10-Q 1 v358216_10q.htm 10-Q
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, DC 20549
 
FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarter period ended September 30, 2013
 
OR
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________ to _________.
 
Commission file number
 
Medifast, Inc.
 
(Exact name of registrant as specified in its charter)
 
Delaware 13-3714405
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
 
11445 Cronhill Drive
Owings Mills, MD 21117
Telephone Number: (410) 581-8042
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 16 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x      No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerate filer. See definition of “accelerated filer and large accelerated filer” in Rule 12 b-2 of the Exchange Act (Check one):
 
Large accelerated filer o Accelerated filer x Non-accelerated filer o
 
Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).
 
Yes o 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 12, 2013
Common stock, $.001 par value per share   13,884,293
 
 
 
Medifast, Inc. and subsidiaries
 
Index
 
Part 1 – Financial Information:  
   
Item 1 – Financial Statements  
   
Condensed Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012 (audited) 3
   
Condensed Consolidated Statements of Income (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012 4
   
Condensed Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012 5
   
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the Nine Months Ended September 30, 2013 6
   
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2013 and 2012 7
   
Notes to Unaudited Condensed Financial Statements 8
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3 – Quantitative and Qualitative Disclosures about Market Risk 24
   
Item 4 – Controls and Procedures 24
   
Part II – Other Information:  
   
Item 1 – Legal Proceedings 24
   
Item 1.A – Risk Factors 24
   
Item 5 – Other Information 25
   
Item 6 – Exhibits 27
 
 
2

 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
(Unaudited)
 
(Audited)
 
 
 
September 30, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
47,980,000
 
$
39,937,000
 
Accounts receivable-net of allowance for sales returns and doubtful accounts
    of $731,000 and $542,000
 
 
1,932,000
 
 
2,148,000
 
Inventory
 
 
17,451,000
 
 
20,804,000
 
Investment securities
 
 
34,028,000
 
 
20,057,000
 
Income taxes, prepaid
 
 
2,555,000
 
 
873,000
 
Prepaid expenses and other current assets
 
 
2,035,000
 
 
3,296,000
 
Deferred tax assets
 
 
875,000
 
 
1,460,000
 
Total current assets
 
 
106,856,000
 
 
88,575,000
 
 
 
 
 
 
 
 
 
Property, plant and equipment - net
 
 
41,135,000
 
 
40,109,000
 
Trademarks and intangibles - net
 
 
49,000
 
 
428,000
 
Other assets
 
 
356,000
 
 
1,139,000
 
 
 
 
 
 
 
 
 
TOTAL ASSETS
 
$
148,396,000
 
$
130,251,000
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
30,338,000
 
$
28,221,000
 
Current maturities of long-term debt and capital leases
 
 
220,000
 
 
528,000
 
Total current liabilities
 
 
30,558,000
 
 
28,749,000
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Long-term debt, net of current portion
 
 
-
 
 
3,113,000
 
Capital leases, net of current portion
 
 
530,000
 
 
696,000
 
Deferred tax liabilities
 
 
5,970,000
 
 
6,907,000
 
Total liabilities
 
 
37,058,000
 
 
39,465,000
 
 
 
 
 
 
 
 
 
Stockholders' Equity:
 
 
 
 
 
 
 
Preferred stock, $.001 par value (1,500,000 authorized, no shares issued and
    outstanding)
 
 
-
 
 
-
 
Common stock; par value $.001 per share; 20,000,000 shares authorized;
    15,542,118 and 15,525,955 issued; 13,884,293 and 13,767,380 issued
    and outstanding
 
 
16,000
 
 
16,000
 
Additional paid-in capital
 
 
42,285,000
 
 
40,191,000
 
Accumulated other comprehensive income
 
 
332,000
 
 
553,000
 
Retained earnings
 
 
95,213,000
 
 
76,534,000
 
Less: cost of 1,608,908 shares of common stock in treasury
 
 
(26,508,000)
 
 
(26,508,000)
 
Total stockholders' equity
 
 
111,338,000
 
 
90,786,000
 
 
 
 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
148,396,000
 
$
130,251,000
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
3

 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
86,480,000
 
$
90,968,000
 
$
279,595,000
 
$
273,464,000
 
Cost of sales
 
 
21,627,000
 
 
22,632,000
 
 
69,403,000
 
 
68,233,000
 
Gross Profit
 
 
64,853,000
 
 
68,336,000
 
 
210,192,000
 
 
205,231,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general, and administration
 
 
57,504,000
 
 
59,408,000
 
 
183,624,000
 
 
185,568,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from operations
 
 
7,349,000
 
 
8,928,000
 
 
26,568,000
 
 
19,663,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and dividend income, net
 
 
167,000
 
 
64,000
 
 
317,000
 
 
226,000
 
Other income
 
 
362,000
 
 
(13,000)
 
 
581,000
 
 
925,000
 
 
 
 
529,000
 
 
51,000
 
 
898,000
 
 
1,151,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
 
7,878,000
 
 
8,979,000
 
 
27,466,000
 
 
20,814,000
 
Provision for income taxes
 
 
2,205,000
 
 
1,771,000
 
 
8,787,000
 
 
6,803,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
5,673,000
 
$
7,208,000
 
$
18,679,000
 
$
14,011,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.41
 
$
0.53
 
$
1.35
 
$
1.02
 
Diluted earnings per share
 
$
0.41
 
$
0.52
 
$
1.34
 
$
1.02
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding -
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
13,884,293
 
