Nutrisystem 2011 Annual Report Download - page 36

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, 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. 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 or the first time the
advertising takes place.
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 for related employees, facility expenses, website development costs, professional service fees and
other general corporate expenses.
Equity and Impairment Loss. Equity and impairment loss consisted of our share of the earnings or losses of
our equity interests. In June 2009, we abandoned our interest in Zero Water, as it was determined that the
business was no longer aligned with our strategic direction. We held approximately a 27% fully diluted interest
in Zero Water. The investment in Zero Water was accounted for using the equity method of accounting.
Interest (Expense) Income, Net. Interest (expense) income, net consists of interest expense on our
outstanding indebtedness net of interest income earned on cash balances and marketable securities.
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.
32