UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2018 |
☐ | 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 0-28551
Nutrisystem, Inc.
(Exact name of registrant as specified in its charter)
Delaware | | 23-3012204 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
Fort Washington Executive Center 600 Office Center Drive Fort Washington, Pennsylvania | | 19034 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code: (215) 706-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | | Name of each exchange on which registered |
Common Stock, $.001 par value | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | | ☒ | Accelerated filer | | ☐ |
Non-accelerated filer | | ☐ | Smaller reporting company | | ☐ |
| | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2018, was $1,113,897,434. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq Stock Market on June 29, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter).
Number of shares outstanding of the registrant’s common stock, $0.001 par value, as of February 20, 2019: 29,496,499 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the United States Securities and Exchange Commission (the “SEC”) for Nutrisystem, Inc.’s annual meeting of stockholders are incorporated by reference into Part III of this Form 10-K.
Nutrisystem, Inc.
Table of Contents
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Special Note Regarding Forward-Looking Statements
From time to time, information provided by us, including but not limited to statements in this Annual Report, or other statements made by or on our behalf, may contain “forward-looking” information within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,” “estimate,” “will be,” “will,” “would,” “expect,” “anticipate,” “plan,” “project,” “intend,” “could,” “should,” or other similar words or expressions often identify forward-looking statements.
Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results, performance, or achievements may vary materially from those anticipated, estimated, or projected. Among the factors that could cause actual results to materially differ include:
| • | uncertainty regarding the value of Tivity Health, Inc. (“Tivity Health”) stockholder merger consideration due to fluctuations in market prices; |
| • | disruptions to our business relationships as a result of the merger with Tivity Health; |
| • | limited ability to pursue alternatives to a merger with Tivity Health; |
| • | failure to complete the merger with Tivity Health; |
| • | litigation regarding the merger with Tivity Health; |
| • | risks associated with triggering change in control or other provisions in certain agreements as a result of the merger with Tivity Health; |
| • | competition from other weight management industry participants or the development of more effective or more favorably perceived weight management methods; |
| • | our ability to continue to develop innovative new programs and enhance our existing programs, or the failure of our programs to continue to appeal to the market; |
| • | the effectiveness of our marketing and advertising programs; |
| • | loss, or disruption in the business, of any of our food suppliers; |
| • | loss, or disruption in the business, of our fulfillment provider; |
| • | disruptions in the shipping of our food products; |
| • | claims that our personnel are unqualified to provide proper weight loss advice and other health or advertising related claims by consumers; |
| • | failure to attract or negative publicity with respect to any of our spokespersons or negative publicity with respect to the weight loss industry; |
| • | our ability to successfully make acquisitions or enter into joint ventures, including our ability to successfully integrate, operate or realize the projected benefits of such businesses; |
| • | general business and economic conditions; |
| • | the seasonal nature of our business; |
| • | loss of any of our third-party retailer agreements and any obligations associated with such loss; |
| • | our ability to enforce our intellectual property rights, as well as the impact of our involvement in any claims related to intellectual property rights; |
| • | uncertainties regarding the satisfactory operation of our information technology or systems; |
| • | risks associated with unauthorized penetration of our information security; |
| • | the impact of existing and future laws and regulations; |
| • | exposure to product liability claims if the use of our products results in illness or injury; |
| • | the impact of our debt covenants; |
| • | our inability to recruit and retain key executive officers; |
| • | potential litigation from our competitors; |
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| • | provisions in our certificate of incorporation may deter or delay an acquisition or prevent a change in control; and |
| • | other risks and uncertainties, including those detailed herein and from time to time in our periodic reports filed with the SEC. |
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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PART I
Overview
Nutrisystem, Inc. (together with its consolidated subsidiaries, “Nutrisystem,” the “Company,” “we,” “us,” or “our”) is a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily online and over the telephone and multi-day kits and single items available at select retail locations. The Company’s multi-brand approach includes Nutrisystem and the South Beach Diet. Typically, our program customers purchase monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and flex meals, which they supplement, depending on the program they are following, with items such as fresh fruits, fresh vegetables, lean protein and dairy. Most of our customers order on an auto-delivery basis (“Auto-Delivery”), which means we send a four-week meal plan on an ongoing basis until notified of a customer’s cancellation. Auto-Delivery customers are offered savings off of our regular one-time rate with each order. Monthly notifications are also sent to remind customers to update order preferences. We offer pre-selected favorites or customers may personalize their meal plan by selecting their entire menu or customizing plans to their specific tastes or dietary preference. In total, our plans feature approximately 250 food options including frozen and ready-to-go entrees, snacks and shakes, at different price points. Additionally, we offer unlimited counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. Counselors are available as needed, seven days a week throughout an extended day, with further support provided through our digital tools.
In December 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Tivity Health, Inc. (“Tivity Health”). Under the terms of the Merger Agreement, Nutrisystem will become a wholly-owned subsidiary of Tivity Health (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Nutrisystem common stock (“Nutrisystem Shares”) issued and outstanding immediately prior to the Effective Time (other than shares as to which dissenter’s rights have been properly exercised and certain other excluded shares) will be converted into the right to receive (i) $38.75 in cash, without interest (the “Cash Consideration”), and (ii) 0.2141 (the “Exchange Ratio”) shares of common stock, par value $0.001 per share, of Tivity Health (“Tivity Health Shares,” and together with the Cash Consideration, the “Merger Consideration”), with cash payable in lieu of fractional Tivity Health Shares.
Completion of the merger is subject to certain customary closing conditions, including (1) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding Nutrisystem Shares entitled to vote thereon at a meeting duly called and held for such purpose, (2) absence of any order or law that has the effect of enjoining or otherwise prohibiting the completion of the Merger and (3) the absence of a material adverse effect with respect to the other party. The Merger is expected to close in the first quarter of 2019.
The Company and Tivity Health have made customary representations and warranties in the Merger Agreement. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (a) the conduct of each of the Company’s and Tivity Health’s respective businesses between the date of the signing of the Merger Agreement and the consummation of the Merger, and (b) the efforts of the parties to cause the Merger to be completed.
The Merger Agreement also provides that under specified circumstances, including a termination by the Company to enter into a definitive agreement for an acquisition proposal that constitutes a superior proposal or a termination by Tivity Health as a result of the Company’s Board of Directors changing its recommendation with respect to the Merger Agreement, the Company will pay Tivity Health a termination fee of $45.0 million.
Our programs are based on the following cornerstones that represent who we are to our customers:
| • | Real Results. Our programs have helped millions of people lose weight for more than 45 years. Our programs are nutritionally balanced and portioned for weight loss. We also offer transition and maintenance plans, which include personalized menu options (e.g., only dinner entrees) as well as continued counseling support and access to apps that provide easy-to-use, interactive and personalized weight loss tracking tools. These digital products integrate with wearable fitness devices and health platforms and are available at no cost to customers, as well as the general population of do-it-yourself dieters. |
| • | Sound Science. The Nutrisystem® program provides a balanced approach to weight loss. The program delivers a reduced calorie meal plan that is high in protein, low in fat and focuses on the right amount of “smart” carbohydrates like whole grains and fiber. The Nutrisystem program offers portion-controlled items that are incorporated into a meal plan. The South Beach Diet® program is a high-protein, low-carb, low in added sugar weight loss program. Our programs offer customers a variety of meal choices, including approximately 250 foods with no artificial flavors or sweeteners, colors from artificial sources, high-fructose corn syrup, MSG, or artificial trans fats (partially hydrogenated oils), and more than 195 foods with no artificial preservatives. |
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| • | Complete Convenience. Our weight loss programs are primarily sold through a direct-to-consumer sales and distribution approach using the Internet and telephone. Our customers can place orders 24 hours a day, seven days a week, on our websites and the food is shipped directly to our customers’ door. Our customers can either choose our pre-selected favorites meal plan or customers may personalize the plan by selecting their entire menu or customizing plans to their specific tastes or dietary preference. The entrees are individually packaged, and food preparation time is minimal. The direct-to-consumer approach using the Internet and telephone provides the convenience and privacy that our customers value. Additionally, we offer unlimited counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. Counselors are available as needed, seven days a week, throughout an extended day, with further support provided through our digital tools. Our programs do not require customers to visit centers, measure foods or count calories. |
| • | Value. We believe our products and programs are very competitively priced within the weight management industry and provide a compelling value proposition to our customers, which includes approximately 250 menu items, expert guides and unlimited counseling from our trained weight loss counselors, registered dietitians and certified diabetes educators and apps, available at no cost. We do not charge membership fees. Various promotional offers and pricing are offered throughout the year. |
Competitive Strengths
We believe our programs, meal kits and digital tools offer a sensible approach to losing weight while also educating customers about proper portion size, as well as the appropriate combinations of fiber, protein, good carbohydrates and fat.
We intend to capitalize on the following competitive strengths:
| • | Product Efficacy. We believe most of our customers are very satisfied with our products and believe they have lost weight while using one of our programs. Our customer research has found that customers tend to stay on the program for 11 to 12 weeks. We have sponsored clinical trials at leading academic centers, including in patients with Type 2 diabetes. Studies on our Nutrisystem® D® (diabetes) plan (in combination with counseling sessions) showed statistically significant and clinically meaningful weight loss and improvements in HbA1c (a key measure of blood glucose control), in addition to improvements in secondary endpoints such as waist circumference, total plasma cholesterol and blood pressure. |
| • | Strong Brand Recognition. We believe that our brands are well recognized in the weight management industry. The Nutrisystem name has been in the weight management industry for more than 45 years, and we estimate that our Company and our predecessors have spent hundreds of millions of dollars in advertising over that time period. The South Beach Diet, created 16 years ago by world-renowned cardiologist Dr. Arthur Agatston, was a bestseller and has more than 23 million copies in print. |
| • | Low Cost, Highly Scalable Model. Unlike traditional commercial weight loss programs, which primarily sell through franchisee and company-owned centers, we primarily generate revenue in our direct channel online and through the telephone (including the redemption of prepaid gift cards). Our method of distribution removes the fixed costs and capital investment associated with diet centers. We minimize fixed costs and capital investments in food procurement and fulfillment by outsourcing the production of our food products to a number of vendors. We also outsource 100% of our fulfillment operations. |
| • | Superior Customer Value Proposition. Our goal is to offer our customers a complete weight loss program that is convenient, private and cost-effective. Our customers primarily place their orders online or over the telephone and have their food delivered directly to their home. This affords our customers the convenience and anonymity that other diets, which rely on weight-loss centers, cannot ensure. Additionally, we provide our customers with monthly food packages containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and Flex™ meals, which they supplement, depending on which program they are using, with fresh fruits, fresh vegetables, lean protein and dairy. This removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. We believe our weight loss programs offer our customers significant value and are priced below those of our competitors. In addition, unlike some of our competitors, we do not charge a membership fee. |
| • | Retail. We also generate revenue through the sale of our multi-day kits and single items at select retail locations. These multi-day kits and single items have expanded our product and consumer reach. The retail channel provides us with great brand exposure, offering consumers who may not be aware of our programs an opportunity to sample Nutrisystem at a more attractive price point. |
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Our Industry
Weight management is a challenge for a significant portion of the U.S. population, as well as the global population. It is estimated that 39.8% of, or 93.3 million, U.S. adults are obese. According to the U.S. Department of Health and Human Services, overweight and obese individuals are increasingly at risk for diseases such as Type 2 diabetes, heart disease, certain types of cancer, stroke, arthritis, sleep apnea and depression. Centers for Disease Control and Prevention (the “CDC”) estimates one out of every ten people (30.3 million) have diabetes in the U.S. and more than one out of three adults (84.1 million) have a condition known as prediabetes. The CDC estimates 110 million Americans will have diabetes by the year 2050. However, there is evidence that weight loss may reduce the risk of developing these conditions, as well as improve the health and quality of life of people who have these conditions.
Competition
The weight loss industry is very competitive and consists of pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants, nutritional supplements and surgical procedures. The weight loss market is served by a diverse array of competitors. Potential customers seeking to manage their weight can turn to traditional center-based competitors, online diet-oriented sites, self-directed dieting and self-administered products such as prescription drugs, over-the-counter drugs and supplements, meal replacement products, as well as medically supervised programs.
We believe that our principal competitive factors in the weight loss market are:
| • | the availability, convenience, privacy and effectiveness of the weight loss program; |
| • | brand recognition and trustworthiness; |
| • | new products and innovative offerings; |
| • | the ability to attract and retain customers through promotion and personal referral. |
Based on these factors, we believe that we can compete effectively in the weight loss industry. We, however, have no control over how successful competitors will be in addressing these factors. By providing well-recognized food-based weight management programs using the direct channel, we believe that we have a competitive advantage in our market.
Our Products and Services
For more than 45 years, Nutrisystem has been recognized as a leader in the weight loss industry. We provide comprehensive weight loss programs consisting primarily of a pre-packaged food program, digital tools and counseling. Typically, our customers purchase monthly food packages of frozen and ready-to-go food containing a four-week meal plan consisting of breakfasts, lunches, dinners, snacks and Flex meals, which they supplement, depending on the program they are following, with fresh fruits, fresh vegetables, lean proteins, dairy and complex carbohydrates like whole grains. Most customers order through our Auto-Delivery feature. Our programs feature approximately 250 menu options at different price points including frozen and ready-to-go entrees, snacks and shakes. Trained weight loss counselors are available to answer questions and make recommendations to help each customer achieve and maintain his or her weight loss goal. Customers support and encourage each other and share information via social media channels. These services are complemented with relevant information on diet, nutrition and physical activity. Additionally, our digital products integrate with wearable fitness devices and health platforms and are offered at no charge.
Our programs consist of approximately 250 foods that contain no artificial flavors, sweeteners, colors from artificial sources, high-fructose corn syrup, MSG, or artificial trans fats (partially hydrogenated oils).
We are focused on things that make our programs truly unique in the marketplace. We do not believe that one brand or product can be all things to all people, which is why we continue to differentiate and expand our multi-brand platform with new product introductions targeted to different consumer audiences.
In 2018, we began to offer the Nutrisystem® Turbo13 program, which meets the United States Department of Agriculture (“USDA”) guidelines for fat, saturated fat, trans fat, sodium, carbohydrates, fiber, added sugars and protein. A large number of our foods aim to have at least 50% of the grains coming from whole grain sources. Including grocery additions to supplement our meals, all plans contain less than 2,300 milligrams of sodium per day, consistent with national guidelines, and tailored versions of the plans are available that deliver as low as 1,500 milligrams per day. In contrast, the average American consumes 2,900 to 4,000 milligrams of sodium per day. We constantly strive to meet or exceed national nutritional guidelines as they are updated. Convenient and easy-to-
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follow, Turbo13 provides safe and meaningful weight loss and includes support and counseling options from trained weight loss coaches, registered dietitians and certified diabetes educators available seven days a week from the Company’s award-winning contact center, as well as free digital apps that complement each plan. Additionally, for customers transitioning to maintenance, there is the Nutrisystem® Success® plan.
The South Beach Diet® program, in its second year as a home-delivered, structured weight-loss plan, continues to offer a safe, effective method of weight loss through an enhanced three-phased low-carb approach designed to burn fat, transform metabolism and boost energy. The 7-Day Body Reboot, the one-week Phase 1 jumpstart introduced this year, helps customers break the sugar habit and delivers fast results. In Phase 2, designed for steady weight loss, customers can choose from an expanded menu and add in good carbs like fruits and whole grains. Phase 3 helps customers learn how to maintain a healthy weight, without hunger or deprivation. The plan allows individuals to eat heart healthy, good fats that nourish and satisfy, versus other high protein diets that do not distinguish between good and bad fats. Created by Dr. Arthur Agatston, a renowned cardiologist from southern Florida, “The South Beach Diet,” was first published in 2003 and became a bestseller with more than 23 million copies in print and multiple titles appearing on the New York Times bestseller list. The plan includes support and counseling options from trained weight-loss coaches and registered dietitians available seven days a week. Customers can also download the new South Beach Diet Tracker app.
This year, we also launched the DNA Body Blueprint™ kit, a genetic-based product using a proprietary algorithm that provides an integrated personal action plan focused on eating behaviors, nutrition and metabolism. Nutrisystem greenlighted the creation of the DNA Body Blueprint based on a thorough assessment of market dynamics and scientific reviews from our Science Advisory Board. This board consists of a team of professionals, each with distinct backgrounds and expertise, who helped evaluate existing research to enhance current programs, as well as develop new programs utilizing the latest science and technology trends within weight management.
Additionally, our multi-day meal kits are available at select retailers. We offer several varieties of our Nutrisystem 5-day kit, a “D” kit targeted to individuals with or at risk of Type 2 diabetes, as well as SmartCarb and PowerFuel products including meal replacement bars, multiple varieties of powder shakes, baked goods and a line of snacks designed to complement our multi-day kits. The retail channel provides us with great brand exposure, offering consumers who may not be aware of our programs an opportunity to sample our products at a more attractive price point. We are seeing repeat business as well as multiple kit purchases, indicating that customers are seeing results or enlisting other family members to diet with them. Also, we continue to offer our programs at Costco through the sale of prepaid gift cards.
For those with Type 2 diabetes or for those at risk for Type 2 diabetes, we have the Nutrisystem® D® Program, a weight loss program specifically designed to produce gradual weight loss. It provides nutrition consistent with the guidelines of the USDA. Two randomized controlled trials published in peer-reviewed medical journals found the Nutrisystem® D® Program, in combination with counseling sessions, produced statistically and clinically meaningful improvements in weight, HbA1c (a key measure of blood glucose control), and several other risk factors. Notably, improvements in diabetes control were observed along with a reduction in diabetes medications among participants who received the Nutrisystem D intervention. A third study, utilizing continuous glucose monitoring technology, found improvements in blood glucose control when subjects used the Nutrisystem® D® Program, even before the achievement of significant weight loss.
By offering a variety of frozen and ready-to-go foods, we help our customers sustain their weight loss efforts. On our websites, customers can order food 24 hours a day, seven days a week. The transition and maintenance plans allow customers the means to gradually increase their responsibility for grocery shopping and food preparation while adhering to the principles of our weight loss programs. These lower cost programs help extend the supportive relationship and allow time to reinforce the dietary changes that produced the initial weight loss. These plans include recipes and portion-control tools in addition to a reduced number of entrees delivered each month. Our weight loss programs’ features are counter to traditional weight loss programs’ limitations, such as, high initiation and recurring membership fees, the inconvenience of traveling to weight loss centers for scheduled appointments and lack of privacy. In addition, our prepared meals provide our customers with a structured program with limited weighing and measuring of foods and no need to count calories, carbohydrates or points.
Customers are provided breakfasts, lunches, dinners and snacks, which they supplement, depending on the program they are following, with Flex meals and snacks made up of fresh fruits, fresh vegetables, lean protein and complex carbs like whole grains. We believe that the convenience of home delivery, reduced grocery shopping time, the portability of the food, and rapid food preparation also aid customer compliance with our weight loss program.
Our food items have accounted for 98%, 99% and 99% of our revenue for the years ended December 31, 2018, 2017 and 2016, respectively. No other product or service has accounted for more than 1% of our revenue in any of the last three years. Approximately 99% of our revenue was generated in the United States in each of the years ended December 31, 2018, 2017 and 2016.
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The Customer Experience
Our sales, marketing, ecommerce and service operations seek to understand our customers’ needs throughout their weight loss and management journey to help us develop effective, compelling and innovative products and services. Through a combination of consumer research and data management, we personalize the introduction, on-boarding, weight loss, transition and maintenance phases of our customers’ experience.
| • | Introduction/Acquisition |
We attract new customers via direct response television, online marketing (including search engine marketing, search engine optimization, affiliate marketing, display advertising, partnerships, social media and email), direct mail, print advertisements and a variety of other direct marketing efforts. We have a fully integrated acquisition enterprise. Response is tracked to the specific vehicle, and analytic models are used to attribute other orders back to the response source, in order to closely manage the effectiveness of our specific direct marketing efforts.
The majority of our new customers buy via our websites. We consistently seek to refine our sales conversion funnel through thoughtful testing to improve the learning and buying experience for prospects and to increase conversion rates.
We also have an in-house call center. Staffing levels fluctuate seasonally and are aligned to marketing spend and consequent call volume. Sales agents, paid primarily on commission, take in-bound responses from our advertisements and personalize the weight loss plan for each customer. They also make out-bound calls to customers who have provided their contact information.
To help customers get off to a strong and successful start, we provide both printed materials in initial shipments of food (including guides and a daily food tracker) and access to a robust set of customizable online tools and trackers. Customers also have access to Nutrisystem and South Beach Diet content sites, The Leaf and The Palm, for recipes, inspiration and how-to articles and videos.