 
13,705,188
 
 
13,852,155
 
 
13,709,702
 
Diluted
 
 
13,903,412
 
 
13,804,212
 
 
13,955,217
 
 
13,766,013
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
5,673,000
 
$
7,208,000
 
$
18,679,000
 
$
14,011,000
 
Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in unrealized gains/losses on marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in fair value of marketable securities, net of tax
 
 
304,000
 
 
165,000
 
 
(4,000)
 
 
292,000
 
Adjustment for net (gains)/losses realized
and included in net income, net of tax
 
 
(32,000)
 
 
(1,000)
 
 
(217,000)
 
 
(91,000)
 
Total change in unrealized gains/losses
on marketable securities, net of tax
 
 
272,000
 
 
164,000
 
 
(221,000)
 
 
201,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income
 
 
272,000
 
 
164,000
 
 
(221,000)
 
 
201,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
5,945,000
 
$
7,372,000
 
$
18,458,000
 
$
14,212,000
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2013
(Unaudited)
 
 
 
Number of
Shares
Issued
 
Par Value
$0.001
Amount
 
Additional Paid-
In Capital
 
Retained Earnings
 
Accumulated
other
comprehensive
income
 
Treasury Stock
 
Total
 
Balance, December 31, 2012
 
 
15,525,955
 
$
16,000
 
$
40,191,000
 
$
76,534,000
 
$
553,000
 
$
(26,508,000)
 
$
90,786,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued to executives
 
 
16,163
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share-based compensation to executives and directors
 
 
 
 
 
 
 
 
1,772,000
 
 
 
 
 
 
 
 
 
 
 
1,772,000
 
Share-based compensation tax benefit
 
 
 
 
 
 
 
 
322,000
 
 
 
 
 
 
 
 
 
 
 
322,000
 
Net income
 
 
 
 
 
 
 
 
 
 
 
18,679,000
 
 
 
 
 
 
 
 
18,679,000
 
Net change in unrealized gain on investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(221,000)
 
 
 
 
 
(221,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2013
 
 
15,542,118
 
$
16,000
 
$
42,285,000
 
$
95,213,000
 
$
332,000
 
$
(26,508,000)
 
$
111,338,000
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
MEDIFAST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
 
$
18,679,000
 
$
14,011,000
 
Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
7,912,000
 
 
8,219,000
 
Realized gain on investment securities, net
 
 
(337,000)
 
 
(4,000)
 
Share-based compensation
 
 
1,772,000
 
 
1,816,000
 
Deferred income taxes
 
 
(47,000)
 
 
(440,000)
 
Loss on disposal of fixed assets
 
 
85,000
 
 
59,000
 
Changes in assets and liabilities which provided (used) cash:
 
 
 
 
 
 
 
Accounts receivable
 
 
216,000
 
 
(1,255,000)
 
Inventory
 
 
3,353,000
 
 
1,690,000
 
Prepaid expenses and other current assets
 
 
1,261,000
 
 
(19,000)
 
Other assets
 
 
764,000
 
 
219,000
 
Accounts payable and accrued expenses
 
 
2,117,000
 
 
10,603,000
 
Income taxes
 
 
(1,682,000)
 
 
4,828,000
 
Net cash provided by operating activities
 
 
34,093,000
 
 
39,727,000
 
Cash Flow from Investing Activities:
 
 
 
 
 
 
 
Sale of investment securities
 
 
7,416,000
 
 
7,140,000
 
Purchase of investment securities
 
 
(21,576,000)
 
 
(6,802,000)
 
Purchase of property and equipment
 
 
(8,644,000)
 
 
(7,435,000)
 
Net cash used in investing activities
 
 
(22,804,000)
 
 
(7,097,000)
 
Cash Flow from Financing Activities:
 
 
 
 
 
 
 
Repayment of long-term debt and capital leases
 
 
(3,587,000)
 
 
(1,297,000)
 
Decrease in note receivable
 
 
19,000
 
 
13,000
 
Excess tax benefits from share-based compensation
 
 
322,000
 
 
567,000
 
Purchase of treasury stock
 
 
-
 
 
(2,764,000)
 
Net cash used in financing activities
 
 
(3,246,000)
 
 
(3,481,000)
 
 
 
 
 
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
 
 
8,043,000
 
 
29,149,000
 
Cash and cash equivalents - beginning of the period
 
 
39,937,000
 
 
14,262,000
 
Cash and cash equivalents - end of period
 
$
47,980,000
 
$
43,411,000
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Interest paid
 
$
49,000
 
$
93,000
 
Income taxes paid
 
$
10,143,000
 
$
2,249,000
 
 
 
 
 
 
 
 
 
Supplemental disclosure of non cash activity:
 
 
 
 
 
 
 
Capitalized lease additions
 
$
-
 
$
104,000
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
7

 
Medifast, Inc. and subsidiaries
 
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, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013 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, 2012 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, 2012 (the 2012 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.
 
Certain amounts reported for prior periods have been reclassified to be consistent with the current period presentation. No reclassification in the consolidated financial statements had a material impact on the presentation.

