UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
quarterly period ended September 30, 2010
  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 0-23016
  MEDIFAST,
INC.
 (Exact
name of registrant as specified in its charter)
  Delaware
                
                13-3714405(State
      or other jurisdiction
                  of
      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 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
  Yes  x    No   ̈
  Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-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 12b-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
                November 8, 2010Common
      stock, $.001 par value per share
              
              15,421,601
      shares
  
  Medifast,
Inc.
 Index
 
 Part
      I - Financial Information:Item
      1 – Financial Statements
                              3Condensed
      Consolidated Balance Sheets as ofSeptember
      30, 2010 (unaudited) and December 31, 2009 (audited)
                              3Condensed
      Consolidated Statements of Income (unaudited) for the Three
      andNine
      months Ended September 30, 2010 and 2009
                              4Condensed
      Consolidated Statements of Changes in Stockholders’ Equity(unaudited)
      for the Nine months Ended September 30,2010
                              5Condensed
      Consolidated Statements of Cash Flows (unaudited) for theNine
      months Ended September 30, 2010 and 2009
                              6Notes
      to Unaudited Condensed Consolidated Financial Statements
                              7Item
      2 - Management’s Discussion and Analysis of Financial
      ConditionAnd
      Results of Operations
                              15Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                              25Item
      4 – Controls and Procedures
                              25Part
      II - Other Information:Item
      1 – Legal Proceedings
                              26Item
      1A – Risk Factors
                              26Item
      5 – Other Information
                              26Item
      6 - Exhibits
                              28
  2
  Part
I. Financial Information
 Item1.
Financial Statements
  MEDIFAST,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 
 (Unaudited)
                                    
                                    
                                    (Audited)September 30, 2010
                                    
                                    
                                    December 31, 2009ASSETSCurrent
      assetsCash
      and cash equivalents
                                    
                                    $
                                    20,211,000
                                    
                                    
                                    $
                                    10,604,000Accounts
      receivable-net of allowance for sales returns and doubtful
      accountsof
      $288,000 and $100,000 respectively
                                    
                                    
                                    864,000
                                    
                                    
                                    
                                    676,000Inventory
                                    
                                    
                                    17,540,000
                                    
                                    
                                    
                                    11,232,000Investment
      securities
                                    
                                    
                                    16,431,000
                                    
                                    
                                    
                                    5,699,000Deferred
      compensation
                                    
                                    
                                    -
                                    
                                    
                                    
                                    641,000Income
      taxes - prepaid
                                    
                                    
                                    3,055,000
                                    
                                    
                                    
                                    2,211,000Prepaid
      expenses and other current assets
                                    
                                    
                                    1,402,000
                                    
                                    
                                    
                                    3,123,000Note
      receivable - current
                                    
                                    
                                    46,000
                                    
                                    
                                    
                                    46,000Deferred
      tax asset
                                    
                                    
                                    156,000
                                    
                                    
                                    
                                    100,000Total
      current assets
                                    
                                    
                                    59,705,000
                                    
                                    
                                    
                                    34,332,000Property,
      plant and equipment - net
                                    
                                    
                                    28,046,000
                                    
                                    
                                    
                                    23,237,000Trademarks
      and intangibles - net
                                    
                                    
                                    3,237,000
                                    
                                    
                                    
                                    4,104,000Note
      receivable, net of current assets
                                    
                                    
                                    109,000
                                    
                                    
                                    
                                    112,000Other
      assets
                                    
                                    
                                    223,000
                                    
                                    
                                    
                                    379,000TOTAL
      ASSETS
                                    
                                    $
                                    91,320,000
                                    
                                    
                                    $
                                    62,164,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
                                    
                                    
                                    14,548,000
                                    
                                    
                                    
                                    4,967,000Income
      taxes payable
                                    
                                    
                                    -
                                    
                                    
                                    
                                    22,000Current
      maturities of long-term debt
                                    
                                    
                                    953,000
                                    
                                    
                                    
                                    796,000Total
      current liabilities
                                    
                                    
                                    15,501,000
                                    
                                    
                                    
                                    5,785,000Other
      liabilitiesLong-term
      debt, net of current portion
                                    
                                    
                                    5,083,000
                                    
                                    
                                    
                                    5,444,000Deferred
      tax liability
                                    
                                    
                                    1,755,000
                                    
                                    
                                    
                                    1,360,000Total
      liabilities
                                    
                                    
                                    22,339,000
                                    
                                    
                                    
                                    12,589,000Stockholders'
      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;15,421,601
      issued and 15,052,693 outstanding at 9/30/10 and 15,398,941 issued and
      15,031,103 sharesoutstanding at 12/31/09
                                    
                                    
                                    16,000
                                    
                                    
                                    
                                    16,000Additional
      paid-in capital
                                    
                                    
                                    31,670,000
                                    
                                    
                                    
                                    28,456,000Accumulated
      other comprehensive income (loss)
                                    
                                    
                                    197,000
                                    
                                    
                                    
                                    159,000Retained
      earnings
                                    
                                    
                                    40,453,000
                                    
                                    
                                    
                                    24,264,000Less:
      cost of 368,908 and 367,838 shares of common stock in
    treasury
                                    
                                    
                                    (3,355,000
                                    )
                                    
                                    
                                    (3,320,000
                                    )Total
      stockholders' equity
                                    
                                    
                                    68,981,000
                                    
                                    
                                    
                                    49,575,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                    
                                    $
                                    91,320,000
                                    
                                    
                                    $
                                    62,164,000
 
 See notes
to condensed consolidated financial statements
  3
 
 MEDIFAST,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 
 Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenue
                  
                  $
                  67,282,000
                  
                  
                  $
                  46,079,000
                  
                  
                  $
                  194,527,000
                  
                  
                  $
                  122,405,000Cost
      of sales
                  
                  
                  16,823,000
                  
                  
                  
                  12,002,000
                  
                  
                  
                  48,834,000
                  
                  
                  
                  32,018,000Gross
      Profit
                  
                  
                  50,459,000
                  
                  
                  
                  34,077,000
                  
                  
                  
                  145,693,000
                  
                  
                  
                  90,387,000Selling,
      general, and administration
                  
                  
                  41,411,000
                  
                  
                  
                  28,514,000
                  
                  
                  
                  119,188,000
                  
                  
                  
                  76,021,000Income
      from operations
                  
                  
                  9,048,000
                  
                  
                  
                  5,563,000
                  
                  
                  
                  26,505,000
                  
                  
                  
                  14,366,000Other
      income/(expense)Interest
      income/ (expense), net
                  
                  
                  74,000
                  
                  
                  
                  (1,000
                  )
                  
                  
                  145,000
                  
                  
                  
                  (3,000
                  )Other
      expense
                  
                  
                  (41,000
                  )
                  
                  
                  (16,000
                  )
                  
                  
                  (151,000
                  )
                  
                  
                  (82,000
                  )33,000
                  
                  
                  
                  (17,000
                  )
                  
                  
                  (6,000
                  )
                  
                  
                  (85,000
                  )Income
      before provision for income taxes
                  
                  
                  9,081,000
                  
                  
                  
                  5,546,000
                  
                  
                  
                  26,499,000
                  
                  
                  
                  14,281,000Provision
      for income taxes
                  
                  
                  (3,330,000
                  )
                  
                  
                  (2,112,000
                  )
                  
                  
                  (10,310,000
                  )
                  
                  
                  (5,363,000
                  )Net
      income
                  
                  $
                  5,751,000
                  
                  
                  $
                  3,434,000
                  
                  
                  $
                  16,189,000
                  
                  
                  $
                  8,918,000Basic
      earnings per share
                  
                  $
                  0.41
                  
                  
                  $
                  0.25
                  
                  
                  $
                  1.15
                  
                  
                  $
                  0.66Diluted
      earnings per share
                  
                  $
                  0.39
                  
                  
                  $
                  0.23
                  
                  
                  $
                  1.11
                  
                  
                  $
                  0.60Weighted
      average shares outstanding -Basic
                  
                  
                  14,137,889
                  
                  
                  
                  13,584,600
                  
                  
                  
                  14,032,917
                  
                  
                  
                  13,429,060Diluted
                  
                  
                  14,769,170
                  
                  
                  
                  14,918,563
                  
                  
                  
                  14,644,461
                  
                  
                  
                  14,763,023
 
 See notes
to condensed consolidated financial statements.
  4
 
 MEDIFAST,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND ACCUMULATED
OTHER COMPREHENSIVE INCOME
 (Unaudited)
 
 Par Value
                      
                      
                      Additional
                      
                      
                      
                      
                      
                      AccumulatedNumber
                      
                      
                      $0.001
                      
                      
                      Paid-In
                      
                      
                      Retained
                      
                      
                      other comp
                      
                      
                      Treasuryof Shares
                      
                      
                      Amount
                      
                      
                      Capital
                      
                      
                      Earnings
                      
                      
                      income/(loss)
                      
                      
                      Stock
                      
                      
                      TotalBalance, December 31, 2009
                      
                      
                      15,398,941
                      
                      
                      $
                      16,000
                      
                      
                      $
                      28,456,000
                      
                      
                      $
                      24,264,000
                      
                      
                      $
                      159,000
                      
                      
                      $
                      (3,320,000
                      )
                      