We use customer preferences to offer a variety of additional products and services that help customers while on the path to their weight loss goals. These offers are made via our websites, emails, social media, newsletters and our contact center.
We also offer unlimited counseling services for our customers with trained weight loss counselors, registered dietitians and certified diabetes educators at no cost. We seek to hire counselors with backgrounds in psychology, sociology, nutrition, dietetics or other health-related fields and with suitable, compassionate personalities to help and support our customers throughout their weight loss journey. Counselors are trained in our programs, motivational techniques and problem solving. Counselors take in-bound requests for help via phone and also reach out to customers via email and phone.
| • | Transition and Maintenance |
As customers reach their weight loss goals, we offer transition and maintenance programs that provide products and guidance that combine the right amount of structure and flexibility. These programs are offered online, via email marketing, and via our contact center’s retention agents.
Because we realize that weight management is a lifelong process, and that customers may need our programs again from time to time, we reach out to past customers to attempt to put them back on structured programs if needed. Our digital content, e-newsletters and apps help keep customer relationships active after the completion of the first weight loss cycle. Employing data and segmentation, we develop products and programs that address the varied needs of past customers. We offer these products and programs via our contact center, television, digital marketing and targeted emails, social media efforts and direct mail.
We are committed to the highest levels of customer service and manage our customer relations through our in-house call center. Our representatives are trained to answer questions and solve problems once a purchase has been made. Customers contact us via email, online chat and phone. Typical inquiries concern delivery dates, reported missing or damaged items, and requests for credits or exchanges. For email inquiries, we have a software system that scans the customer’s email for keywords and automatically supplies the representative with a response that is then reviewed, edited and sent to the customer. We regularly review customer satisfaction levels and improve our practices accordingly.
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Supply Chain
An integrated order receipt, billing, picking, shipping and delivery tracking system comprised of proprietary and third-party components is utilized for our orders. This system integrates the front end, or website customer interface, with order processing and shipping, and allows customers to access shippers’ order tracking numbers online. Our computer-assisted picking system allows for virtually paperless order picking in all warehouse facilities.
We utilize an integrated network of distribution facilities through an existing arrangement with our outside fulfillment provider. We work closely with our fulfillment provider to drive out waste and continuously improve processes. We currently utilize seven outsourced distribution facilities. Three are located in Pennsylvania (Allentown, Bethlehem and Chambersburg), two in Nevada (both in Sparks), one in Illinois (Troy) and one in Georgia (Atlanta). As of December 31, 2018, all fulfillment was being handled by one outsourced provider.
We have a service agreement with our outside fulfillment provider which provides for storage, handling of frozen and ready-to-go foods and other services, including pricing and minimum space commitments. The current contract expires on various dates ranging from June 30, 2020 to June 30, 2023 with respect to certain of the sites but may be terminated sooner upon 180-day written notice. We believe that other outside fulfillment providers could be utilized if needed and we continually evaluate the need for secondary fulfillment services.
We continue to partner with our fulfillment provider to efficiently process and ship our orders. In 2018, approximately, 94% of all direct customer initial orders were shipped within three business days of the date the order was received.
Direct customers are not charged for their orders until the ordered product is shipped. We do not charge customers for shipping on any four-week meal plan. For customers who purchase an Auto-Delivery plan, we provide a discount off the regular one-time rate of the four-week meal plan. If an Auto-Delivery customer cancels before receipt of a second shipment and after the 14-day money back guarantee period, the customer will be charged a cancellation fee for the Auto-Delivery discount received on the first shipment.
Product Development
All of our foods and supplements are currently outsourced from more than 35 manufacturers or vendors. We have entered into supply agreements with several of these vendors, some of which may provide for annual pricing, annual purchase obligations, exclusivity in the production of certain products, as well as certain rebates to us if certain volume thresholds are exceeded. These contracts have terms of five years or less and generally may be terminated by us upon written notice, mostly between 30 and 180 days, or under certain circumstances only upon a default of the vendor. We anticipate meeting all annual purchase obligations.
In 2018, approximately 10% and 6% of inventory purchases were from two vendors. In 2017, these vendors supplied approximately 12% and 8% of inventory purchases, and in 2016, they supplied approximately 11% of inventory purchases each.
Our product development team uses a number of sources – customer feedback, market trends, nutrition science, national dietary guidelines and breakthroughs in food technology – to create new ideas for our program. New foods are created to enhance the variety of our current offerings or to support the efforts of creating a new program. Typically, concepts are formulated in collaboration with our food manufacturers to meet our requirements for nutrition and stability. We then contract with these food manufacturers to produce these products based on our specifications. Alternatively, food manufacturers may suggest items. Regardless of a given food item’s pathway through development, that food is evaluated for nutrition, compliance with our program, taste and cost considerations. The number of stock keeping units, or SKUs, we introduce each year varies depending on whether we are introducing a new program or simply updating an existing one.
Public Relations
We conduct a proactive public relations program that is designed to garner positive coverage of the Company and our weight loss programs across all media platforms including television, magazine, print, online news, blogs and social media, particularly around the key dieting seasons. In addition, the public relations team supports an executive communication program to broadly support our brands.
Community Support
We have been a local sponsor of the Go Red for Women Campaign for the last four years. In 2018, Nutrisystem CEO, Dawn Zier, served as a member of the Go Red for Women Executive Leadership Team, a committee of Philadelphia based executives committed to raising awareness of heart disease and stroke. In 2017, the Go Red for Women Campaign in Greater Philadelphia, under
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Nutrisystem CEO Dawn Zier’s leadership as chair, generated more funds than ever before, setting a new local record for total funds raised making Greater Philadelphia’s efforts the largest in the nation.
Nutrisystem is a perennial sponsor –– 2018 was the 9th consecutive year –– of The American Diabetes Association Step Out: Walk to Stop Diabetes in Philadelphia. As part of our sponsorship in 2018, we hosted the Step Out Café and dozens of our employees assisted with the registration of event participants and provided other logistical services in support of the event.
Since 2015, Nutrisystem has been a partner of Girl Talk, an international, non-profit, peer-to-peer mentoring program focused on helping teens build confidence and develop leadership skills, having announced the partnership in conjunction with the Company’s #NowBelieveIt campaign, a social empowerment initiative that highlights the positive power that compliments play in the lives of women and girls. Each year, Nutrisystem has awarded a scholarship to Girl Talk’s 2018 National Leader of the Year, the organization’s highest and most prestigious honor.
Our Customers
We offer weight loss programs designed for women and men as well as people with Type 2 diabetes or at risk for Type 2 diabetes who want to lose weight and manage their diabetes. Based on our customer research, our typical Nutrisystem® customer is female and we believe that, on average, customers want to lose 40 pounds over a period of time. Additionally, based on our customer research, we believe our typical customers tend to stay on our program for 11 to 12 weeks. We believe that this research indicates our customers value the following Nutrisystem® program attributes:
| • | convenient direct delivery to their door; |
| • | simple to follow and stay on program; |
| • | food can be easily prepared in minutes; |
| • | wide variety of food choices; and |
| • | they feel satisfied while on the program. |
Information Systems
Our ecommerce and community websites and our tools and trackers, all of which are based primarily on third-party software customized to meet our business needs, are each hosted in top tier hosting facilities. These facilities provide redundant network connections, physical and fire security and generator power back up for the equipment upon which our websites rely and are intended to provide an uninterruptible power supply. Our servers and our network are monitored 24 hours a day, seven days a week.
We use a variety of security techniques to protect our confidential customer data. When our customers place an order or access their account information, we secure that transaction by using encryption technologies, including transport layer security, or TLS. Our customer data is protected against unauthorized access by security measures and we engage a variety of industry leading technology providers including VeriSign, CyberSource and SecureWorks to further ensure the security of our credit card transactions and the safety of our customers’ personal information.
Intellectual Property
We own numerous domestic and international trademarks and other proprietary rights that are important to our business. Depending upon the jurisdiction, trademarks are valid as long as they are used in the regular course of trade and/or their registrations are properly maintained. We believe the protection of our trademarks, copyrights, patents, domain names, trade dress, and trade secrets is important to our success. We aggressively protect our intellectual property rights by relying on a combination of watch services and trademark, copyright, patent, trade dress and trade secret laws, and through the domain name dispute resolution system.
Employees
As of December 31, 2018, we had 544 employees and consider our relations with these employees to be good.
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Seasonality
Typically in the weight loss industry, revenue is greatest in the first calendar quarter and lowest in the fourth quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of the year and the placement of our advertising, which is based on the price and availability of certain media at such times.
Available Information
All periodic and current reports, registration statements, code of conduct and other material that we are required to file with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through our investor relations page at www.nutrisystem.com. Such documents are available as soon as reasonably practicable after electronic filing of the material with the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report.
The SEC maintains an Internet site, www.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file such information electronically with the SEC.
Executive Officers of the Company
The Company’s current executive officers and their respective ages and positions are as follows:
Name | | Age | | Position |
Dawn M. Zier | | 53 | | President and Chief Executive Officer |
| | | | |
Michael P. Monahan | | 46 | | Executive Vice President and Chief Financial Officer |
| | | | |
Keira Krausz | | 53 | | Executive Vice President and Chief Marketing Officer |
Dawn M. Zier has served as our President and Chief Executive Officer and as a member of our Board of Directors since November 2012. Before joining us, Ms. Zier served as the President of International at The Reader's Digest Association, Inc., a global media and direct marketing company (the “Reader's Digest Association”), from April 2011 until November 2012, and as an Executive Vice President of the Reader's Digest Association from February 2011 until November 2012. From October 2009 to April 2011, Ms. Zier served as President, Europe of the Reader's Digest Association. Prior to serving in these roles, Ms. Zier served as the President of Global Consumer Marketing for the Reader's Digest Association from June 2008 to October 2009 and as the President and Chief Executive Officer of Direct Holdings U.S. Corp., a marketer of audio and video products and at such time a subsidiary of the Reader's Digest Association, from June 2009 to October 2009. From August 2005 to June 2008, Ms. Zier served as the President of North American Consumer Marketing for the Reader's Digest Association. In February 2013, RDA Holdings Co., the holding company and parent of the Reader’s Digest Association, filed voluntary petitions for reorganization relief pursuant to Chapter 11 of the United States Bankruptcy Code. Ms. Zier currently serves on the board of Spirit Airlines, joining in 2015 and on the board of the Hain Celestial Group, joining in 2017. Ms. Zier served on the Velo Holdings Inc. Board of Directors from 2015 to 2016, Marketing Edge’s Board of Trustees from 2010 to 2012, and the Direct Marketing Association’s Board of Directors from 2008 to 2015, while also serving as its Nominating Committee Chair and Secretary from 2012 to 2014. From 2005 to 2009, she chaired the Magazine’s Director’s Advisory Committee for the Audit Bureau of Circulations.
Michael P. Monahan has served as our Executive Vice President and Chief Financial Officer since May 2013. Prior to joining us, Mr. Monahan served as the Chief Financial Officer of PetroChoice Holdings, Inc., a privately-held distributor of industrial, commercial and passenger car lubricants since January 2009. From April 2006 through January 2009, Mr. Monahan served as our Vice President of Finance. Prior to that, Mr. Monahan held positions with Exelon Corporation, Accenture and Arthur Andersen LLP.
Keira Krausz has served as our Executive Vice President and Chief Marketing Officer since February 2013. Prior to joining us, Ms. Krausz served as head of new business development for Animated Storyboards, a global independent provider of television test spots to the advertising industry, from April 2012 to January 2013. Prior to that, Ms. Krausz served as Vice President of Marketing for QSP, Inc., a subsidiary of Time, Inc. from 2005 until March 2012 as QSP was sold. Ms. Krausz started her career at Reader's Digest Association in 1992, and held a number of progressively-responsible positions in product management, marketing, and business management, ultimately ascending to Vice President, Marketing and General Manager, of Reader's Digest Association’s Books & Music Business. Ms. Krausz currently serves on the Data & Marketing Association’s Board of Directors.
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You should consider carefully the following risks and uncertainties when reading this Annual Report. If any of the events described below actually occurs, the Company’s business, financial condition and operating results could be materially adversely affected. You should understand that it is not possible to predict or identify all such risks and uncertainties. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
Because the Exchange Ratio is fixed and the market price of Tivity Health common stock has fluctuated and will continue to fluctuate, you cannot be sure of the value of the Merger Consideration our stockholders will receive.
Upon completion of the Merger, each share of Nutrisystem common stock outstanding immediately prior to the Merger (other than those held by Nutrisystem as treasury stock, by Tivity Health or by any subsidiary of Nutrisystem or Tivity Health or with respect to which appraisal rights have been properly exercised in accordance with the General Corporation Law of the State of Delaware) will be converted into the right to receive $38.75 in cash, without interest, and 0.2141 of a share of Tivity Health common stock. Because the Exchange Ratio is fixed, except for the potential adjustment described under “The Merger Agreement—Merger Consideration” in the proxy statement we filed on February 4, 2019, the value of the stock portion of the Merger Consideration will depend on the market price of Tivity Health common stock at the time the Merger is completed. The value of the stock portion of the Merger Consideration has fluctuated since the date of the announcement of the Merger Agreement and will continue to fluctuate from the date hereof to the date of the Nutrisystem special meeting and the date the Merger is completed and thereafter. For example, on December 7, 2018, the last trading day before the public announcement of the Merger, the closing price of Tivity Health common stock on Nasdaq was $40.61; on December 10, 2018, the trading day on which the public announcement of the Merger took place, the closing price of Tivity Health common stock on Nasdaq was $27.65, and on February 20, 2019, the most recent practicable trading day prior to the date of this annual report, the closing price of Tivity Health common stock on Nasdaq was $22.38. Accordingly, at the time of the Nutrisystem special meeting, Nutrisystem stockholders will not know or be able to determine the market value of the Merger Consideration they would receive upon completion of the Merger. Stock price changes may result from a variety of factors, including, among others, general market and economic conditions, changes in Tivity Health’s and Nutrisystem’s respective businesses, operations and prospects, market assessments of the strategic and operational aspects of the Merger and market assessments of the likelihood that the Merger will be completed, the timing of the Merger and other factors. Many of these factors are beyond Tivity Health’s and Nutrisystem’s control.
Our business relationships may be subject to disruption due to uncertainty associated with the Merger.
Parties with which we do business may experience uncertainty associated with the transaction, including with respect to current or future business relationships with us. Our business relationships may be subject to disruption as customers, suppliers and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than Nutrisystem. These disruptions could have an adverse effect on the businesses, financial condition, results of operations or prospects of Nutrisystem. The adverse effect of such disruptions could be exacerbated by a delay in completion of the Merger or termination of the Merger Agreement.
The Merger Agreement limits our ability to pursue alternatives to the Merger.
The Merger Agreement contains provisions that make it more difficult for us to sell our business to a party other than Tivity Health. These provisions include a general prohibition on our soliciting any acquisition proposal or offer for a competing transaction. Further, there are only limited exceptions to the agreement that our Board of Directors will not withdraw or modify in a manner adverse to Tivity Health the recommendation of our Board of Directors in favor of the adoption of the Merger Agreement, and Tivity Health generally has a right to match any competing acquisition proposals that may be made.
However, at any time prior to the adoption of the Merger Agreement by our stockholders, our Board of Directors is permitted to take certain of these actions and, in certain circumstances, terminate the Merger Agreement if it determines in good faith that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law. Doing so could in certain circumstances obligate us to pay to Tivity Health a termination fee of $45.0 million.
While we believe these provisions are reasonable and not preclusive of other offers, the provisions may discourage a third party that has an interest in acquiring all or a significant part of Nutrisystem from considering or proposing that acquisition, even if that party were prepared to pay consideration with a higher per-share value than the currently proposed Merger Consideration. Furthermore, the termination fee may result in a potential competing acquirer proposing to pay a lower per-share price to acquire Nutrisystem than it might otherwise have proposed to pay because of the added expense of the $45.0 million termination fee that may become payable by us in certain circumstances.
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Failure to complete the Merger could negatively impact our stock price and the future business and financial results.
If the Merger is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the Merger, we would be subject to a number of risks, including the following:
| • | we may experience negative reactions from the financial markets, including negative impacts on our stock price, and from our customers, suppliers, regulators and employees; |
| • | we may be required to pay Tivity Health a termination fee of $45.0 million if the Merger is terminated under certain circumstances; |
| • | we will be required to pay certain costs relating to the Merger, whether or not the Merger is completed; and |
| • | matters relating to the Merger (including integration planning) will require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company. |
There can be no assurance that the risks described above will not materialize. If any of those risks materialize, they may adversely affect our businesses, financial condition, financial results and stock price.
In addition, we could be subject to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against Tivity Health or us to perform their respective obligations under the Merger Agreement. If the Merger is not completed, these risks may materialize and may adversely affect our business, financial condition, financial results and stock price.
Lawsuits have been filed and other lawsuits may be filed against Nutrisystem, Tivity Health and their respective boards of directors challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.
As of February 20, 2019, six putative class action complaints have been filed by purported Nutrisystem stockholders challenging the Merger in the United States District Court for the District of Delaware. The complaints are captioned Klein v. Nutrisystem, Inc. et al., Docket No. 1:19-cv-00056 (filed January 9, 2019), Shaev v. Nutrisystem, Inc. et al., Docket No. 1:19-cv-00063 (filed January 10, 2019), Vladimir Gusinsky Rev. Trust v. Nutrisystem, Inc., Docket No. 1:19-cv-00069 (filed January 10, 2019), Frechter v. Nutrisystem, Inc., et al., Docket No. 1:19-cv-00087 (filed January 16, 2019), Walton v. Nutrisystem, Inc. et al., Docket No. 1:19-cv-00112 (filed January 19, 2019), and Haines v. Nutrisystem, Inc., et al., Docket No. 1:19-cv-00137 (filed January 24, 2019). The complaints name as defendants each member of our Board of Directors and Nutrisystem itself and, in the case of the Klein and Gusinsky complaints, Tivity Health and Sweet Acquisition, Inc. The complaints allege, among other things, that statements made in the registration statement filed by Tivity Health on January 7, 2019 were materially incomplete and misleading and violated Sections 14(a) and 20(a) of the Exchange Act. In addition, the complaints generally allege that the Merger undervalues Nutrisystem, that the process leading up to the execution of the Merger Agreement was flawed, and that certain provisions of the Merger Agreement improperly favor Tivity Health and improperly impede a potential alternative transaction. Among other remedies, the complaints seek equitable relief rescinding the Merger Agreement and enjoining the defendants from completing the Merger, as well as recovery of litigation costs and attorneys’ fees. Nutrisystem believes that the claims asserted in the actions are without merit and no supplemental disclosure is required under applicable law. However, in order to avoid the risk of adverse effect or delay in connection with these actions and to minimize the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, Nutrisystem voluntarily supplemented its proxy statement as described in a Current Report on Form 8-K filed on February 22, 2019, and the plaintiffs in these actions have agreed to voluntarily dismiss their lawsuits in light of this supplemental disclosure.
One of the conditions to completion of the Merger is the absence of any law enacted, adopted or promulgated in the United States following December 9, 2018 or order that prohibits, renders illegal or enjoins the consummation of the Merger. Accordingly, if a plaintiff is successful in obtaining an order prohibiting completion of the Merger, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe.
The closing of the Merger may trigger change in control or other provisions in certain agreements to which Nutrisystem is a party.
The closing of the Merger may trigger change in control or other provisions in certain agreements to which Nutrisystem is a party. If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to Nutrisystem or the combined business.
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Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures and our ability to select effective markets and media in which to advertise.
Our marketing expenditures were $203.2 million, $198.9 million and $152.4 million in 2018, 2017 and 2016, respectively. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our marketing expenditures, including our ability to:
| • | create greater awareness of our brands and our programs; |
| • | identify the most effective and efficient levels of spending in each market, media and specific media vehicle; |
| • | determine the appropriate creative messages and media mix for advertising, marketing and promotional expenditures; |
| • | effectively manage marketing costs (including creative and media) in order to maintain acceptable customer acquisition costs; |
| • | acquire cost-effective national television advertising; |
| • | select the most effective markets, media and specific media vehicles in which to advertise; and |
| • | convert consumer inquiries into actual orders. |
Our planned marketing expenditures may not result in increased revenue or generate sufficient levels of brand name and program awareness. We may not be able to manage our marketing expenditures on a cost-effective basis whereby our customer acquisition costs may exceed the contribution profit generated from each additional customer.
Our sales may be adversely impacted by the health and stability of the general economy.