3.
Recent Accounting Pronouncements
 
We have considered all new accounting pronouncements and have concluded that there are no new pronouncements that may have a material impact on our results of operations, financial condition, or cash flows, based on current information.

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 primarily occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping. Medifast Weight Control Centers’ program fees are recognized over the estimated service period.

5.
Inventories
 
Inventories consist principally of packaged meal replacements held in the Company’s warehouses. Inventory is stated at the lower of cost or market, utilizing the first-in, first-out method. The cost of finished goods includes the cost of raw materials, packaging supplies, direct and indirect labor and other indirect manufacturing costs. On a quarterly basis, management reviews inventory for unsalable or obsolete inventory.
 
8

Inventories consisted of the following at September 30, 2013 and December 31, 2012:
  
 
 
2013
 
2012
 
Raw Materials
 
$
5,235,000
 
$
5,685,000
 
Packaging
 
 
730,000
 
 
653,000
 
Non-food Finished Goods
 
 
796,000
 
 
961,000
 
Finished Goods
 
 
10,936,000
 
 
13,857,000
 
Reserve for Obsolete Inventory
 
 
(246,000)
 
 
(352,000)
 
 
 
$
17,451,000
 
$
20,804,000
 
 
9

 
6.
Intangible Assets
 
The Company has acquired certain intangible assets, which include: customer lists, trademarks, patents and copyrights. The customer lists are being amortized over a 3-year period based on management’s best estimate of the expected useful life. The costs of trademarks, patents and copyrights are amortized over 2 to 7 years based on their estimated useful life.
 
 
 
As of September 30, 2013
 
As of December 31, 2012
 
 
 
 
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Weighted-Avg.
Amortization
Period
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists
 
$
235,000
 
$
228,000
 
$
235,000
 
$
206,000
 
3 years
 
Trademarks, patents, and copyrights
 
 
2,437,000
 
 
2,395,000
 
 
2,437,000
 
 
2,038,000
 
4 years
 
Total
 
$
2,672,000
 
$
2,623,000
 
$
2,672,000
 
$
2,244,000
 
 
 
  
Amortization expense for the three and nine months ended September 30, 2013 and 2012 was as follows:
  
 
 
Three Months Ended September 30,
 
Nine Months Ended September  30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Customer lists
 
$
7,000
 
$
20,000
 
$
22,000
 
$
60,000
 
Trademarks, patents, and copyrights
 
 
111,000
 
 
132,000
 
 
357,000
 
 
351,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total trademarks and intangibles
 
$
118,000
 
$
152,000
 
$
379,000
 
$
411,000
 
  
Amortization expense is included in selling, general and administrative expenses.

7.
Earnings per Share
 
Basic earnings per share (“EPS”) computations are calculated utilizing the weighted average number of common shares outstanding during the periods presented. Diluted EPS is calculated utilizing the weighted average number of common shares outstanding adjusted for the effect of dilutive common stock equivalents.
 
The following table sets forth the computation of basic and diluted EPS for the three and nine months ended September 30:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Numerator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
5,673,000
 
$
7,208,000
 
$
18,679,000
 
$
14,011,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
 
 
13,884,293
 
 
13,705,188
 
 
13,852,155
 
 
13,709,702
 
Effect of dilutive common stock equivalents
 
 
19,119
 
 
99,024
 
 
103,062
 
 
56,311
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average diluted common shares outstanding
 
 
13,903,412
 
 
13,804,212
 
 
13,955,217
 
 
13,766,013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EPS:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.41
 
$
0.53
 
$
1.35
 
$
1.02
 
Diluted
 
$
0.41
 
$
0.52
 
$
1.34
 
$
1.02
 
  
 
10

 
8.
Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.   Actual results could differ from those estimates.

9.
Financial Instruments
 
Certain financial assets and liabilities are accounted for at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy prioritizes the inputs used to measure fair value:
 
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
 
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value from the perspective of a market participant.
 
The following table represents cash and the available-for-sale securities adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or investment securities as of September 30, 2013 and December 31, 2012:
 
 
11

  
 
 
September 30, 2013
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Accrued
Interest
 
Estimated
Fair Value
 
Cash & Cash
Equivalents
 
Investment
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
45,816,000
 
$
-
 
$
-
 
$
-
 
$
45,816,000
 
$
45,816,000
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money Market Accounts
 
 
2,164,000
 
 
-
 
 
-
 
 
-
 
 
2,164,000
 
 
2,164,000
 
 
-
 
Mutual Funds
 
 
9,426,000
 
 
52,000
 
 
(244,000)
 
 
-
 
 
9,234,000
 
 
-
 
 
9,234,000
 
Corporate Equity Securities
 
 
4,585,000
 
 
668,000
 
 
(98,000)
 
 
-
 
 
5,155,000
 
 
-
 
 
5,155,000
 
Government & Agency Securities
 
 
7,774,000
 
 
83,000
 
 
(76,000)
 
 
31,000
 
 
7,812,000
 
 
-
 
 
7,812,000
 
 
 
 
23,949,000
 
 
803,000
 
 
(418,000)
 
 
31,000
 
 
24,365,000
 
 
2,164,000
 
 
22,201,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Bonds
 
 
3,629,000
 
 
99,000
 
 
-
 
 
23,000
 
 
3,751,000
 
 
-
 
 
3,751,000
 
Corporate Bonds
 
 
8,007,000
 
 
73,000
 
 
(57,000)
 