                      $
                      49,575,000Share-based
      compensation to executives and directors
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,892,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,892,000Shares
      issued
                      
                      
                      12,660
                      
                      
                      
                      
                      
                      
                      
                      50,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      50,000Exercise
      of stock options
                      
                      
                      10,000
                      
                      
                      
                      
                      
                      
                      
                      34,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      34,000Purchase
      of treasury stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (35,000
                      )
                      
                      
                      (35,000
                      )Adjustment
      for stock compensation tax benefit
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,238,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,238,000Net
      change in unrealized gain on investments, net of
taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      38,000
                      
                      
                      
                      
                      
                      
                      
                      38,000Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,189,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      16,189,000Balance,
      September 30, 2010
                      
                      
                      15,421,601
                      
                      
                      $
                      16,000
                      
                      
                      $
                      31,670,000
                      
                      
                      $
                      40,453,000
                      
                      
                      $
                      197,000
                      
                      
                      $
                      (3,355,000
                      )
                      
                      $
                      68,981,000
 
 See notes
to condensed consolidated financial statements.
  5
 
 MEDIFAST,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine Months Ended September 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      income
                    
                    $
                    16,189,000
                    
                    
                    $
                    8,918,000Adjustments
      to reconcile net income to net cashprovided
      by operating activitiesDepreciation
      and amortization
                    
                    $
                    4,304,000
                    
                    
                    $
                    3,832,000Realized
      loss on investment securities
                    
                    
                    74,000
                    
                    
                    
                    83,000Common
      stock issued for services
                    
                    
                    50,000
                    
                    
                    
                    155,000Vesting
      of share-based compensation
                    
                    
                    1,892,000
                    
                    
                    
                    1,577,000Deferred
      income taxes
                    
                    
                    244,000
                    
                    
                    
                    (329,000
                    )Changes
      in assets and liabilities which provided (used) cash:Accounts
      receivable
                    
                    
                    (188,000
                    )
                    
                    
                    (249,000
                    )Inventory
                    
                    
                    (6,308,000
                    )
                    
                    
                    3,097,000Prepaid
      expenses & other current assets
                    
                    
                    1,721,000
                    
                    
                    
                    (108,000
                    )Deferred
      compensation
                    
                    
                    606,000
                    
                    
                    
                    (272,000
                    )Other
      assets
                    
                    
                    156,000
                    
                    
                    
                    (15,000
                    )Income
      taxes
                    
                    
                    (867,000
                    )
                    
                    
                    (162,000
                    )Accounts
      payable and accrued expenses
                    
                    
                    9,579,000
                    
                    
                    
                    2,084,000Net
      cash provided by operating activities
                    
                    
                    27,452,000
                    
                    
                    
                    18,611,000Cash
      Flow from Investing Activities:Purchase
      of investment securities
                    
                    
                    (12,614,000
                    )
                    
                    
                    (94,000
                    )Sale
      of investment securities
                    
                    
                    1,978,000
                    
                    
                    
                    -Purchase
      of property and equipment
                    
                    
                    (8,246,000
                    )
                    
                    
                    (3,159,000
                    )Net
      cash (used in) investing activities
                    
                    
                    (18,882,000
                    )
                    
                    
                    (3,253,000
                    )Cash
      Flow from Financing Activities:Repayment
      of long-term debt
                    
                    
                    (596,000
                    )
                    
                    
                    1,869,000Issuance
      of long-term debt
                    
                    
                    393,000Decrease
      in line of credit
                    
                    
                    -
                    
                    
                    
                    (3,164,000
                    )Decrease
      in note receivable
                    
                    
                    3,000
                    
                    
                    
                    91,000Excess
      tax benefits from share-based payment arrangements
                    
                    
                    1,238,000
                    
                    
                    
                    -Proceeds
      from issuance of common stock
                    
                    
                    34,000
                    
                    
                    
                    142,000Purchase
      of treasury stock
                    
                    
                    (35,000
                    )
                    
                    
                    (102,000
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    1,037,000
                    
                    
                    
                    (1,164,000
                    )NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    9,607,000
                    
                    
                    
                    14,194,000Cash
      and cash equivalents - beginning of the period
                    
                    
                    10,604,000
                    
                    
                    
                    973,000Cash
      and cash equivalents - end of period
                    
                    $
                    20,211,000
                    
                    
                    $
                    15,167,000Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    82,000
                    
                    
                    $
                    114,000Income
      taxes
                    
                    $
                    9,678,000
                    
                    
                    $
                    5,841,000Supplemental
      disclosure of non cash activityTreasury
      stock received in lieu of note receivable
                    
                    $
                    -
                    
                    
                    $
                    932,000
 
 See notes
to condensed consolidated financial statements
  6
 
 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 nine
months ended September 30, 2010 are not necessarily indicative of the results to
be expected for the year ending December 31, 2010 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, 2009 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, 2009 (the “2009 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
January 2010, the FASB issued new guidance that expands and clarifies
existing disclosures about fair value measurements. The guidance requires the
gross presentation of activity within the Level 3 fair value measurements roll
forward and details of transfers in and out of Level 1 and 2 fair value
measurements. In addition, companies will be required to disclose quantitative
information about the inputs used in determining fair values. These standards
were adopted in the first quarter of 2010. The adoption had no impact on the
Company’s consolidated financial position or results
  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.
 
 Revenue
from product sales includes amounts billed for shipping and handling. Revenue
from shipping and handling charges was $3.3 million and $1.1 million for the
three months ended September 30, 2010 and 2009 respectively. Revenue from
shipping and handling charges was $9.0 million and $3.0 million for the nine
months ended September 30, 2010 and 2009 respectively. Shipping-related costs
are included in cost of goods sold in the accompanying condensed consolidated
statement of income.
  7
 
 1.
              Inventories
 
 Inventories consist principally of
finished packaged foods, packaging and raw materials held in either the
Company’s manufacturing facility or distribution warehouse. Inventory is stated
at the lower of cost or market, utilizing the first-in, first-out
method.
 
 Inventory
consist of the following at September 30, 2010 and December 31,
2009
 
 2010
                        
                        
                        2009Raw
      Materials
                        
                        $
                        5,572,000
                        
                        
                        $
                        3,900,000Packaging
                        
                        
                        3,030,000
                        
                        
                        
                        2,628,000Finished
      Goods
                        
                        
                        8,938,000
                        
                        
                        
                        4,704,000$
                        17,540,000
                        
                        
                        $
                        11,232,000
 
 6.
              Intangible
      Assets
 
 The
Company has acquired other intangible assets, which include: customer lists,
trademarks, patents, and copyrights. The customer lists are being amortized over
a period ranging between 5 and 7 years based on management’s best estimate of
the expected benefits to be consumed or otherwise used up. The costs of patents
and copyrights with finite lives are amortized over 5 and 7 years based on their
estimated useful life, while trademarks representing brands with an infinite
life, and are carried at cost and tested annually for impairment as outlined
below. Infinite life intangible assets are tested annually for impairment in the
fourth quarter, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. The Company assesses the recoverability of its intangible assets by
comparing the projected undiscounted net cash flows associated with the related
asset, over their remaining lives, in comparison to their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets.
  8
 
 As of September 30, 2010
                    
                    
                    As of December 31, 2009Gross Carrying
                    
                    
                    Accumulated
                    
                    
                    Gross Carrying
                    
                    
                    AccumulatedAmount
                    
                    
                    Amortization
                    
                    
                    Amount
                    
                    
                    AmortizationCustomer
      lists
                    
                    $
                    8,567,000
                    
                    
                    $
                    6,772,000
                    
                    
                    $
                    8,567,000
                    
                    
                    $
                    6,086,000Non-compete
      agreements
                    
                    $
                    840,000
                    
                    
                    $
                    840,000
                    
                    
                    $
                    840,000
                    
                    
                    $
                    840,000Trademarks,
      patents, and copyrightsfinite
      life
                    
                    
                    1,622,000
                    
                    
                    
                    1,107,000
                    
                    
                    
                    1,622,000
                    
                    
                    
                    926,000infinite
      life
                    
                    
                    927,000
                    
                    
                    
                    -
                    
                    
                    
                    927,000
                    
                    
                    
                    -Total
                    
                    $
                    11,956,000
                    
                    
                    $
                    8,719,000
                    
                    
                    $
                    11,956,000
                    
                    
                    $
                    7,852,000
 
 Amortization
expense for the three and nine months ended September 30, 2010 and 2009 was as
follows:
 
 Three months ended September 30,
                  
                  
                  Nine months ended September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Customer
      lists
                  
                  $
                  228,000
                  
                  
                  $
                  359,000
                  
                  
                  $
                  686,000
                  
                  
                  $
                  1,089,000Trademarks
      and patents
                  
                  
                  61,000
                  
                  
                  
                  61,000
                  
                  
                  
                  181,000
                  
                  
                  
                  181,000Total
      Trademarks and Intangibles
                  
                  $
                  289,000
                  
                  
                  $
                  420,000
                  
                  
                  $
                  867,000
                  
                  
                  $
                  1,270,000
 
 Amortization
expense is included in selling, general and administrative
expenses.
 
