obligated to purchase any shares. Subject to applicable securities laws repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be funded from our available cash.

There are 1,125,000 remaining authorized shares that may be repurchased.

The following is a summary of our common stock purchases during the quarter ended September 30, 2012:

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.

Index to Exhibits