 
53,000
 
 
8,076,000
 
 
-
 
 
8,076,000
 
 
 
 
11,636,000
 
 
172,000
 
 
(57,000)
 
 
76,000
 
 
11,827,000
 
 
-
 
 
11,827,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
81,401,000
 
$
975,000
 
$
(475,000)
 
$
107,000
 
$
82,008,000
 
$
47,980,000
 
$
34,028,000
 
  
 
 
December 31, 2012
 
 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Accrued
Interest
 
Estimated
Fair Value
 
Cash & Cash
Equivalents
 
Investment
Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash
 
$
38,977,000
 
$
-
 
$
-
 
$
-
 
$
38,977,000
 
$
38,977,000
 
$
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money Market Accounts
 
 
960,000
 
 
-
 
 
-
 
 
-
 
 
960,000
 
 
960,000
 
 
-
 
Mutual Funds
 
 
234,000
 
 
13,000
 
 
(1,000)
 
 
-
 
 
246,000
 
 
-
 
 
246,000
 
Corporate Equity Securities
 
 
1,853,000
 
 
489,000
 
 
(46,000)
 
 
-
 
 
2,296,000
 
 
-
 
 
2,296,000
 
Government & Agency Securities
 
 
7,004,000
 
 
180,000
 
 
(3,000)
 
 
34,000
 
 
7,215,000
 
 
-
 
 
7,215,000
 
 
 
 
10,051,000
 
 
682,000
 
 
(50,000)
 
 
34,000
 
 
10,717,000
 
 
960,000
 
 
9,757,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Bonds
 
 
4,197,000
 
 
124,000
 
 
(4,000)
 
 
27,000
 
 
4,344,000
 
 
-
 
 
4,344,000
 
Corporate Bonds
 
 
5,772,000
 
 
136,000
 
 
(2,000)
 
 
50,000
 
 
5,956,000
 
 
-
 
 
5,956,000
 
 
 
 
9,969,000
 
 
260,000
 
 
(6,000)
 
 
77,000
 
 
10,300,000
 
 
-
 
 
10,300,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
58,997,000
 
$
942,000
 
$
(56,000)
 
$
111,000
 
$
59,994,000
 
$
39,937,000
 
$
20,057,000
 
 

10.
Shared-based Compensation
 
The Company has issued restricted stock to employees and nonemployee directors generally with terms up to five 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 Value
 
Unvested at December 31, 2012
 
 
149,667
 
$
8.21
 
Granted
 
 
314,706
 
 
25.23
 
Vested
 
 
(151,883)
 
 
13.14
 
Forfeited
 
 
-
 
 
-
 
Unvested at September 30, 2013
 
 
312,490
 
$
22.95
 
 
 
12

 
The total restricted stock awards vested and charged against income during the three months ended September 30, 2013 and 2012 was $620,000 and $360,000, respectively and $2.0 million and $1.8 million for the nine months ended September 30, 2013 and 2012, respectively. The total income tax benefit recognized in the consolidated statement of income for these restricted stock awards was approximately $211,000 and $139,000 for the three months ended September 30, 2013 and 2012, respectively and $602,000 and $702,000 for the nine months ended September 30, 2013 and 2012, respectively. The tax benefit recognized in additional paid-in capital upon vesting of restricted stock awards was approximately $224,000 and $104,000 for the three months ended September 30, 2013 and 2012, respectively and $322,000 and 567,000 for the nine months ended September 30, 2013 and 2012, respectively. There was approximately $7.2 million of total unrecognized compensation cost related to restricted stock awards as of September 30, 2013. The cost is expected to be recognized over a weighted-average period of approximately 4.4 years.

11.
Business Segments
 
Operating segments are components of an enterprise about which separate financial information is available that is regularly reviewed by the chief operating decision maker about how to allocate resources and in assessing performance. The Company has two reportable operating segments: Medifast, and MWCC and Wholesale. The Medifast reporting segment consists of the following distribution channels: Medifast Direct and Take Shape For Life. The MWCC and Wholesale segment consists of Medifast Corporate and Franchise Weight Control Centers as well as Medifast Wholesale Physicians.
 
Total assets and operating expense not identified with a specific segment are listed as “Other” and include items such as auditors’ fees, attorney’s fees, stock compensation expense and corporate governance related to NYSE, Sarbanes Oxley and SEC regulations. Evaluation of the performance of operating segments is based on their respective income from operations before taxes. The accounting policies of the segments are the same as those of the Company. The presentation and allocation of assets, liabilities and results of operations may not reflect the actual economic costs of the segments as stand-alone businesses. If a different basis of allocation were utilized, the relative contributions of the segments might differ, but management believes that the relative trends in segments would likely not be impacted.
 