 7.
              Note
      Receivable
 
 Medifast
realized a $1,503,000 note receivable as a result of the sale of Consumer Choice
Systems on January 17, 2006 to a former board member.  The note has a
10-year term with imputed interest of 4% and was collateralized by 50,000 shares
of Medifast stock and all the assets of Consumer Choice Systems.  On
August 27, 2009, Medifast, Inc. accepted an offer by a former board member to
pay down a large portion of the note using the 50,000 shares of Medifast, Inc.
stock held as collateral. Medifast, Inc. obtained 50,000 shares of Medifast
common stock and placed in treasury stock on August 27, 2009 at the closing
price of $18.63.  This resulted in a $931,500 reduction in the note
receivable balance due.  The restructured note has a remaining
principal balance of $236,000 and will be paid over the remaining 82-month
term.
 
 8.
              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.
  The
following table sets forth the computation of basic and diluted EPS for the nine
months ended September 30:
  9
 
 Three Months Ended
                        
                        
                        Nine Months EndedSeptember 30,
                        
                        
                        September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Numerator:Net
      income
                        
                        $
                        5,751,000
                        
                        
                        $
                        3,434,000
                        
                        
                        $
                        16,189,000
                        
                        
                        $
                        8,918,000Denominator:Weighted
      average shares of common stock outstanding
                        
                        
                        14,137,889
                        
                        
                        
                        13,584,600
                        
                        
                        
                        14,032,917
                        
                        
                        
                        13,429,060Effect
      of dilutive common stock equivalents
                        
                        
                        631,281
                        
                        
                        
                        1,333,963
                        
                        
                        
                        611,544
                        
                        
                        
                        1,333,963Weighted
      average diluted common shares outstanding
                        
                        
                        14,769,170
                        
                        
                        
                        14,918,563
                        
                        
                        
                        14,644,461
                        
                        
                        
                        14,763,023EPSBasic
                        
                        $
                        0.41
                        
                        
                        $
                        0.25
                        
                        
                        $
                        1.15
                        
                        
                        $
                        0.66Diluted
                        
                        $
                        0.39
                        
                        
                        $
                        0.23
                        
                        
                        $
                        1.11
                        
                        
                        $
                        0.60
 
 9
              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 and 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.
 
 10
              Deferred
      Compensation Plan
 
 We maintain a non-qualified deferred
compensation plan for Senior Executive management. Currently, Bradley
MacDonald is the only participant in the plan. Under the deferred
compensation plan that became effective in 2003, executive officers of the
Company may defer a portion of their salary and bonus (performance-based
compensation) annually. A participant may elect to receive distributions of the
accrued deferred compensation in a lump sum or in installments upon
retirement.
 
 The
participating executive officer may request that the deferred amounts be
allocated among several available investment options established and offered by
the Company. These investment options provide market rates of return and are not
subsidized by the Company. The benefit payable under the plan at any time to a
participant following termination of employment is equal to the applicable
deferred amounts, plus or minus any earnings or losses attributable to the
investment of such deferred amounts. The Company has established a trust for the
benefit of participants in the deferred compensation plan. Pursuant to the terms
of the trust, as soon as possible after any deferred amounts have been withheld
from a plan participant, the Company will contribute such deferred amounts to
the trust to be held for the benefit of the participant in accordance with the
terms of the plan and the trust.
 
 Retirement
payouts under the plan upon an executive officer’s retirement from the Company
are payable either in a lump-sum payment or in annual installments over a period
of up to ten years. Upon death, disability or termination of employment, all
amounts shall be paid in a lump-sum payment as soon as administratively
feasible.
 
 11. Fair
Value Measurements
 
 As of
January 1, 2009, we adopted ASC 820-10 for all non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements. We had previously adopted ASC 820-10 for all financial assets and
liabilities.  ASC 820-10 defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, which are
required to be recorded at fair value, we consider the principal or most
advantageous market in which we would transact and the market-based risk
measurements or assumptions that market participants would use in pricing the
asset or liability, such as inherent risk, transfer restrictions, and credit
risk.
  ASC
820-10 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value.  The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).  The levels of the fair value
hierarchy under ASC 820-10 are described below:
  10
  Level 1
              Valuation
      is based upon quoted prices for identical instruments traded in active
      markets.
  Level 2
              Valuation
      is based upon quoted prices for similar instruments in active markets,
      quoted prices for identical or similar instruments that are not active,
      and model-based valuation techniques for which all significant assumptions
      are observable in the market.
  Level 3
              Valuation
      is generated from model-based techniques that use significant assumptions
      not observable in the market. These unobservable assumptions reflect our
      own estimates of assumptions that market participants would use in pricing
      the asset or liability. Valuation techniques include use of option pricing
      models, discounted cash flow models and similar
  techniques.
 
 The
Company’s financial instruments include cash and cash equivalents, trade
receivables, 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 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
and liabilities measured at fair value on a recurring
basis as of September 30, 2010:
 
 Level I
                      
                      
                      Level II
                      
                      
                      Level III
                      
                      
                      TotalInvestment
      securities
                      
                      $
                      16,431,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      $
                      16,431,000Cash
      equivalents
                      
                      
                      20,211,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      20,211,000Total
      Assets
                      
                      $
                      36,642,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      36,642,000Liabilities
                      
                      
                      
                      
                      
                      
                      6,036,000
                      
                      
                      
                      -
                      
                      
                      
                      6,036,000Total
      Liabilities
                      
                      $
                      -
                      
                      
                      
                      6,036,000
                      
                      
                      $
                      -
                      
                      
                      $
                      6,036,000
  The
Company implemented ASC 820-10 10 (formerly FSP 157-2, “Effective Date of
FASB Statement No. 157”), for our nonfinancial assets and liabilities that
are re-measured at fair value on a non-recurring basis. The adoption for our
nonfinancial assets and liabilities that are re-measured at fair value on a
non-recurring basis did not impact our financial position or results of
operations; however, could have an impact in future periods.
 
 12.
              Share
      Based Compensation
 
 The Company adopted a stock option plan
("Plan"), which as amended, authorizing the grant of incentive and non-incentive
options for an aggregate of 1,250,000 shares of the Company's common stock to
officers, employees, directors and consultants. Incentive options are to be
granted at fair market value. Options are to be exercisable as determined by the
compensation committee.
  11
 
 Stock
Options
 
 The
following summarizes the stock option activity for the nine months ended
September 30, 2010:
 
 Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOutstanding
      at beginning of year
                      
                      
                      10,000
                      
                      
                      $
                      3.83Options
      exercised
                      
                      
                      (10,000
                      )
                      
                      
                      3.83Options
      forfeited or expired
                      
                      
                      -
                      
                      
                      
                      -Outstanding
      at September 30, 2010
                      
                      
                      -
                      
                      
                      $
                      -Options
      exercisable at September 30, 2010
                      
                      
                      -
                      
                      
                      $
                      -
 
 Restricted
Stock
  The
Company has issued restricted stock to employees and directors generally with
terms ranging from three to six years. The fair value is equal to the market
price of the Company’s common stock on the date of grant. Expense for restricted
stock is amortized ratably over the vesting period. The following table
summarizes the restricted stock activity:
 
 Shares
                    
                    
                    Weighed-Average
                      Grant Date Fair
                      ValueUnvested
      at January 1, 2010
                    
                    
                    1,204,378
                    
                    
                    $
                    5.57Granted
                    
                    
                    7,000
                    
                    
                    
                    22.75Vested
                    
                    
                    (323,811
                    )
                    
                    
                    5.70Forfeited
                    
                    
                    -
                    
                    
                    
                    -Unvested
      at September 30, 2010
                    
                    
                    887,567
                    
                    
                    
                    5.66
  The
Company recorded stock compensation expense of $673,000 and $509,000 for the
three months ended September 30, 2010 and 2009, respectively.
  The
Company recorded stock compensation expense of $1.9 million and $1.6 million for
the nine months ended September 30, 2010 and 2009, respectively. As of September
30, 2010, there was $5 million of total unrecognized compensation expense
related to unvested share-based compensation arrangements.
  12
 
 13.
              Reclassifications
 
 Certain
amounts for the three and nine months ended September 30, 2009 have been
reclassified to conform to the presentation of the September 30, 2010 amounts.
The reclassifications have no effect on net income for the three and nine months
ended September 30, 2010 and 2009.
 
 14.
              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 All Other. The
Medifast reporting segment consists of the following distribution channels:
Medifast Direct, Take Shape for Life, and Doctors. The All Other reporting
segments consist of Medifast Weight Control Centers Corporate and Franchise, and
the Company’s parent company operations.
 
