10-Q 1 v318729_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarter period ended June 30, 2012

OR

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

For the transition period from to .

Commission file number

Medifast, Inc.

(Exact name of registrant as specified in its charter)

Delaware | 13-3714405
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)

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.

Class |  | Outstanding at August 9, 2012 |
Common stock, $.001 par value per share |  |  | 15,525,955 |

Medifast, Inc.

Index

Part 1 – Financial Information: |
Item 1 – Financial Statements |
Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011 (audited) | 3
Condensed Consolidated Statements of Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011 | 4
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011 | 5
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2012 | 6
Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2012 and 2011 | 7
Notes to Unaudited Condensed Financial Statements | 8
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14
Item 3 – Quantitative and Qualitative Disclosures about Market Risk | 24
Item 4 – Controls and Procedures | 24
Part II – Other Information: |
Item 1 – Legal Proceedings | 25
Item 1-A – Risk Factors | 25
Item 5 – Other Information | 26
Item 6 – Exhibits |

2

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

|  | (Unaudited) |  |  | (Audited) |
|  | June 30, 2012 |  |  | December 31, 2011 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 37,120,000 |  |  | $ | 14,262,000 |
Accounts receivable-net of allowance for sales returns and doubtful accounts of $628,000 and $504,000 |  |  | 2,395,000 |  |  |  | 1,477,000 |
Inventory |  |  | 16,265,000 |  |  |  | 19,969,000 |
Investment securities |  |  | 19,436,000 |  |  |  | 19,538,000 |
Income taxes, prepaid |  |  | 442,000 |  |  |  | 5,434,000 |
Prepaid expenses and other current assets |  |  | 3,094,000 |  |  |  | 2,251,000 |
Deferred tax assets |  |  | 748,000 |  |  |  | 1,055,000 |
Total current assets |  |  | 79,500,000 |  |  |  | 63,986,000 |
Property, plant and equipment - net |  |  | 39,621,000 |  |  |  | 38,852,000 |
Trademarks and intangibles - net |  |  | 741,000 |  |  |  | 1,003,000 |
Other assets |  |  | 1,096,000 |  |  |  | 1,824,000 |
TOTAL ASSETS |  | $ | 120,958,000 |  |  | $ | 105,665,000 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable and accrued expenses |  | $ | 30,087,000 |  |  | $ | 18,830,000 |
Current maturities of long-term debt and capital leases |  |  | 552,000 |  |  |  | 1,426,000 |
Total current liabilities |  |  | 30,639,000 |  |  |  | 20,256,000 |
Other liabilities |  |  |  |  |  |  |  |
Long-term debt, net of current portion |  |  | 3,225,000 |  |  |  | 3,337,000 |
Capital leases, net of current portion |  |  | 841,000 |  |  |  | 914,000 |
Deferred tax liabilities |  |  | 6,856,000 |  |  |  | 7,756,000 |
Total liabilities |  |  | 41,561,000 |  |  |  | 32,263,000 |
Stockholders' Equity: |  |  |  |  |  |  |  |
Preferred stock, $.001 par value (1,500,000 authorized, no shares issued and outstanding) |  |  | - |  |  |  | - |
Common stock; par value $.001 per share; 20,000,000 shares authorized; 15,525,955 and 15,510,185 issued and outstanding |  |  | 16,000 |  |  |  | 16,000 |
Additional paid-in capital |  |  | 37,995,000 |  |  |  | 36,076,000 |
Accumulated other comprehensive income |  |  | 432,000 |  |  |  | 396,000 |
Retained earnings |  |  | 67,462,000 |  |  |  | 60,658,000 |
Less: cost of 1,608,908 and 1,458,908 shares of common stock in treasury |  |  | (26,508,000 | ) |  |  | (23,744,000 | )
Total stockholders' equity |  |  | 79,397,000 |  |  |  | 73,402,000 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |  | $ | 120,958,000 |  |  | $ | 105,665,000 |

See notes to unaudited condensed consolidated financial statements.

3

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Revenue |  | $ | 93,571,000 |  |  | $ | 78,255,000 |  |  | $ | 182,496,000 |  |  | $ | 152,550,000 |
Cost of sales |  |  | 23,431,000 |  |  |  | 19,214,000 |  |  |  | 45,600,000 |  |  |  | 36,829,000 |
Gross Profit |  |  | 70,140,000 |  |  |  | 59,041,000 |  |  |  | 136,896,000 |  |  |  | 115,721,000 |
Selling, general, and administration |  |  | 65,542,000 |  |  |  | 49,984,000 |  |  |  | 126,160,000 |  |  |  | 96,562,000 |
Income from operations |  |  | 4,598,000 |  |  |  | 9,057,000 |  |  |  | 10,736,000 |  |  |  | 19,159,000 |
Other income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income/ (expense), net |  |  | 90,000 |  |  |  | 79,000 |  |  |  | 162,000 |  |  |  | 142,000 |
Other |  |  | 814,000 |  |  |  | 6,000 |  |  |  | 938,000 |  |  |  | 122,000 |
|  |  | 904,000 |  |  |  | 85,000 |  |  |  | 1,100,000 |  |  |  | 264,000 |
Income before income taxes |  |  | 5,502,000 |  |  |  | 9,142,000 |  |  |  | 11,836,000 |  |  |  | 19,423,000 |
Provision for income taxes |  |  | (2,689,000 | ) |  |  | (3,198,000 | ) |  |  | (5,032,000 | ) |  |  | (7,121,000 | )
Net income |  | $ | 2,813,000 |  |  | $ | 5,944,000 |  |  | $ | 6,804,000 |  |  | $ | 12,302,000 |
Basic earnings per share |  | $ | 0.20 |  |  | $ | 0.42 |  |  | $ | 0.50 |  |  | $ | 0.87 |
Diluted earnings per share |  | $ | 0.20 |  |  | $ | 0.41 |  |  | $ | 0.49 |  |  | $ | 0.85 |
Weighted average shares outstanding - |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 13,747,000 |  |  |  | 14,175,990 |  |  |  | 13,711,961 |  |  |  | 14,219,532 |
Diluted |  |  | 13,834,264 |  |  |  | 14,461,316 |  |  |  | 13,779,595 |  |  |  | 14,489,759 |

See notes to unaudited condensed consolidated financial statements.