Unfavorable changes in general economic conditions, such as a recession or prolonged economic slowdown, may reduce the demand for our products and otherwise adversely affect our sales. For example, economic forces, including general economic conditions, demographic trends, consumer confidence in the economy, changes in disposable consumer income and/or reductions in discretionary spending, may cause consumers to defer purchases of our programs which could adversely affect our revenue, gross margins, and/or our overall financial condition and operating results.
We rely on third parties to provide us with adequate food supply, freight and fulfillment and Internet and networking services, the loss of any of which could cause our revenue, earnings or reputation to suffer.
Food Manufacturers and Other Suppliers. We rely solely on third-party manufacturers to supply all of the food and other products we sell as well as packaging materials. In 2018, approximately 10% and 6% of inventory purchases were from two vendors. If we are unable to obtain sufficient quantity, quality and variety of food, other products and packaging materials in a timely and low-cost manner from our manufacturers, we will be unable to fulfill our customers’ orders in a timely manner, which may cause us to lose revenue and market share or incur higher costs, as well as damage the value of our brands.
Freight and Fulfillment. In 2018, 100% of our order fulfillment was handled by one third-party provider. Also, more than 97% of our direct to consumer orders were shipped by one third-party provider and more than 97% of our orders for retail programs were shipped by another third-party provider. Should these providers be unable to service our needs for even a short duration, our revenue and business could be harmed. Additionally, the cost and time associated with replacing these providers on short notice would add to our costs. Any replacement fulfillment provider would also require startup time, which could cause us to lose sales and market share.
Internet and Networking. Our business also depends on a number of third parties for Internet access and networking, and we have limited control over these third parties. Should our network connections go down, our ability to fulfill orders would be delayed. Further, if our websites or call center become unavailable for a noticeable period of time due to Internet or communication failures, our business could be adversely affected, including harm to our brands and loss of sales.
Therefore, we are dependent on maintaining good relationships with these third parties. The services we require from these parties may be disrupted by a number of factors associated with their businesses, including the following:
| • | financial condition or results of operations; |
| • | internal inefficiencies; |
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| • | natural or man-made disasters; and |
| • | with respect to our food suppliers, shortages of ingredients or USDA or United States Food and Drug Administration (“FDA”) compliance issues. |
We may be subject to claims that our personnel are unqualified to provide proper weight loss advice.
We offer counseling options from weight loss counselors, registered dietitians and certified diabetes educators with varying levels of training. We may be subject to claims from our customers alleging that our personnel lack the qualifications necessary to provide proper advice regarding weight loss and related topics. We may also be subject to claims that our personnel have provided inappropriate advice or have inappropriately referred or failed to refer customers to health care providers for matters other than weight loss. Such claims could result in lawsuits, damage to our reputation and divert management’s attention from our business, which would adversely affect our business.
We may be subject to health or advertising related claims from our customers.
Our weight loss programs do not include medical treatment or medical advice, and we do not engage physicians or nurses to monitor the progress of our customers. Many people who are overweight suffer from other physical conditions, and our target consumers could be considered a high-risk population. A customer who experiences health problems could allege or bring a lawsuit against us on the basis that those problems were caused or worsened by participating in our weight management programs or by consuming one or more of our individual products. For example, our predecessor businesses suffered substantial losses due to health-related claims and related publicity. Further, customers who allege that they were deceived by any statements that we made in advertising or labeling could bring a lawsuit against us under consumer protection laws. Currently, we are neither subject to any such allegations nor have we been named in any such litigation. If we were subject to any such claims, while we would defend ourselves against such claims, we may ultimately be unsuccessful in our defense. Also, defending ourselves against such claims, regardless of their merit and ultimate outcome, would likely be lengthy and costly, and adversely affect our results of operations. Further, our general liability insurance may not cover claims of these types.
The weight management industry is highly competitive. If any of our competitors or a new entrant into the market with significant resources pursues a weight management program similar to ours, our business could be significantly affected.
Competition is intense in the weight management industry and we must remain competitive in the areas of program efficacy, price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, digital tools and wearable trackers, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements. Some of our competitors are significantly larger than we are and have substantially greater resources. Our business could be adversely affected if someone with significant resources decided to imitate our weight management programs. For example, if a major supplier of pre-packaged foods decided to enter this market and made a substantial investment of resources in advertising and training diet counselors, our business could be significantly affected. Any increased competition from new entrants into our industry or any increased success by existing competition could result in reductions in our sales or prices, or both, which could have an adverse effect on our business and results of operations.
We are dependent on certain third-party agreements for a percentage of revenue.
We have contractual agreements with certain third-party retailers. Under the agreements, these third parties control when and how often our products are offered and we are not guaranteed any minimum level of sales. If any third party elects not to renew their agreement with us or reduces the promotion of our products, our revenue will suffer. In addition, our third-party retailers may decide to stop selling our products upon written notice, which may result in an increased level of reclamation claims. In the event any retailer terminates its relationship with us and the level of reclamation claims exceeds the estimated amount reserved on our balance sheet at the time of sale to the retailer, we will have to record an expense for the excess claims, which could adversely impact our results of operations and financial condition. Additionally, in certain instances, we could be prohibited from selling our products through competitors of these third parties for a specified time after the termination of the agreements.
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New weight loss products or services may put us at a competitive disadvantage.
On an ongoing basis, many existing and potential providers of weight loss solutions, including many pharmaceutical firms with significantly greater financial and operating resources than we have, are developing new products and services. The creation of a weight loss solution, such as a drug therapy, that is perceived to be safe, effective and “easier” than a portion-controlled meal plan would put us at a disadvantage in the marketplace and our results of operations could be negatively affected.
We may be subject to litigation from our competitors.
Our competitors may pursue litigation against us based on our advertising or other marketing practices regardless of its merit and chances of success, especially if we engage in comparative advertising, which includes advertising that directly or indirectly mentions a competitor or a competitor’s weight loss program in comparison to our programs. While we would defend ourselves against any such claims, our defense may ultimately be unsuccessful. Also, defending against such claims, regardless of their merit and ultimate outcome, may be lengthy and costly, strain our resources and divert management’s attention from their core responsibilities, which would have a negative impact on our business.
Our business is subject to online security risks, including security breaches and identity theft.
Unauthorized users who penetrate our information security could misappropriate proprietary or customer information or data or cause interruptions to the product offerings on our websites. As a result, it may become necessary to expend significant additional amounts of capital and resources to protect against, or to alleviate, problems caused by unauthorized users. These expenditures, however, may not prove to be a timely remedy against unauthorized users who are able to penetrate our information security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could adversely affect our computer systems and, in turn, harm our business.
A significant number of states require that customers be notified if a security breach results in the disclosure of their personal financial account or other information. Additional states and governmental entities are considering such “notice” laws. In addition, other public disclosure laws may require that material security breaches be reported. If we experience a security breach and such notice or public disclosure is required in the future, our reputation and our business may be harmed.
In the ordinary course of our business, we collect and utilize proprietary and customer information and data. Privacy concerns among prospective and existing customers regarding our use of such information or data collected on our websites or through our services and products, such as weight management information, financial data, email addresses and home addresses, could keep them from using our websites or purchasing our services or products. We currently face certain legal obligations regarding the manner in which we treat such information and data. Businesses have been criticized by privacy groups and governmental bodies for their use and handling of such information and data. Currently, a significant number of our customers authorize us to bill their credit cards directly for fees charged by us. We rely on third-party software products to secure our credit card transactions. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent payment transactions and other security breaches, failure to prevent or mitigate such fraud or breaches or changes in industry standards or regulations may adversely affect our business and operating results or cause us to lose our ability to accept credit cards as a form of payment and result in chargebacks of the fraudulently charged amounts. Furthermore, widespread credit card fraud may lessen our customers’ willingness to purchase our products on our websites.
We may experience fluctuations in our operating results which may cause our stock price to be volatile.
We have experienced and expect to continue to experience fluctuations in our quarterly results of operations. Our business is seasonal, with revenue generally greatest in the first calendar quarter and weakest in the fourth quarter. The market price of our common stock is subject to fluctuations in response to our operating results, general trends in the weight loss industry, announcements by our competitors, our ability to meet or exceed securities analysts’ expectations, recommendations by securities analysts, the condition of the financial markets and other factors. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock and cause it to fluctuate significantly.
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Acquisitions and the pursuit of new business opportunities present risks, and we may be unable to achieve the financial and strategic goals of any acquisition or new business.
A component of our growth strategy has been and may continue to be to acquire existing businesses or pursue other business opportunities in the market for weight management and fitness products and other complimentary products and services. These types of transactions will face a number of risks and uncertainties, including:
| • | difficulties in integrating newly acquired or newly started businesses into existing operations, which may result in increasing operating costs that would adversely affect our operating income and earnings; |
| • | the risk that our current and planned facilities, information systems, personnel and controls will not be adequate to support our future operations; |
| • | diversion of management time and capital resources from our existing businesses, which could adversely affect their performance and our operating results; |
| • | dependence on key management personnel of acquired or newly started businesses and the risk that we will be unable to integrate or retain such personnel; |
| • | the risk that the new products or services we may introduce or begin offering, whether as a result of internal expansion or business acquisitions, will not gain acceptance among consumers and existing customers; |
| • | the risk that new efforts may have a detrimental effect on our brands; |
| • | the risk that we will face competition from established or larger competitors in the new markets we may enter, which could adversely affect the financial performance of any businesses we might acquire or start; and |
| • | the risk that the anticipated benefits of any acquisition or of the commencement of any new business may not be realized, in which event we will not be able to achieve any return on our investment in that new business. |
Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition or results of operations. We may also issue additional equity in connection with these transactions, which would dilute our existing stockholders.
We have and expect to continue to launch new weight loss programs and brands which may not be successful due to the failure of such programs or brands to achieve anticipated levels of market acceptance, which could adversely affect our business, financial condition and results of operations.
There are a number of risks inherent in any new program or brand introduction, which could prevent us from achieving revenue growth and increasing our overall market share in the commercial weight loss market. Any new program or brand may fail to achieve the anticipated level of market acceptance or appeal to consumer tastes and preferences. In addition, introduction costs, including product testing and marketing, may be greater than anticipated. If the new program or brand is not successful or falls short of anticipated market acceptance, we may be adversely affected by continued expenses and the diversion of management time to this initiative. Any or all of such events could have adverse effects on our business, financial condition and results of operations.
If we do not continue to receive referrals from existing customers, our customer acquisition cost may increase.
We rely on word-of-mouth advertising for a portion of our new customers. If our brands suffer or the number of customers acquired through referrals drops due to other circumstances, our costs associated with acquiring new customers and generating revenue will increase, which will, in turn, have an adverse effect on our profitability.
We use third-party marketing vendors to promote our products. If the spokespersons affiliated with the third-party marketing vendors suffer adverse publicity or elect to not renew, our revenue could be adversely affected.
Our marketing strategy depends in part on celebrity spokespersons, as well as customer spokespersons, to promote our weight loss programs. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from a segment of our customer base, whether weight loss related or not. If so, such events may reduce the effectiveness of his or her endorsement and, in turn, adversely affect our revenue and results of operations. Additionally, if a spokesperson elects not to renew their agreement with us, our revenue may suffer.
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Third parties may infringe on our brands, trademarks and other intellectual property rights, which may have an adverse impact on our business.
We currently rely on a combination of trademark and other intellectual property laws and confidentiality procedures to establish and protect our proprietary rights, including our brands. If we fail to successfully enforce our intellectual property rights, the value of our brands, services and products could be diminished and our business may suffer. Our precautions may not prevent misappropriation of our intellectual property. Any legal action that we may bring to protect our brands and other intellectual property could be unsuccessful and expensive and could divert management’s attention from other business concerns. In addition, legal standards relating to the validity, enforceability and scope of protection of intellectual property, especially in Internet-related businesses, are uncertain and evolving. We cannot assure you that these evolving legal standards will sufficiently protect our intellectual property rights in the future.
We may in the future be subject to intellectual property rights claims.
Third parties may in the future make claims against us alleging infringement of their intellectual property rights. Any intellectual property claims, regardless of merit, could be time-consuming and expensive to litigate or settle and could significantly divert management’s attention from other business concerns. In addition, if we were unable to successfully defend against such claims, we may have to pay damages, stop selling the service or product or stop using the software, technology or content found to be in violation of a third party’s rights, seek a license for the infringing service, product, software, technology or content or develop alternative non-infringing services, products, software, technology or content. If we cannot license on reasonable terms, develop alternatives or stop using the service, product, software, technology or content for any infringing aspects of our business, we may be forced to limit our service and product offerings. Any of these results could reduce our revenue and our ability to compete effectively, increase our costs or harm our business.
Our credit agreement contains financial and other covenants. The failure to comply with such covenants could have an adverse effect on us.
Our credit agreement contains certain financial and other covenants including a minimum consolidated fixed charge coverage ratio (applicable if there are outstanding borrowings), and limitations on, among other things, liens, indebtedness, certain acquisitions, consolidations and sales of assets. There were no borrowings outstanding as of December 31, 2018. Any failure to comply with the restrictions of the credit agreement may result in an event of default under the agreement.
We are dependent on our key executive officers for future success. If we lose the services of any of our key executive officers and we are unable to timely retain a qualified replacement, our business could be harmed.
Our future success depends to a significant degree on the skills, experience and efforts of our key executive officers. The loss of the services of any of these individuals could harm our business. If any key executive officers left us or were seriously injured and became unable to work, our business could be harmed.
Provisions in our certificate of incorporation may deter or delay an acquisition of us or prevent a change in control, even if an acquisition or a change of control would be beneficial to our stockholders.
Provisions of our certificate of incorporation (as amended) may have the effect of deterring unsolicited takeovers or delaying or preventing a third party from acquiring control of us, even if our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our certificate of incorporation (as amended) permits our Board of Directors to issue preferred stock without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders of our common stock will be junior to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding common stock. The issuance of a substantial number of preferred shares could adversely affect the price of our common stock.
Changes in consumer preferences could negatively impact our operating results.
Our programs feature frozen and ready-to-go food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our programs versus various other weight loss, weight management and fitness regimens, such as low carbohydrate diets, appetite suppressants and diets featured in the published media. Changes in consumer tastes and preferences away from our frozen or ready-to-go food and support and counseling services, and any
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failure to provide innovative responses to these changes, may have a materially adverse impact on our business, financial condition, operating results and cash flows.
Our success is also dependent on our food innovation including maintaining a robust array of food items and improving the quality of existing items. If we do not continually expand our food items or provide customers with items that are desirable in taste and quality, our business could be harmed.
The weight loss industry is subject to adverse publicity, which could harm our business.
The weight loss industry receives adverse publicity from time to time, and the occurrence of such publicity could harm us, even if the adverse publicity is not directly related to us. In the early 1990s, our predecessor businesses were subject to extremely damaging adverse publicity relating to a large number of lawsuits alleging that the Nutrisystem® weight loss program in use at that time led to gall bladder disease. This publicity was a factor that contributed to the bankruptcy of our predecessor businesses in 1993. In addition, our predecessor businesses were severely impacted by significant litigation and damaging publicity related to their customers’ use of fen-phen as an appetite suppressant, which the FDA ordered withdrawn from the market in September 1997. The significant decline in business resulting from the fen-phen problems caused our predecessor businesses to close all of their company-owned weight loss centers.
Congressional hearings about practices in the weight loss industry have also resulted in adverse publicity and a consequent decline in the revenue of weight loss businesses. Future research reports or publicity that is perceived as unfavorable or that question certain weight loss programs, products or methods could result in a decline in our revenue. Because of our dependence on consumer perceptions, adverse publicity associated with illness or other undesirable effects resulting from the consumption of our products or similar products by competitors, whether or not accurate, could also damage customer confidence in our weight loss programs and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user’s failure to use such products or services appropriately.
Our industry is subject to governmental regulation that could increase in severity and hurt results of operations.
Our industry is subject to federal, state and other governmental regulation. Certain federal and state agencies, such as the Federal Trade Commission (the “FTC”), regulate and enforce such laws relating to advertising, disclosures to consumers, privacy, consumer pricing and billing arrangements and other consumer protection matters. A determination by a federal or state agency, or a court, that any of our practices do not meet existing or new laws or regulations could result in liability, adverse publicity and restrictions on our business operations. Some advertising practices in the weight loss industry, in particular, have led to investigations from time to time by the FTC and other governmental agencies and many companies in the weight loss industry, including our predecessor businesses, have entered into consent decrees with the FTC relating to weight loss claims and other advertising practices. In addition, the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising require us and other weight loss companies to use a statement as to what the typical weight loss a customer can expect to achieve on our programs when using a customer’s weight loss testimonial in advertising. Federal and state regulation of advertising practices generally, and in the weight loss industry in particular, may increase in scope or severity in the future, which could have a material adverse impact on our business.
Other aspects of our industry are also subject to government regulation. For example, the manufacturing, labeling and distribution of food products, including dietary supplements, are subject to strict USDA and FDA requirements and food manufacturers are subject to rigorous inspection and other requirements of the USDA and FDA, and companies operating in foreign markets must comply with those countries’ requirements for proper labeling, controls on hygiene, food preparation and other matters. If federal, state, local or foreign regulation of our industry increases for any reason, then we may be required to incur significant expenses, as well as modify our operations to comply with new regulatory requirements, which could harm our operating results. Additionally, remedies available in any potential administrative or regulatory actions may include product recalls and requiring us to refund amounts paid by all affected customers or pay other damages, which could be substantial.
Laws and regulations directly applicable to communications, operations or commerce over the Internet such as those governing intellectual property, privacy, libel and taxation, are becoming more prevalent and some remain unsettled. If we are required to comply with new laws or regulations or new interpretations of existing laws or regulations, or if we are unable to comply with these laws, regulations or interpretations, our business could be adversely affected.
Future laws or regulations, including laws or regulations affecting our marketing and advertising practices, relations with consumers, employees, service providers, or our services and products, may have an adverse impact on us.
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The sale of ingested products involves product liability and other risks.
Like other distributors of products that are ingested, we face an inherent risk of exposure to product liability claims if the use of our products results in illness or injury. The foods that we resell in the U.S. are subject to laws and regulations, including those administered by the USDA and FDA that establish manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, including dietary supplements, as well as our predecessor businesses, have been named as defendants in product liability lawsuits from time to time. The successful assertion or settlement of an uninsured claim, a significant number of insured claims or a claim exceeding the limits of our insurance coverage would harm us by adding costs to the business and by diverting the attention of senior management from the operation of the business. We may also be subject to claims that our products contain contaminants, are improperly labeled, include inadequate instructions as to use or inadequate warnings covering interactions with other substances. Product liability litigation, even if not meritorious, is very expensive and could also entail adverse publicity for us and reduce our revenue. In addition, the products we distribute, or certain components of those products, may be subject to product recalls or other deficiencies. Any negative publicity associated with these actions would adversely affect our brand and may result in decreased product sales and, as a result, lower revenue and profits.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
We currently lease one location in Fort Washington, Pennsylvania. This location totals 119,767 square feet of office space and our lease expires in 2022. Our fulfillment capacity is located in Chambersburg, Pennsylvania; Allentown, Pennsylvania; Bethlehem, Pennsylvania; Atlanta, Georgia; Troy, Illinois and Sparks, Nevada through an outsourced provider. We have lease obligations to our outsourced fulfillment provider and are subject to minimum space commitments which we may reduce over a specified period of time. Management believes our outsourced fulfillment capacity is adequate to meet our needs for the foreseeable future.
As of February 20, 2019, six putative class action complaints have been filed by purported Nutrisystem stockholders challenging the Merger with Tivity Health in the United States District Court for the District of Delaware. The complaints are captioned Klein v. Nutrisystem, Inc. et al., Docket No. 1:19-cv-00056 (filed January 9, 2019), Shaev v. Nutrisystem, Inc. et al, Docket No. 1:19-cv-00063 (filed January 10, 2019), Vladimir Gusinsky Rev. Trust v. Nutrisystem, Inc., Docket No. 1:19-cv-00069 (filed January 10, 2019), Frechter v. Nutrisystem, Inc., et al, Docket No. 1:19-cv-00087 (filed January 16, 2019), Walton v. Nutrisystem, Inc. et al, Docket No. 1:19-cv-00112 (filed January 19, 2019), and Haines v. Nutrisystem, Inc., et al, Docket No. 1:19-cv-00137 (filed January 24, 2019). The complaints name as defendants each member of Nutrisystem’s Board of Directors and Nutrisystem itself and, in the case of the Klein and Gusinsky complaints, Tivity Health and Sweet Acquisition, Inc. The complaints allege, among other things, that statements made in the registration statement filed by Tivity Health on January 7, 2019 were materially incomplete and misleading and violated Sections 14(a) and 20(a) of the Exchange Act. In addition, the complaints generally allege that the Merger undervalues Nutrisystem, that the process leading up to the execution of the Merger Agreement was flawed, and that certain provisions of the Merger Agreement improperly favor Tivity Health and improperly impede a potential alternative transaction. Among other remedies, the complaints seek equitable relief rescinding the Merger Agreement and enjoining the defendants from completing the Merger, as well as recovery of litigation costs and attorneys’ fees. Nutrisystem believes that the claims asserted in the actions are without merit and no supplemental disclosure is required under applicable law. However, in order to avoid the risk of adverse effect or delay in connection with these actions and to minimize the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, Nutrisystem voluntarily supplemented its proxy statement as described in a Current Report on Form 8-K filed on February 22, 2019, and the plaintiffs in these actions have agreed to voluntarily dismiss their lawsuits in light of this supplemental disclosure.