 The accounting policies of the segments
are the same as those of the Company. The presentation and allocation of assets,
liabilities and results of operations may not reflect the actual economic costs
of the segments as stand-alone businesses. If a different basis of allocation
were utilized, the relative contributions of the segments might differ, but
management believes that the relative trends in segments would likely not be
impacted..
  The
following tables present segment information for the three and nine months ended
September 30, 2010 and 2009:
  13
  Three Months Ended September 30, 2010Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    60,944,000
                    
                    
                    $
                    6,338,000
                    
                    
                    
                    
                    
                    
                    $
                    67,282,000Cost
      of Sales
                    
                    
                    15,453,000
                    
                    
                    
                    1,370,000
                    
                    
                    
                    
                    
                    
                    
                    16,823,000Selling,
      General and Adminstrative Expenses
                    
                    
                    34,998,000
                    
                    
                    
                    4,925,000
                    
                    
                    
                    
                    
                    
                    
                    39,923,000Depreciation
      and Amortization
                    
                    
                    1,239,000
                    
                    
                    
                    249,000
                    
                    
                    
                    
                    
                    
                    
                    1,488,000Interest
      (net) and Other
                    
                    
                    2,000
                    
                    
                    
                    (35,000
                    )
                    
                    
                    
                    
                    
                    
                    (33,000
                    )Income
      Before income tax provision
                    
                    $
                    9,252,000
                    
                    
                    
                    (171,000
                    )
                    
                    
                    
                    
                    
                    $
                    9,081,000Segment
      Assets
                    
                    $
                    49,075,000
                    
                    
                    $
                    42,245,000
                    
                    
                    
                    
                    
                    
                    $
                    91,320,000
 
 Three Months Ended September 30, 2009Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    41,743,000
                    
                    
                    $
                    4,336,000
                    
                    
                    
                    
                    
                    
                    $
                    46,079,000Cost
      of Sales
                    
                    
                    11,143,000
                    
                    
                    
                    859,000
                    
                    
                    
                    
                    
                    
                    
                    12,002,000Selling,
      General and Adminstrative Expenses
                    
                    
                    23,945,000
                    
                    
                    
                    3,273,000
                    
                    
                    
                    
                    
                    
                    
                    27,218,000Depreciation
      and Amortization
                    
                    
                    1,039,000
                    
                    
                    
                    257,000
                    
                    
                    
                    
                    
                    
                    
                    1,296,000Interest
      (net) and Other
                    
                    
                    9,000
                    
                    
                    
                    8,000
                    
                    
                    
                    
                    
                    
                    
                    17,000Income
      Before income tax provision
                    
                    $
                    5,607,000
                    
                    
                    
                    (61,000
                    )
                    
                    
                    
                    
                    
                    $
                    5,546,000Segment
      Assets
                    
                    $
                    39,916,000
                    
                    
                    $
                    21,087,000
                    
                    
                    
                    
                    
                    
                    $
                    61,003,000
 
 Nine Months Ended September 30, 2010Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    176,232,000
                    
                    
                    $
                    18,295,000
                    
                    
                    
                    
                    
                    
                    $
                    194,527,000Cost
      of Sales
                    
                    
                    44,922,000
                    
                    
                    
                    3,912,000
                    
                    
                    
                    
                    
                    
                    
                    48,834,000Selling,
      General and Adminstrative Expenses
                    
                    
                    101,037,000
                    
                    
                    
                    13,847,000
                    
                    
                    
                    
                    
                    
                    
                    114,884,000Depreciation
      and Amortization
                    
                    
                    3,481,000
                    
                    
                    
                    823,000
                    
                    
                    
                    
                    
                    
                    
                    4,304,000Interest
      (net) and Other
                    
                    
                    99,000
                    
                    
                    
                    (93,000
                    )
                    
                    
                    
                    
                    
                    
                    6,000Income
      Before income tax provision
                    
                    $
                    26,693,000
                    
                    
                    
                    (194,000
                    )
                    
                    
                    
                    
                    
                    $
                    26,499,000Segment
      Assets
                    
                    $
                    49,075,000
                    
                    
                    $
                    42,245,000
                    
                    
                    
                    
                    
                    
                    $
                    91,320,000
 
 Nine Months Ended September 30, 2009Medifast
                    
                    
                    All Other
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedRevenues,
      net
                    
                    $
                    111,165,000
                    
                    
                    $
                    11,240,000
                    
                    
                    
                    
                    
                    
                    $
                    122,405,000Cost
      of Sales
                    
                    
                    29,661,000
                    
                    
                    
                    2,357,000
                    
                    
                    
                    
                    
                    
                    
                    32,018,000Selling,
      General and Adminstrative Expenses
                    
                    
                    63,130,000
                    
                    
                    
                    9,059,000
                    
                    
                    
                    
                    
                    
                    
                    72,189,000Depreciation
      and Amortization
                    
                    
                    3,081,000
                    
                    
                    
                    751,000
                    
                    
                    
                    
                    
                    
                    
                    3,832,000Interest
      (net) and Other
                    
                    
                    5,000
                    
                    
                    
                    80,000
                    
                    
                    
                    
                    
                    
                    
                    85,000Income
      Before income tax provision
                    
                    $
                    15,288,000
                    
                    
                    
                    (1,007,000
                    )
                    
                    
                    
                    
                    
                    $
                    14,281,000Segment
      Assets
                    
                    $
                    39,916,000
                    
                    
                    $
                    21,087,000
                    
                    
                    
                    
                    
                    
                    $
                    61,003,000
  14
  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 2010
and beyond, are forward-looking statements and involve various risks and
uncertainties. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge, there can be no
assurance that actual results will not differ materially from the Company’s
expectations. The Company cautions investors not to place undue reliance on
forward-looking statements which speak only to management’s experience on this
data.
 
 The
following discussion should be read in conjunction with the unaudited condensed
consolidated financial statements and related notes appearing elsewhere
herein
 
 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.  Medifast, Inc.’s product lines include meal replacements and
vitamins.   Our products and services are sold to weight loss program
participates 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 93% of our revenues for the nine months ended September 30,
2010 and 95% of our revenues for the nine months ended September 30, 2009.
Program sales in our Medifast Weight Control Center channel accounted for 2% of
revenues for the first nine months of 2010 and 3% for the first nine months of
2009. Shipping revenue and other accounted for 5% for the first nine months of
2010 and 3% for the first nine months of 2009. No other product or service has
accounted for more than 1% of consolidated revenue in any of the last three
years.
  Revenue
consists primarily of meal replacement food sales. For the first nine months of
2010, revenue increased to $194.5 million as compared to $122.4 million for the
first nine months of 2009, an increase of $72.1 million or 59%. The Take Shape
for Life sales channel accounted for 63% of total revenue, direct response
marketing 26%, Medifast Weight Control Centers 10%, and Doctors
1%.
  We review
and analyze a number of key operating and financial metrics to manage our
business, including revenue to spend in the Medifast Direct channel, number of
active health coaches and average revenue per health coach per month in the Take
Shape for Life channel, and average same store sales improvement for the
Medifast Weigh Control Center channel.
  In the
first nine months of 2010 we continued to see very strong growth and improvement
in: Take Shape for Life; Medifast Direct and Medifast Weight Control
Centers.  Take Shape for Life revenue increased 70% to $123.3 million
compared with $72.6 million in the first nine months of 2009. Growth in revenues
for the segment was driven by increased customer product sales as a result of an
increase in active health coaches. The number of active health coaches during
the first nine months of 2010 increased to approximately 9,000 compared with
5,800 during the period a year ago, an increase of 55%. In addition, the average
revenue per health coach per month increased from approximately $1,730 for the
first nine months of 2009 to $1,740 in the first nine months of 2010. As the
number of active health coaches’ increase, the Company receives additional sales
proceeds from product referrals, approximately $1,740 in product referrals per
month for the average coach in the first nine months of 2010.
  The
Medifast Direct Sales division sales increased 38% to $49.8 million as compared
with $36 million in the first nine months of 2009, an increase of $13.8 million.
Due to a more effective advertising message, more targeted advertising through
extensive analytical analysis, and improved call center closing rates, the
company experienced a 2.8 to 1 return on advertising spend in the first nine
months of 2010 as compared to 2.7 to 1 in the first nine months of
2009.
 
 The
Medifast Weight Control Centers experienced revenue growth of 59% versus the
same time period last year. Revenue increased due to the opening of seven new
centers throughout 2009, a 28% increase in the same store sales for Centers open
for greater than one year, and the launch of the franchise opportunity. The
Company is continuing to focus on improved advertising effectiveness, improved
closing rates on walk-in sales, as well as the hiring of more experienced clinic
personnel
  If all of
our sales divisions continue to grow, there will be increasing demands on our
infrastructure. The increased demands could cause long hold times in the call
center as well as delays on our website.  In addition, there could be
delays in order processing, packaging and shipping.  We could run out of a
majority of our inventory if product sales growth exceeded our production
capacity.  In order to mitigate these risks, a key focus for the Company in
2010 and 2011 will be investing in infrastructure to ensure that the Company can
support the revenue growth of each of our sales divisions. This initiative
includes a new Distribution Center that opened in July 2010 to better service
our Midwest to West Coast customers and increase the maximum number of orders
the Company can ship daily, new machinery to increase our production capacity to
support sales growth, an improved web platform for all our sales divisions, and
expansion of an additional call center location to handle additional call
volume. There is also risk that our Independent contractor field leaders and
health coaches could leave the company for a better opportunity which could
result in decreased revenue from Take Shape for Life channel. This risk is
offset by the increased revenue per month earned as these same leader health
coaches build their organization of health coaches because they have proven to
be passionate about helping others and combating the growing obesity epidemic in
America at present.
  15
  Overview
of the Company
 
 Distribution
Channels
 
 Take Shape for LifeTM - Take
Shape for Life is the direct selling division of Medifast. Take Shape for Life
is lead by its co-founder, a physician with a background in critical care who
has published a book on nutrition and support counseling as has its other
co-founder. The network consists of independent contractor health coaches, who
are trained to provide coaching and support to clients on Medifast weight loss
programs. Health coaches are conduits to give clients the encouragement and
mentoring to assist them to successfully reach a healthy weight. Take Shape For
Life programs provide a road map to empower the individual to take control of
their health through better habits. Take Shape for Life offers the exclusive
proprietary BeSlim®
philosophy, which encourages long-term weight maintenance for those who follow
it. 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. The products are high quality because of the ingredients used which are
specified to be a certain quality. Health coaches and their clients follow the
Habits of Health book and companion workbook written by the Take Shape for Life
co-founder as well as The Secret Is Out co-authored by the other Take Shape for
Life co-founder, which presents the scientific basis for Medifast diet results
as clinically validated, 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 support calls and access to registered dieticians
via toll free telephone, email and web chats.
 