 
13

  
The following tables present segment information for the three and  nine months ended September 30, 2013 and 2012:
 
 
 
Three Months Ended September, 2013
 
 
 
Medifast
 
MWCC &
Wholesale
 
Other
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
73,324,000
 
$
13,156,000
 
$
-
 
$
86,480,000
 
Cost of Sales
 
 
18,120,000
 
 
3,507,000
 
 
-
 
 
21,627,000
 
Selling, General and Administrative Expense
 
 
44,970,000
 
 
8,434,000
 
 
1,408,000
 
 
54,812,000
 
Depreciation and Amortization
 
 
1,939,000
 
 
684,000
 
 
69,000
 
 
2,692,000
 
Interest(net) and other
 
 
(306,000)
 
 
3,000
 
 
(226,000)
 
 
(529,000)
 
Income before income taxes
 
$
8,601,000
 
$
528,000
 
$
(1,251,000)
 
$
7,878,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets
 
$
91,370,000
 
$
12,450,000
 
$
44,576,000
 
$
148,396,000
 
  
 
 
Three Months Ended September 30, 2012
 
 
 
Medifast
 
MWCC &
Wholesale
 
Other
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
76,777,000
 
$
14,191,000
 
$
-
 
$
90,968,000
 
Cost of Sales
 
 
18,986,000
 
 
3,646,000
 
 
-
 
 
22,632,000
 
Selling, General and Administrative Expense
 
 
46,118,000
 
 
9,311,000
 
 
1,012,000
 
 
56,441,000
 
Depreciation and Amortization
 
 
2,068,000
 
 
841,000
 
 
58,000
 
 
2,967,000
 
Interest(net) and other
 
 
30,000
 
 
5,000
 
 
(86,000)
 
 
(51,000)
 
Income before income taxes
 
$
9,575,000
 
$
388,000
 
$
(984,000)
 
$
8,979,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets
 
$
82,402,000
 
$
17,362,000
 
$
28,536,000
 
$
128,300,000
 
  
 
 
Nine Months Ended September, 2013
 
 
 
Medifast
 
MWCC &
Wholesale
 
Other
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
238,625,000
 
$
40,970,000
 
$
-
 
$
279,595,000
 
Cost of Sales
 
 
58,790,000
 
 
10,613,000
 
 
-
 
 
69,403,000
 
Selling, General and Administrative Expense
 
 
145,028,000
 
 
26,058,000
 
 
4,626,000
 
 
175,712,000
 
Depreciation and Amortization
 
 
5,583,000
 
 
2,135,000
 
 
194,000
 
 
7,912,000
 
Interest(net) and other
 
 
(228,000)
 
 
7,000
 
 
(677,000)
 
 
(898,000)
 
Income before income taxes
 
$
29,452,000
 
$
2,157,000
 
$
(4,143,000)
 
$
27,466,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets
 
$
91,370,000
 
$
12,450,000
 
$
44,576,000
 
$
148,396,000
 
  
 
 
Nine Months Ended September 30, 2012
 
 
 
Medifast
 
MWCC &
Wholesale
 
Other
 
Consolidated
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
230,550,000
 
$
42,914,000
 
$
-
 
$
273,464,000
 
Cost of Sales
 
 
57,694,000
 
 
10,539,000
 
 
-
 
 
68,233,000
 
Selling, General and Administrative Expense
 
 
138,140,000
 
 
31,426,000
 
 
7,783,000
 
 
177,349,000
 
Depreciation and Amortization
 
 
5,955,000
 
 
2,071,000
 
 
193,000
 
 
8,219,000
 
Interest(net) and other
 
 
76,000
 
 
14,000
 
 
(1,241,000)
 
 
(1,151,000)
 
Income before income taxes
 
$
28,685,000
 
$
(1,136,000)
 
$
(6,735,000)
 
$
20,814,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment Assets
 
$
82,402,000
 
$
17,362,000
 
$
28,536,000
 
$
128,300,000
 
 
 
14

 
12.
Contingencies
 
 The Company filed a civil complaint on February 17, 2010 in the U.S. District Court (SD, Cal) against Barry Minkow and the Fraud Discovery Institute, Inc. (collectively, “Minkow”), iBusiness Reporting, and its editor William Lobdell, Tracy Coenen and Sequence, Inc. (collectively, “Coenen”), “Zee Yourself”, and Robert L. Fitzpatrick (“FitzPatrick”) for Defamation, Market Manipulation and Unfair Business Practices, alleging a scheme of market manipulation of Medifast stock for Defendants’ monetary gain, by damaging the business reputation of Medifast and its Take Shape For Life division. Bradley T. MacDonald, former Executive Chairman of Medifast and Company shareholder, joined the lawsuit individually.  The lawsuit seeks $270 million in compensatory damages, punitive damages, and ancillary relief. In March 2011, the District Court granted in part and denied in part certain Anti-SLAPP Motions to Strike (i.e. motions to dismiss) previously filed by all Defendants. The Company has appealed that portion of the District Court’s ruling which dismissed its defamation claims against Minkow and Coenen in the 9th Circuit Court of Appeals. Defendant FitzPatrick’s motion was denied as to the Company’s defamation claim, and FitzPatrick has appealed that portion of the Court’s ruling.  Both appeals have been fully-briefed and oral argument was held on March 5, 2013. On May 20, 2013, the Court deferred its decision on Medifast and FitzPatrick’s appeals pending the determination of a petition for rehearing en banc in another Anti-SLAPP appeal, Tarla Makaeff v. Trump University, LLC, Case No. 11-55016, filed on April 30, 2013. That petition is currently pending before the Ninth Circuit.
 