4

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Net income |  | $ | 2,813,000 |  |  | $ | 5,944,000 |  |  | $ | 6,804,000 |  |  | $ | 12,302,000 |
Other comprehensive income, net of tax |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gains (losses) on securities |  |  | (102,000 | ) |  |  | 124,000 |  |  |  | 36,000 |  |  |  | 96,000 |
Other comprehensive income (loss) |  |  | (102,000 | ) |  |  | 124,000 |  |  |  | 36,000 |  |  |  | 96,000 |
Comprehensive income |  | $ | 2,711,000 |  |  | $ | 6,068,000 |  |  | $ | 6,840,000 |  |  | $ | 12,398,000 |

See notes to unaudited condensed consolidated financial statements.

5

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Six Months Ended June 30, 2012

(Unaudited)

|  |  |  |  |  |  |  |  |  |  |  |  |  | Accumulated |  |  |  |  |  |  |
|  |  |  |  | Par Value |  |  |  |  |  |  |  |  | other |  |  |  |  |  |  |
|  | Number of |  |  | $0.001 |  |  | Additional Paid- |  |  | Retained |  |  | comprehensive |  |  |  |  |  |  |
|  | Shares |  |  | Amount |  |  | In Capital |  |  | Earnings |  |  | income |  |  | Treasury Stock |  |  | Total |
Balance, December 31, 2011 |  |  | 15,510,185 |  |  | $ | 16,000 |  |  | $ | 36,076,000 |  |  | $ | 60,658,000 |  |  | $ | 396,000 |  |  | $ | (23,744,000 | ) |  | $ | 73,402,000 |
Share-based compensation to executives and directors |  |  |  |  |  |  |  |  |  |  | 1,455,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,455,000 |
Share-based compensation tax benefit |  |  |  |  |  |  |  |  |  |  | 464,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 464,000 |
Restricted shares issued to executives and directors |  |  | 15,770 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Treasury stock purchases |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2,764,000 | ) |  |  | (2,764,000 | )
Comprehensive income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 6,804,000 |  |  |  |  |  |  |  |  |  |  |  | 6,804,000 |
Net change in unrealized gain (loss) on investments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 36,000 |  |  |  |  |  |  |  | 36,000 |
Comprehensive income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 6,840,000 |
Balance, June 30, 2012 |  |  | 15,525,955 |  |  | $ | 16,000 |  |  | $ | 37,995,000 |  |  | $ | 67,462,000 |  |  | $ | 432,000 |  |  | $ | (26,508,000 | ) |  | $ | 79,397,000 |

See notes to unaudited condensed consolidated financial statements.

6

MEDIFAST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net income |  | $ | 6,804,000 |  |  | $ | 12,302,000 |
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 5,190,000 |  |  |  | 3,662,000 |
Realized (gain) on investment securities, net |  |  | (48,000 | ) |  |  | (12,000 | )
Share-based compensation |  |  | 1,455,000 |  |  |  | 1,299,000 |
Deferred income taxes |  |  | (616,000 | ) |  |  | 209,000 |
Loss on disposal of fixed assets |  |  | 44,000 |  |  |  | - |
Changes in assets and liabilities which provided (used) cash: |  |  |  |  |  |  |  |
Accounts receivable |  |  | (918,000 | ) |  |  | (524,000 | )
Inventory |  |  | 3,704,000 |  |  |  | 3,823,000 |
Prepaid expenses and other current assets |  |  | (843,000 | ) |  |  | 325,000 |
Other assets |  |  | 429,000 |  |  |  | (1,000 | )
Accounts payable and accrued expenses |  |  | 11,256,000 |  |  |  | 5,915,000 |
Income taxes |  |  | 4,992,000 |  |  |  | 3,508,000 |
Net cash provided by operating activities |  |  | 31,449,000 |  |  |  | 30,506,000 |
Cash Flow from Investing Activities: |  |  |  |  |  |  |  |
Sale of investment securities |  |  | 5,411,000 |  |  |  | 4,927,000 |
Purchase of investment securities |  |  | (5,200,000 | ) |  |  | (6,277,000 | )
Purchase of property and equipment |  |  | (5,347,000 | ) |  |  | (5,549,000 | )
Purchase of intangible assets |  |  | - |  |  |  | (131,000 | )
Net cash used in investing activities |  |  | (5,136,000 | ) |  |  | (7,030,000 | )
Cash Flow from Financing Activities: |  |  |  |  |  |  |  |
Repayment of long-term debt and capital leases |  |  | (1,163,000 | ) |  |  | (730,000 | )
Decrease in note receivable |  |  | 8,000 |  |  |  | 5,000 |
Excess tax benefits from share-based compensation |  |  | 464,000 |  |  |  | 709,000 |
Purchase of treasury stock |  |  | (2,764,000 | ) |  |  | (12,333,000 | )
Net cash used in financing activities |  |  | (3,455,000 | ) |  |  | (12,349,000 | )
NET CHANGE IN CASH AND CASH EQUIVALENTS |  |  | 22,858,000 |  |  |  | 11,127,000 |
Cash and cash equivalents - beginning of the period |  |  | 14,262,000 |  |  |  | 17,165,000 |
Cash and cash equivalents - end of period |  | $ | 37,120,000 |  |  | $ | 28,292,000 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Interest paid |  | $ | 56,000 |  |  | $ | 50,000 |
Income taxes paid |  | $ | 105,000 |  |  | $ | 2,639,000 |
Supplemental disclosure of non cash activity: |  |  |  |  |  |  |  |
Capitalized lease additions |  | $ | 104,000 |  |  | $ | - |

See notes to unaudited condensed consolidated financial statements.

7

Medifast, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

General

| 1. | Basis of Presentation

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 six months ended June 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.

| 2. | Presentation of 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.

| 3. | Recent Accounting Pronouncements

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.

| 4. | 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.

| 5. | Inventories

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.

8

Inventories consist of the following at June 30, 2012 and December 31, 2011:

|  | 2012 |  |  | 2011 |
Raw Materials |  | $ | 4,464,000 |  |  | $ | 4,591,000 |
Packaging |  |  | 2,554,000 |  |  |  | 2,204,000 |
Finished Goods |  |  | 9,247,000 |  |  |  | 13,174,000 |
|  | $ | 16,265,000 |  |  | $ | 19,969,000 |

| 6. | Intangible Assets

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.

|  | As of June 30, 2012 |  |  | As of December 31, 2011 |  |  |  |
|  | Gross |  |  |  |  |  | Gross |  |  |  |  |  | Weighted-Avg. |
|  | Carrying |  |  | Accumulated |  |  | Carrying |  |  | Accumulated |  |  | Amortization |
|  | Amount |  |  | Amortization |  |  | Amount |  |  | Amortization |  |  | Period |
Customer lists |  | $ | 235,000 |  |  | $ | 168,000 |  |  | $ | 235,000 |  |  | $ | 128,000 |  |  |  | 3 years |
Trademarks, patents, and copyrights |  |  | 2,437,000 |  |  |  | 1,763,000 |  |  |  | 2,440,000 |  |  |  | 1,544,000 |  |  |  | 4 years |
Total |  | $ | 2,672,000 |  |  | $ | 1,931,000 |  |  | $ | 2,675,000 |  |  | $ | 1,672,000 |  |  |  |  |

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

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Customer lists |  | $ | 20,000 |  |  | $ | 20,000 |  |  | $ | 40,000 |  |  | $ | 39,000 |
Trademarks, patents, and copyrights |  |  | 132,000 |  |  |  | 95,000 |  |  |  | 219,000 |  |  |  | 191,000 |
Total trademarks and intangibles |  | $ | 152,000 |  |  | $ | 115,000 |  |  | $ | 259,000 |  |  | $ | 230,000 |

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

| 7. | Earnings per Share

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.