 Program
entrants are encouraged to consult with their primary care physician and a Take
Shape for Life Health Coach 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.
 
 Take
Shape for Life health coaches earn compensation on product sales by referring
clients to their replicated Take Shape for Life website or to the Company’s
in-house call center to purchase product. The client purchases all Medifast
product directly from the Company which is shipped directly to the client. Our
health coaches do not handle payment and are not required to hold inventory for
resale to clients. In addition, our health coaches pay the same price for
product as their clients. 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 receive a commission on any product
sales they refer to the Company. In addition, in the Take Shape for Life network
approximately 20% of active health coaches are health care providers. Doctors
and health care providers receive the same compensation that health coaches
receive for any product orders referred in the Take Shape for Life
Network
 
 Take
Shape for Life health coaches are independent contractors who are paid
compensation on product sales referred to the Company. Health coaches can earn
compensation in two ways:
 
 ·
              Commissions
      – The primary way a health coach is compensated is through earning
      commissions on product sold. 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. Health coaches 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. 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 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.
  16
  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 a $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 provides an Income Disclosure Statement of the high, low,
average, and median monthly income for each active health coach rank on the Take
Shape for Life website at http://leads.tsfl.com/IDS.pdf.
The Company policy is not to state or endorse “potential” or “hypothetical”
income claims but rather to present historical data and ranges of actual health
coach earnings.
 
 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 forLife,
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, 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.
 
 Medifast Direct –In the
direct to consumer channel, customers order Medifast product directly through
the Company’s website, www.choosemedifast.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 print,
radio, web advertising, direct mail and television as well as public relations
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 dieticians to better serve its
customers. In addition, Medifast also continues to promote its use of leading
web technology featuring customized meal planning and web community components.
MyMedifast is a robust online community which provides a library of support
articles, support forums, meal planning tools and social media
functions,
 
 Medifast Weight Control Centers
– The Medifast Weight Control Center is the brick and mortar clinic
channel of Medifast located in Texas, Florida, Maryland, and Washington, D.C. In
2009, the Company opened seven new Medifast Weight Control Centers and had a
total of twenty – seven locations in operation at year-end. At September 30,
2010 thirty-two corporately owned Centers were in operation. The centers offer a
high-touch model including comprehensive Medifast programs for weight loss and
maintenance, customized patient counseling, and Inbody TM
composition analysis. Medifast Weight Control Centers conduct local advertising
including radio, print, television and web initiatives. The centers also benefit
from the nationally advertised brand which encourages walk-ins and referrals
from 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
and Minnesota. At September 30, 2010, twenty franchise locations were in
operation.
  17
  Medifast Physicians–Medifast
physicians have implemented the Medifast program within their practice or clinic
since 1980. These physicians carry an inventory of Medifast products and resell
them to patients. They also provide appropriate medical monitoring, testing, and
support for patients on the program. Management estimates that more than 20,000
physicians nationwide have recommended Medifast as a treatment for their
overweight patients since 1980, and over an estimated 1 million patients have
used its’ products to lose and maintain their weight. Many Medifast physicians
prefer not to carry inventory and resell products in their offices and 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
dieticians that provide program support and advice via a toll free telephone
help line, by e-mail and online chats
 
 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.
 
 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 material tax positions and determined that we did not have any
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 nine months ended September 30, 2010 and 2009, no
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 2007.
  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 September 30, 2010 and 2009 were $.3 million and
$0.1 million, respectively.
  18


Overview
of the Three Months Ended September 30, 2010 Compared to Three Months Ended
September 30, 2009
 
 Three Months Ended September 30,2010
                          
                          
                          2009
                          
                          
                          $ Change
                          
                          
                          % ChangeRevenue
                          
                          $
                          67,282,000
                          
                          
                          $
                          46,079,000
                          
                          
                          $
                          21,203,000
                          
                          
                          
                          46
                          %Cost
      of sales
                          
                          
                          16,823,000
                          
                          
                          
                          12,002,000
                          
                          
                          
                          4,821,000
                          
                          
                          
                          40
                          %Gross
      Profit
                          
                          
                          50,459,000
                          
                          
                          
                          34,077,000
                          
                          
                          
                          16,382,000
                          
                          
                          
                          48
                          %Selling,
      general, and administration
                          
                          
                          41,411,000
                          
                          
                          
                          28,514,000
                          
                          
                          
                          12,897,000
                          
                          
                          
                          45
                          %Income
      from operations
                          
                          
                          9,048,000
                          
                          
                          
                          5,563,000
                          
                          
                          
                          3,485,000
                          
                          
                          
                          63
                          %Other
      income/(expense)Interest
      income (expense), net
                          
                          
                          74,000
                          
                          
                          
                          (1,000
                          )
                          
                          
                          75,000
                          
                          
                          
                          -7500
                          %Other
      income/(expense)
                          
                          
                          (41,000
                          )
                          
                          
                          (16,000
                          )
                          
                          
                          (25,000
                          )
                          
                          
                          156
                          %33,000
                          
                          
                          
                          (17,000
                          )
                          
                          
                          50,000
                          
                          
                          
                          -294
                          %Income
      before provision for income taxes
                          
                          
                          9,081,000
                          
                          
                          
                          5,546,000
                          
                          
                          
                          3,535,000
                          
                          
                          
                          64
                          %Provision
      for income tax (expense)
                          
                          
                          (3,330,000
                          )
                          
                          
                          (2,112,000
                          )
                          
                          
                          (1,218,000
                          )
                          
                          
                          58
                          %Net
      income
                          
                          $
                          5,751,000
                          
                          
                          $
                          3,434,000
                          
                          
                          $
                          2,317,000
                          
                          
                          
                          67
                          %% of revenueGross
      Profit
                          
                          
                          75.0
                          %
                          
                          
                          74.0
                          %Selling,
      general, and administration
                          
                          
                          61.5
                          %
                          
                          
                          61.9
                          %Income
      from Operations
                          
                          
                          13.4
                          %
                          
                          
                          12.1
                          %
 
 Three
Months Ended September 30, 2010 and September 30, 2009
 
 Revenue:  Revenue
increased to $67.3 million in the third quarter of 2010 compared to $46.1
million in the third quarter of 2009, an increase of $21.2 million or 46%. The
Take Shape for Life sales channel accounted for 65% of total revenue; Medifast
Direct channel accounted for 24%, brick and mortar clinics 10%, and doctors
1%.  Take Shape for Life sales, which are fueled byincreased customer product
sales as a result of an increase in active health coaches increased by 53%
compared to the third quarter of 2009. As compared to the third quarter of 2009,
the Medifast Direct sales channel, which is fueled primarily by consumer
advertising, increased revenues by approximately 30% year-over year. The
Medifast Weight Control Centers increased sales by 46% due to the opening of new
corporate and franchise locations and improvement in same store
sales.
 
 Take
Shape for Life revenue increased 53% to $43.7 million compared with $28.6
million in the comparable quarter of 2009.   Growth in revenues
for the distribution channel was driven by increased customer product sales as a
result of an increase in active health coaches.   The number of
active health coaches during the third quarter increased to approximately 9,000
compared with 5,800 during the period a year ago, an increase of 55% and up from
8,000 at the close of the second quarter of 2010.  In today’s
environment where trust and personal recommendations are becoming a more
important component in consumer purchasing decisions, the Take Shape for Life
model of one-on-one communication continues to excel. Take Shape for Life
customers who have utilized the Medifast products and programs and successfully
have addressed their body weight and health issues are increasingly choosing to
become active health coaches.   Becoming a health coach is a
business opportunity that has a low cost of start-up and requires no holding of
inventory as all orders are shipped to the end consumer.  In the
current economic environment, many people are looking for supplemental income to
assist in paying bills such as the car payment, rent, or mortgage, and becoming
a health coach allows for supplemental income in the form of a commission
compensation on product sales and supporting the customer needs by providing
education on the program and support to customers ordering through Take Shape
for Life and most importantly the ability to help others regain their health
through the use of clinically proven Medifast products.
  19
  The
Medifast Direct Response Sales division sales increased 30% to $16.1 million as
compared with $12.4 million in the third quarter of 2009, an increase of $3.7
million.  Due to a more effective advertising message, more targeted
advertising through extensive analytical analysis, and improved call center
closing rates the company experienced a 2.8 to 1 return on advertising spend
during the third quarter of 2010 as compared to  a 2.7 to
1  return in the third quarter of 2009.  The Company spent
approximately $5.8 million on direct response advertising in the third quarter
of 2010, an increase of 28% from the third quarter of 2009.
 