The Company is also involved in various other claims and routine litigation matters that arise in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years and management believes the range of reasonably possible losses from current matters is immaterial.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
The Company’s common stock trades on the Nasdaq Stock Market, under the symbol “NTRI.” The following table sets forth, for the periods indicated, the high and low sale prices for the Company’s common stock as reported on the Nasdaq Stock Market.
| | High | | | Low | |
2019 First Quarter (through February 20, 2019) | | $ | 44.30 | | | $ | 42.76 | |
| | | | | | | | |
2018 First Quarter | | $ | 53.55 | | | $ | 26.85 | |
2018 Second Quarter | | | 39.35 | | | | 26.06 | |
2018 Third Quarter | | | 43.65 | | | | 34.25 | |
2018 Fourth Quarter | | | 45.25 | | | | 31.54 | |
| | | | | | | | |
2017 First Quarter | | $ | 55.92 | | | $ | 31.60 | |
2017 Second Quarter | | | 57.50 | | | | 44.50 | |
2017 Third Quarter | | | 67.95 | | | | 47.50 | |
2017 Fourth Quarter | | | 60.80 | | | | 46.40 | |
Holders
As of February 20, 2019, the Company had approximately 231 record holders of its common stock.
Dividends
Prior to 2008, we had not declared or paid any dividend since inception. We paid a quarterly dividend of $0.175 per share beginning with the second quarter of 2008 through the fourth quarter of 2017. During each of the four quarters of 2018, we paid a dividend of $0.25 per share to all stockholders of record. As provided in the Merger Agreement with Tivity Health, we have agreed not to declare or pay any dividends to our stockholders from the date of the Merger Agreement until the effective time of the Merger.
Securities Authorized for Issuance Under Equity Compensation Plans
The information under the heading “Securities Authorized for Issuance Under Equity Compensation Plans” will be filed in the Company’s definitive proxy statement for the 2019 annual meeting of stockholders and is incorporated herein by reference, or will be provided in an amendment filed on Form 10-K/A.
Issuer Purchases of Equity Securities
The following table provides information relating to our purchases of our common stock during the quarter ended December 31, 2018:
Period | | Total Number of Shares Purchased (1) (2) | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Program (1) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program (1) | |
October 1 - October 31, 2018 | | | 0 | | | $ | 0 | | | | 0 | | | $ | 75,000,000 | |
November 1 - November 30, 2018 | | | 0 | | | $ | 0 | | | | 0 | | | $ | 75,000,000 | |
December 1 - December 31, 2018 | | | 0 | | | $ | 0 | | | | 0 | | | $ | 75,000,000 | |
(1) On October 25, 2017, we announced that our Board of Directors had authorized a new share repurchase program. We could purchase up to $50 million of our outstanding shares of common stock over a 24-month period commencing November 4, 2017. On October 30, 2018, we terminated the existing $50 million share repurchase program and replaced it with a new share repurchase program to repurchase up to $75 million of our outstanding shares of common stock over a 24-month period commencing on October 30, 2018. The timing, number and amount of any shares repurchased will be determined by us at our discretion and will be based on a number of factors including our evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements and compliance with the terms of our outstanding indebtedness. The stock repurchase program may be suspended or discontinued at any time without prior notice. As provided in the Merger Agreement we have agreed to not repurchase any additional shares of our common stock under this program until the effective time of the Merger.
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(2) The period October 1, 2018 through December 31, 2018, does not include 68,466 shares of common stock, at an average purchase price of $43.87, surrendered by employees to the Company for the payment of the tax withholding obligations upon the vesting of shares of restricted stock.
STOCK PRICE PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total return since December 31, 2013, for our common stock, the Russell 2000 Index and the Dow Jones US Specialized Consumer Services Index (a published industry index), each of which assumes an initial value of $100 and reinvestment of dividends. Our common stock trades on the Nasdaq Stock Market under the ticker symbol NTRI. This graph and accompanying information shall not be deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any prior or subsequent filing by us under the Securities Act of 1933, as amended or the Exchange Act.
| | 12/13 | | | 12/14 | | | 12/15 | | | 12/16 | | | 12/17 | | | 12/18 | |
Nutrisystem, Inc. | | $ | 100 | | | $ | 124 | | | $ | 142 | | | $ | 234 | | | $ | 360 | | | $ | 309 | |
Russell 2000 Index | | | 100 | | | | 105 | | | | 100 | | | | 122 | | | | 139 | | | | 124 | |
Dow Jones US Specialized Consumer Services Index | | | 100 | | | | 107 | | | | 96 | | | | 107 | | | | 144 | | | | 149 | |
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ITEM 6. | SELECTED FINANCIAL DATA |
The selected consolidated financial data presented below has been derived from our Consolidated Financial Statements for each of the periods indicated. The data set forth below is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements included as Items 7 and 8, respectively, in this Annual Report.
Selected Consolidated Financial Data
(In thousands, except per share data)
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | | |
Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 691,039 | | | $ | 696,957 | | | $ | 545,451 | | | $ | 462,609 | | | $ | 403,083 | | |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | | 325,235 | | | | 321,210 | | | | 256,994 | | | | 224,581 | | | | 199,053 | | |
Marketing | | | 203,189 | | | | 198,949 | | | | 152,387 | | | | 124,209 | | | | 107,706 | | |
Selling, general and administrative | | | 72,717 | | (a) | | 78,305 | | | | 68,290 | | | | 64,651 | | (d) | | 59,231 | | |
Depreciation and amortization | | | 15,875 | | | | 15,082 | | | | 13,736 | | (c) | | 9,158 | | | | 7,849 | | |
Operating income | | | 74,023 | | | | 83,411 | | | | 54,044 | | | | 40,010 | | | | 29,244 | | |
Interest (income) expense, net | | | (852 | ) | | | (119 | ) | | | 26 | | | | 169 | | | | 142 | | |
Income tax expense (b) | | | 16,282 | | | | 25,658 | | | | 18,549 | | | | 13,698 | | | | 9,791 | | |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 35,469 | | | $ | 26,143 | | | $ | 19,311 | | |
Basic income per common share | | $ | 1.98 | | | $ | 1.93 | | | $ | 1.20 | | | $ | 0.90 | | | $ | 0.67 | | |
Diluted income per common share | | $ | 1.95 | | | $ | 1.90 | | | $ | 1.19 | | | $ | 0.89 | | | $ | 0.66 | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 29,396 | | | | 29,706 | | | | 29,213 | | | | 28,695 | | | | 28,323 | | |
Diluted | | | 29,750 | | | | 30,191 | | | | 29,545 | | | | 29,175 | | | | 28,787 | | |
Dividends declared per common share | | $ | 1.00 | | | $ | 0.70 | | | $ | 0.70 | | | $ | 0.70 | | | $ | 0.70 | | |
| | December 31, | |
| | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash, cash equivalents and short term investments | | $ | 81,324 | | | $ | 72,222 | | | $ | 33,496 | | | $ | 15,508 | | | $ | 29,247 | |
Working capital | | | 105,445 | | | | 88,454 | | | | 41,805 | | | | 18,009 | | | | 23,780 | |
Total assets | | | 204,237 | | | | 201,543 | | | | 154,240 | | | | 129,893 | | | | 109,892 | |
Non-current liabilities | | | 2,325 | | | | 1,636 | | | | 1,877 | | | | 2,284 | | | | 2,710 | |
Stockholders' equity | | | 146,516 | | | | 135,803 | | | | 94,524 | | | | 69,928 | | | | 55,515 | |
| (a) | In 2018, we incurred $2,795 in transaction costs related to the Merger with Tivity Health and $1,143 in transaction costs related to the stockholder cooperation agreement. |
| (b) | In the fourth quarter of 2017, we recorded a charge of $836 to write-down our net deferred tax assets to reflect the reduction in the future federal corporate tax rate from 35% to 21% due to the enactment of the Tax Act. Additionally, we recorded a valuation allowance of $817 as certain state net operating loss carryforwards might not be realized due to changes in tax legislation. In addition, this reflects the adoption of ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” on a prospective basis. We adopted this standard in the first quarter of 2017 and recognized an excess tax benefit from share-based compensation of $1,879 and $5,491 for 2018 and 2017, respectively, within income tax expense as opposed to being recognized in additional paid-in capital under previous accounting guidance. The amounts recognized in additional paid-in capital were $2,936, $2,750 and $(68) for 2016, 2015 and 2014, respectively. |
| (c) | In 2016, we recorded a charge of $1,297 to write-down certain software licenses that were no longer expected to be used as more enhanced software options were available to handle our evolving business needs. |
| (d) | On December 17, 2015, we acquired the South Beach Diet (“SBD”) brand for a cash payment of $15,000. In connection with this acquisition, we incurred $2,498 in transaction costs which were charged to expense in 2015. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the financial information included elsewhere in this Annual Report.
Background
Nutrisystem, Inc. (“Nutrisystem,” the “Company,” “we,” “us,” or “our”) is a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily online and over the telephone and multi-day kits and single items available at select retail locations. Our weight loss programs are designed for women and men. Our Nutrisystem® programs are based on over 45 years of nutrition research. The Company’s pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid gift cards), referred to as the direct channel, through QVC, a television shopping network, and select retailers.
In December 2018, we entered into the Merger Agreement with Tivity Health. Under the terms of the Merger Agreement, Nutrisystem will become a wholly-owned subsidiary of Tivity Health. Pursuant to the Merger Agreement, at the Effective Time, each share of Nutrisystem common stock issued and outstanding immediately prior to the Effective Time (other than shares as to which dissenter’s rights have been properly exercised and certain other excluded shares) will be converted into the right to receive (i) $38.75 in cash, without interest, and (ii) 0.2141 Tivity Health Shares, with cash payable in lieu of fractional Tivity Health Shares.
Completion of the Merger is subject to certain customary closing conditions, including, without limitation (1) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding Nutrisystem Shares entitled to vote thereon at a meeting duly called and held for such purpose, (2) absence of any order or law that has the effect of enjoining or otherwise prohibiting the completion of the Merger and (3) the absence of a material adverse effect with respect to the other party. The Merger is expected to close in the first quarter of 2019.
Nutrisystem and Tivity Health have made customary representations and warranties in the Merger Agreement. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (a) the conduct of each of the Company’s and Tivity Health’s respective businesses between the date of the signing of the Merger Agreement and the consummation of the Merger, and (b) the efforts of the parties to cause the Merger to be completed.
The Merger Agreement also provides that under specified circumstances, including a termination by us to enter into a definitive agreement for an acquisition proposal that constitutes a superior proposal or a termination by Tivity Health as a result of our Board of Directors changing its recommendation with respect to the Merger Agreement, we will pay Tivity Health a termination fee of $45.0 million.
Revenue consists primarily of food sales. For 2018, 2017 and 2016, the direct channel accounted for 93%, 92% and 91%, respectively, of revenue compared to 5%, 6% and 6%, respectively, for retail and 2%, 2% and 3%, respectively, for QVC. We incur significant marketing expenditures to support our brands as we continue to advertise across various media channels. New media channels are tested on a continual basis and we consider our media mix to be diverse. We market our weight loss systems through television, print, direct mail, Internet, public relations and social media. We review and analyze a number of key operating and financial metrics to manage our business, including the number of new customers, revenue per customer, reactivation revenue, total revenue, marketing per new customer and operating margins.
Our ecommerce, direct-to-consumer business model provides flexibility which allows us to manage marketing spend according to customer demand. We believe this flexibility is especially valuable as it allows us to react to changing market conditions relatively quickly. Additionally, we are continually looking to make investments to improve lifetime customer economics, length of stay and overall customer satisfaction. We are able to test new commercials, offers and website configurations to allow us to be more responsive to customer needs and attempt to drive conversion.
We offer customizable programs. Customers are given a meal plan and access to weight loss trackers and tools, educational digital content and exercise suggestions. Customers are also encouraged to check in periodically with a counselor as their needs change in response to weight loss.
We utilize a multi-brand approach with two distinct programs, the Nutrisystem® Turbo13 plan and the South Beach Diet® plan. The South Beach Diet plan launched in January 2017 as a structured meal delivery weight-loss program. The plan features fully prepared, globally inspired meals that are flash-frozen to maintain the quality of taste and nutrition, and delivered right to the customer’s doorstep. The South Beach Diet was created by Dr. Arthur Agatston, a cardiologist from southern Florida. Also, in 2018, we launched the DNA Body Blueprint™ kit, a genetic-based product using a proprietary algorithm that provides an integrated personal action plan focused on eating behaviors, nutrition and metabolism.
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Additionally, our multi-day weight loss kits are available at select retailers. The retail channel provides us with great brand exposure, offering consumers who may not be aware of our programs an opportunity to sample Nutrisystem programs and products at a more attractive price point. We have multiple kits and single items available for purchase. Also, we continue to offer our Nutrisystem® programs through the sale of prepaid gift cards at Costco.
Revenue for the year ended December 31, 2018 decreased 1% from the comparable period of 2017 to $691.0 million. We experienced new customer acquisition challenges in the direct channel due to a lower than expected response to our 2018 marketing campaign further pressured by lower viewership on historically well performing television stations. New customers in their initial diet cycle and retail revenue decreased, which offset increased reactivation revenue from former customers. Reactivation revenue increased due to higher volumes building off of increases in new customer counts from previous years and a higher reactivation rate. Retail revenue decreased due to lower sell through rates in 2018 as compared to 2017.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies, including the impact of recently issued accounting pronouncements, are described in Note 2 of the consolidated financial statements included in Item 8.
The preparation of these consolidated 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. The accounting estimates we consider critical include reserves for returns and excess and obsolete inventory. These critical accounting estimates are discussed with our audit committee quarterly.
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 and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of returns changes, we 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 years ended December 31, 2018, 2017 and 2016 was $18.3 million, $19.0 million and $14.9 million, respectively. The reserve for estimated returns incurred but not received and processed was $765,000 and $868,000 at December 31, 2018 and 2017, respectively, and has been included in other accrued expenses and current liabilities in the accompanying consolidated balance sheets.
Excess and Obsolete Inventory. We continually assess the quantities of inventory on hand to identify excess or obsolete inventory and a provision is recorded for any estimated loss. We estimate the reserve for excess and obsolete inventory based primarily on our forecasted demand and/or our ability to sell the products, introduction of new products, future production requirements and changes in our customers’ behavior. The reserve for excess and obsolete inventory was $1.4 million and $1.9 million at December 31, 2018 and 2017, respectively.
Results of Operations
Revenue and expenses consist of the following components:
Revenue. Revenue consists primarily of food sales. Food sales include sales of food, supplements, shipping and handling charges billed to customers and sales credits and adjustments, including product returns. Revenue from the retail programs is also net of any trade allowances, reclamation reserves or broker commissions.
Cost of Revenue. Cost of revenue consists primarily of the cost of the products sold, including compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Marketing Expense. Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Internet advertising expense is recorded based on either the rate of delivery of a guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. Advertising costs are charged to expense as incurred or the first time the advertising takes place. Prior to adopting Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers”, we capitalized direct-mail advertising costs and expensed such costs over the period of benefit.
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Selling, General and Administrative Expense. Selling, general and administrative expense consists of compensation for administrative, information technology, call center and sales personnel, share-based payment arrangements for related employees, facility expenses, website development costs, professional service fees and other general corporate expenses.
Interest (Income) Expense, Net. Interest (income) expense, net consists of interest income earned on cash balances and short term investments net of interest expense and unused line fees on our revolving credit facility.
Income Tax Expense. We are subject to corporate level income taxes and record income taxes based on an effective income tax rate for the year.
Overview of the Direct Channel
In 2018, 2017 and 2016, the direct channel represented 93%, 92% and 91%, respectively, of our revenue. Revenue through the direct channel was $638.3 million in 2018 compared to $643.0 million in 2017 and $498.2 million in 2016. Revenue is generated primarily through customer starts, reactivation of former customers and the customer ordering behavior, including length of time on our program and the diet program selection. The revenue decrease in 2018 was attributable primarily to lower revenue from customers in their initial diet cycle partially offset by reactivation revenue. Critical to increasing customer starts is our ability to deploy marketing dollars while maintaining marketing effectiveness. Factors influencing our marketing effectiveness include the quality of the advertisements, promotional activity by our competitors, as well as the price and availability of appropriate media.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | $ Change | | | % Change | |
| | (in thousands) | |
REVENUE | | $ | 691,039 | | | $ | 696,957 | | | $ | (5,918 | ) | | | (1 | )% |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of revenue | | | 325,235 | | | | 321,210 | | | | 4,025 | | | | 1 | % |
Marketing | | | 203,189 | | | | 198,949 | | | | 4,240 | | | | 2 | % |
Selling, general and administrative | | | 72,717 | | | | 78,305 | | | | (5,588 | ) | | | (7 | )% |
Depreciation and amortization | | | 15,875 | | | | 15,082 | | | | 793 | | | | 5 | % |
Total costs and expenses | | | 617,016 | | | | 613,546 | | | | 3,470 | | | | 1 | % |
Operating income | | | 74,023 | | | | 83,411 | | | | (9,388 | ) | | | (11 | )% |
INTEREST INCOME, net | | | (852 | ) | | | (119 | ) | | | (733 | ) | | | 616 | % |
Income before income tax expense | | | 74,875 | | | | 83,530 | | | | (8,655 | ) | | | (10 | )% |
INCOME TAX EXPENSE | | | 16,282 | | | | 25,658 | | | | (9,376 | ) | | | (37 | )% |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 721 | | | | 1 | % |
| | | | | | | | | | | | | | | | |
% of revenue | | | | | | | | | | | | | | | | |
Gross margin | | | 52.9 | % | | | 53.9 | % | | | | | | | | |
Marketing | | | 29.4 | % | | | 28.5 | % | | | | | | | | |
Selling, general and administrative | | | 10.5 | % | | | 11.2 | % | | | | | | | | |
Operating income | | | 10.7 | % | | | 12.0 | % | | | | | | | | |
Revenue. Revenue decreased to $691.0 million in 2018 from $697.0 million in 2017. The decrease in revenue is attributable primarily to lower revenue from new customers in their initial diet cycle ($41.7 million) and decreased retail revenue ($1.9 million) offset partially by increased reactivation revenue ($37.1 million). In 2018, direct revenue accounted for 93% of revenue compared to 5% for retail and 2% for QVC. In 2017, direct revenue accounted for 92% of revenue compared to 6% for retail and 2% for QVC.
Costs and Expenses. Cost of revenue increased to $325.2 million in 2018 from $321.2 million in 2017. Gross margin as a percent of revenue decreased to 52.9% in 2018 from 53.9% in 2017. The decrease in gross margin was attributable primarily to higher packaging, freight and fulfillment costs, promotional activity and program mix.
Marketing expense increased to $203.2 million in 2018 from $198.9 million in 2017. Marketing expense as a percent of revenue increased to 29.4% in 2018 from 28.5% in 2017. Substantially all of the marketing spending in 2018 promoted the direct business. The increase in marketing expense was attributable primarily to increased spending for marketing consulting ($2.8 million), media
27
($594,000) and marketing compensation and benefits ($559,000). In total, media spending was $178.0 million in 2018 and $177.4 million in 2017.
Selling, general and administrative expense decreased to $72.7 million in 2018 from $78.3 million in 2017 and as a percent of revenue decreased to 10.5% in 2018 from 11.2% in 2017. The decrease in spending was attributable primarily to lower compensation and benefits ($8.1 million), a decrease in non-cash expense for share-based payment arrangements ($456,000) and lower telephone expense ($368,000). These decreases were partially offset by an increase in spending for professional, outside and computer services ($3.6 million) attributable primarily to $2.8 million in transaction costs related to the Merger with Tivity Health and $1.1 million in transaction costs related to the stockholder cooperation agreement.
Depreciation and amortization expense increased slightly to $15.9 million in 2018 from $15.1 million in 2017.