9

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

|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income |  | $ | 2,813,000 |  |  | $ | 5,944,000 |  |  | $ | 6,804,000 |  |  | $ | 12,302,000 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Weighted average shares of common stock outstanding |  |  | 13,747,000 |  |  |  | 14,175,990 |  |  |  | 13,711,961 |  |  |  | 14,219,532 |
Effect of dilutive common stock equivalents |  |  | 87,264 |  |  |  | 285,326 |  |  |  | 67,634 |  |  |  | 270,227 |
Weighted average diluted common shares outstanding |  | $ | 13,834,264 |  |  | $ | 14,461,316 |  |  | $ | 13,779,595 |  |  | $ | 14,489,759 |
EPS: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.20 |  |  | $ | 0.42 |  |  | $ | 0.50 |  |  | $ | 0.87 |
Diluted |  | $ | 0.20 |  |  | $ | 0.41 |  |  | $ | 0.49 |  |  | $ | 0.85 |

10

| 8. | Estimates

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.

| 9. | Fair Value Measurements

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 June 30, 2012 and December 31, 2011:

June 30, 2012 |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Investment securities |  | $ | 19,436,000 |  |  |  | - |  |  |  | - |  |  | $ | 19,436,000 |
Cash equivalents |  |  | 1,241,000 |  |  |  | - |  |  |  | - |  |  |  | 1,241,000 |
Total Assets |  | $ | 20,677,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 20,677,000 |

December 31, 2011 |  | Level I |  |  | Level II |  |  | Level III |  |  | Total |
Investment securities |  | $ | 19,538,000 |  |  |  | - |  |  |  | - |  |  | $ | 19,538,000 |
Cash equivalents |  |  | 803,000 |  |  |  | - |  |  |  | - |  |  |  | 803,000 |
Total Assets |  | $ | 20,341,000 |  |  | $ | - |  |  | $ | - |  |  | $ | 20,341,000 |

| 10. | Share-based Compensation

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:

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|  |  |  |  | Weighed-Average |
|  | Shares |  |  | Grant Date Fair Value |
Unvested at December 31, 2011 |  |  | 455,256 |  |  | $ | 7.08 |
Granted |  |  | 15,770 |  |  |  | 17.46 |
Vested |  |  | (211,975 | ) |  |  | 7.00 |
Forfeited |  |  | - |  |  |  | - |
Unvested at June 30, 2012 |  |  | 259,051 |  |  | $ | 7.88 |

The total restricted stock awards vested and charged against income during the three months ended June 30, 2012 and 2011 was $882,000 and $617,000, respectively and for the six months ended June 30, 2012 and 2011 was $1.5 million and $1.3 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 $341,000 and $232,000 for the three months ended June 30, 2012 and 2011, respectively and $563,000 and $488,000 for the six months ended June 30, 2012 and 2011, respectively. The tax benefit recognized in additional paid-in capital upon vesting of restricted stock awards was approximately $464,000 and $214,000 for the three months ended June 30, 2012 and 2011, respectively and $464,000 and $709,000 for the six months ending June 30, 2012 and 2011, respectively. There was approximately $2 million of total unrecognized compensation cost related to restricted stock awards as of June 30, 2012. The cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

| 11. | Business Segments

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.

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.

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

|  | Three Months Ended June 30, 2012 |
|  | Medifast |  |  | MWCC & Wholesales |  |  | Other |  |  | Consolidated |
Revenues |  | $ | 78,220,000 |  |  | $ | 15,351,000 |  |  | $ | - |  |  | $ | 93,571,000 |
Cost of Sales |  |  | 19,782,000 |  |  |  | 3,649,000 |  |  |  | - |  |  |  | 23,431,000 |
Selling, General and Administrative Expense |  |  | 47,173,000 |  |  |  | 10,279,000 |  |  |  | 5,282,000 |  |  |  | 62,734,000 |
Depreciation and Amortization |  |  | 2,030,000 |  |  |  | 720,000 |  |  |  | 58,000 |  |  |  | 2,808,000 |
Interest(net) and other |  |  | 14,000 |  |  |  | 4,000 |  |  |  | (922,000 | ) |  |  | (904,000 | )
Income before income taxes |  | $ | 9,221,000 |  |  | $ | 699,000 |  |  | $ | (4,418,000 | ) |  | $ | 5,502,000 |
Segment Assets |  | $ | 76,898,000 |  |  | $ | 15,853,000 |  |  | $ | 28,207,000 |  |  | $ | 120,958,000 |

|  | Three Months Ended June 30, 2011 |
|  | Medifast |  |  | MWCC & Wholesales |  |  | Other |  |  | Consolidated |
Revenues |  | $ | 68,603,000 |  |  | $ | 9,652,000 |  |  | $ | - |  |  | $ | 78,255,000 |
Cost of Sales |  |  | 16,920,000 |  |  |  | 2,294,000 |  |  |  | - |  |  |  | 19,214,000 |
Selling, General and Administrative Expense |  |  | 39,735,000 |  |  |  | 6,664,000 |  |  |  | 1,570,000 |  |  |  | 47,969,000 |
Depreciation and Amortization |  |  | 1,648,000 |  |  |  | 283,000 |  |  |  | 84,000 |  |  |  | 2,015,000 |
Interest(net) and other |  |  | 3,000 |  |  |  | - |  |  |  | (88,000 | ) |  |  | (85,000 | )
Income before income taxes |  | $ | 10,297,000 |  |  | $ | 411,000 |  |  | $ | (1,566,000 | ) |  | $ | 9,142,000 |
Segment Assets |  | $ | 51,687,000 |  |  | $ | 10,849,000 |  |  | $ | 39,370,000 |  |  | $ | 101,906,000 |

