Nutrisystem 2010 Annual Report Download - page 33

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 are evaluated for future
realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We
consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our
recent earnings and expectations of future taxable income and other relevant factors.
We estimate the annual effective income tax rate at the beginning of each year and revise the estimate at
each reporting period based on a number of factors including operating results, level of tax exempt interest
income and sales by state, among other items.
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. No
revenue is recorded for food products provided at no charge as part of promotions.
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 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. Direct-mail advertising costs are capitalized
if the primary purpose was to elicit sales to customers who could be shown to have responded specifically to the
advertising and results in probable future economic benefits. The capitalized costs are amortized to expense over
the period during which the future benefits are expected to be received. All other advertising costs are charged to
expense as incurred.
General and Administrative Expense. General and administrative expense consists of compensation for
administrative, information technology, counselors, customer service and sales personnel, share-based payment
arrangements, facility expenses, website development costs, professional service fees and other general corporate
expenses.
Equity and Impairment Loss. Equity and impairment loss consists of our share of the earnings or losses of
our equity interests. In June 2009, we abandoned our interest in Zero Water, as management determined that the
business was no longer aligned with our current strategic direction. We held approximately a 27% fully diluted
interest in Zero Water and had the ability to significantly influence the operations of Zero Water. The investment
in Zero Water was accounted for using the equity method of accounting.
Interest Income, Net. Interest income, net consists of interest income earned on cash balances and
marketable securities, net of interest expense.
Income Taxes. We are subject to corporate level income taxes and record a provision for income taxes based
on an estimated effective income tax rate for the year.
Loss on Discontinued Operations, Net. We ceased the operations of two of our subsidiaries, Slim and Tone
and NuKitchen. Accordingly, the operating results of these discontinued operations have been presented
separately from continuing operations for all periods presented.
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