On July 20, 2012, Jason Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company, signed a proposed consent decree with the Federal Trade Commission (“FTC”), in response to the FTC’s investigation of certain statements in the Company’s advertising for its weight-loss programs. On September 17, 2012 the consent decree was entered and approved by the United States District Court for the District of Columbia. The consent decree replaces a previous consent order entered into by Jason Pharmaceuticals, Inc. and the FTC in 1992. The FTC expressed concern that some of the Company’s advertising contained claims which were not compatible with current standards for substantiation. Pursuant to the consent decree, the Company agreed to modify certain advertising claims in this regard and agreed to ensure that its clinical studies meet the protocol contained in the consent agreement. The Company paid a civil penalty of $3.7 million to resolve the FTC’s concerns and avoid protracted legal proceedings. The Company accrued for the penalty in the second quarter of 2012 as part of selling, general & administration expenses.
 
 
15

 
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 2013 and beyond, are forward-looking statements and involve various risks and uncertainties.  Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge, there can be no assurance that actual results will not differ materially from the Company’s expectations.  The Company cautions investors not to place undue reliance on forward-looking statements which speak only to management’s experience on this data.
 
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note 2 of the consolidated financial statements filed on Form 10-K.
 
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Management develops, and changes periodically, these estimates and assumptions based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management considers the following accounting estimates to be the most critical in preparing our consolidated financial statements. These critical accounting estimates have been discussed with our Audit Committee.
 
Revenue Recognition:  Revenue is recognized net of discounts, rebates, promotional adjustments, price adjustments, and estimated returns and upon transfer of title and risk to the customer which primarily occurs at shipping (F.O.B. terms). Upon shipment, the Company has no further performance obligations and collection is reasonably assured as the majority of sales are paid for prior to shipping. Medifast Weight Control Centers program fees are recognized over the estimated service period.
 
Impairment of Fixed Assets and Intangible Assets: We continually assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and our operating performance. Future events could cause us to conclude that impairment indicators exist and the carrying values of fixed and intangible assets may be impaired. Any resulting impairment loss would be limited to the value of net fixed and intangible assets.
 
Income Taxes: The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than-not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
 
We evaluated our tax positions and determined that we did not have any material uncertain tax positions. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. For the nine months ended   September 30, 2013 and 2012, no material estimated interest or penalties were recognized for the uncertainty of certain tax positions. We file income tax returns in the United States and various states jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the years before 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 provisions for estimated returns as of September 30, 2013 and December 31, 2012 were $514,000 and $300,000, respectively. 
 
Operating leases: Medifast leases retail stores, distribution facilities, and office space under operating leases. Many lease agreements contain tenant improvement allowances, rent holidays, rent escalation clauses and contingent rent provisions. The Company recognizes incentives and minimum rental expenses on a straight-line basis over the terms of the leases. We commence recording rent expense on the date of initial possession, which is generally when we enter the space and begin to make improvements to properties for our intended use. For tenant improvement allowances and rent holidays, we record a deferred rent liability on the consolidated balance sheets and amortize the deferred rent over the terms of the leases as reductions to rent expense on the consolidated statements of income.
 
For scheduled rent escalation clauses during the lease terms or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases on the consolidated statements of income. Several leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. We record a contingent rent liability on the consolidated balance sheets and the corresponding rent expense when we determine achieving specified levels is probable.
 
 
16

 
Background:
 
The Company is engaged in the production, distribution, and sale of weight management products and other consumable health and diet products.   The Company’s product lines include meal replacements and supplements.  Our products and services are sold to weight loss program participants primarily via the internet, telephone, and brick and mortar clinics.  Customers of our Health Coaches in the Take Shape For Life person-to-person direct sales channel are directed to order our products through either the internet or through the Company’s in-house call center.  Our product sales accounted for 96% of our revenues in the first nine months of 2013 and 95% of our revenues in the first nine months of 2012.  Program sales in our Medifast Weight Control Center channel accounted for 2% of revenues in the first nine months of 2013 and 3% in the first nine months of 2012.  Shipping revenue and other accounted for 2% in the first nine months of 2013 and 2012.  Revenue consists primarily of meal replacement food sales. In the first nine months of 2013, revenue increased to $279.6 million as compared to $273.5 million in the first nine months of 2012, an increase of $6.1 million or 2.2%. The Take Shape For Life sales channel accounted for 63.3% of total revenue, Medifast Direct 22.0%, and Medifast Weight Control Centers and Medifast Wholesale Physicians 14.7%.
 
We review and analyze a number of key operating and financial metrics to manage our business, including revenue to advertising spend, number of active Health Coaches and average monthly revenue generated per health coach in the Take Shape For Life channel, and average same store sales improvement for the Medifast Weight Control Center channel.
 
Overview of the Company
 
Distribution Channels
 
Medifast Direct – In the direct-to-consumer channel (“Medifast Direct”), customers order Medifast product directly through the Company’s website, www.medifast1.com or our in-house call center. The product is shipped directly to the customer’s home. This business is driven by a multi-media customer acquisition strategy that includes both national and regional print, radio, web advertising, direct mail, and television as well as public relations, word of mouth referrals, and social media initiatives. The Medifast Direct division focuses on targeted marketing initiatives and provides customer support through its in-house call center and nutrition support team of registered dietitians to better serve its customers. In addition, Medifast continues to use leading web technology featuring customized meal planning and web community components. MyMedifast is a robust online community which provides a library of support articles, support forums, meal-planning tools, and social media functions. See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.
 