 The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in thirty-two corporate
locations in Austin, Dallas, Houston, Orlando, Baltimore, and Washington, D.C.,
and twenty franchise centers. In the third quarter of 2010, the Company
experienced revenue growth of 46% versus the same time period last
year.   In the third quarter of 2010, same store sales increased
by 20% for corporate Centers open greater than one year.  In the third
quarter of 2010, the Company opened two additional corporately owned centers in
the Washington D.C. market and one corporate center in Dallas, TX.  In
the fourth quarter of 2010, the Company plans on opening six to eight additional
corporately owned clinics in existing markets.
 
 Costs of
Sales:  Cost of revenue increased $4.8 million to $16.8 million as
compared to $12.0 million in the comparable quarter of 2009.  As a
percentage of sales, gross margin increased to 75.0% from 74.0% in the third
quarter of 2009.  We do not consider the change in our cost of sales
as a percentage of net sales for the quarter ended September 30, 2010 to be
a particularly meaningful change and attribute it to our fixed cost of
manufacturing being spread over a greater number of units sold.
 
 Selling,
General and Administrative:  Overall, selling, general and
administrative expenses increased by $12.9 million as compared to the third
quarter of 2009.  As a percentage of sales, selling, general and
administrative expenses decreased to 61.5% versus 61.9% in the third quarter of
2009, which lead to a 70% increase in diluted earnings per share in the third
quarter of 2010 versus prior year.   Take Shape for Life
commission expense, which is completely variable based upon product sales,
increased by approximately $6.0 million as the Company showed sales growth of
53% as compared to the third quarter of 2009. Take Shape for Life health coaches
are independent contractors that are paid commissions on product sales referred
to the Company.    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 order and payment of product and their order is shipped directly
to their home or designated address.  Health coaches are not required
to purchase product in order to receive a commission.  In addition,
health coaches do not receive a commission on their personal product orders.
Salaries and benefits increased by approximately $3.2 million in the third
quarter of 2010 as compared to last year.  The increase includes the
hiring of additional expertise in critical areas such as Take Shape for Life and
the Medifast Weight Control Centers.  Areas that also experienced
additional staffing due to the 46% sales growth in the third quarter of 2010
include manufacturing, distribution, call center, and IT.  The opening
of the Company’s new Dallas, TX distribution center in July of 2010 also led to
the hiring of additional personnel in both distribution and the call center.
Sales and marketing expense increased by $2.0 million in the third quarter of
2010 as compared to prior year, primarily due to the $1.3 million increase in
Medifast Direct advertising.  Communication expense increased $125,000
and other expenses increased by $400,000 which included items such as
depreciation, amortization, credit card processing fees, charitable
contributions, and property taxes.  Operating expenses were flat as
compared to the third quarter of 2009..  Office expense increased by
$1,000,000 and stock compensation expense increased by $164,000 as additional
restricted shares were issued to key executives and Board members.
 
 Income
taxes:In the third quarter of
2010, the Company recorded $3.3 million in income tax expense, which represents
an effective rate of 36.7%.  For the third quarter of 2009, we
recorded income tax expense of $2.1 million which reflected an estimated
effective tax rate of 38.1%.
 
 Net
income: Net income was approximately $5.8 million for the third quarter of 2010
as compared to approximately $3.4 million for the third quarter of 2009, an
increase of 67%.  Pre-tax profit as a percent of sales increased to
13.5% in the third quarter of 2010 as compared to 12.0% in 2009. The improved
profitability in the third quarter of 2010 is due to sales growth in the Take
Shape for Life division, Medifast Weight Control Centers, and Direct Response
sales channels as well as improved advertising effectiveness in the Medifast
Direct sales channel, gross margin improvement as well as leveraging the fixed
costs associated with our vertically-integrated support
structure.
  20
 
 Overview
of the Nine Months Ended September 30, 2010 Compared to Nine Months Ended
September 30, 2009
 
 NineMonthsEndedSeptember30,2010
                      
                      
                      2009
                      
                      
                      $Change
                      
                      
                      %ChangeRevenue
                      
                      $
                      194,527,000
                      
                      
                      $
                      122,405,000
                      
                      
                      $
                      72,122,000
                      
                      
                      
                      59
                      %Cost
      of sales
                      
                      
                      48,834,000
                      
                      
                      
                      32,018,000
                      
                      
                      
                      16,816,000
                      
                      
                      
                      53
                      %Gross
      Profit
                      
                      
                      145,693,000
                      
                      
                      
                      90,387,000
                      
                      
                      
                      55,306,000
                      
                      
                      
                      61
                      %Selling,
      general, and administration
                      
                      
                      119,188,000
                      
                      
                      
                      76,021,000
                      
                      
                      
                      43,167,000
                      
                      
                      
                      57
                      %Income
      from operations
                      
                      
                      26,505,000
                      
                      
                      
                      14,366,000
                      
                      
                      
                      12,139,000
                      
                      
                      
                      84
                      %Other
      income/(expense)Interest
      income (expense), net
                      
                      
                      145,000
                      
                      
                      
                      (3,000
                      )
                      
                      
                      148,000
                      
                      
                      
                      -4933
                      %Other
      income/(expense)
                      
                      
                      (151,000
                      )
                      
                      
                      (82,000
                      )
                      
                      
                      (69,000
                      )
                      
                      
                      84
                      %(6,000
                      )
                      
                      
                      (85,000
                      )
                      
                      
                      79,000
                      
                      
                      
                      -93
                      %Income
      before provision for income taxes
                      
                      
                      26,499,000
                      
                      
                      
                      14,281,000
                      
                      
                      
                      12,218,000
                      
                      
                      
                      86
                      %Provision
      for income tax (expense)
                      
                      
                      (10,310,000
                      )
                      
                      
                      (5,363,000
                      )
                      
                      
                      (4,947,000
                      )
                      
                      
                      92
                      %Net
      income
                      
                      $
                      16,189,000
                      
                      
                      $
                      8,918,000
                      
                      
                      $
                      7,271,000
                      
                      
                      
                      82
                      %% of revenueGross
      Profit
                      
                      
                      74.9
                      %
                      
                      
                      73.8
                      %Selling,
      general, and administration
                      
                      
                      61.3
                      %
                      
                      
                      62.1
                      %Income
      from Operations
                      
                      
                      13.6
                      %
                      
                      
                      11.7
                      %
 
 Revenue:  Revenue
increased to $194.5 million for the first nine months of 2010 compared to $122.4
million for the first nine months of 2009, an increase of $72.1 million or 59%.
The Take Shape for Life sales channel accounted for 63% of total revenue,
Medifast Direct channel accounted for 26%, brick and mortar clinics 10%, and
doctors 1%.  Take Shape for Life sales, which are fueled byincreased customer product
sales as a result of an increase in active health coaches increased by 70%
compared to the first nine months of 2009. As compared to the first nine months
of 2009, the Medifast Direct sales channel, which is fueled primarily by
consumer advertising, increased revenues by approximately 39% year-over
year.  The Medifast Weight Control Centers increased sales by 59% due
to the opening of new corporate and franchise locations and improvement in same
store sales.
  Take
Shape for Life revenue increased 70% to $123.3 million compared with $72.6
million in the first nine months of 2009.   Growth in revenues
for the distribution channel was driven by increased customer product sales as a
result of an increase in active health coaches.   The number of
active health coaches during the third quarter increased to approximately 9,000
compared with 5,800 during the period a year ago, an increase of 55% and up from
8,000 at the close of the second quarter of 2010.  In addition, the
average revenue per health coach per month increased from approximately $1,730
for the first nine months of 2009 to $1,740 in the first nine months of 2010. As
the number of active health coaches increase, the Company receives additional
sales proceeds from product referrals, approximately $1,740 in product referrals
per month for the average coach in the first nine months of
2010.
  21
 
 The
Medifast Direct Sales division sales increased 38% to $49.8 million as compared
with $36 million in the first nine months of 2009, an increase of $13.8
million.  Due to a more effective advertising message, more targeted
advertising through extensive analytical analysis, and improved call center
closing rates, the company experienced a 2.8 to 1 return on advertising spend in
the first nine months of 2010 as compared to 2.7 to 1 in the first nine months
of 2009.  The Company spent approximately $17.7 million on direct
response advertising in the first nine months of 2010, an increase of 33% from
prior year.
 
