| Summary Of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Presentation of Financial Statements The Company’s consolidated financial statements include 100% of the assets and liabilities of Nutrisystem, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Interim Financial Statements The Company’s consolidated financial statements as of and for the three and six months ended June 30, 2015 and 2014 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position and results of operations for these interim periods. Accordingly, readers of these consolidated financial statements should refer to the Company’s audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), and the related notes thereto, as of and for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “2014 Annual Report”) as certain footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission (the “SEC”). The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015. Cash Equivalents and Short Term Investments Cash equivalents include only securities having a maturity of three months or less at the time of purchase. At June 30, 2015 and December 31, 2014, demand accounts and money market accounts comprised all of the Company’s cash and cash equivalents. Short term investments consist of investments in government and agency securities and corporate debt securities with original maturities of greater than three months at the time of purchase. The Company classifies these investments as available-for-sale securities. These investments are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of related tax effects. At June 30, 2015, cash, cash equivalents and short term investments consisted of the following:
Cost Gross Gross Fair Value
Cash $ 29,109 $ 0 $ 0 $ 29,109
Money market account 3,786 0 0 3,786
Government and agency securities 7,135 39 (1 ) 7,173
Corporate debt securities 4,535 16 (34 ) 4,517
$ 44,565 $ 55 $ (35 ) $ 44,585
At December 31, 2014, cash, cash equivalents and short term investments consisted of the following:
Cost Gross Gross Fair Value
Cash $ 12,471 $ 0 $ 0 $ 12,471
Money market account 149 0 0 149
Government and agency securities 9,912 31 (8 ) 9,935
Corporate debt securities 6,709 25 (42 ) 6,692
$ 29,241 $ 56 $ (50 ) $ 29,247
Fixed Assets Fixed assets are stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the related assets, which are generally two to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the estimated useful life of the asset or the related lease term. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and improvements are capitalized. Included in fixed assets is the capitalized cost of internal-use software and website development incurred during the application development stage. Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or maintenance of internal-use software and website development are charged to expense as incurred. The net book value of capitalized software was $13,995 and $13,162 at June 30, 2015 and December 31, 2014, respectively. Revenue Recognition Revenue from direct to consumer product sales is recognized when the earnings process is complete, which is upon transfer of title to the product. Recognition of revenue upon shipment meets the revenue recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collection is reasonably assured. The Company also sells prepaid program cards to wholesalers and retailers. Revenue from these cards is recognized after the card is redeemed online at the Company’s website or via telephone by the customer and the product is shipped to the customer. Revenue from the retail programs is recognized when the product is received at the seller’s location. Deferred revenue consists primarily of unredeemed prepaid gift cards and unshipped frozen foods. When a customer orders the frozen program, two separate shipments are delivered. One contains Nutrisystem’s standard shelf-stable food and the second contains the frozen foods. Both shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units. Direct to consumer customers may return unopened shelf-stable products within 30 days of purchase in order to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly. The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data available at that time. To estimate reserves for returns, the Company considers actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, the Company will adjust the reserve, which will impact the amount of revenue recognized in the period of the adjustment. The provision for estimated returns for the three and six months ended June 30, 2015 was $3,890 and $7,869, respectively and $4,201 and $8,110 for the three and six months ended June 30, 2014, respectively. The reserve for estimated returns incurred but not received and processed was $1,158 and $762 at June 30, 2015 and December 31, 2014, respectively, and has been included in other accrued expenses and current liabilities in the accompanying consolidated balance sheets. Revenue from product sales includes amounts billed for shipping and handling and is presented net of estimated returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions. Revenue from shipping and handling charges was $758 and $1,474 for the three and six months ended June 30, 2015, respectively, and $537 and $1,142 for the three and six months ended June 30, 2014, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations. Dependence on Suppliers Approximately 18% and 18% of inventory purchases for the six months ended June 30, 2015 were from two suppliers. The Company has supply arrangements with these suppliers that require the Company to make minimum purchases. For the six months ended June 30, 2014, these suppliers provided approximately 17% and 11% of inventory purchases. The Company outsources 100% of its fulfillment operations to a third-party provider and more than 95% of its orders are shipped by one third-party provider. Supplier Rebate One of the Company’s suppliers provides for rebates based on purchasing levels. The Company accounts for this rebate on an accrual basis as purchases are made at a rebate percentage determined based upon the estimated total purchases from the supplier. The estimated rebate is recorded as a receivable from the supplier with a corresponding reduction in the carrying value of purchased inventory, and is reflected in the consolidated statements of operations when the associated inventory is sold. The rebate period is June 1 through May 31 of each year. For the three and six months ended June 30, 2015, the Company reduced cost of revenue by $282 and $698, respectively, for these rebates. For the comparable periods of 2014, the cost of revenue was reduced by $270 and $546, respectively. A receivable of $951 and $360 at June 30, 2015 and December 31, 2014, respectively, has been recorded in receivables in the accompanying consolidated balance sheets. Historically, the actual rebate received from the supplier has closely matched the estimated rebate recorded. An adjustment is made to the estimate upon determination of the final rebate. Fair Value of Financial Instruments A three-tier fair value hierarchy has been established by the Financial Accounting Standards Board (“FASB”) to prioritize the inputs used in measuring fair value. These tiers are as follows: Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets. Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The fair values of the Company’s Level 1 instruments are based on quoted prices in active exchange markets for identical assets. The Company had no Level 2 or 3 instruments at June 30, 2015 and December 31, 2014. The following table summarizes the Company’s financial assets measured at fair value at June 30, 2015:
Total Fair Value Quoted Prices in Active
Money market account $ 3,786 $ 3,786
Government and agency securities 7,173 7,173
Corporate debt securities 4,517 4,517
Total assets $ 15,476 $ 15,476
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2014:
Total Fair Value Quoted Prices in Active
Money market account $ 149 $ 149
Government and agency securities 9,935 9,935
Corporate debt securities 6,692 6,692
Total assets $ 16,776 $ 16,776
Earnings Per Share The Company uses the two-class method to calculate earnings per share (“EPS”) as the unvested restricted stock issued under the Company’s equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period. Undistributed losses are not allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses. The following table sets forth the computation of basic and diluted EPS:
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
Net income $ 12,085 $ 8,703 $ 15,028 $ 8,927
Net income allocated to unvested restricted stock (138 ) (179 ) (202 ) (187 )
Net income allocated to common shares $ 11,947 $ 8,524 $ 14,826 $ 8,740
Weighted average shares outstanding:
Basic 28,627 28,208 28,510 28,226
Effect of dilutive securities 445 392 493 408
Diluted 29,072 28,600 29,003 28,634
Basic income per common share $ 0.42 $ 0.30 $ 0.52 $ 0.31
Diluted income per common share $ 0.41 $ 0.30 $ 0.51 $ 0.31
In the three and six months ended June 30, 2015, common stock equivalents representing 308 and 311 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive. In the three and six months ended June 30, 2014, common stock equivalents representing 444 and 400 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive. Cash Flow Information The Company made payments for income taxes of $3,532 and $18 in the six months ended June 30, 2015 and 2014, respectively. Interest payments in the six months ended June 30, 2015 and 2014 were $97 and $98, respectively. For the six months ended June 30, 2015 and 2014, the Company had non-cash capital additions of $530 and $597, respectively, of unpaid invoices in accounts payable and other accrued expenses and current liabilities. Recently Issued Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). Use of Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and operating expenses during the reporting period. Actual results could differ from these estimates. |