Take Shape For Life™ – Take Shape For Life is the personal coaching division of Medifast.  The coaching network consists of independent contractor Health Coaches (“Health Coaches”), who are trained to provide coaching and support to clients on Medifast weight-loss programs and is led by its co-founder, a physician with a background in critical care. The role of the Health Coach is to give clients the encouragement and mentoring to assist them to successfully reach a healthy weight.  The Take Shape For Life program provides a road map to empower the individual to take control of their health through adopting better long-term habits.  Take Shape For Life moves beyond the scope of weight loss to teach clients how to achieve optimal health through the balance of body, mind, and finances.  The program uses the high-quality, medically validated products of Medifast that have been proven safe and effective in clinical studies described in our most recent Annual Report on Form 10-K, under “Clinical Research Overview.”  Health Coaches and their clients follow the principles of the Discover Your Optimal Health book, Habits of Health book, and Habits of Health companion workbook written by the Take Shape For Life co-founder to create a lifelong health optimization program.  In addition to the encouragement and support of a Health Coach, clients of Take Shape For Life are offered a bio-network of support including product and program information on our website, weekly medical and general support calls, and access to our registered dietitians.
 
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 of Medifast products and programs. Our Health Coaches provide coaching and support to their Clients throughout the weight-loss and weight-maintenance process. Most new Health Coaches are introduced to the opportunity by an existing Health Coach. The vast majority of new Health Coaches started as weight-loss clients of a Health Coach, had success on the Medifast program, and became a Health Coach to help others through the weight-loss process. Approximately 20% of active Health Coaches in the Take Shape For Life network are health care providers.
 
Take Shape For Life Health Coaches are independent contractors who are compensated 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 products, and their order is shipped directly from the Company to the client’s home or designated address. Our Health Coaches do not handle payments and are not required to purchase or store products in order to receive a commission. In addition, Health Coaches do not receive a commission on their own personal product orders. Health Coaches pay the same price for products as their clients. The Company pays retail commissions to qualified Health Coaches on a weekly basis.
 
· Bonuses: Health Coaches are offered several bonus opportunities, including client support bonuses, certification bonus, team growth bonuses, generation bonuses, elite leadership bonuses, consistency bonuses, client acquisition bonuses, and new Health Coach assist bonuses. The purposes of these bonuses are to reward Health Coaches for successfully referring product sales to the Take Shape For Life network, and to incentivize Health Coaches to further support and develop other Health Coaches within their network. The Company pays bonuses on a monthly basis to qualified Health Coaches.
 
 
17

 
o
Client Support bonuses are paid to Health Coaches who have at least 1,200 in frontline product sales to either Clients or personally sponsored Health Coaches. These are incremental bonuses based on the Health Coach frontline product sales performance.
 
 
o
Certification bonus is paid to Health Coaches who have purchased the COPE online certification course, completed the course work and passed a final examination. This bonus is earned on all frontline product sales starting in the month certification status is obtained.
 
 
 
 
o
Team growth bonuses are paid to Health Coaches who have at least five ordering clients per month and who have generated over $1,200 in group product sales per month.  Monthly growth bonuses are incremental bonuses that enable Health Coaches to earn income on product orders placed by clients and/or Health Coach Teams within their network.
 
 
 
 
o
Generation bonuses are paid to Health Coaches who qualify as Executive Director and have one or more Health Coaches in their business who have achieved the rank of Executive Director.  An Executive Director is a Health Coach who has obtained 5 Qualifying Points. Qualifying Points are earned for every $1,200 in frontline product sales generated or every qualified Senior Coach Team. .  A Senior Coach is a Health Coach who generates at least $1,200 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 who qualify as Executive Director and have three or more Health Coaches in their business who have achieved the rank of Executive Director. 
 
 
 
 
o
Consistency bonuses are paid to Health Coaches who are Certified and maintain frontline product sales and/or qualified Senior Coach Team performance with order consistency month after month. Health Coaches who generate at least $2,000 or more in frontline product sales for three consecutive months are paid a Health Coach consistency bonus. Certified Health Coaches who maintain at least $6,000 in frontline product sales, at least $15,000 in group product sales, and qualify 5 Senior Coach teams for three consecutive months are paid a Fully Integrated Business Coach Consistency Bonus.
 
 
 
 
o
Client acquisition bonuses are paid to new Health Coaches who develop five Clients and generate $1,000 in frontline product sales within their first 30 calendar days in Take Shape For Life program.
 
 
 
 
o
The assist bonuses are paid to Health Coaches who assist a newly sponsored Health Coach attain the Client acquisition bonus. 
 
Health Coaches do not earn a commission or bonus when they recruit a new Health Coach into the Take Shape For Life network. Fees paid by new Health Coaches for start-up materials are at the Company’s approximate cost and no commissions are paid thereon.
 