|  | Six Months Ended June 30, 2012 |
|  | Medifast |  |  | MWCC & Wholesales |  |  | Other |  |  | Consolidated |
Revenues |  | $ | 153,773,000 |  |  | $ | 28,723,000 |  |  | $ | - |  |  | $ | 182,496,000 |
Cost of Sales |  |  | 38,709,000 |  |  |  | 6,891,000 |  |  |  | - |  |  |  | 45,600,000 |
Selling, General and Administrative Expense |  |  | 92,084,000 |  |  |  | 22,115,000 |  |  |  | 6,771,000 |  |  |  | 120,970,000 |
Depreciation and Amortization |  |  | 3,825,000 |  |  |  | 1,230,000 |  |  |  | 135,000 |  |  |  | 5,190,000 |
Interest(net) and other |  |  | 47,000 |  |  |  | 8,000 |  |  |  | (1,155,000 | ) |  |  | (1,100,000 | )
Income before income taxes |  | $ | 19,108,000 |  |  | $ | (1,521,000 | ) |  | $ | (5,751,000 | ) |  | $ | 11,836,000 |
Segment Assets |  | $ | 76,898,000 |  |  | $ | 15,853,000 |  |  | $ | 28,207,000 |  |  | $ | 120,958,000 |

|  | Six Months Ended June 30, 2011 |
|  | Medifast |  |  | MWCC & Wholesales |  |  | Other |  |  | Consolidated |
Revenues |  | $ | 134,700,000 |  |  | $ | 17,850,000 |  |  | $ | - |  |  | $ | 152,550,000 |
Cost of Sales |  |  | 32,650,000 |  |  |  | 4,179,000 |  |  |  | - |  |  |  | 36,829,000 |
Selling, General and Administrative Expense |  |  | 78,129,000 |  |  |  | 11,820,000 |  |  |  | 2,951,000 |  |  |  | 92,900,000 |
Depreciation and Amortization |  |  | 2,965,000 |  |  |  | 532,000 |  |  |  | 165,000 |  |  |  | 3,662,000 |
Interest(net) and other |  |  | 10,000 |  |  |  | - |  |  |  | (274,000 | ) |  |  | (264,000 | )
Income before income taxes |  | $ | 20,946,000 |  |  | $ | 1,319,000 |  |  | $ | (2,842,000 | ) |  | $ | 19,423,000 |
Segment Assets |  | $ | 51,687,000 |  |  | $ | 10,849,000 |  |  | $ | 39,370,000 |  |  | $ | 101,906,000 |

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| 12. | Contingencies

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 will replace 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 accrued an estimated civil penalty of $3.7 million to resolve the FTC’s concerns and avoid protracted legal proceedings. The proposed consent agreement must be accepted by the FTC and submitted for approval to a federal district court before it becomes effective. The proposed consent decree is attached as Exhibit 10.9 to this Quarterly Report on Form 10-Q.

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 disputes the Trustee’s allegations and intends to vigorously defend itself. This action was by Court order placed on hold while the Trustee litigates similar issues against another Party.

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 recently. The Company intends to vigorously defend against the remaining claims.

| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

FORWARD LOOKING STATEMENTS

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.

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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 requiring recognition of a liability. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. For the six months ended June 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 provision for estimated returns as of June 30, 2012 and December 31, 2011 were $324,000 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 six months of 2012 and 93% 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 six months of 2012 and 2% in the first six months of 2011. Shipping revenue and other accounted for 2% in the first six months of 2012 and 4% in the first six months of 2011. In the first six months of 2012, revenue increased to $182.5 million as compared to $152.6 million in the first six months of 2011, an increase of $29.9 million or 20%. The Take Shape for Life sales channel accounted for 59.6% of total revenue, direct response marketing 24.7%, and Medifast Weight Control Centers and Medifast Wholesale Physicians 15.7%.

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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 six months of 2012, we continued to see sales growth and improvement in Take Shape for Life, Medifast Direct and Medifast Weight Control Centers and Medifast Wholesale Physicians. Take Shape for Life revenue increased 13% to $108.7 million compared with $96.4 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 $1,615 in the second quarter of 2011 to $1,683 in the second quarter of 2012. The increase is primarily due to an increase in usage of our newly streamlined Trilogy Training website that was launched at the Take Shape for Life annual conference in late July 2011, offering easier to access training material. In addition, Take Shape for Life launched monthly incentives that drove client and coach acquisition and resulted in the increase of monthly revenue per health coach. The number of active Health Coaches at the end of the second quarter of 2012 decreased to 10,200 compared to 10,300 in the prior year, a decrease of 1%. Since December 31, 2011 however, the number of active health coaches has increased 6% from 9,600. Active Health Coaches are defined as Health Coaches receiving income from a product sale in the last month of the quarter.

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 is also focusing on regional events throughout the country to ensure participating Health Coaches receive actionable and relevant content to enhance and grow their business. As the number of active Health Coaches increase, the Company receives additional sales proceeds from product referrals.

The Medifast Direct Sales division increased 18% to $45.1 million as compared with $38.2 million in 2011, an increase of $6.9 million. The Company experienced a revenue to spend ratio of 2.8 to 1 return on advertising spend in the first half of 2012 and 2011.

The Medifast Weight Control Centers and Medifast Wholesale Physicians experienced revenue growth of 60% to $28.7 million compared with $17.9 million in 2011. Revenue increased due to the opening of thirty-one new centers in 2011, eighteen new centers in the first half of 2012, a 20% increase in the same store sales for Centers open for greater than one year, and the increased success of franchise centers. 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, the support of a dietitian, and a medical review of laboratory tests to show members the impact of weight loss on their overall health. In order to improve profitability, the Company is focused on reducing advertising spend as a percentage of sales for each Corporate Center, as well as realigning our four-wall staffing strategy of each Corporate Center and the amount of corporate support required to support the Medifast Weight Control 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 opened a new Distribution Center in July 2010 to better service our Midwest to West Coast customers, and increase the number of orders the Company can ship daily. The Company also launched a new web platform for its sales divisions in March 2011, and added a call center location to handle additional volume.

There is also risk our independent contractor field leaders and Health Coaches could leave the Company for better opportunities, resulting in decreased revenue in the Take Shape for Life channel. This risk is mitigated by a compensation program that fairly rewards Health Coaches supporting their clients’ weight loss and health goals, and increases revenue per month as Health Coaches build their organizations.