Interest Income, Net. Interest income, net, was $852,000 in 2018 compared to $119,000 in 2017, due to higher amounts of short term investments being invested and higher interest rates.
Income Tax Expense. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act included a number of changes to U.S. tax laws that impact us, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. In 2018, we recorded income tax expense of $16.3 million, which reflects an effective tax rate of 21.7%, as compared to $25.7 million in 2017 with an effective tax rate of 30.7%. The impact of the lower corporate income tax rate was partially offset by a lower excess tax benefit from share-based compensation. We recorded an excess tax benefit from share-based compensation of $1.9 million in 2018 and $5.5 million in 2017. In 2017, we recorded a charge of $836,000 to write-down our net deferred tax assets to reflect the reduction in the corporate tax rate from 35% to 21% and a valuation allowance of $817,000 as certain state net operating loss carryforwards might not be realized due to changes in tax legislation.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | $ Change | | | % Change | |
| | (in thousands) | |
REVENUE | | $ | 696,957 | | | $ | 545,451 | | | $ | 151,506 | | | | 28 | % |
| | | | | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | | | | |
Cost of revenue | | | 321,210 | | | | 256,994 | | | | 64,216 | | | | 25 | % |
Marketing | | | 198,949 | | | | 152,387 | | | | 46,562 | | | | 31 | % |
Selling, general and administrative | | | 78,305 | | | | 68,290 | | | | 10,015 | | | | 15 | % |
Depreciation and amortization | | | 15,082 | | | | 13,736 | | | | 1,346 | | | | 10 | % |
Total costs and expenses | | | 613,546 | | | | 491,407 | | | | 122,139 | | | | 25 | % |
Operating income | | | 83,411 | | | | 54,044 | | | | 29,367 | | | | 54 | % |
INTEREST (INCOME) EXPENSE, net | | | (119 | ) | | | 26 | | | | (145 | ) | | | (558 | )% |
Income before income tax expense | | | 83,530 | | | | 54,018 | | | | 29,512 | | | | 55 | % |
INCOME TAX EXPENSE | | | 25,658 | | | | 18,549 | | | | 7,109 | | | | 38 | % |
Net income | | $ | 57,872 | | | $ | 35,469 | | | $ | 22,403 | | | | 63 | % |
| | | | | | | | | | | | | | | | |
% of revenue | | | | | | | | | | | | | | | | |
Gross margin | | | 53.9 | % | | | 52.9 | % | | | | | | | | |
Marketing | | | 28.5 | % | | | 27.9 | % | | | | | | | | |
Selling, general and administrative | | | 11.2 | % | | | 12.5 | % | | | | | | | | |
Operating income | | | 12.0 | % | | | 9.9 | % | | | | | | | | |
Revenue. Revenue increased to $697.0 million in 2017 from $545.5 million in 2016. The increase in revenue is attributable primarily to revenue from new customers in their initial diet cycle ($107.5 million), reactivation revenue ($37.8 million) and retail revenue ($5.2 million). In 2017, direct revenue accounted for 92% of revenue compared to 6% for retail and 2% for QVC. In 2016, direct revenue accounted for 91% of revenue compared to 6% for retail and 3% for QVC.
Costs and Expenses. Cost of revenue increased to $321.2 million in 2017 from $257.0 million in 2016. Gross margin as a percent of revenue increased to 53.9% in 2017 from 52.9% in 2016. The increase in gross margin was attributable primarily to lower food costs from the direct channel, less promotional costs from retail and increases in average selling prices, which offset increased packaging and freight costs due to increased sales of our frozen products.
28
Marketing expense increased to $198.9 million in 2017 from $152.4 million in 2016. Marketing expense as a percent of revenue increased to 28.5% in 2017 from 27.9% in 2016. Substantially all of the marketing spending in 2017 promoted the direct business. The increase in marketing expense was attributable to increased spending for media ($46.9 million) primarily for short form television media and Internet advertising, marketing compensation and benefits ($1.9 million) partially offset by decreases in television production ($1.6 million) and public relations ($632,000). In total, media spending was $177.4 million in 2017 and $130.5 million in 2016.
Selling, general and administrative expense increased to $78.3 million in 2017 from $68.3 million in 2016 and as a percent of revenue decreased to 11.2% in 2017 from 12.5% in 2016. The increase in spending was attributable primarily to higher compensation and benefits ($5.5 million), an increase in non-cash expense for share-based payment arrangements ($3.1 million) and higher spending for professional, outside and computer services ($2.3 million). These increases were partially offset by a decrease in program and product costs ($916,000).
Depreciation and amortization expense increased to $15.1 million in 2017 from $13.7 million in 2016 due to increased capital expenditures for our websites, digital tools and our new warehouses.
Interest (Income) Expense, Net. Interest income, net, was $119,000 in 2017 compared to $26,000 in interest expense, net in 2016, due to higher interest income and a lower amount of amortization of capitalized debt issuance costs associated with our credit facility.
Income Tax Expense. In 2017, we recorded income tax expense at $25.7 million, which reflects an effective tax rate of 30.7%, as compared to $18.5 million in 2016 with an effective tax rate of 34.3%. Due to the adoption of Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” as of January 1, 2017, we recognized an excess tax benefit from share-based compensation of $5.5 million within income tax expense rather than as additional paid-in capital under previous accounting guidance. This benefit was partially offset by a charge of $836,000 to write-down our net deferred tax assets to reflect the reduction in the corporate tax rate from 35% to 21% due to the enactment of the Tax Act on December 22, 2017. Additionally, at December 31, 2017, we recorded a valuation allowance of $817,000 as certain state net operating loss carryforwards might not be realized due to changes in tax legislation.
Contractual Obligations and Commercial Commitments
As of December 31, 2018, our principal commitments consisted of obligations under agreements with suppliers, an agreement with our outside fulfillment provider, agreements with our Internet and networking providers, operating leases and employment contracts. Although we have no material commitments for capital expenditures, we anticipate continuing requirements for capital expenditures.
Following is a summary of our contractual obligations.
| | Payments Due by Period (in millions) | |
Contractual obligations | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 4-5 Years | | | More Than 5 Years | |
Purchase obligations | | $ | 12.8 | | | $ | 7.0 | | | $ | 5.8 | | | $ | 0 | | | $ | 0 | |
Lease obligations | | | 21.0 | | | | 6.0 | | | | 11.0 | | | | 4.0 | | | | 0 | |
| | $ | 33.8 | | | $ | 13.0 | | | $ | 16.8 | | | $ | 4.0 | | | $ | 0 | |
We have entered into agreements with various suppliers. These agreements may provide for annual pricing, annual purchase obligations, exclusivity in the production of certain products, as well as rebates if certain volume thresholds are exceeded, with terms of five years or less. We anticipate we will meet all annual purchase obligations.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing arrangements.
Liquidity, Capital Resources and Other Financial Data
At December 31, 2018, we had working capital of $105.4 million, an increase of $16.9 million from the $88.5 million working capital balance at December 31, 2017. Cash and cash equivalents at December 31, 2018 were $22.2 million, a decrease of $2.5 million from the balance of $24.7 million at December 31, 2017. In addition, we had $59.1 million and $47.6 million invested in short term investments at December 31, 2018 and 2017, respectively. Our principal sources of liquidity during 2018 were cash flows from operations.
29
On November 6, 2015, we entered into a $50.0 million unsecured revolving credit facility with a lender. The credit facility provides for interest on borrowings at either a base rate or the London Inter-Bank Offered Rate, in each case plus an applicable margin and is also subject to an unused fee payable quarterly. The credit facility contains financial and other covenants, including a minimum consolidated fixed charge coverage ratio (applicable if there are outstanding borrowings), and limitations on, among other things, liens, indebtedness, certain acquisitions, consolidations and sales of assets. The credit facility can be drawn upon through November 6, 2020, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2018 and 2017.
In 2018, we generated cash flows of $79.9 million from operating activities, a slight increase of $165,000 from 2017. The increase in cash flows from operations was attributable primarily to an increase in net income partially offset by the timing of working capital requirements.
In 2018, net cash used in investing activities was $22.9 million, a decrease of $14.4 million from 2017 due to a decrease in the net outflows for short term investments of $12.5 million and a decrease of capital additions of $1.9 million.
In 2018, net cash used in financing activities was $59.4 million, an increase of $32.0 million from 2017, due primarily to increased stock repurchases and increasing the quarterly dividend from $0.175 to $0.25 per share. We paid $30.2 million for dividends, $26.3 million for share repurchases and $4.9 million to satisfy the tax withholding obligations associated with the vesting of equity awards partially offset by $1.9 million of proceeds received from the exercise of stock options.
We had a share repurchase program to repurchase up to $50.0 million of our outstanding shares of common stock which expired on November 3, 2017. On October 25, 2017, we announced that our Board of Directors had authorized a new share repurchase program to replace the expiring repurchase program. Under the new share repurchase program, we could repurchase up to $50.0 million of our outstanding shares of common stock over a 24-month period commencing November 4, 2017. On October 30, 2018, we announced that our Board of Directors terminated the existing $50.0 million share repurchase program and replaced it with a new share repurchase program to repurchase up to $75.0 million of our outstanding shares of common stock over a 24-month period commencing on October 30, 2018. The timing, number and amount of any shares repurchased will be determined by us at our discretion and will be based on a number of factors including our evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements and compliance with the terms of our outstanding indebtedness. The share repurchase program may be suspended or discontinued at any time without prior notice. During 2018, we purchased and placed in treasury 838,762 shares of common stock under these programs for an aggregate cost of $26.3 million. During 2017, we purchased and subsequently retired 28,675 shares of common stock for an aggregate cost of $1.5 million. Additionally, we purchased and placed in treasury 71,925 shares of common stock for an aggregate cost of $3.5 million. As provided in the Merger Agreement with Tivity Health, we have agreed not to repurchase any additional shares of our common stock under these programs from the date of the Merger Agreement until the effective time of the Merger.
Our Board of Directors declared quarterly dividends of $0.25 per share, which were paid on March 19, 2018, May 21, 2018, August 20, 2018 and November 19, 2018. As provided in the Merger Agreement with Tivity Health, we have agreed not to declare or pay any dividends to our stockholders from the date of the Merger Agreement until the effective time of the Merger.
We believe that our available capital resources are sufficient to fund our working capital requirements, capital expenditures and income tax obligations for the foreseeable future.
Seasonality
Typically, in the weight loss industry, revenue is greatest in the first calendar quarter and weakest in the fourth quarter. We believe our business experiences seasonality, driven primarily by the predisposition of dieters to initiate a diet at certain times of the year and the placement of our advertising, which is based on the price and availability of certain media at such times.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We believe that we are not subject to any material risks arising from changes in foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments. Our cash and cash equivalents at December 31, 2018 of $22.2 million were maintained in demand accounts and money market funds. Additionally, we invested $59.1 million in short term investments, which are classified as available-for-sale securities and are reported at fair value in the accompanying consolidated balance sheet as of December 31, 2018. A change in interest rates of 1 percentage point would not have a material impact on our operating results and cash flows.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this Item is set forth on pages 36 through 59 hereto.
30
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on the evaluation of the effectiveness of our disclosure controls and procedures by our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures at the end of the period covered by this report were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made in accordance with management and board of director authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on its financial statements would be prevented or detected on a timely basis.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
There was no change in our internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management evaluated the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018.
Our independent registered public accounting firm, KPMG LLP, has audited our internal control over financial reporting as of December 31, 2018. Their report on the effectiveness of our internal control over financial reporting appears on page 32.
31
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Nutrisystem, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Nutrisystem, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 26, 2019
32
ITEM 9B. | OTHER INFORMATION |
None.
33
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information concerning directors and compliance with Section 16(a) of the Exchange Act and our Code of Conduct that applies to our principal executive officer, principal financial officer, principal accounting officer or controller called for by Item 10 of Form 10-K will be set forth under the captions “Our Board of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Conduct” in our definitive proxy statement for the 2019 annual meeting of stockholders, to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference, or will be provided in an amendment filed on Form 10-K/A.
The required information as to executive officers is set forth in Part I hereof.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2019 annual meeting of stockholders, or will be provided in an amendment filed on Form 10-K/A.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2019 annual meeting of stockholders, or will be provided in an amendment filed on Form 10-K/A.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2019 annual meeting of stockholders, or will be provided in an amendment filed on Form 10-K/A.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by Item 14 of Form 10-K is incorporated by reference to the information contained in our definitive proxy statement for the 2019 annual meeting of stockholders, or will be provided in an amendment filed on Form 10-K/A.
34
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) 1. Financial Statements
See Index to the Consolidated Financial Statements on page 36 of this Annual Report.
2. Financial Statement Schedules
None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements.
3. Exhibits
Reference is made to the Exhibit Index on page 60 of this Annual Report for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this Annual Report.
ITEM 16. | FORM 10-K SUMMARY |
Not applicable.
35
NUTRISYSTEM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
36
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Nutrisystem, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Nutrisystem, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue in the year ended December 31, 2018 due to the adoption of Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” and changed its method of accounting for excess tax benefits from share-based payment transactions in the year ended December 31, 2017 due to the adoption of Accounting Standards Update No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.”
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Philadelphia, Pennsylvania
February 26, 2019
37
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
| | December 31, | |
| | 2018 | | | 2017 | |
ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash and cash equivalents | | $ | 22,241 | | | $ | 24,654 | |
Short term investments | | | 59,083 | | | | 47,568 | |
Receivables | | | 16,640 | | | | 17,871 | |
Inventories | | | 47,755 | | | | 44,266 | |
Prepaid income taxes | | | 2,942 | | | | 6,441 | |
Prepaid expenses and other current assets | | | 12,180 | | | | 11,758 | |
Total current assets | | | 160,841 | | | | 152,558 | |
FIXED ASSETS, net | | | 28,129 | | | | 31,549 | |
INTANGIBLE ASSETS, net | | | 12,084 | | | | 13,084 | |
DEFERRED INCOME TAXES | | | 2,039 | | | | 3,202 | |
OTHER ASSETS | | | 1,144 | | | | 1,150 | |
Total assets | | $ | 204,237 | | | $ | 201,543 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 36,373 | | | $ | 34,816 | |
Accrued payroll and related benefits | | | 4,980 | | | | 15,229 | |
Deferred revenue | | | 8,407 | | | | 7,991 | |
Other accrued expenses and current liabilities | | | 5,636 | | | | 6,068 | |
Total current liabilities | | | 55,396 | | | | 64,104 | |
NON-CURRENT LIABILITIES | | | 2,325 | | | | 1,636 | |
Total liabilities | | | 57,721 | | | | 65,740 | |
COMMITMENTS AND CONTINGENCIES (Note 8) | | | | | | | | |
STOCKHOLDERS’ EQUITY: | | | | | | | | |
Preferred stock, $.001 par value (5,000 shares authorized, no shares issued and outstanding) | | | 0 | | | | 0 | |
Common stock, $.001 par value (100,000 shares authorized; shares issued – 31,159 at December 31, 2018 and 30,729 at December 31, 2017) | | | 31 | | | | 31 | |
Additional paid-in capital | | | 81,488 | | | | 69,245 | |
Treasury stock, at cost, 1,627 shares at December 31, 2018 and 679 shares at December 31, 2017 | | | (47,583 | ) | | | (16,359 | ) |
Retained earnings | | | 112,611 | | | | 83,035 | |
Accumulated other comprehensive loss | | | (31 | ) | | | (149 | ) |
Total stockholders’ equity | | | 146,516 | | | | 135,803 | |
Total liabilities and stockholders’ equity | | $ | 204,237 | | | $ | 201,543 | |
The accompanying notes are an integral part of these consolidated financial statements.
38
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | |
REVENUE | | $ | 691,039 | | | $ | 696,957 | | | $ | 545,451 | | |
| | | | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | | | |
Cost of revenue | | | 325,235 | | | | 321,210 | | | | 256,994 | | |
Marketing | | | 203,189 | | | | 198,949 | | | | 152,387 | | |
Selling, general and administrative | | | 72,717 | | | | 78,305 | | | | 68,290 | | |
Depreciation and amortization | | | 15,875 | | | | 15,082 | | | | 13,736 | | |
Total costs and expenses | | | 617,016 | | | | 613,546 | | | | 491,407 | | |
Operating income | | | 74,023 | | | | 83,411 | | | | 54,044 | | |
INTEREST (INCOME) EXPENSE, net | | | (852 | ) | | | (119 | ) | | | 26 | | |
Income before income tax expense | | | 74,875 | | | | 83,530 | | | | 54,018 | | |
INCOME TAX EXPENSE | | | 16,282 | | | | 25,658 | | | | 18,549 | | |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 35,469 | | |
BASIC INCOME PER COMMON SHARE | | $ | 1.98 | | | $ | 1.93 | | | $ | 1.20 | | |
DILUTED INCOME PER COMMON SHARE | | $ | 1.95 | | | $ | 1.90 | | | $ | 1.19 | | |
WEIGHTED AVERAGE SHARES OUTSTANDING: | | | | | | | | | | | | | |
Basic | | | 29,396 | | | | 29,706 | | | | 29,213 | | |
Diluted | | | 29,750 | | | | 30,191 | | | | 29,545 | | |
DIVIDENDS DECLARED PER COMMON SHARE | | $ | 1.00 | | | $ | 0.70 | | | $ | 0.70 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 35,469 | | |
OTHER COMPREHENSIVE INCOME (LOSS): | | | | | | | | | | | | | |
Short term investments: | | | | | | | | | | | | | |
Unrealized gain (loss), net of income tax expense (benefit) of $32, ($63), and ($11), respectively | | | 118 | | | | (116 | ) | | | (21 | ) | |
Comprehensive income | | $ | 58,711 | | | $ | 57,756 | | | $ | 35,448 | | |
The accompanying notes are an integral part of these consolidated financial statements.