 The
Medifast Weight Control Centers, which represent approximately 10% of the
Company’s overall revenues, are currently operating in thirty-two corporate
locations in Austin, Dallas, Houston, Orlando, Baltimore, and Washington D.C.
and twenty franchise locations.  In the first nine months of 2010, the
Company experienced revenue growth of 59% versus the same time period last
year.  In the first nine months of 2010, same store sales increased by
28% for corporate Centers open greater than one year.  The Company
opened seven additional corporately owned centers in the first nine months of
2010.  Three additional corporately owned centers in the Baltimore,
MD. market, three in the Washington D.C, market, and one in the Texas
market.  In the fourth quarter of 2010, the Company plans on opening
six to eight additional corporately owned clinics in existing
markets.
 
 Costs of
Sales:  Cost of revenue increased $16.8 million to $48.8 million for
the first nine months of 2010 from $32.0 million for the first nine months of
2009.  As a percentage of sales, gross margin increased to 74.9% from
73.8% in the nine months of 2009.  We do not consider the change in
our cost of sales as a percentage of net sales for the nine month period
ended September 30, 2010 to be a particularly meaningful change and attribute it
to our fixed cost of manufacturing being spread over a greater number of units
sold. The result is a fairly constant cost of sales and overall cost per unit
produced and sold from one nine month period to the next.
  Selling,
General and Administrative: Overall, selling, general and administrative
expenses increased by $43.2 million as compared to the first nine months of
2009. As a percentage of sales, selling, general and administrative expenses
decreased to 61.3% versus 62.1% in the first nine months of 2009, which led to
an 85% increase in diluted earnings per share in the first nine months of 2010
versus prior year. Take Shape for Life commission expense, which is completely
variable based upon product revenue, increased by approximately $22.2 million as
the Company showed sales growth of 70% as compared to the first nine months of
2009. Take Shape for Life health coaches are independent contractors that are
paid commissions on product sales referred to the Company. 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 order and payment of product and their order is shipped directly
to their home or designated address. Health coaches are not required to purchase
product in order to receive a commission. In addition, health coaches do not
receive a commission on their personal product orders. Salaries and benefits
increased by approximately $9.1 million in the first nine months of 2010 as
compared to last year. The increase includes the hiring of additional expertise
in critical areas such as Take Shape for Life and the Medifast Weight Control
Centers. Areas that also experienced additional staffing due to the 59% sales
growth in the first nine months of 2010 include manufacturing, distribution,
call center, and IT. The opening of the Company’s new Dallas, TX distribution
center in July of 2010 also led to the hiring of additional personnel in both
distribution and the call center. Sales and marketing expenses increased by $5.5
million as compared to prior year, primarily due to the $4.4 million increase in
Medifast Direct advertising. Communication expense increased by $225,000 and
other expenses increased by $1.5 million which included items such as
depreciation, amortization, credit card processing fees, charitable
contributions, and property taxes. Operating expenses increased by $800,000
which primarily resulted from additional printing expense for our direct to
consumer postcard mailings, printed materials included in each product shipment,
as well as maintenance, repairs, and supplies for our manufacturing and
distribution facilities. Office expense increased by $2.5 million and stock
compensation expense increased by $363,000 as additional restricted shares were
issued to key executives and Board members in the third and fourth quarters of
2009, as well as the third quarter of 2010 that will be vesting over a five year
term.
  Income
taxes:In the first nine months
of 2010, the Company recorded $10.3 million in income tax expense, which
represents an annual effective rate of 38.9%.  For the first nine
months of 2009, we recorded income tax expense of $5.4 million which reflected
an estimated annual effective tax rate of 37.6%.
 
 Net
income: Net income was approximately $16.2 million for the first nine months of
2010 as compared to approximately $8.9 million for the first nine months of
2009, an increase of 82%.  Pre-tax profit as a percent of sales
increased to 13.6% in the first nine months of 2010 as compared to 11.7% in
2009. The improved profitability in the first nine months of 2010 is due to
sales growth in the Take Shape for Life division, Medifast Weight Control
Centers, and Direct Response sales channels as well as improved advertising
effectiveness in the Medifast Direct sales channel, gross margin improvement as
well as leveraging the fixed costs associated with our vertically-integrated
support structure.
  22
 
 SEGMENT
RESULTS OF OPERATIONS
 
 Net Sales by Segment for the Three Months Ended September 30,2010
                        
                        
                        2009Segments
                        
                        Sales
                        
                        
                        %ofTotal
                        
                        
                        Sales
                        
                        
                        %ofTotalMedifast
                        
                        $
                        60,944,000
                        
                        
                        
                        91
                        %
                        
                        $
                        41,743,000
                        
                        
                        
                        91
                        %All
      Other
                        
                        
                        6,338,000
                        
                        
                        
                        9
                        %
                        
                        
                        4,336,000
                        
                        
                        
                        9
                        %Total
      Sales
                        
                        $
                        67,282,000
                        
                        
                        
                        100
                        %
                        
                        $
                        46,079,000
                        
                        
                        
                        100
                        %
 
 Net Sales by Segment for the Nine Months Ended September 30,2010
                            
                            
                            2009Segments
                            
                            Sales
                            
                            
                            %ofTotal
                            
                            
                            Sales
                            
                            
                            %ofTotalMedifast
                            
                            $
                            176,232,000
                            
                            
                            
                            91
                            %
                            
                            $
                            111,165,000
                            
                            
                            
                            91
                            %All
      Other
                            
                            
                            18,295,000
                            
                            
                            
                            9
                            %
                            
                            
                            11,240,000
                            
                            
                            
                            9
                            %Total
      Sales
                            
                            $
                            194,527,000
                            
                            
                            
                            100
                            %
                            
                            $
                            122,405,000
                            
                            
                            
                            100
                            %
 
 Three
Months Ended September 30, 2010 and September 30, 2009
 
 Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Three
Months Ended September 30, 2010 compared to the Three Months Ended September 30,
2010” above.
 
 All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Centers and Medifast Weight Control Franchise
Centers.  Sales increased by $2,002,000 year-over year for the three
month period ended September 30, 2010. Sales increased in the Medifast Weight
Control Centers and Franchise Centers due to the opening of five new corporate
centers and eight new franchise centers. The Company is continuing to focus on
improved advertising effectiveness, improved closing rates on walk-in sales, as
well as the hiring of more experienced clinic operators to manage the clinics,
and improved efficiencies in operation of the clinics. In the third quarter of
2010, the Company opened one additional corporately owned center in the Dallas,
TX market and two in the Washington D.C. market.  In the fourth
quarter of 2010, the Company plans on opening six to eight additional
corporately clinics in existing markets.  The Company now has
thirty-two corporately owned clinics, compared to twenty four clinics in
operation at the end of the third quarter of 2009.  The Company also
has twenty franchisee centers in operation.
 
 Nine
Months Ended September 30, 2010 and September 30, 2009
 
 Medifast
Segment:  The Medifast reporting segment consists of the sales of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Nine
Months Ended September 30, 2010 compared to the Three Months Ended September 30,
2010” above.
 
 All Other
Segment:  The All Other reporting segment consists of the sales of
Medifast Weight Control Centers and Medifast Weight Control Franchise
Centers.  Sales increased by $7,055,000 year-over year for the nine
month period ended September 30, 2010. Sales increased in the Medifast Weight
Control Centers and Franchise Centers due to the opening of five new corporate
centers and eight new franchise centers. The Company is continuing to focus on
improved advertising effectiveness, improved closing rates on walk-in sales, as
well as the hiring of more experienced clinic operators to manage the clinics,
and improved efficiencies in operation of the clinics. In the third quarter of
2010, the Company opened one additional corporately owned centers in the Dallas,
TX market and two in the Washington D.C. market..  In the fourth
quarter of 2010, the Company plans on opening six to eight additional
corporately clinics in existing markets.  The Company now has
thirty-two corporately owned clinics, compared to twenty four clinics in
operation at the end of the third quarter of 2009.  The Company also
has twenty franchisee centers in operation, compared to twelve at September 30,
2009.
  23
 
 Operating Profit by Segment for the Three Months Ended September 30,2010
                        
                        
                        2009Segments
                        
                        Profit
                        
                        
                        %ofTotal
                        
                        
                        Profit
                        
                        
                        %ofTotalMedifast
                        
                        $
                        9,252,000
                        
                        
                        
                        102
                        %
                        
                        $
                        5,607,000
                        
                        
                        
                        101
                        %All
      Other
                        
                        
                        (171,000
                        )
                        
                        
                        -2
                        %
                        
                        
                        (61,000
                        )
                        
                        
                        -1
                        %Total
      Operating Profit
                        
                        $
                        9,081,000
                        
                        
                        
                        100
                        %
                        
                        $
                        5,546,000
                        
                        
                        
                        100
                        %
 
 Operating Profit by Segment for the Nine Months Ended September 30,2010
                        
                        
                        2009Segments
                        
                        Profit
                        
                        
                        %ofTotal
                        
                        
                        Profit
                        
                        
                        %ofTotalMedifast
                        
                        $
                        26,693,000
                        
                        
                        
                        101
                        %
                        
                        $
                        15,288,000
                        
                        
                        
                        107
                        %All
      Other
                        
                        
                        (194,000
                        )
                        
                        
                        -1
                        %
                        
                        
                        (1,007,000
                        )
                        
                        
                        -7
                        %Total
      Operating Profit
                        
                        $
                        26,499,000
                        
                        
                        
                        100
                        %
                        
                        $
                        14,281,000
                        
                        
                        
                        100
                        %
 
 Three
Months Ended September 30, 2010 and September 30, 2009
 
 Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Three
Months Ended September 30, 2010 compared to the Three Months Ended September 30,
2010” above.  See footnote 13, “Business Segments” for a detailed
breakout of expenses.
 