Overview of the Company

Distribution Channels

Medifast Direct – In the direct-to-consumer channel (“Medifast Direct”), customers order Medifast product directly through the Company’s websites, www.choosemedifast.com and www.medifastnow.com or our in-house call center. The product is shipped directly to the customer’s home. This business is driven by an aggressive multi-media customer acquisition strategy that includes both national and regional print, radio, web advertising, direct mail, and 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 to better serve its customers. 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.

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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 are conduits to give clients the encouragement and mentoring to assist them to successfully reach a healthy weight. Take Shape For Life provides a road map to empower the individual to take control of their health through better habits. 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 addition, 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:

| · | Commissions: The primary way a Health Coach is compensated is through earning commissions on products purchased from the company by their clients. Health Coaches earn commissions by referring product sales through their own replicated website or through the Company’s in-house call center. The clients of Health Coaches are responsible for ordering and paying for product, and their order is shipped directly from the Company to the client’s home or designated address. Our Health Coaches do not handle payments and are not required to purchase or store product in order to receive a commission. In addition, Health Coaches do not receive a commission on their product orders for their personal use. Health Coaches pay the same price for products as their clients. The Company pays retail commissions on a weekly basis.

| · | Bonuses: Health Coaches are offered several bonus opportunities, including growth bonuses, generation bonuses, elite leadership bonuses, rolling consistency bonuses, client acquisition bonuses, and customer assist bonuses. The purposes of these bonuses are to reward Health Coaches for successfully referring product sales to the Take Shape For Life network, and to incentivize Health Coaches to further develop Health Coaches within their network. The Company pays bonuses on a monthly basis.

| o | Growth bonuses are paid to Health Coaches that have at least five ordering clients per month and that have generated over $1,000 in product sales per month. Monthly growth bonuses are incremental bonuses that enable Health Coaches to earn income on product orders placed by clients or Health Coaches within their network.

| o | Generation bonuses are paid to Health Coaches that have one or more Health Coaches in their business that have achieved the rank of Executive Director. An Executive Director is a Health Coach that either generates $6,000 a month in frontline product sales to either Clients or personally sponsored Health Coaches or personally sponsors five senior Health Coaches. A senior Health Coach is a Health Coach that generates at least $1,000 a month in group product sales from a combination of at least five personally enrolled, ordering Clients, and/or Health Coaches, Health Coach teams, or a combination of both.

| o | Elite leadership bonuses are paid to Health Coaches that have three or more Health Coaches in their business that have achieved the rank of Executive Director.

| o | Rolling consistency bonuses are paid to Health Coaches that display frontline product sales order consistency month after month. Health Coaches that generate at least $2,000 or more in frontline product sales for three consecutive months are paid a rolling consistency bonus.

| o | Client acquisition bonuses are paid out to new Health Coaches that within their first 30 calendar days in Take Shape For Life develop five Clients and $1,000 in frontline product sales.

| o | The assist bonuses are paid to Health Coaches that assist a new Health Coach in their business attain the Client acquisition bonus.

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 the products Take Shape For Life markets. 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.

17

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 second quarter of 2012, the Company opened thirteen new Medifast Weight Control Centers and had a total of eighty-eight locations in operation at June 30, 2012. The centers offer a high-touch model including comprehensive Medifast programs for weight loss and maintenance, customized patient counseling, and InbodyTM 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 June 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 between Medifast and the franchises.

Our franchise strategy depends upon on our franchisees’ active involvement in and management of Medifast Weight Control Center operations. Candidates are reviewed for appropriate operational experience and financial stability, including specific net worth and liquidity requirements. Upon franchisee approval, they shall promptly select sites for the Centers and shall request Franchisor’s approval of such selection based on guidelines, terms, and conditions.

A franchisee’s initial fee covers the cost of Company resources provided to train applicant and staff, and determine territory for development. If a successful applicant desires to open more than three centers in the designated territory, there is an additional fee for each location over the three to be developed. The Company provides initial investment estimates in the FDD and cautions applicants considering the franchise opportunity that their actual expenses may vary from the estimates given. Legal disclosures are given and the applicant cannot sign the Agreement until he/she has had 14 days to consider the FDD.

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

| i. | designate the Center’s Protected Territory.

| ii. | if the Company has not already approved a site that the franchisee has selected before signing the Franchise Agreement, designate the area within which the franchisee will locate the Center and approve the site the franchisee has selected for the location of the Center.

| iii. | if the Company has not already approved a site before signing the Franchise Agreement, review and approve the franchisee lease or purchase agreement for the site for the approved location.

| iv. | provide the franchisee with standard plans and specifications for the build-out of the Center along with a list of equipment and improvements which the franchisee is required to purchase and install.

| v. | provide an initial training program.

| vi. | provide the franchisee on-site assistance and guidance for approximately three to five days during or close to the opening of the Center.

| vii. | provide the franchise with online access to a password-protected, electronic version of the Medifast Weight Control Centers® Franchise Operations Manual.

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 that are consulting their primary care physician. Customers have access to registered dietitians that 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.

18

Overview of Financial Results

|  | Three Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | $ Change |  |  | % Change |
Revenue |  | $ | 93,571,000 |  |  | $ | 78,255,000 |  |  | $ | 15,316,000 |  |  |  | 20 | %
Cost of sales |  |  | 23,431,000 |  |  |  | 19,214,000 |  |  |  | 4,217,000 |  |  |  | 22 | %
Gross Profit |  |  | 70,140,000 |  |  |  | 59,041,000 |  |  |  | 11,099,000 |  |  |  | 19 | %
Selling, general, and administrative costs |  |  | 65,542,000 |  |  |  | 49,984,000 |  |  |  | 15,558,000 |  |  |  | 31 | %
Income from operations |  |  | 4,598,000 |  |  |  | 9,057,000 |  |  |  | (4,459,000 | ) |  |  | -49 | %
Other income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income (expense), net |  |  | 90,000 |  |  |  | 79,000 |  |  |  | 11,000 |  |  |  | 14 | %
Other income |  |  | 814,000 |  |  |  | 6,000 |  |  |  | 808,000 |  |  |  | 13467 | %
|  |  | 904,000 |  |  |  | 85,000 |  |  |  | 819,000 |  |  |  | 964 | %
Income before provision for income taxes |  |  | 5,502,000 |  |  |  | 9,142,000 |  |  |  | (3,640,000 | ) |  |  | -40 | %
Provision for income tax (expense) |  |  | (2,689,000 | ) |  |  | (3,198,000 | ) |  |  | 509,000 |  |  |  | -16 | %
Net income |  | $ | 2,813,000 |  |  | $ | 5,944,000 |  |  | $ | (3,131,000 | ) |  |  | -53 | %
% of revenue |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Profit |  |  | 75.0 | % |  |  | 75.4 | % |  |  |  |  |  |  |  |
Selling, general, and administrative costs |  |  | 70.0 | % |  |  | 63.9 | % |  |  |  |  |  |  |  |
Income from Operations |  |  | 4.9 | % |  |  | 11.6 | % |  |  |  |  |  |  |  |

