Nutrisystem 2011 Annual Report Download - page 54

evidence of an arrangement exists, delivery has occurred, the selling price is fixed and determinable and
collection is reasonably assured. The Company also sells prepaid program cards to wholesalers and retailers.
Revenue from these cards is recognized after the card is redeemed online at the Company’s website by the
customer and the product is shipped to the customer.
Deferred revenue consists primarily of unredeemed prepaid program cards and unshipped frozen foods. When a
customer orders the Nutrisystem®Select®program, two separate shipments are delivered. The first shipment
contains Nutrisystem’s standard shelf-stable food. The second shipment contains the fresh-frozen foods and is
generally delivered within two weeks of a customer’s order. Both shipments qualify as separate units of
accounting and the fair value is based on the estimated selling price of both units.
Customers may return unopened product within 30 days of purchase in order to receive a refund or credit. Fresh-
frozen products are non-returnable and non-refundable unless the order is canceled within seven days of delivery.
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.
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 $2,867, $5,763 and $5,193 in 2011, 2010 and
2009, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated
statements of operations.
Dependence on Suppliers
In 2011, approximately 16% and 15%, respectively, of inventory purchases were from two suppliers. The
Company has a supply arrangement with one of these vendors that requires the Company to make minimum
purchases. In 2010, these vendors supplied approximately 17% and 18%, respectively, of inventory purchases
and in 2009, approximately 19% and 18%, respectively, of total purchases (see Note 9). Additionally, the
Company was dependent on one frozen food supplier for less than 20% of its food costs in 2011. The amount
provided from this supplier in 2010 was negligible. The Company had a supply agreement with this supplier that
expired in November 2011 and the Company has found other frozen food supply options to replace this supplier.
During 2011 and 2010, the Company outsourced 100% of its fulfillment operations to third party providers.
During 2009, more than 85% of its fulfillment operations were handled by third party providers.
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. The rebate period is June 1 through May 31 of each
year. For the years ended December 31, 2011, 2010 and 2009, the Company reduced cost of revenue by $1,401,
$1,912 and $2,316, respectively, for these rebates. A receivable of $686 and $541 at December 31, 2011 and
2010, 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, including share-based payment arrangements, for personnel engaged in these activities. Media
expense was $88,828, $127,597 and $126,117 in 2011, 2010 and 2009, respectively. Direct-mail advertising
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