 All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  For the three months ended September 30, 2010, the loss
in the All Other segment increased to a loss of $171,000 from a loss of $61,000
in the third quarter of 2009. The Medifast Weight Control Centers and Franchise
Centers showed an increase in net profitability year-over-year of
$246,000.   The increase in profitability was due to opening of
six new corporately owned centers in 2010, and opening eight new franchise
centers in 2009. The increase in the total number of corporate clinics to
thirty-two, twenty operating franchise centers, and improvements in same store
sales year-over-year led to additional sales and
profitability.  Medifast Corporate expenses increased by $356,000
year-over-year.  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 as well as income tax
expense adjustments for prior year taxes.  See footnote 14, “Business
Segments” for a detailed breakout of expenses.
 
 Nine
Months Ended September 30, 2010 and September 30, 2009
 
 Medifast
Segment:  The Medifast reporting segment consists of the profits of
Medifast Direct, Take Shape for Life, and Doctors.  As this represents
the majority of our business this is referenced to the “Overview of the Nine
Months Ended September 30, 2010 compared to the Three Months Ended September 30,
2010” above.  See footnote 13, “Business Segments” for a detailed
breakout of expenses.
 
 All Other
Segment:  The All Other reporting segment consists of the profit or
loss of Medifast Weight Control Centers, Medifast Weight Control Franchise
Centers, and corporate expenses related to the parent company
operations.  For the first nine months of 2010, the loss in the All
Other segment increased improved to a loss of $194,000, from a loss of
$1,007,000 in the first nine months of 2009. The Medifast Weight Control Centers
and Franchise Centers showed an increase in net profitability year-over-year of
$1,969,000.   The increase in profitability was due to opening of
nine new corporately owned centers in 2009, and opening eight new franchise
centers in 2009. The increase in the total number of corporate clinics to
thirty-two, twenty operating franchise centers, and improvements in same store
sales year-over-year led to additional sales and
profitability.  Medifast Corporate expenses increased by $1,156,000
year-over-year.  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 as well as income tax
expense adjustments for prior year taxes.  See footnote 13, “Business
Segments” for a detailed breakout of expenses.
  24
 
 Seasonality
 The
Company's weight management products and programs have historically been subject
to seasonality.  Traditionally the holiday season in November/December
of each year is considered poor for diet control products and
services.  January and February generally show increases in sales, as
these months are considered the commencement of the “diet season.”  In
2010, seasonality has not been a significant factor.  This is largely
due to the increase in the consumer’s awareness of the overall health and
nutritional benefits accompanied with the use of the Company’s product
line.  As consumers continue to increase their association of
nutritional weight loss programs with overall health, seasonality will continue
to decrease.
 
 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 an equal change in our net interest
expense.  At September 30, 2010, there was $6.0 million of variable
interest loans outstanding which is subject to interest rate
risk.  Interest rates on our variable rate loans ranged from 1.54% to
2.74% for the period ended September 30, 2010.  Each 100 basis point
increase in the bank’s LIBOR rates relative to these borrowings would impact
interest expense by $60,000 over a 12-month period.
 
 We are
exposed to market risk related to changes in interest rates and market pricing
impacting our investment portfolio. Our current investment policy is to maintain
an investment portfolio consisting mainly of U.S. money market and high-grade
corporate securities, directly or through managed funds. Our cash is deposited
in and invested through highly rated financial institutions in North America.
Our marketable securities are subject to interest rate risk and market pricing
risk and will fall in value if market interest rates increase or if market
pricing decreases. If market interest rates were to increase and market pricing
were to decrease immediately and uniformly by 10% from levels at September 30,
2010, we estimate that the fair value of our investment portfolio would decline
by an immaterial amount and therefore we would not expect our operating results
or cash flows to be affected to any significant degree by the effect of a change
in market conditions on our investments.
 
 Item
4.     Controls and Procedures
  Management,
including our Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, as of September 30, 2010. 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
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were not effective as
of September 30, 2010, because of the material weaknesses in internal control
over financial reporting discussed in the fiscal 2009 Form 10-K.  The
material weakness related to the preparation and review process for the
calculation of the tax provision, which led to errors in the computation of
deferred tax assets, deferred tax liabilities, and related income tax
provision.
  As a
consequence of that determination, we have implemented a procedure designed to
detect or prevent this error from occurring in the future. In February 2010, the
Company hired a CPA in-house with extensive experience in financial reporting
and ASC 740, “Accounting for Income Taxes.”  In addition, on a
quarterly basis the company will have an outside tax advisor review management’s
tax provision calculations. Management believes that such enhanced procedure
will prospectively mitigate this material weakness.  The second
quarter of 2010 was the first full quarter in which all remedial measures were
in place to detect or prevent a material weakness in the preparation and review
process for the calculation of the tax provision.  Management
anticipates in the fourth quarter of 2010 the remedial measures will be
effective in order to conclude that our disclosure controls and procedures will
be effective as of December 31, 2010.
  Because
of the material weaknesses in internal control over financial reporting
described in the fiscal 2009 Form 10-K, we performed additional analyses and
other post-closing procedures to ensure that our consolidated financial
statements were prepared in accordance with generally accepted accounting
principles. Accordingly, management, including our Chief Executive Officer and
Chief Financial Officer, believes the consolidated financial statements included
in this report fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods
presented.
  25
 
 Changes in Internal Control
over Financial Reporting:
 There
were changes in the Company’s internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act)
during the last fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting. We identified a material weakness in our
internal control over financial reporting and have described the changes to our
internal controls over financial reporting designed to remediate this material
weakness.  Additionally, as a consequence of that determination, we have
implemented a procedure designed to detect or prevent this error from occurring
in the future. In February 2010, the Company hired a CPA in-house with extensive
experience in financial reporting and ASC 740, “Accounting for Income
Taxes.”  In addition, on a quarterly basis the company will have an outside
tax advisor review management’s tax provision calculations. Management believes
that such enhanced procedure will prospectively mitigate this material
weakness.
 
 Part II  Other
Information
 
 Item
1.  Legal Proceedings
 
 Medifast, Inc. continues to prosecute
its civil claim pending in the US District Court (SD Cal) against Fraud
Discovery Institute, Inc, its subsidiary IBusiness Reporting, its editor William
Lobdell, Tracy Coenen, her Sequence, Inc., “Zee Yourself”, Robert L. Fitzpatrick
and Barry Minkow for defamation, violations of California Corporate Code
Sections 25400 et seq, and 17200 et seq, and civil conspiracy. Productive
 discovery allowed by the Court has been conducted by the Plaintiffs
through October 22, 2010 on the Defendants and other persons with probative
knowledge. Medifast, Inc. continues to closely cooperate with all governmental
regulatory and criminal investigative agencies with whom it has filed complaints
or inquiries
 
 Item
1A. Risk Factors
  Information
about risk factors for the nine months ended September 30, 2010, 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, 2009.
 
 Item 5. Other
Information
 
 On
September 3, 2004, our Board of Directors authorized the repurchase of up to
500,000 shares of our common stock.  Depending upon market conditions,
shares may be repurchased from time to time at prevailing market prices through
open market or privately negotiated transactions.
 
 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.   As of September 30, 2010, we
had purchased 135,000 shares as treasury stock through the repurchase program
noted above.
 
 The
Company Executive Chairman of the Board reserves the right within the company’s
trading policy to sell or donate for charitable purposes 100,000 shares of MED
stock for estate planning and tax purposes prior to the end of 2010. Should he
exercise his right to sell or donate stock the Mac Donald family will remain one
of the largest holders of MED common stock.
 
 The
following is a summary of our common stock purchases during the quarter ended
September 30, 2010:
 
 Period
                  
                  Total Number of
                    SharesPurchased
                  
                  
                  Average Price Paid
                    per Share
                  
                  
                  Total Number of Shares
                    Purchased as Part of Publicly
                    Announced Plans or
                    Programs
                  
                  
                  Maximum Number of
                    Sharesthat May Yet Be
                    PurchasedUnder the Plans
                    or ProgramsJuly
      1 - July 31,2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000August  1
      - August 31, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000September
      1 - September 30, 2010
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  365,000
  26
 
 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 S. MCDEVITT
                        November
      9, 2010Michael
      S. McDevittChief
      Executive Officer(principal
      executive officer and principal financial officer)
 
 BY:
                      /S/
      BRENDAN N. CONNORS
                      November  9,
      2010Brendan
      N. ConnorsChief
      Financial Officer(principal
      executive officer and principal financial officer)
  27
  Index to
Exhibits
 
 Exhibit
      Number
              Description
      of Exhibit
 
 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
  28