Nutrisystem 2008 Annual Report Download - page 50

Revenue Recognition
Revenue from product sales is recognized when the earnings process is complete, which is upon transfer of title
to the product. This transfer occurs upon shipment. Recognition of revenue upon shipment meets the revenue
recognition criteria in that persuasive evidence of an arrangement exists, delivery has occurred, the selling price
is fixed and determinable and collection is reasonably assured. Customers may return unopened product within
30 days of purchase in order to receive a refund or credit. Estimated returns are accrued at the time the sale is
recognized and actual returns are tracked monthly. The Company reviews its history of actual versus estimated
returns to ensure reserves are appropriate.
During 2008, the Company began to sell prepaid program cards to a national wholesaler. Revenue from these
cards is recognized when the card is redeemed online at the Company’s website by the customer and the product
is shipped to the customer. Deferred revenue consists primarily of the sale of these prepaid program cards to the
wholesaler.
Revenue from product sales includes amounts billed for shipping and handling and is presented net of returns and
billed sales tax. Revenue from shipping and handling charges was $5,019, $5,060 and $2,564 in 2008, 2007 and
2006, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated
statements of operations.
Dependence on Suppliers
In 2008, approximately 19% and 15%, respectively, of inventory purchases were from two suppliers. The
Company has supply arrangements with these vendors that require the Company to make minimum purchases. In
2007, these vendors supplied 24% and 11% of total purchases and in 2006, these vendors supplied 32% and 12%
of total purchases (see Note 9).
In 2008, 2007 and 2006, the Company outsourced more than 85% of its fulfillment operations to a third-party
provider.
Vendor Rebates
One of the Company’s suppliers provides for rebates based on purchasing levels. The Company accounts for this
rebate on an accrual basis as purchases are made at a rebate percent determined based upon the estimated total
purchases from the vendor. The estimated rebate is recorded as a reduction in the carrying value of purchased
inventory and is reflected in the consolidated statements of operations when the associated inventory is sold. A
receivable is recorded for the estimate of the rebate earned. A receivable of $1,870 and $3,703 at December 31,
2008 and 2007, respectively, has been recorded in receivables in the accompanying consolidated balance sheets.
Historically, the actual rebate received from the vendor has closely matched the estimated rebate recorded. An
adjustment is made to the estimate upon determination of the final rebate.
Marketing Expense
Marketing expense includes media, advertising production, marketing and promotional expenses and payroll-
related expenses for personnel engaged in these activities. Media expense was $153,610, $162,691 and $111,290
in 2008, 2007 and 2006, respectively. 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 direct mailing 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. Typically, this period falls within 40 days of the initial direct
mailing. All other advertising costs are charged to expense as incurred or the first time the advertising takes
place. At December 31, 2008 and 2007, $0 and $15, respectively, of capitalized direct-mail advertising costs are
included in other current assets and $2,066 and $4,760, respectively, of costs have been prepaid for upcoming
advertisements and promotions.
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