Take Shape For Life is a member of the Direct Selling Association (the “DSA”), a national trade association representing over 200 direct selling companies doing business in the United States. To become a member of the DSA, Take Shape For Life, like other active DSA member companies, underwent a comprehensive and rigorous one-year company review by DSA legal staff that included a detailed analysis of its company business-plan materials. This review is designed to ensure that a company’s business practices do not contravene DSA’s Code of Ethics. Compliance with the requirements of the Code of Ethics is paramount to becoming and remaining a member in good standing of DSA. Accordingly, we believe membership in DSA by Take Shape For Life demonstrates its commitment to the highest standards of ethics and a pledge not to engage in any deceptive, unlawful, or unethical business practices. Among those Code of Ethics proscriptions are pyramid schemes or endless chain schemes as defined by federal, state, or local laws. Moreover, Take Shape For Life, like other DSA member companies in good standing, has pledged to provide consumers with accurate and truthful information regarding the price, grade, quality, and performance of the products Take Shape For Life markets. See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.
 
Medifast Weight Control Centers – Medifast Weight Control Centers is the brick and mortar clinic channel of Medifast with affiliate-owned locations in Pennsylvania, New Jersey, Delaware, Texas, Florida, Maryland, North Carolina and Virginia. Jason Properties, LLC, a subsidiary of Medifast, Inc., had a total of 83 Medifast Weight Control Centers in operation at quarter-end. Medifast Weight Control Centers offer a high-touch model including comprehensive Medifast programs for weight loss and maintenance, customized client counseling, an InBodyTM body composition analysis, and monitoring with a BodyGemTM indirect calorimeter that determines resting metabolic rates. Medifast Weight Control Centers conduct local advertising including radio, print, television and web initiatives. The Centers also benefit from the enterprise brand advertising which encourages walk-ins and referrals from its customers and other Medifast business channels.
 
In 2008, Medifast Franchise Systems, Inc. (“MFSI”), a subsidiary of Medifast, began offering the Center model as a franchise opportunity. MFSI currently has franchised centers located in Alabama, Arizona, California, Louisiana, Minnesota, Wisconsin, Maryland and Pennsylvania. As of September 30, 2013, 36 franchise locations were in operation.
 
MFSI currently offers the Medifast Weight Control Center franchise opportunity in all states under a registered (where required) franchise disclosure document (FDD). The MFSI Franchise Agreement requires franchisees to develop a minimum of three Medifast Weight Control Centers within a defined geographic area in the time frame set forth in the Development Agreement between Medifast and the franchisee.
 
MFSI’s franchise strategy depends on our franchisees’ active involvement in, and management of, Medifast Weight Control Center operations. Candidates are reviewed for appropriate operational experience and financial stability, including specific net worth and liquidity requirements. Upon execution of the Franchise Agreement and Development Agreement, franchisees are required to promptly select sites for the Centers which are subject to MFSI’s approval.
 
A franchisee’s initial fee includes the franchise fee for the first Center to be developed and a non-refundable deposit for the second and third Centers to be developed, and covers the cost of MFSI resources provided for, among other things, the training of franchisees and their staff, and approval of the proposed territory for development. If a franchisee desires to open more than three centers in the designated territory, there is an additional fee charged for each additional Center to be developed. MFSI provides initial investment estimates in the FDD and cautions applicants considering the franchise opportunity that their actual expenses may vary from the estimates given. Required legal disclosures are provided and the applicant may not sign the Agreements until the applicant has had 14 days to consider the FDD.
 
 
18

 
Prior to the opening of each Medifast Weight Control Center franchise established under the Franchise and Development Agreements, MFSI will do the following:
 
i. designate the Center’s Protected Territory.
 
ii. review for approval the sites selected by the Franchisee for the Center.
 
iii. review for approval the lease governing the location where the Center is to be located.
 
iv. provide the franchisee with standard plans and specifications for the build-out of the Center along with a list of equipment and improvements which the franchisee is required to purchase and install.
 
v. provide an initial training program.
 
vi. provide the franchisee on-site assistance and guidance for approximately three to five days during or close to the opening of the Center.
 
vii. provide the franchisee with online access to a password-protected, electronic version of the Medifast Weight Control Centers® Franchise Operations Manuals.
 
MFSI may, in certain limited circumstances, provide products at a discounted price. MFSI may, in certain circumstances guarantee a franchisee’s notes, leases or other obligations. MFSI does not offer direct or indirect financing.
 
While MFSI does not currently have a purchase option included in its franchise agreement, it does have the right of first refusal to acquire a Center if the franchisee wishes to sell a Center. 
 
See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.
 
Medifast Wholesale Physicians- Medifast physicians have been implementing the Medifast Program within their practices since 1980. These physicians carry an inventory of wholesale Medifast products and resell them to patients. They also provide appropriate medical monitoring, testing, and support for patients on the Medifast Program. Medifast products and programs have been recommended by over 20,000 doctors since 1980.
 
The Company offers an in-house support program to assist the physicians, their staff and their patients.  We enable them with on boarding materials, marketing assets and appropriate training modules to help their practice support patients to achieve their weight loss goals.  Physicians have access to registered dietitians who provide program support and advice via a toll-free telephone help line, by email, and online chats.  See Note 11, “Business Segments” of the financial statements for a detailed breakout of revenues, profit or loss, and total assets of each of the Company’s business segments.
 
 
19

 
Overview of Financial Results
 
 
 
Three Months Ended September 30,
 
 
 
2013
 
 
2012
 
 
$ Change
 
% Change