| 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 nine months ended September 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 nine months ended September 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 September 30, 2015 and December 31, 2014, demand accounts and money market funds 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 September 30, 2015, cash, cash equivalents and short term investments consisted of the following:
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Cash
$
26,394
$
0
$
0
$
26,394
Money market funds
1,655
0
0
1,655
Government and agency securities
12,669
64
0
12,733
Corporate debt securities
6,471
23
(16
)
6,478
$
47,189
$
87
$
(16
)
$
47,260
At December 31, 2014, cash, cash equivalents and short term investments consisted of the following:
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Cash
$
12,471
$
0
$
0
$
12,471
Money market funds
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 $14,171 and $13,162 at September 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 food. 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 they are 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 nine months ended September 30, 2015 was $3,424 and $11,293, respectively, and $2,783 and $10,893 for the three and nine months ended September 30, 2014, respectively. The reserve for estimated returns incurred but not received and processed was $1,130 and $762 at September 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 $647 and $2,121 for the three and nine months ended September 30, 2015, respectively, and $483 and $1,625 for the three and nine months ended September 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 nine months ended September 30, 2015 were from two suppliers. The Company has a supply arrangement with one of these suppliers that requires the Company to make minimum purchases. For the nine months ended September 30, 2014, these suppliers provided approximately 16% and 12% of inventory purchases. The Company outsources 100% of its fulfillment operations to a third-party provider and more than 96% 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 nine months ended September 30, 2015, the Company reduced cost of revenue by $0 and $698, respectively, for these rebates. For the comparable periods of 2014, the cost of revenue was reduced by $172 and $718, respectively. At September 30, 2015, no receivable was recorded but at December 31, 2014, $360 was recorded in receivables in the accompanying consolidated balance sheets. Effective June 1, 2015, the Company entered into a new agreement with the supplier that includes lower initial pricing and higher levels of purchases required to earn rebates resulting in no rebate being earned during the three months ended September 30, 2015. 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 September 30, 2015 and December 31, 2014. The following table summarizes the Company’s financial assets measured at fair value at September 30, 2015:
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Money market funds
$
1,655
$
1,655
Government and agency securities
12,733
12,733
Corporate debt securities
6,478
6,478
Total assets
$
20,866
$
20,866
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2014:
Total Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Money market funds
$
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 September 30,
Nine Months Ended September 30,
2015
2014
2015
2014
Net income
$
7,309
$
5,076
$
22,337
$
14,003
Net income allocated to unvested restricted stock
(74
)
(89
)
(276
)
(277
)
Net income allocated to common shares
$
7,235
$
4,987
$
22,061
$
13,726
Weighted average shares outstanding:
Basic
28,831
28,274
28,618
28,287
Effect of dilutive securities
442
407
476
407
Diluted
29,273
28,681
29,094
28,694
Basic income per common share
$
0.25
$
0.18
$
0.77
$
0.49
Diluted income per common share
$
0.25
$
0.17
$
0.76
$
0.48
In the three and nine months ended September 30, 2015, common stock equivalents representing 165 and 262 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 or the minimum performance requirements have not yet been met. In the three and nine months ended September 30, 2014, common stock equivalents representing 434 and 411 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes or the minimum performance requirements have not yet been met. Cash Flow Information The Company made payments for income taxes of $11,602 and $6,118 in the nine months ended September 30, 2015 and 2014, respectively. Interest payments in the nine months ended September 30, 2015 and 2014 were $144 and $134, respectively. For the nine months ended September 30, 2015 and 2014, the Company had non-cash capital additions of $726 and $399, 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”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for annual periods beginning on or after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently assessing the impact that adopting this new accounting standard will have on the consolidated financial statements and footnote disclosures. In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” An entity using an inventory method other than last-in, first out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for annual periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures. 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. |