19

|  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | $ Change |  |  | % Change |
Revenue |  | $ | 182,496,000 |  |  | $ | 152,550,000 |  |  | $ | 29,946,000 |  |  |  | 20 | %
Cost of sales |  |  | 45,600,000 |  |  |  | 36,829,000 |  |  |  | 8,771,000 |  |  |  | 24 | %
Gross Profit |  |  | 136,896,000 |  |  |  | 115,721,000 |  |  |  | 21,175,000 |  |  |  | 18 | %
Selling, general, and administrative costs |  |  | 126,160,000 |  |  |  | 96,562,000 |  |  |  | 29,598,000 |  |  |  | 31 | %
Income from operations |  |  | 10,736,000 |  |  |  | 19,159,000 |  |  |  | (8,423,000 | ) |  |  | -44 | %
Other income |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest income (expense), net |  |  | 162,000 |  |  |  | 142,000 |  |  |  | 20,000 |  |  |  | 14 | %
Other income |  |  | 938,000 |  |  |  | 122,000 |  |  |  | 816,000 |  |  |  | 669 | %
|  |  | 1,100,000 |  |  |  | 264,000 |  |  |  | 836,000 |  |  |  | 317 | %
Income before provision for income taxes |  |  | 11,836,000 |  |  |  | 19,423,000 |  |  |  | (7,587,000 | ) |  |  | -39 | %
Provision for income tax (expense) |  |  | (5,032,000 | ) |  |  | (7,121,000 | ) |  |  | 2,089,000 |  |  |  | -29 | %
Net income |  | $ | 6,804,000 |  |  | $ | 12,302,000 |  |  | $ | (5,498,000 | ) |  |  | -45 | %
% of revenue |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross Profit |  |  | 75.0 | % |  |  | 75.9 | % |  |  |  |  |  |  |  |
Selling, general, and administrative costs |  |  | 69.1 | % |  |  | 63.3 | % |  |  |  |  |  |  |  |
Income from Operations |  |  | 5.9 | % |  |  | 12.6 | % |  |  |  |  |  |  |  |

Revenue: Revenue increased 20% to $93.6 million and $182.5 million for the three and six months ended June 30, 2012, respectively, as compared to $78.3 million and $152.6 million for the three and six months ended June 30, 2011. For the three months ended June 30, 2012, the Take Shape for Life sales channel accounted for 59.5% of total revenue, the Medifast Direct channel accounted for 24.1% of total revenue and the Weight Control Centers and Medifast Wholesale Physicians accounted for 16.4% of total revenue. For the six months ended June 30, 2012, the Take Shape for Life sales channel accounted for 59.6% of total revenue, the Medifast Direct channel accounted for 24.7% of total revenue, and the Weight Control Centers and Medifast Wholesale Physicians accounted for 15.7% of total revenue.

Take Shape for Life revenue increased 13% to $55.7 million and $108.7 million for the three and six months ended June 30, 2012, respectively, in comparison to 2011. Growth in revenues for the segment was driven by increased customer product sales as a result of an increase in the monthly revenue per active health coach. The average monthly revenue per health coach increased from $1,615 in the second quarter of 2011 to $1,683 in the second quarter of 2012. The Company attributes the 4% average revenue increase per health coach to improvements to its training since establishing the Trilogy Training website launched at the Take Shape for Life annual conference in July 2011. In addition, Take Shape for Life offered monthly incentives during the first half of 2012, increasing client sales.

The Medifast Direct Response Sales division sales increased 17% to $22.5 million for the three months ended June 30, 2012, and 18% to $45.1 million for the six months ended June 30, 2012 compared to same periods for 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 on television. The revenue to spend for the six months of 2012 was 2.8 to 1. The Company spent approximately $15.8 million on direct response advertising during this period, an increase of 15% from the first six months of 2011.

The Medifast Weight Control Centers and Medifast Wholesale Physicals channel revenues increased 59% and 61% for the three and six months ended June 30, 2012, respectively. This increase was driven by the opening of new corporate and franchise locations and year-over-year improvement in same store sales. At June 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 centers open greater than one year increased by 19% and 20% for the three and six months ended June 30, 2012, respectively, in comparison to 2011. There were forty-six centers in the comparative same-store-sales base.

Cost of Sales: Cost of sales increased $4.2 million and $8.8 million to $23.4 million and $45.6 million for the three and six months ended June 30, 2012, respectively as compared to $19.2 million and $36.8 million for the year prior. As a percentage of sales, gross margin decreased to 75% from 75.9% for the first six months of 2011. The six months ended decline in gross margin was due to increases in commodity costs, more customer orders qualifying for reduced shipping charges, and customers taking advantage of additional promotional offerings introduced during the first quarter of 2012.

20

Selling, General and Administrative Costs: Selling, general, and administrative expenses were $65.5 million compared to $50.0 million in the second quarter of 2011, an increase of $15.5 million. For the first six months ended June 30, 2012, selling, general, and administrative expenses were $126.2 million compared to $96.6 million for the prior year, an increase of $29.6 million. As a percentage of sales, selling, general, and administrative expenses increased to 70.0% and 69.1% for the three and six months ended June 30, 2012, respectively, versus 63.9% and 63.3% for the prior year. 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 $3.5 million as Take Shape for Life sales grew 13% compared to the second quarter of 2011. Take Shape for Life Health Coaches are independent contractors that are paid commissions on product sales referred to the Company.

Salaries and benefits increased by approximately $3.1 million and $7.5 million for the three and six months ended June 30, 2012, respectively, in comparison to the prior year. This increase is due to the hiring of employees to support new Medifast Weight Control Centers, and new hires in our information technology, human resources, finance, Take Shape for Life, and marketing departments to support growth. Since the beginning of 2011, the Company has opened an additional 49 centers. Headcount costs in the second quarter of 2012 declined as compared to the first quarter of 2012 as a result of restructuring actions implemented at the end of March 2012, discussed below.

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. The workforce reduction and staffing re-alignment will result in approximately $3 million in annualized savings. As of June 30, 2012, the Company paid $611,000 of these restructuring charges. Several additional positions were also eliminated during the quarter, increasing the total restructuring charges by $80,000. The remaining $174,000 in restructuring charges is expected to be paid prior to December 31, 2012.