40
NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | Common Shares | | | Common Stock | | | Additional Paid-in Capital | | | Treasury Stock | | | Retained Earnings | | | Accumulated Other Comprehensive Loss | | | Total | |
BALANCE, January 1, 2016 | | | 29,621 | | | $ | 29 | | | $ | 41,392 | | | $ | (5,672 | ) | | $ | 34,191 | | | $ | (12 | ) | | $ | 69,928 | |
Net income | | 0 | | | 0 | | | 0 | | | 0 | | | | 35,469 | | | 0 | | | | 35,469 | |
Share-based compensation expense | | 296 | | | 1 | | | | 6,969 | | | 0 | | | 0 | | | 0 | | | | 6,970 | |
Exercise of stock options | | 286 | | | 0 | | | | 2,760 | | | 0 | | | 0 | | | 0 | | | | 2,760 | |
Equity compensation awards, net | | 0 | | | 0 | | | | 2,936 | | | 0 | | | 0 | | | 0 | | | | 2,936 | |
Cash dividends | | 0 | | | 0 | | | 0 | | | 0 | | | | (20,861 | ) | | 0 | | | | (20,861 | ) |
Employee tax withholdings related to the vesting of equity awards | | 0 | | | 0 | | | 0 | | | | (2,657 | ) | | 0 | | | 0 | | | | (2,657 | ) |
Other comprehensive loss, net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | (21 | ) | | | (21 | ) |
BALANCE, December 31, 2016 | | | 30,203 | | | | 30 | | | | 54,057 | | | | (8,329 | ) | | | 48,799 | | | | (33 | ) | | | 94,524 | |
Net income | | 0 | | | 0 | | | 0 | | | 0 | | | | 57,872 | | | 0 | | | | 57,872 | |
Share-based compensation expense | | 306 | | | 1 | | | | 10,922 | | | 0 | | | 0 | | | 0 | | | | 10,923 | |
Exercise of stock options | | 271 | | | 0 | | | | 4,266 | | | 0 | | | 0 | | | 0 | | | | 4,266 | |
Repurchase and retirement of common shares | | | (51 | ) | | 0 | | | 0 | | | 0 | | | | (2,285 | ) | | 0 | | | | (2,285 | ) |
Repurchase of common shares for treasury | | 0 | | | 0 | | | 0 | | | | (3,485 | ) | | 0 | | | 0 | | | | (3,485 | ) |
Cash dividends | | 0 | | | 0 | | | 0 | | | 0 | | | | (21,351 | ) | | 0 | | | | (21,351 | ) |
Employee tax withholdings related to the vesting of equity awards | | 0 | | | 0 | | | 0 | | | | (4,545 | ) | | 0 | | | 0 | | | | (4,545 | ) |
Other comprehensive loss, net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | (116 | ) | | | (116 | ) |
BALANCE, December 31, 2017 | | | 30,729 | | | | 31 | | | | 69,245 | | | | (16,359 | ) | | | 83,035 | | | | (149 | ) | | | 135,803 | |
Impact of change in accounting policy (Note 2) | | 0 | | | 0 | | | | 0 | | | 0 | | | | 1,135 | | | 0 | | | | 1,135 | |
Net income | | 0 | | | 0 | | | 0 | | | 0 | | | | 58,593 | | | 0 | | | | 58,593 | |
Share-based compensation expense | | 329 | | | 0 | | | | 10,304 | | | 0 | | | 0 | | | 0 | | | | 10,304 | |
Exercise of stock options | | 101 | | | 0 | | | | 1,939 | | | 0 | | | 0 | | | 0 | | | | 1,939 | |
Repurchase of common shares for treasury | | 0 | | | 0 | | | 0 | | | | (26,304 | ) | | 0 | | | 0 | | | | (26,304 | ) |
Cash dividends | | 0 | | | 0 | | | 0 | | | 0 | | | | (30,152 | ) | | 0 | | | | (30,152 | ) |
Employee tax withholdings related to the vesting of equity awards | | 0 | | | 0 | | | 0 | | | | (4,920 | ) | | 0 | | | 0 | | | | (4,920 | ) |
Other comprehensive income, net of tax | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | | 118 | | | | 118 | |
BALANCE, December 31, 2018 | | | 31,159 | | | $ | 31 | | | $ | 81,488 | | | $ | (47,583 | ) | | $ | 112,611 | | | $ | (31 | ) | | $ | 146,516 | |
The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 35,469 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 15,875 | | | | 15,082 | | | | 13,736 | | |
Loss on disposal of fixed assets | | | 0 | | | | 0 | | | | 104 | | |
Share–based compensation expense | | | 10,304 | | | | 10,923 | | | | 6,970 | | |
Deferred income tax expense | | | 869 | | | | 3,775 | | | | 448 | | |
Other charges | | | 42 | | | | 34 | | | | 2 | | |
Changes in operating assets and liabilities: | | | | | | | | | | | | | |
Receivables | | | 1,231 | | | | (311 | ) | | | 825 | | |
Inventories | | | (3,489 | ) | | | (5,762 | ) | | | (7,974 | ) | |
Prepaid expenses and other assets | | | (286 | ) | | | (1,895 | ) | | | 76 | | |
Accounts payable | | | 1,609 | | | | 1,916 | | | | (5,356 | ) | |
Accrued payroll and related benefits | | | (10,249 | ) | | | 4,878 | | | | 2,795 | | |
Deferred revenue | | | 1,753 | | | | 509 | | | | 1,864 | | |
Income taxes | | | 3,429 | | | | (6,643 | ) | | | 1,297 | | |
Other accrued expenses and liabilities | | | 231 | | | | (631 | ) | | | 342 | | |
Net cash provided by operating activities | | | 79,912 | | | | 79,747 | | | | 50,598 | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | |
Purchases of short term investments | | | (26,652 | ) | | | (38,479 | ) | | | (19,127 | ) | |
Proceeds from the sale and maturity of short term investments | | | 15,245 | | | | 14,571 | | | | 4,537 | | |
Capital additions | | | (11,481 | ) | | | (13,408 | ) | | | (14,756 | ) | |
Net cash used in investing activities | | | (22,888 | ) | | | (37,316 | ) | | | (29,346 | ) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | |
Exercise of stock options | | | 1,939 | | | | 4,266 | | | | 2,760 | | |
Employee tax withholdings related to the vesting of equity awards | | | (4,920 | ) | | | (4,545 | ) | | | (2,657 | ) | |
Excess tax benefits from share-based compensation | | | 0 | | | | 0 | | | | 2,938 | | |
Repurchase of common shares for treasury | | | (26,304 | ) | | | (3,485 | ) | | | 0 | | |
Repurchase and retirement of common shares | | | 0 | | | | (2,285 | ) | | | 0 | | |
Payment of dividends | | | (30,152 | ) | | | (21,351 | ) | | | (20,861 | ) | |
Net cash used in financing activities | | | (59,437 | ) | | | (27,400 | ) | | | (17,820 | ) | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | (2,413 | ) | | | 15,031 | | | | 3,432 | | |
CASH AND CASH EQUIVALENTS, beginning of year | | | 24,654 | | | | 9,623 | | | | 6,191 | | |
CASH AND CASH EQUIVALENTS, end of year | | $ | 22,241 | | | $ | 24,654 | | | $ | 9,623 | | |
The accompanying notes are an integral part of these consolidated financial statements.
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NUTRISYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
Nature of the Business
Nutrisystem, Inc. (the “Company” or “Nutrisystem”) is a provider of weight management products and services, including nutritionally balanced weight loss programs sold primarily online and over the telephone and multi-day kits and single items available at select retail locations. The weight loss programs are designed for women and men. The Nutrisystem® programs are based on over 45 years of nutrition research. The Company’s pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the redemption of prepaid gift cards), referred to as the direct channel, through QVC, a television shopping network, and select retailers. Approximately 99% of revenue for each of the years ended December 31, 2018, 2017 and 2016 was generated in the United States.
In December 2018, the Company entered into an agreement and plan of merger (the “Merger Agreement”) with Tivity Health, Inc. (“Tivity Health”). Under the terms of the Merger Agreement, Nutrisystem will become a wholly-owned subsidiary of Tivity Health (the “Merger”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of Nutrisystem common stock (“Nutrisystem Shares”) issued and outstanding immediately prior to the Effective Time (other than shares as to which dissenter’s rights have been properly exercised and certain other excluded shares) will be converted into the right to receive (i) $38.75 in cash, without interest, and (ii) 0.2141 shares of common stock, par value $0.001 per share, of Tivity Health (“Tivity Health Shares”), with cash payable in lieu of fractional Tivity Health Shares.
Completion of the Merger is subject to certain customary closing conditions, including, without limitation (1) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding Nutrisystem Shares entitled to vote thereon at a meeting duly called and held for such purpose, (2) absence of any order or law that has the effect of enjoining or otherwise prohibiting the completion of the Merger and (3) the absence of a material adverse effect with respect to the other party. The Merger is expected to close in the first quarter of 2019.
The Company and Tivity Health have made customary representations and warranties in the Merger Agreement. The Merger Agreement also contains customary covenants and agreements, including covenants and agreements relating to (a) the conduct of each of the Company’s and Tivity Health’s respective businesses between the date of the signing of the Merger Agreement and the consummation of the Merger, and (b) the efforts of the parties to cause the Merger to be completed.
The Merger Agreement also provides that under specified circumstances, including a termination by the Company to enter into a definitive agreement for an acquisition proposal that constitutes a superior proposal or a termination by Tivity Health as a result of the Company’s Board of Directors changing its recommendation with respect to the Merger Agreement, the Company will pay Tivity Health a termination fee of $45,000. In 2018, the Company incurred $2,795 in transaction costs related to the Merger with Tivity Health, which are recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations.
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.
Cash, 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 December 31, 2018 and 2017, 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 between three months and three years. 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 loss, a component of stockholders’ equity, net of related tax effects.
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The Company evaluates its investments for other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of the market value. There were no other-than-temporary impairments in 2018, 2017 or 2016.
Inventories
Inventories consist principally of packaged food held in outside fulfillment locations. Inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out method. Quantities of inventory on hand are continually assessed to identify excess or obsolete inventory and a provision is recorded for any estimated loss. The reserve is estimated for excess and obsolete inventory based primarily on forecasted demand and/or the Company’s ability to sell the products, introduction of new products, future production requirements and changes in customers’ behavior. The reserve for excess and obsolete inventory was $1,414 and $1,945 at December 31, 2018 and 2017, respectively.
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 $13,094 and $16,419 at December 31, 2018 and December 31, 2017, respectively.
During 2016, the Company determined certain software licenses were no longer expected to be used as more enhanced software options were available to handle its evolving business needs and a charge of $1,297 was recorded to write-down these assets. The charge was recorded as depreciation and amortization in the accompanying consolidated statement of operations.
Intangible Assets
Intangible assets consist of a trade name from the acquisition of the South Beach Diet (“SBD”) brand in December 2015 and domain names (see Note 6). The trade name is presented at cost, net of accumulated amortization, and is amortized on a straight-line basis over its estimated useful life. The domain names have indefinite lives and are not being amortized but are reviewed for impairment on an annual basis.
Long-Lived Assets
The Company continually evaluates whether events or circumstances have occurred that would indicate that the remaining estimated useful lives of long-lived assets may warrant revision or that the remaining balance may not be recoverable. Long-lived assets are evaluated for indicators of impairment. When factors indicate that long-lived assets should be evaluated for possible impairment, an estimate of the related undiscounted cash flows over the remaining life of the long-lived assets is used to measure recoverability. If any impairment is indicated, measurement of the impairment will be based on the difference between the carrying value and fair value of the asset, generally determined based on the present value of expected future cash flows associated with the use of the asset. As of December 31, 2018, management believes that no reductions to the remaining useful lives or write-downs of long-lived assets are required.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective method by recognizing the cumulative effect as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. While the adoption of this standard did not have a material impact on the Company’s consolidated financial statements and footnote disclosures, it did have an impact on the timing of revenue recognized in accounting for gift cards as presented in the consolidated statement of operations for 2018. In accordance with the new standard, the Company is recognizing the estimated breakage of gift cards (estimated amount of unused gift cards) over the pattern of redemption of the gift cards. Prior to adopting ASC 606, the Company recognized gift card breakage when the likelihood of redemption became remote. The Company also is recognizing direct-mail advertising costs to expense as incurred. Prior to adopting ASC 606, the Company capitalized these costs and expensed them over the period of benefit. Additionally, the Company is recognizing an asset for
44
the carrying amount of product to be returned and for costs to obtain a contract if the amortization period is more than one year in duration. The Company is applying the practical expedient to expense costs to obtain a contract as incurred if the amortization period is less than one year. Prior to adopting ASC 606, the value of product expected to be returned was presented net as a reduction of the related reserve for returns and costs to obtain a contract were expensed as incurred.
Revenue is measured based on the consideration specified in a contract with a customer and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue producing transaction, and that are collected by the Company from a customer, are excluded from revenue and presented on a net basis.
Shipping and handling costs associated with outbound freight, after control over a product has transferred to a customer, are accounted for as a fulfillment cost and are included in revenue and cost of revenue in the accompanying consolidated statements of operations. Revenue from shipping and handling charges was $16,179, $7,295 and $2,869 in 2018, 2017 and 2016, respectively. The increase in shipping and handling was due primarily to an increased handling charge paid by customers.
The Company’s pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone, referred to as the direct channel, through QVC, a television shopping network, and select retailers. Pre-packaged foods are comprised of both frozen and non-frozen (ready-to-go) products.
Products sold through the direct channel, both frozen and non-frozen, may be sold separately (a la carte) or as part of a packaged monthly meal plan which customers pay for at the point of sale. Products sold through QVC are payable by QVC upon satisfaction of the performance obligation. Revenue is recognized at a point in time. Direct to consumer customers may return unopened ready-to-go products within 30 days of purchase in order to receive a refund or credit. Frozen products are nonreturnable and non-refundable unless the order is canceled within 14 days of delivery. The Company recognizes revenue at the shipping point.
Products sold to retailers include both frozen and non-frozen products and are payable by the retailer upon satisfaction of the performance obligation. Revenue is recognized at a point in time. Certain retailers have the right to return unsold products. The Company recognizes revenue when the retailers take possession of the product.
The Company accounts for the shipment of frozen and non-frozen products as separate performance obligations. The consideration, including variable consideration for product returns, are allocated between frozen and non-frozen products based on their stand-alone selling prices. The amount of revenue recognized is adjusted for expected returns, which are estimated based on historical data.
In addition to its pre-packaged foods, the Company sells prepaid gift cards through a wholesaler that are redeemable through the Internet or telephone. Prepaid gift cards represent grants of rights to goods to be provided in the future to retail customers. The wholesaler has the right to return all unsold prepaid gift cards. The retail selling price of the gift cards is deferred in the balance sheets and recognized as revenue when the Company has satisfied its performance obligation when the retail customer redeems the gift card. The Company recognizes breakage amounts as revenue, in proportion to the actual gift card redemptions exercised by the retail customer in relation to the total expected redemptions of gift cards. The Company utilizes historical experience in estimating the total expected breakage and period over which the gift cards will be redeemed.
In the following table, revenue is disaggregated by the source of revenue:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Direct | | $ | 638,304 | | | $ | 642,959 | | | $ | 498,171 | |
Retail | | | 36,735 | | | | 38,658 | | | | 33,423 | |
QVC | | | 15,624 | | | | 14,950 | | | | 13,494 | |
Other | | | 376 | | | | 390 | | | | 363 | |
| | $ | 691,039 | | | $ | 696,957 | | | $ | 545,451 | |
The Company applied ASC 606 using the cumulative effect method and the comparative information for the prior years have not been adjusted and continue to be reported under ASC 605, “Revenue Recognition.”
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The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
| | December 31, 2018 | | | January 1, 2018 | |
| | | | | | As Adjusted | |
Receivables | | $ | 16,640 | | | $ | 17,871 | |
Contract assets | | $ | 207 | | | $ | 279 | |
Contract liabilities | | $ | 8,407 | | | $ | 6,654 | |
Receivables primarily relate to the timing of credit card receivables and sales to retailers. The contract assets primarily relate to unbilled accounts receivable and are included as prepaid expenses and other current assets in the accompanying consolidated balance sheet. The contract liabilities (deferred revenue) primarily relate to sale of prepaid gift cards and unshipped foods, which are deferred until such time as the Company has satisfied its performance obligations.
Significant changes in the contract liabilities (deferred revenue) balance during 2018 is as follows:
| | | | Year Ended December 31, 2018 | |
Revenue recognized that was included in the contract liability (deferred revenue) balance at January 1, 2018 | | $ | (5,191 | ) |
Increases due to cash received for prepaid gift cards sold or unshipped food, excluding amounts recognized as revenue | | $ | 6,944 | |
The following table includes estimated revenue from the prepaid gift cards expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at December 31, 2018:
2019 | | $ | 4,894 | |
2020 | | | 896 | |
2021 | | | 500 | |
2022 | | | 250 | |
| | $ | 6,540 | |
The Company applies the practical expedient in subtopic ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
The following table summarizes the impacts of adopting ASC 606 on the Company’s consolidated financials for 2018:
| Year Ended December 31, 2018 | |
| As Reported | | | Adjustments | | | Amounts without Adoption of ASC 606 | |
Statement of Operations | | | | | | | | | | | |
Revenue | $ | 691,039 | | | $ | 254 | | | $ | 690,785 | |
Income tax expense | $ | 16,282 | | | $ | 50 | | | $ | 16,232 | |
Net income | $ | 58,593 | | | $ | 204 | | | $ | 58,389 | |
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| | December 31, 2018 | |
| | As Reported | | | Adjustments | | | Amounts without Adoption of ASC 606 | |
Balance Sheet | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | |
Prepaid income taxes | | $ | 2,942 | | | $ | 382 | | | $ | 3,324 | |
Prepaid expenses and other current assets | | $ | 12,180 | | | $ | (103 | ) | | $ | 12,077 | |
| | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | |
Deferred revenue | | $ | 8,407 | | | $ | (1,677 | ) | | $ | 10,084 | |
Other accrued expenses and current liabilities | | $ | 5,636 | | | $ | 59 | | | $ | 5,577 | |
| | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | |
Retained earnings | | $ | 112,611 | | | $ | 1,339 | | | $ | 111,272 | |
| | | | | | | | | | | | |
| | Year Ended December 31, 2018 | |
| | As Reported | | | Adjustments | | | Amounts without Adoption of ASC 606 | |
Statement of Cash Flows | | | | | | | | | | | | |
Net income | | $ | 58,593 | | | $ | 204 | | | $ | 58,389 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Prepaid expenses and other assets | | $ | (286 | ) | | $ | 27 | | | $ | (313 | ) |
Deferred revenue | | $ | 1,753 | | | $ | (340 | ) | | $ | 2,093 | |
Income taxes | | $ | 3,429 | | | $ | 50 | | | $ | 3,379 | |
Other accrued expenses and liabilities | | $ | 231 | | | $ | 59 | | | $ | 172 | |
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.
Cost of Revenue
Cost of revenue consists primarily of the cost of the products sold, including compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders.
Dependence on Suppliers
In 2018, approximately 10% and 6% of inventory purchases were from two suppliers. In 2017, these suppliers provided approximately 12% and 8% of inventory purchases, and in 2016, they provided approximately 11% of inventory purchases each (see Note 8).
The Company outsources 100% of its fulfillment operations to a third-party provider. Additionally, more than 97% of its direct to consumer orders are shipped by one third-party provider and more than 97% of its orders for the retail programs are shipped by another third-party provider.
Supplier Rebates
Two of the Company’s suppliers provide for rebates based on purchasing levels. The Company accounts for these rebates 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. For the years ended December 31, 2018, 2017 and 2016, the Company reduced cost of revenue for these rebates by $346, $486 and $75, respectively. A receivable of $453 was recorded at December 31, 2018. No receivable was recorded at December 31, 2017.
Marketing Expense
Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-related expenses, including share-based payment arrangements, for personnel engaged in these activities. Media expense was $177,981, $177,387 and $130,451 in 2018, 2017 and 2016, respectively. Internet advertising expense is recorded based on either the rate of delivery of a
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guaranteed number of impressions over the advertising contract term or on a cost per customer acquired, depending upon the terms. All other advertising costs are charged to expense as incurred or the first time the advertising takes place. Prior to adopting ASC 606, we capitalized direct-mail advertising costs and expensed such costs over the period of benefit. At December 31, 2018 and 2017, $3,861 and $3,426, respectively, of costs have been prepaid for future advertisements and promotions.
Selling, General and Administrative Expense
Selling, general and administrative expense consists of compensation for administrative, information technology, call center and sales personnel, share-based payment arrangements for related employees, facility expenses, website development costs, professional service fees and other general corporate expenses.
Lease Related Expenses
Certain of the Company’s lease contracts contain rent holidays, various escalation clauses or landlord/tenant incentives.
The Company records rental costs, including costs related to fixed rent escalation clauses and rent holidays, on a straight-line basis over the lease term. Lease allowances utilized for space improvement are recorded as leasehold improvement assets and amortized over the shorter of the economic useful life of the asset or the lease term. Tenant lease incentive allowances received are recorded as deferred rent and amortized as reductions to rent expense over the lease term. Included in the accompanying consolidated balance sheet is $1,231 of a tenant improvement allowance at December 31, 2018, of which $345 is included in other accrued expenses and current liabilities and $886 in non-current liabilities. At December 31, 2017, the tenant improvement allowance was $1,576, of which $345 was included in other accrued expenses and current liabilities and $1,231 in non-current liabilities.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the period that includes the enactment date. In assessing the ability to realize deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
A tax benefit from an uncertain tax position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority having full knowledge of all relevant information. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest (income) expense, net.
Segment Information
The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales.
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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:
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | |
Net income | | $ | 58,593 | | | $ | 57,872 | | | $ | 35,469 | | |
Net income allocated to unvested restricted stock | | | (469 | ) | | | (487 | ) | | | (294 | ) | |
Net income allocated to common shares | | $ | 58,124 | | | $ | 57,385 | | | $ | 35,175 | | |
Weighted average shares outstanding: | | | | | | | | | | | | | |
Basic | | | 29,396 | | | | 29,706 | | | | 29,213 | | |
Effect of dilutive securities | | | 354 | | | | 485 | | | | 332 | | |
Diluted | | | 29,750 | | | | 30,191 | | | | 29,545 | | |
| | | | | | | | | | | | | |
Basic income per common share | | $ | 1.98 | | | $ | 1.93 | | | $ | 1.20 | | |
Diluted income per common share | | $ | 1.95 | | | $ | 1.90 | | | $ | 1.19 | | |
In 2018, 2017 and 2016, common stock equivalents representing 170, 146 and 335 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 for such common stock equivalents have not yet been met.
Share-Based Payment Awards
The cost of all share-based awards to employees and non-employees, including grants of stock options, restricted stock and restricted stock units, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock and performance-based restricted stock unit awards is equal to the market price of the Company’s common stock on the date of grant.
The fair value of share-based awards is recognized over the requisite service period, net of estimated forfeitures. The Company relies primarily upon historical experience to estimate expected forfeitures and recognizes compensation expense on a straight-line basis from the date of grant over the requisite service period except for performance-based units which are recognized on a straight-line basis based on the probable expected performance to be achieved and adjusted accordingly if performance varies. The Company issues new shares upon exercise of stock options, granting of restricted stock or vesting of restricted stock units.