The rollforward of the restructuring charges is as follows:

Restructuring Charges

|  |  |  |  | MWCC & |  |  |  |
|  | Medifast |  |  | Wholesales |  |  | Total |
Accrued restructuring charges as of December 31, 2011 |  | $ | - |  |  | $ | - |  |  | $ | - |
Restructuring charges accrued |  | $ | 335,000 |  |  | $ | 388,000 |  |  | $ | 723,000 |
Payments during the quarter |  |  | - |  |  |  | - |  |  |  | - |
Ending balance accrued as of March 31, 2012 |  | $ | 335,000 |  |  | $ | 388,000 |  |  | $ | 723,000 |
Additional restructuring charges accrued |  | $ | 37,000 |  |  | $ | 43,000 |  |  | $ | 80,000 |
Payments during the quarter |  |  | (269,000 | ) |  |  | (360,000 | ) |  |  | (629,000 | )
Ending balance accrued as of June 30, 2012 |  | $ | 103,000 |  |  | $ | 71,000 |  |  | $ | 174,000 |

Sales and marketing expense increased by $1.4 million and $4.5 million for the three and six months ended June 30, 2012, respectively, as compared to last year. The 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 branding investments included $500,000 video production costs and $700,000 television and internet advertising in three of the Company’s larger markets.

Office expenses increased $1.2 million for the three months ended June 30, 2012 and $3.0 million for the six months ended June 30, 2012, in comparison to 2011. The increase was primarily due to higher rent for administrative offices and Medifast Weight Control Centers, information technology related costs to support our core operating systems, and insurance costs. Legal expenses increased $3.7 million due to the anticipated settlement with the Federal Trade Commission related to prior advertising practices. Other expenses consisting primarily of depreciation and credit card processing fees increased $2.0 million and $3.6 million for the three and six months ended June 30, 2012, respectively, in comparison to the same periods in 2011.

Income Taxes: In the second quarter of 2012, the Company recorded $2.7 million in income tax expense resulting in an effective tax rate of 48.9%. For the same period in 2011, $3.2 million of income tax expense was recorded and the Company had an effective tax rate of 35.0%. For the six months ended June 30, 2012, income tax expense was $5.0 million, an effective rate of 42.5% compared to $7.1 million in 2011 with an effective rate of 36.7%. The increase in the effective tax rate was the result of the non-deductibility of the costs associated with the anticipated FTC settlement. The Company anticipates a full year tax rate of approximately 38% to 39% in 2012.

21

Pre-tax profit declined as a percent of sales from 11.7% and 12.7% in the three and six months ended June 30, 2011, respectively, to 5.9% and 6.5% in the three and six months ended June 30, 2012. The Medifast segment declined from 15.0% and 15.6% in the three and six months ended June 30, 2011 to 11.8% and 12.4% in three and six months ended June 30, 2012. The decline in pre-tax profit was a result of the increase in cost of sales as described above as well as the $3.7 million increase in legal expenses due to the anticipated FTC settlement. The decrease was partially offset by a one-time $0.8 million gain in other income associated with a key man insurance proceed for the Company’s former Executive Chairman of the Board of Directors.

Net Income: Net income was $2.8 million and $6.8 million for the three and six months ended June 30, 2012, respectively, a decrease of $3.1 million and $5.5 million in comparison to 2011. Pre-tax profit as a percent of sales decreased to 5.9% for the three months ended June 30, 2012, and 6.5% for the six months ended June 30, 2012. The decrease in profitability is primarily the result of the expansion of the corporate Medifast Weight Control Centers and the anticipated FTC settlement.

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 anticipated 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:

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Income from operations |  | $ | 4,598,000 |  |  | $ | 9,057,000 |  |  | $ | 10,736,000 |  |  | $ | 19,159,000 |
FTC Settlement Expense |  |  | 3,700,000 |  |  |  | - |  |  |  | 3,700,000 |  |  |  | - |
Adjusted Income from operations-excluding FTC settlement expense |  | $ | 8,298,000 |  |  | $ | 9,057,000 |  |  | $ | 14,436,000 |  |  | $ | 19,159,000 |

|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |  |  | 2012 |  |  | 2011 |
Net income |  | $ | 2,813,000 |  |  | $ | 5,944,000 |  |  | $ | 6,804,000 |  |  | $ | 12,302,000 |
Adjustment for FTC Settlement Expense |  |  | 3,700,000 |  |  |  | - |  |  |  | 3,700,000 |  |  |  | - |
Adjusted net income-excluding FTC settlement expense |  | $ | 6,513,000 |  |  | $ | 5,944,000 |  |  | $ | 10,504,000 |  |  | $ | 12,302,000 |
Diluted earnings per share |  | $ | 0.20 |  |  | $ | 0.41 |  |  | $ | 0.49 |  |  | $ | 0.85 |
Adjustment of FTC settlement expense |  |  | 0.27 |  |  |  | - |  |  |  | 0.27 |  |  |  | - |
Adjusted diluted earnings per share |  | $ | 0.47 |  |  | $ | 0.41 |  |  | $ | 0.76 |  |  | $ | 0.85 |

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 anticipated FTC settlement recognized during the second quarter of 2012, income from operations for the quarter ended June 30, 2012, decreased $0.8 million to $8.3 million from $9.1 million income from operations during the first quarter of 2011. Adjusted income from operations for the six months ended June 30, 2012 decreased $4.8 million to $14.4 from $19.2 million during the six months ended June 30, 2011. Adjusted net income for the quarter ended June 30, 2012 increased 9.6% to $6.5 million, as compared to 2011 net income of $5.9 million. Adjusted net income for the six months ended June 30, 2012 decreased to $10.5 million from $12.3 million for the six months ended June 30, 2011. The costs associated with the anticipated FTC settlement are non-deductible for tax purposes and resulted in an increased effective tax rate of 48.9% for the six months ended June 30, 2012. Adjusted diluted earnings per share for the second quarter of 2012 increased to $0.47 as compared to diluted earnings per share of $0.41 for same period in 2011.