Cash Flow Information
The Company made payments for income taxes of $11,077, $28,547 and $14,175 in 2018, 2017 and 2016, respectively. Interest payments in 2018, 2017 and 2016 were $174, $210 and $171, respectively. As of December 31, 2018, 2017 and 2016, the Company had non-cash capital additions of $102, $128 and $548, respectively, consisting of unpaid invoices in accounts payable and other accrued expenses and current liabilities.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 superseded most 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 requires 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 was effective for annual periods beginning on or after December 15, 2017, including interim
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reporting periods within that reporting period and was applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application.
The Company adopted ASC 606, “Revenue from Contracts with Customers,” on January 1, 2018 using the modified retrospective method by recognizing the cumulative effect as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. Therefore, the comparative information for periods ended prior to January 1, 2018 was not restated. The Company applied the transition practical expedient to only assess contracts that were not completed contracts at the date of initial application when applying the cumulative effect method. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements and footnote disclosures. The cumulative impact of adopting ASC 606 on January 1, 2018 was an increase in stockholders’ equity of $1,135.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. In July 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements to ASC 842,” which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842 as the date of initial application of transition. The Company plans to adopt the standard effective January 1, 2019 using the transition option provided under ASU No. 2018-11 and anticipates applying the package of practical expedients included therein and the use of hindsight. The Company also expects to elect the short-term lease recognition exemption for all leases that qualify. The Company believes the most significant impact relates to fulfillment warehouse agreements and its real estate operating lease. The Company anticipates the recognition of a right-of-use asset of approximately $18,000 to $20,000 and a lease liability of approximately $21,000 to $23,000 related to leases upon adoption. The Company is in the process of implementing changes to its systems, processes and controls to account for its leases in accordance with the new standard. The Company is continuing its assessment of potential changes to its disclosures under the ASU.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The Company adopted this standard in the first quarter of 2017 and recognized an excess tax benefit from share-based compensation of $1,879 and $5,491 for 2018 and 2017, respectively, within income tax expense on the accompanying consolidated statements of operations as opposed to being recognized in additional paid-in capital under previous accounting guidance. The amount recognized in additional paid-in capital was $2,936 for the year ended December 31, 2016. In addition, the excess tax benefits from share-based compensation are now classified as operating cash flows on the consolidated statements of cash flows instead of being separately stated in the financing activities for the years ended December 31, 2018 and 2017. The year ended December 31, 2016 has not been restated. The Company has elected to continue to estimate expected forfeitures.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies and provides guidance on eight cash flow classification issues and is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This standard was effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements and footnote disclosures.
In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting. This standard was effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this new accounting standard did not have a material impact on the Company’s consolidated financial statements and footnote disclosures.
In June 2018, the FASB issued ASU No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting,” which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. This standard is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The adoption of this new accounting standard is not expected to have a material impact on the Company’s consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,” which requires implementation costs incurred by customers in cloud computing
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arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement. This standard is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of this new accounting standard is not expected to have a material impact on the Company’s consolidated financial statements and footnote disclosures.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles 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.
3.CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
At December 31, 2018, cash, cash equivalents and short term investments consisted of the following:
| | | | | | Gross | | | Gross | | | | | |
| | | | | | Unrealized | | | Unrealized | | | Estimated | |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
Cash | | $ | 20,329 | | | $ | 0 | | | $ | 0 | | | $ | 20,329 | |
Money market funds | | | 1,912 | | | | 0 | | | | 0 | | | | 1,912 | |
Government and agency securities | | | 52,096 | | | | 192 | | | | (275 | ) | | | 52,013 | |
Corporate debt securities | | | 7,066 | | | | 37 | | | | (33 | ) | | | 7,070 | |
| | $ | 81,403 | | | $ | 229 | | | $ | (308 | ) | | $ | 81,324 | |
At December 31, 2017, cash, cash equivalents and short term investments consisted of the following:
| | | | | | Gross | | | Gross | | | | | |
| | | | | | Unrealized | | | Unrealized | | | Estimated | |
| | Cost | | | Gains | | | Losses | | | Fair Value | |
Cash | | $ | 24,454 | | | $ | 0 | | | $ | 0 | | | $ | 24,454 | |
Money market funds | | | 200 | | | | 0 | | | | 0 | | | | 200 | |
Government and agency securities | | | 42,220 | | | | 135 | | | | (355 | ) | | | 42,000 | |
Corporate debt securities | | | 5,577 | | | | 28 | | | | (37 | ) | | | 5,568 | |
| | $ | 72,451 | | | $ | 163 | | | $ | (392 | ) | | $ | 72,222 | |
4. | FAIR VALUE MEASUREMENTS |
A three-tier fair value hierarchy has been established by the 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 December 31, 2018 and 2017.
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The following table summarizes the Company’s financial assets measured at fair value at December 31, 2018:
| | Total Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | |
Money market funds | | $ | 1,912 | | | $ | 1,912 | |
Government and agency securities | | | 52,013 | | | | 52,013 | |
Corporate debt securities | | | 7,070 | | | | 7,070 | |
Total assets | | $ | 60,995 | | | $ | 60,995 | |
The following table summarizes the Company’s financial assets measured at fair value at December 31, 2017:
| | Total Fair Value | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | |
Money market funds | | $ | 200 | | | $ | 200 | |
Government and agency securities | | | 42,000 | | | | 42,000 | |
Corporate debt securities | | | 5,568 | | | | 5,568 | |
Total assets | | $ | 47,768 | | | $ | 47,768 | |
Fixed assets consist of the following:
| | December 31, | |
| | 2018 | | | 2017 | |
Furniture and fixtures | | $ | 2,779 | | | $ | 3,106 | |
Computer hardware and software | | | 72,057 | | | | 69,865 | |
Equipment | | | 10,215 | | | | 7,515 | |
Leasehold improvements | | | 12,934 | | | | 12,661 | |
| | | 97,985 | | | | 93,147 | |
Accumulated depreciation | | | (69,856 | ) | | | (61,598 | ) |
| | $ | 28,129 | | | $ | 31,549 | |
Depreciation and amortization expense related to fixed assets was $14,875, $14,082 and $12,736 in 2018, 2017 and 2016, respectively.
6. INTANGIBLE ASSETS
On December 17, 2015, the Company acquired the South Beach Diet (“SBD”) brand for a cash payment of $15,000. The acquisition was financed with existing cash.
The Company developed the South Beach Diet® meal programs, products, and services in 2016 and launched a structured meal delivery weight-loss program as a distinct brand in 2017. The acquisition provides consumers with additional choices and enables the Company the ability to capture a greater share of the commercial weight loss market as it further leverages its expertise in product development, marketing, ecommerce, supply chain logistics and retail.
The allocation of the purchase price was to the SBD trade name and is being amortized on a straight-line basis over a period of 15 years.
The following table summarizes the Company’s identifiable intangible assets:
| | December 31, 2018 | | | December 31, 2017 | |
| | Gross | | | | | | | Net | | | Gross | | | | | | | Net | |
| | Carrying | | | Accumulated | | | Carrying | | | Carrying | | | Accumulated | | | Carrying | |
| | Amount | | | Amortization | | | Amount | | | Amount | | | Amortization | | | Amount | |
Trade name | | $ | 15,000 | | | $ | (3,000 | ) | | $ | 12,000 | | | $ | 15,000 | | | $ | (2,000 | ) | | $ | 13,000 | |
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Amortization expense for intangible assets was $1,000 for each of 2018, 2017 and 2016. Estimated amortization expense for identifiable intangible assets for the next five years is expected to be as follows:
2019 | | $ | 1,000 | |
2020 | | | 1,000 | |
2021 | | | 1,000 | |
2022 | | | 1,000 | |
2023 | | | 1,000 | |
Additionally, the Company has $84 of domain names acquired in previous years with indefinite lives that are not being amortized.
On November 6, 2015, the Company entered into an Amended and Restated Credit Agreement that provides for a $50,000 unsecured revolving credit facility (the “Credit Facility”) with a lender. The Credit Facility can be drawn upon through November 6, 2020, at which time all amounts must be repaid. There were no borrowings outstanding at December 31, 2018 or December 31, 2017.
The Credit Facility provides for interest at either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate will be the highest of (i) the Administrative Agent’s prime rate, (ii) 0.50% above the Federal Funds Rate and (iii) the LIBOR rate for deposits in dollars for a one-month interest period as determined three business days prior to such date, plus 1.50%. The LIBOR rate is equal to the London Inter-Bank Offered Rate for the relevant term. The applicable margin is subject to adjustment based on the Company’s consolidated fixed charge coverage ratio and ranges from 0.00-0.50% per year for base rate loans and from 1.25-1.75% per year for LIBOR rate loans. The Company also pays an unused line fee. The unused line fee is 0.25% of the total available credit. The Company had no borrowings and incurred no interest expense during 2018, 2017 and 2016. During each of 2018, 2017 and 2016, the Company incurred $127 in an unused line fee under the Credit Facility. Interest payments and unused line fees are classified within interest (income) expense, net in the accompanying consolidated statements of operations.
The Credit Facility contains financial and other covenants including a minimum consolidated fixed charge coverage ratio (applicable if there are outstanding borrowings), and limitations on, among other things, liens, indebtedness, certain acquisitions, consolidations and sales of assets. As of December 31, 2018, the Company was in compliance with all covenants contained in the Credit Facility.
At December 31, 2018, the Company had $9 of unamortized debt issuance costs associated with the Credit Facility that are being amortized over its remaining term.
8. | COMMITMENTS AND CONTINGENCIES |
Operating Leases
The Company leases its corporate headquarters and certain equipment. These leases generally have initial terms of one to 12 years and have renewal options for additional periods. The Company also has certain lease rights and obligations related to its warehouse space included in its fulfillment agreements. Certain of the leases contain escalation clauses based upon increases in costs related to the properties. Lease obligations, including those within the fulfillment agreements, with initial or remaining terms of one or more years, consist of the following at December 31, 2018:
2019 | | $ | 6,026 | |
2020 | | | 5,600 | |
2021 | | | 5,376 | |
2022 | | | 3,523 | |
2023 | | | 503 | |
| | $ | 21,028 | |
Total rent expense, including amounts related to warehouse space included in fulfillment agreements, for 2018, 2017 and 2016 was $5,830, $5,514 and $4,787, respectively.
Litigation
As of February 20, 2019, six putative class action complaints have been filed by purported Nutrisystem stockholders challenging the Merger with Tivity Health in the United States District Court for the District of Delaware. The complaints are captioned Klein v. Nutrisystem, Inc. et al., Docket No. 1:19-cv-00056 (filed January 9, 2019), Shaev v. Nutrisystem, Inc. et al, Docket No. 1:19-cv-
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00063 (filed January 10, 2019), Vladimir Gusinsky Rev. Trust v. Nutrisystem, Inc., Docket No. 1:19-cv-00069 (filed January 10, 2019), Frechter v. Nutrisystem, Inc., et al, Docket No. 1:19-cv-00087 (filed January 16, 2019), Walton v. Nutrisystem, Inc. et al, Docket No. 1:19-cv-00112 (filed January 19, 2019), and Haines v. Nutrisystem, Inc., et al, Docket No. 1:19-cv-00137 (filed January 24, 2019). The complaints name as defendants each member of Nutrisystem’s Board of Directors and Nutrisystem itself and, in the case of the Klein and Gusinsky complaints, Tivity Health and Sweet Acquisition, Inc. The complaints allege, among other things, that statements made in the registration statement filed by Tivity Health on January 7, 2019 were materially incomplete and misleading and violated Sections 14(a) and 20(a) of the Exchange Act. In addition, the complaints generally allege that the Merger undervalues Nutrisystem, that the process leading up to the execution of the Merger Agreement was flawed, and that certain provisions of the Merger Agreement improperly favor Tivity Health and improperly impede a potential alternative transaction. Among other remedies, the complaints seek equitable relief rescinding the Merger Agreement and enjoining the defendants from completing the Merger, as well as recovery of litigation costs and attorneys’ fees. Nutrisystem believes that the claims asserted in the actions are without merit and no supplemental disclosure is required under applicable law. However, in order to avoid the risk of adverse effect or delay in connection with these actions and to minimize the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, Nutrisystem voluntarily supplemented its proxy statement as described in a Current Report on Form 8-K filed on February 22, 2019, and the plaintiffs in these actions have agreed to voluntarily dismiss their lawsuits in light of this supplemental disclosure.
The Company is also involved in various other claims and routine litigation matters that arise in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows in future years and management believes the range of reasonably possible losses from current matters is immaterial.
Contractual Commitments
The Company’s principal commitments consist of obligations under agreements with suppliers, an agreement with its outside fulfillment provider, agreements with its Internet and networking providers, operating leases and employment contracts. These agreements may provide for annual pricing, annual purchase obligations, exclusivity in the production of certain products, as well as rebates if certain volume thresholds are exceeded, with terms of one to twelve years for the operating leases and five years or less for the other agreements. The Company has total purchase obligations of $12,835 as of December 31, 2018. The Company anticipates it will meet all annual purchase obligations outstanding at December 31, 2018.
Common Stock
In 2018, the Company issued 101 shares of common stock upon the exercise of stock options and received proceeds of $1,939. During 2018, employees surrendered to the Company 109 shares of common stock valued at $4,920 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2018, the Company issued 33 shares of common stock as compensation to board members. During each of the four quarters of 2018, the Company paid a dividend of $0.25 per share to all stockholders of record. As provided in the Merger Agreement with Tivity Health, the Company has agreed not to declare or pay any dividends to its stockholders from the date of the Merger Agreement until the effective time of the Merger.
In 2017, the Company issued 271 shares of common stock upon the exercise of stock options and received proceeds of $4,266. During 2017, employees surrendered to the Company 90 shares of common stock valued at $4,545 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Additionally, during 2017, employees surrendered to the Company 22 shares of common stock valued at $785, also in satisfaction of tax withholding obligations associated with the vesting of equity awards, which were retired. Also, in 2017, the Company issued 14 shares of common stock as compensation to board members. During each of the four quarters of 2017, the Company paid a dividend of $0.175 per share to all stockholders of record.
In 2016, the Company issued 286 shares of common stock upon the exercise of stock options and received proceeds of $2,760. During 2016, employees surrendered to the Company 128 shares of common stock valued at $2,657 in satisfaction of tax withholding obligations associated with the vesting of equity awards. These shares are included in treasury stock. Also, in 2016, the Company issued 27 shares of common stock as compensation to board members. During each of the four quarters of 2016, the Company paid a dividend of $0.175 per share to all stockholders of record.
The Company had a share repurchase program to repurchase up to $50,000 of its outstanding shares of common stock that expired on November 3, 2017. On October 25, 2017, the Company announced that its Board of Directors had authorized a new share repurchase program to replace that expiring program. Under the terms of the new share repurchase program, the Company could repurchase up to
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$50,000 of its outstanding shares of common stock over a 24-month period commencing November 4, 2017. On October 30, 2018, the Company announced it was terminating the existing $50,000 share repurchase program and replacing it with a new share repurchase program to repurchase up to $75,000 of its outstanding shares over a 24-month period commencing on October 30, 2018. The timing, number and amount of any shares repurchased will be determined by the Company at its discretion and will be based on a number of factors including its evaluation of general market and economic conditions, the trading price of the common stock, regulatory requirements and compliance with the terms of the Company’s outstanding indebtedness. The share repurchase program may be suspended or discontinued at any time without prior notice. During 2018, the Company purchased and placed in treasury 839 shares of common stock under these programs for an aggregate cost of $26,304. During 2017, the Company purchased and subsequently retired 29 shares of common stock for an aggregate cost of $1,500. Additionally, the Company purchased and placed in treasury 72 shares of common stock for an aggregate cost of $3,485. As of December 31, 2018, the October 2018 program had $75,000 available to repurchase the Company’s outstanding shares of common stock. As provided in the Merger Agreement with Tivity Health, the Company has agreed to not repurchase any additional shares of our common stock under these programs from the date of the Merger Agreement until the effective time of the Merger.
Preferred Stock
The Company has authorized 5,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law, the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of delaying, averting or preventing a change in control of the Company.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act includes a number of changes to U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Other changes include the acceleration of depreciation for certain assets placed into service after September 27, 2017 as well as, changes beginning in 2018 including additional limitations on executive compensation.
Income tax expense consists of the following:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Current: | | | | | | | | | | | | |
Federal | | $ | 14,510 | | | $ | 20,930 | | | $ | 17,562 | |
State | | | 903 | | | | 953 | | | | 539 | |
| | | 15,413 | | | | 21,883 | | | | 18,101 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 638 | | | | 2,794 | | | | 509 | |
State | | | 231 | | | | 981 | | | | (61 | ) |
| | | 869 | | | | 3,775 | | | | 448 | |
| | $ | 16,282 | | | $ | 25,658 | | | $ | 18,549 | |
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A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Statutory federal income tax rate | | | 21.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes, net of federal benefit | | | 1.2 | | | | 0.7 | | | | 0.6 | |
Executive compensation limitation | | | 0.7 | | | | 0.3 | | | | 0.1 | |
Stock-based compensation | | | (2.3 | ) | | | (6.4 | ) | | | 0 | |
Food donations | | | (0.7 | ) | | | (1.1 | ) | | | (1.1 | ) |
Changes in reserves | | | 1.4 | | | | 0 | | | | (0.1 | ) |
Tax credits | | | 0.1 | | | | (0.2 | ) | | | (0.2 | ) |
Expired charitable contribution carryover | | | 0 | | | | 0.8 | | | | 0 | |
Rate change due to tax reform | | | (0.2 | ) | | | 1.0 | | | | 0 | |
Transaction costs | | | 0.6 | | | | 0 | | | | 0 | |
Valuation allowance | | | 0 | | | | 0.8 | | | | 0 | |
Other | | | (0.1 | ) | | | (0.2 | ) | | | 0 | |
| | | 21.7 | % | | | 30.7 | % | | | 34.3 | % |
The change in the effective tax rate for 2017 to 2018 was due primarily to the lower corporate income tax rate partially offset by a lower excess tax benefit from share-based compensation. The change in the effective tax rate from 2016 to 2017 was due primarily to the adoption of ASU No. 2016-09 as of January 1, 2017 partially offset by a charge recorded to write-down the net deferred asset due to the enactment of the Tax Act. The Company recognized an excess tax benefit from share-based compensation of $1,879 and $5,491 in 2018 and 2017, respectively, within income tax expense in the accompanying consolidated statements of operations rather than as additional paid-in capital in the consolidated balance sheet under previous accounting guidance. This benefit was partially offset by a charge of $836 in 2017 to write-down the net deferred tax asset to reflect the reduction of the future federal corporate income tax rate from 35% to 21%.
The significant items comprising the Company’s deferred income tax assets and liabilities are as follows:
| | December 31, | |
| | 2018 | | | 2017 | |
Deferred tax assets: | | | | | | | | |
Reserves and accruals | | $ | 619 | | | $ | 979 | |
Goodwill/Intangible assets | | | 336 | | | | 396 | |
Net operating loss carryforwards | | | 2,075 | | | | 2,074 | |
Stock-based compensation | | | 2,349 | | | | 2,437 | |
Charitable contribution carryforward | | | 0 | | | | 122 | |
Other | | | 552 | | | | 608 | |
| | | 5,931 | | | | 6,616 | |
Valuation allowance | | | (829 | ) | | | (817 | ) |
| | | 5,102 | | | | 5,799 | |
Deferred tax liability: | | | | | | | | |
Property and equipment | | | (2,322 | ) | | | (2,597 | ) |
Prepaid expenses | | | (741 | ) | | | 0 | |
Net deferred tax asset | | $ | 2,039 | | | $ | 3,202 | |
At December 31, 2018 and 2017, the Company had net operating loss carryforwards of approximately $27,498 and $27,948, respectively, for state tax purposes. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can be utilized in a given year to offset state taxable income. The net operating losses will begin to expire in 2025.
56
In 2017, the Company recorded a valuation allowance of $817 as certain state net operating loss carryforwards might not be realized due to changes in tax legislation. Based on the projected level of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the remaining net deferred tax assets. An analysis of the activity of the valuation allowance is as follows:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Balance at beginning of year | | $ | 817 | | | $ | 0 | | | $ | 0 | |
Additions charged to expense | | | 12 | | | | 817 | | | | 0 | |
Deductions | | | 0 | | | | 0 | | | | 0 | |
Balance at end of year | | $ | 829 | | | $ | 817 | | | $ | 0 | |
The total amount of gross unrecognized tax benefits as of December 31, 2018, 2017 and 2016 was $1,203, $131 and $168, respectively. Certain of the unrecognized tax benefits reduce deferred income taxes in the consolidated balance sheets and include $298, $131 and $168 as of December 31, 2018, 2017 and 2016, respectively. The total amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate is approximately $1,183, $103 and $109 as of December 31, 2018, 2017 and 2016, respectively. The Company records accrued interest and penalties related to unrecognized tax benefits as part of interest (income) expense, net. No interest expense was recognized during 2018, 2017 and 2016. The Company’s federal income tax returns for 2015 through 2018 are open and are subject to examination by the Internal Revenue Service. State tax jurisdictions that remain open to examination range from 2015 through 2018. The Company does not believe that that there will be any material changes to unrecognized tax positions over the next 12 months.
A reconciliation of the beginning and ending amounts of the total unrecognized tax benefit is as follows:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Balance at beginning of year | | $ | 131 | | | $ | 168 | | | $ | 272 | |
Increase related to current year tax positions | | | 1,133 | | | | 30 | | | | 20 | |
Decrease due to lapse of statute of limitations | | | (61 | ) | | | (67 | ) | | | (124 | ) |
Balance at end of year | | $ | 1,203 | | | $ | 131 | | | $ | 168 | |
Equity Incentive Plans
The Company has three equity incentive plans: the 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Second Amended and Restated 2008 Long-Term Incentive Plan (collectively, the “Equity Incentive Plans”). The Second Amended and Restated 2008 Long-Term Incentive Plan is currently the only plan under which new awards may be granted. Under that plan, a variety of equity instruments can be granted to key employees and directors including incentive and nonqualified stock options to purchase shares of the Company’s common stock, restricted stock, restricted stock units or shares of common stock. The 1999 Equity Incentive Plan, the 2000 Equity Incentive Plan and the Second Amended and Restated 2008 Long-Term Incentive Plan authorize up to 1,000, 5,600 and 7,400 shares of common stock, respectively, for issuance. At December 31, 2018, the Second Amended and Restated 2008 Long-Term Incentive Plan had 2,694 shares available for grant. As provided in the Merger Agreement, the Company will not issue or authorize any new grants until the effective time of the Merger.
Under each of the plans, the Board’s Compensation Committee determines the term of each award, but no award can be exercisable more than 10 years from the date the award is granted. The stock options issued under the Equity Incentive Plans generally expire seven years from the grant date. The Compensation Committee also determines the vesting provisions of all awards and the exercise price per share of stock options issued under the plans, which is the fair value at date of grant. Awards issued to employees generally vest over terms ranging from two to four years.
57
The following table summarizes the Company’s stock option activity for 2016, 2017 and 2018:
| | Number of Shares | | | Weighted- Average Exercise Price Per Share | | | Weighted- Average Remaining Contractual Life (years) | | | Aggregate Intrinsic Value | |
Outstanding, January 1, 2016 | | | 726 | | | $ | 12.60 | | | | | | | | | |
Granted | | | 140 | | | | 20.94 | | | | | | | | | |
Exercised | | | (286 | ) | | | 9.65 | | | | | | | | | |
Forfeited/expired | | | (3 | ) | | | 20.94 | | | | | | | | | |
Outstanding, December 31, 2016 | | | 577 | | | | 16.04 | | | | | | | | | |
Granted | | | 0 | | | | 0 | | | | | | | | | |
Exercised | | | (271 | ) | | | 15.76 | | | | | | | | | |
Forfeited/expired | | | 0 | | | | 0 | | | | | | | | | |
Outstanding, December 31, 2017 | | | 306 | | | | 16.28 | | | | | | | | | |
Granted | | | 0 | | | | 0 | | | | | | | | | |
Exercised | | | (101 | ) | | | 19.16 | | | | | | | | | |
Forfeited/expired | | | (1 | ) | | | 20.94 | | | | | | | | | |
Outstanding, December 31, 2018 | | | 204 | | | $ | 14.83 | | | | 2.50 | | | $ | 5,931 | |
Exercisable at December 31, 2018 | | | 159 | | | $ | 13.12 | | | | 2.07 | | | $ | 4,903 | |
Vested and expected to vest at December 31, 2018 | | | 203 | | | $ | 14.79 | | | | 2.49 | | | $ | 5,900 | |
The Company recorded compensation expense of $313, $884 and $1,072, in the accompanying consolidated statements of operations for 2018, 2017 and 2016, respectively, for stock option awards. No options were granted in 2018 and 2017. The weighted-average grant date fair value of stock options granted in 2016 was $5.99. The total intrinsic value of stock options exercised in 2018, 2017 and 2016 was $2,615, $8,660 and $5,727, respectively.
The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions:
| | 2016 | |
Expected dividend yield | | | 3.29 | % |
Expected volatility | | | 43.53 | % |
Risk-free interest rate | | | 1.62 | % |
Expected life (in years) | | | 4.50 | |
In 2018, 2017 and 2016, the Company authorized the issuance of 33, 14 and 27 fully vested shares of common stock, respectively, as compensation to the Board of Directors resulting in compensation expense of $1,040, $700 and $700, respectively. In addition, in 2018 and 2017, the Company issued 3 and 1 shares of common stock, respectively, to consultants for services resulting in expense of $100 and $20, respectively. No shares were issued to consultants during 2016.
58
The Company has issued restricted stock to employees generally with vesting terms ranging from two to four 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 for 2016, 2017 and 2018:
| | Number of Shares | | | Weighted- Average Grant-Date Fair Value | | | Aggregate Intrinsic Value | |
Nonvested, January 1, 2016 | | | 276 | | | $ | 17.05 | | | | | |
Granted | | | 84 | | | | 21.02 | | | | | |
Vested | | | (139 | ) | | | 12.40 | | | | | |
Forfeited | | | (5 | ) | | | 19.91 | | | | | |
Nonvested, December 31, 2016 | | | 216 | | | | 21.51 | | | | | |
Granted | | | 140 | | | | 35.11 | | | | | |
Vested | | | (120 | ) | | | 14.93 | | | | | |
Forfeited | | | (4 | ) | | | 31.23 | | | | | |
Nonvested, December 31, 2017 | | | 232 | | | | 32.96 | | | | | |
Granted | | | 122 | | | | 51.74 | | | | | |
Vested | | | (116 | ) | | | 25.45 | | | | | |
Forfeited | | | (7 | ) | | | 40.93 | | | | | |
Nonvested, December 31, 2018 | | | 231 | | | $ | 46.36 | | | $ | 10,193 | |
Additionally, the Company grants performance-based restricted stock units. The performance-based units have performance conditions and service-based vesting conditions. Each vesting tranche is treated as an individual award and the compensation expense is recognized on a straight-line basis over the requisite service period for each tranche. The requisite service period is a combination of the performance period and the subsequent vesting period based on continued service. The level of achievement of such goals may cause the actual amount of units that ultimately vest to range from 0% to 200% of the original units granted. The Company recognizes expense ratably over the vesting period for performance-based restricted stock units when it is probable that the performance criteria specified will be achieved. The fair value is equal to the market price of the Company’s common stock on the date of grant.
The following table summarizes the restricted stock unit activity for 2016, 2017 and 2018:
| | Number of Restricted Stock Units | | | Weighted- Average Grant-Date Fair Value | | | Aggregate Intrinsic Value | |
Nonvested, January 1, 2016 | | | 313 | | | $ | 14.92 | | | | | |
Granted | | | 161 | | | | 26.59 | | | | | |
Vested | | | (190 | ) | | | 12.54 | | | | | |
Forfeited | | | (3 | ) | | | 20.39 | | | | | |
Nonvested, December 31, 2016 | | | 281 | | | | 23.18 | | | | | |
Granted | | | 73 | | | | 35.75 | | | | | |
Performance factor adjustment | | | 34 | | | | 17.56 | | | | | |
Vested | | | (155 | ) | | | 18.92 | | | | | |
Forfeited | | | (1 | ) | | | 20.52 | | | | | |
Nonvested, December 31, 2017 | | | 232 | | | | 29.20 | | | | | |
Granted | | | 83 | | | | 31.30 | | | | | |
Performance factor adjustment | | | 89 | | | | 20.52 | | | | | |
Vested | | | (178 | ) | | | 20.52 | | | | | |
Forfeited | | | (2 | ) | | | 29.70 | | | | | |
Nonvested, December 31, 2018 | | | 224 | | | $ | 33.41 | | | $ | 9,841 | |
The Company recorded compensation expense of $8,851, $9,319 and $5,198 in the accompanying consolidated statements of operations for 2018, 2017 and 2016, respectively, in connection with the issuance of restricted stock and restricted stock units. As of December 31, 2018, the Company expects 228 shares of restricted stock and 221 restricted stock units to vest.
59
As of December 31, 2018, there was $8,738 of total unrecognized compensation expense related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1 year. The total unrecognized compensation expense will be fully charged to expense through the fourth quarter of 2021.
The Company maintains a qualified tax deferred defined contribution retirement plan (the “Plan”). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to contribute on a before and after-tax basis a certain percentage of their compensation. The Company matched 100% of employees’ first 3% contribution and 50% of the employees’ next 2% contribution. Employees vest immediately in their contributions and the Company’s contribution. The Company’s contributions in 2018, 2017 and 2016 were $1,111, $965 and $892, respectively.
Following is an analysis for the returns reserve which is included as other accrued expenses and current liabilities in the accompanying consolidated balance sheets:
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Balance at beginning of year | | $ | 868 | | | $ | 740 | | | $ | 870 | |
Impact of change in accounting policy (Note 2) | | | 55 | | | 0 | | | 0 | |
Provision for estimated returns | | | 18,287 | | | | 19,011 | | | | 14,929 | |
Actual returns | | | (18,445 | ) | | | (18,883 | ) | | | (15,059 | ) |
Balance at end of year | | $ | 765 | | | $ | 868 | | | $ | 740 | |
14. | QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) |
| | Quarter | | | | | |
| | First | | | Second | | | Third | | | Fourth | | | Year | |
(In thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | |
2018: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 210,930 | | | $ | 191,311 | | | $ | 159,255 | | | $ | 129,543 | | | $ | 691,039 | |
Gross margin | | $ | 112,279 | | | $ | 102,940 | | | $ | 83,245 | | | $ | 67,340 | | | $ | 365,804 | |
Net income | | $ | 2,803 | | | $ | 26,136 | | | $ | 15,994 | | | $ | 13,660 | | | $ | 58,593 | |
Basic income per common share | | $ | 0.09 | | | $ | 0.88 | | | $ | 0.54 | | | $ | 0.46 | | | $ | 1.98 | |
Diluted income per common share | | $ | 0.09 | | | $ | 0.87 | | | $ | 0.54 | | | $ | 0.46 | | | $ | 1.95 | |
2017: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 212,677 | | | $ | 194,894 | | | $ | 158,149 | | | $ | 131,237 | | | $ | 696,957 | |
Gross margin | | $ | 114,447 | | | $ | 105,797 | | | $ | 85,792 | | | $ | 69,711 | | | $ | 375,747 | |
Net income | | $ | 7,484 | | | $ | 24,435 | | | $ | 15,027 | | | $ | 10,926 | | | $ | 57,872 | |
Basic income per common share | | $ | 0.25 | | | $ | 0.82 | | | $ | 0.50 | | | $ | 0.36 | | | $ | 1.93 | |
Diluted income per common share | | $ | 0.25 | | | $ | 0.80 | | | $ | 0.49 | | | $ | 0.36 | | | $ | 1.90 | |
The sum of the quarterly basic and diluted per share amounts may not equal amounts reported for the year. This is due to the effects of rounding and changes in weighted average shares outstanding for each period.
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INDEX TO EXHIBITS
No. | | Description |
| | |
2.1 | | Agreement and Plan of Merger by and among Tivity Health, Inc., Sweet Acquisition, Inc. and Nutrisystem, Inc., dated as of December 9, 2018, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on December 10, 2018. |
2.2 | | Asset Purchase Agreement, dated as of December 17, 2015, between SBD Enterprises, LLC (formerly known as Nutrisystem SBD, LLC) and SBD Holdings Group Corp., incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on December 17, 2015. |
*3.1 | | Certificate of Incorporation. |
| | |
3.2 | | Amended and Restated Bylaws of Nutrisystem, Inc., incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on July 22, 2009. |
3.3 | | Amendment to the Amended and Restated Bylaws of Nutrisystem, Inc., incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on January 7, 2016. |
3.4 | | Amendment to the Amended and Restated Bylaws of Nutrisystem, Inc., incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on April 5, 2017. |
| | |
+10.1 | | Amended and Restated Nutrisystem, Inc. 2008 Long Term Incentive Plan incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on September 6, 2012. |
| | |
+10.2 | | Amendment No. 1 to Amended and Restated Nutrisystem, Inc. 2008 Long Term Incentive Plan incorporated by reference to the designated exhibit of the Company’s Annual Report on Form 10-K filed on February 28, 2017. |
| | |
+10.3 | | Second Amended and Restated Nutrisystem, Inc. 2008 Long Term Incentive Plan incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on May 12, 2017. |
| | |
10.4 | | Agreement, dated December 21, 2004, between Nutrisystem, Inc. and QVC, Inc. incorporated by reference to the designated exhibit of the Company’s Annual Report on Form 10-K filed on March 14, 2006. |
| | |
+10.5 | | Compensation Policy For Non-Employee Directors, Effective April 1, 2017 incorporated by reference to the designated exhibit of the Company’s Annual Report on Form 10-K filed on February 28, 2017. |
| | |
10.6 | | Amended and Restated Credit Agreement, dated November 6, 2015, among Nutrisystem, Inc., as Borrower, Manufacturers and Traders Trust Company, as the Administrative Agent, Swing Line Lender, L/C Issuer and a Lender, and other Lenders, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on November 10, 2015. |
| | |
+10.7 | | Letter Agreement, dated November 1, 2012, between Nutrisystem, Inc. and Dawn Zier, the Company’s President and Chief Executive Officer, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on November 7, 2012. |
| | |
+10.8 | | Letter Agreement, dated May 21, 2013, between Nutrisystem, Inc. and Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on May 28, 2013. |
| | |
+10.9 | | First Amendment to the Employment Agreement between Nutrisystem, Inc. and Dawn M. Zier, dated January 2, 2015, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
+10.10 | | Form of Restricted Stock Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on November 7, 2012. |
| | |
+10.11 | | Form of Nonqualified Stock Option Grant Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on November 7, 2012. |
| | |
+10.12 | | Form of Performance-Based Restricted Stock Unit Agreement for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on November 7, 2012. |
| | |
+10.13 | | 2015 Nonqualified Stock Option Grant Agreement dated December 31, 2015 for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on January 5, 2016. |
| | |
+10.14 | | 2015 Performance-Based Restricted Stock Unit Grant Agreement, dated December 31, 2015 for Dawn Zier, incorporated by reference to the designated exhibit of the Company’s Current Report on Form 8-K filed on January 5, 2016. |
| | |
61
No. | | Description |
+10.15 | | Letter Agreement, dated April 19, 2013, between Nutrisystem, Inc. and Michael Monahan, the Company’s Executive Vice President and Chief Financial Officer, incorporated by reference to the designated exhibit of the Company’s Quarterly Report on Form 10-Q filed on May 8, 2013. |
| | |
+10.16 | | First Amendment to the Employment Agreement between Nutrisystem, Inc. and Michael P. Monahan, dated January 2, 2015, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
+10.17 | | Second Amendment to the Employment Agreement between Nutrisystem, Inc. and Michael P. Monahan, dated December 27, 2017, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on December 28, 2017. |
| | |
+10.18 | | 2013 Performance-Based Restricted Stock Unit Grant Agreement for Michael Monahan, incorporated by reference to the designated exhibit of the Company’s Quarterly Report on Form 10-Q filed on August 6, 2013. |
| | |
+10.19 | | Employment Agreement, dated February 5, 2013 between Nutrisystem, Inc. and Keira Krausz, the Company’s Executive Vice President and Chief Marketing Officer, incorporated by reference to the designated exhibit on the Company’s Annual Report on Form 10-K filed on March 12, 2013. |
| | |
+10.20 | | First Amendment to the Employment Agreement between Nutrisystem, Inc. and Keira Krausz, dated January 2, 2015, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
+10.21 | | Second Amendment to the Employment Agreement between Nutrisystem, Inc. and Keira Krausz, dated December 27, 2017, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on December 28, 2017. |
| | |
+10.22 | | Form of Restricted Stock Agreement for Keira Krausz, incorporated by reference to the designated exhibit on the Company’s Annual Report on Form 10-K filed on March 12, 2013. |
| | |
+10.23 | | Form of Nonqualified Stock Option Grant Agreement for Keira Krausz, incorporated by reference to the designated exhibit on the Company’s Annual Report on Form 10-K filed on March 12, 2013. |
| | |
+10.24 | | 2013 Performance-Based Restricted Stock Unit Grant Agreement for Keira Krausz, incorporated by reference to the designated exhibit of the Company’s Quarterly Report on Form 10-Q filed on August 6, 2013. |
| | |
+10.25 | | Form of Performance-Based Restricted Stock Unit Grant Agreement for Executives (for all grants issued prior to 2015), incorporated by reference to the designated exhibit on the Company’s Quarterly Report on Form 10-Q filed on August 6, 2013. |
| | |
+10.26 | | Form of Nonqualified Stock Option Grant Agreement for Executives (for all grants issued prior to 2015), incorporated by reference to the designated exhibit on the Company’s Annual Report on Form 10-K filed on March 12, 2013. |
| | |
+10.27 | | Form of Restricted Stock Award Agreement for Executives (for all grants issued prior to 2015), incorporated by reference to the designated exhibit on the Company’s Annual Report on Form 10-K filed on March 12, 2013. |
| | |
+10.28 | | Form of Performance-Based Restricted Stock Unit Grant Agreement for Executives (for all grants issued in or after 2015), incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
+10.29 | | Form of Nonqualified Stock Option Grant Agreement for Executives (for all grants issued in or after 2015), incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
+10.30 | | Form of Restricted Stock Award Agreement for Executives (for all grants issued in or after 2015), incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on January 2, 2015. |
| | |
10.31 | | Lease Agreement, dated October 13, 2009, between B.R. Properties Owner, LP and Nutrisystem, Inc., incorporated by reference to the designated exhibit of the Company’s Quarterly Report on Form 10-Q filed on August 5, 2010. |
10.32 | | Cooperation Agreement, dated October 23, 2018, by and among Nutrisystem, Inc., Legion Partners Asset Management, LLC and the other parties named therein, incorporated by reference to the designated exhibit on the Company’s Current Report on Form 8-K filed on October 25, 2018. |
21.1 | | Subsidiaries of Nutrisystem, Inc. |
| | |
23.1 | | Consent of KPMG LLP. |
| | |
62
* | Incorporated by reference to the designated exhibit of the Company’s Registration Statement on Form 10 filed on December 17, 1999 (file number 0-28551). |
+ | Management contract or compensatory plan or arrangement. |
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Nutrisystem, Inc. |
| | |
By: | | /S/ DAWN M. ZIER |
| | Dawn M. Zier, President and |
| | Chief Executive Officer |
Dated: February 26, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capabilities indicated.
BY: | /S/ DAWN M. ZIER | | February 26, 2019 |
Dawn M. Zier | | |
President and Chief Executive Officer and Director | | |
| | |
BY: | /S/ MICHAEL P. MONAHAN | | February 26, 2019 |
Michael P. Monahan | | |
Executive Vice President, Chief Financial Officer and Principal Accounting Officer | | |
| | |
BY: | /S/ ROBERT F. BERNSTOCK | | February 26, 2019 |
Robert F. Bernstock | | |
Director | | |
| | |
BY: | /S/ PAUL GUYARDO | | February 26, 2019 |
Paul Guyardo | | |
Director | | |
| | |
BY: | /S/ MICHAEL J. HAGAN | | February 26, 2019 |
Michael J. Hagan | | |
Chairman, Director | | |
| | |
BY: | /S/ PATRICIA HAN | | February 26, 2019 |
Patricia Han | | |
Director | | |
BY: | /S/ JAY HERRATTI | | February 26, 2019 |
Jay Herratti | | |
Director | | |
| | |
BY: | /S/ BENJAMIN A. KIRSHNER | | February 26, 2019 |
Benjamin A. Kirshner | | |
Director | | |
BY: | /S/ MICHAEL D. MANGAN | | February 26, 2019 |
Michael D. Mangan | | |
Director | | |
| | |
BY: | /S/ BRIAN P. TIERNEY | | February 26, 2019 |
Brian P. Tierney | | |
Director | | |
| | |
BY: | /S/ ANDREA WEISS | | February 26, 2019 |
Andrea Weiss | | |
Director | | |
64