22

SEGMENT RESULTS OF OPERATIONS

|  | Net Sales by Segment for the Three Months Ended June 30, |
|  | 2012 |  |  | 2011 |
Segments |  | Sales |  |  | % of Total |  |  | Sales |  |  | % of Total |
Medifast |  | $ | 78,220,000 |  |  |  | 84 | % |  | $ | 68,603,000 |  |  |  | 88 | %
MWCC and Wholesale |  |  | 15,351,000 |  |  |  | 16 | % |  |  | 9,652,000 |  |  |  | 12 | %
Total Sales |  | $ | 93,571,000 |  |  |  | 100 | % |  | $ | 78,255,000 |  |  |  | 100 | %

|  | Net Sales by Segment for the Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |
Segments |  | Sales |  |  | % of Total |  |  | Sales |  |  | % of Total |
Medifast |  | $ | 153,773,000 |  |  |  | 84 | % |  | $ | 134,700,000 |  |  |  | 88 | %
MWCC and Wholesale |  |  | 28,723,000 |  |  |  | 16 | % |  |  | 17,850,000 |  |  |  | 12 | %
Total Sales |  | $ | 182,496,000 |  |  |  | 100 | % |  | $ | 152,550,000 |  |  |  | 100 | %

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. Sales increased by $5.7 million, or 59% in the second quarter of 2012 and by $10.9 million, or 61% for the six months ended June 30, 2012 as compared to 2011. Revenue increased due to the opening of forty-two new corporate centers since June 30, 2011, eighteen of which were opened during the first six months of 2012. The company had thirty-two franchise centers in operation as of June 30, 2012, as compared to twenty-four 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, dietician support, and reviews of laboratory tests to demonstrate to members the impact of weight loss on their overall health.

|  | Operating Profit by Segment for the Three Months Ended June 30, |
|  | 2012 |  |  | 2011 |
Segments |  | Profit |  |  | % of Total |  |  | Profit |  |  | % of Total |
Medifast |  | $ | 9,235,000 |  |  |  | 201 | % |  | $ | 10,300,000 |  |  |  | 114 | %
MWCC and Wholesale |  |  | 703,000 |  |  |  | 15 | % |  |  | 411,000 |  |  |  | 4 | %
All Other |  |  | (5,340,000 | ) |  |  | -116 | % |  |  | (1,654,000 | ) |  |  | -18 | %
Net Profit |  | $ | 4,598,000 |  |  |  | 100 | % |  | $ | 9,057,000 |  |  |  | 100 | %

|  | Operating Profit by Segment for the Six Months Ended June 30, |
|  | 2012 |  |  | 2011 |
Segments |  | Profit |  |  | % of Total |  |  | Profit |  |  | % of Total |
Medifast |  | $ | 19,155,000 |  |  |  | 178 | % |  | $ | 20,956,000 |  |  |  | 109 | %
MWCC and Wholesale |  |  | (1,513,000 | ) |  |  | -14 | % |  |  | 1,319,000 |  |  |  | 7 | %
All Other |  |  | (6,906,000 | ) |  |  | -64 | % |  |  | (3,116,000 | ) |  |  | -16 | %
Net Profit |  | $ | 10,736,000 |  |  |  | 100 | % |  | $ | 19,159,000 |  |  |  | 100 | %

23

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 $292,000 for the second quarter of 2012 in comparison to the second quarter of 2011 primarily due to an increase in customer sales. Profitability decreased $2.8 million in the first six months of 2012 as compared to the first six 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 during the past year. Results included a charge of $388,000 during the first quarter that 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.

The benefits of the re-alignment began being recognized in the second quarter and profitability increased $288,000 as compared to the second quarter of 2011. The increase is also due to the opening of forty-two centers since June 30, 2011, including eighteen in the current year. Additionally, the Company has reduced the advertising spend as a percentage of sales for each corporate center and has focused on a strategy to leverage corporate office support at the individual centers.

All Other Segment: The All other segment consists of corporate expenses related to the parent Company operations. Year-over-year parent company expenses increased by $3.7 million and $3.8 million for the three and six months ended June 30, 2012, respectively. The increase was caused by the anticipated FTC settlement for $3.7 million. 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 June 30, 2012, there was $3.5 million of variable interest loans outstanding which is subject to interest rate risk. Interest rates on our variable rate loans were 1.54% to 2.24% for the period ended June 30, 2012. Each 100 basis point increase in the bank’s LIBOR rates relative to these borrowings would impact interest expense by $35,000 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 June 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 June 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 June 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 June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 will replace 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 estimates it will pay a civil penalty of approximately $3.7 million, without conceding any wrongdoing or liability, to resolve the FTC’s concerns and avoid protracted legal proceedings. The proposed consent agreement must be accepted by the FTC and submitted for approval to a federal district court before it becomes effective.

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. 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 the Company and other unrelated entities seeking to recover, as to each, alleged preferential payments. Jason Pharmaceuticals, Inc. sold product received by the Debtors and has previously filed a pending claim in the same bankruptcy. Medifast disputes the Trustee’s allegations and intends to vigorously defend itself. This action was by Court order placed on hold while the Trustee litigates similar issues against another Party.

Since 2010, Jason Pharmaceuticals, Inc. has received seven Notices of Charge of Discrimination filed with the U.S. Equal Employment Opportunity Commission (“EEOC”) alleging discrimination suffered by two current employees, three former employees, and two applicants for employment. The EEOC dismissed three of those charges in 2011. In 2011 the two claimants whose claims were dismissed during the second quarter, filed suit to pursue those claims in U.S. District Court. One of those claims was resolved through mediation recently. The Company intends to vigorously defend against the remaining claim.

Item 1A. Risk Factors

Information about risk factors for the six months ended June 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.

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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 June 30, 2012:

|  | Total Number |  |  | Average |  |  | Total Number of Shares |  |  | Maximum Number of Shares |
|  | of Shares |  |  | Price Paid |  |  | Purchased as Part of Publicly |  |  | that May Yet Be Purchased |
Period |  | Purchased |  |  | per Share |  |  | Announced Plans or Programs |  |  | Under the Plans or Programs |
April 1 - April 30, 2012 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 275,000 |
May 1 - May 31, 2012 |  |  | 150,000 |  |  | $ | 18.34 |  |  |  | 150,000 |  |  |  | 1,125,000 |
June 1 - June 30, 2012 |  |  | - |  |  | $ | - |  |  |  | - |  |  |  | 1,125,000 |

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medifast, Inc.

BY: | /S/ MICHAEL C. MACDONALD | August 9, 2012
| Michael C. MacDonald |
| Executive Chairman of the Board and Chief Executive Officer |
| (principal executive officer ) |

BY: | /S/ BRENDAN N. CONNORS | August 9, 2012
| Brendan N. Connors |
| Chief Financial Officer |
| (principal financial officer) |

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Index to Exhibits

Exhibit Number |  | Description of Exhibit
10.9 |  | Proposed Consent Decree between Jason Pharmaceuticals, Inc. and the United States of America
31.1 |  | Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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