Nutrisystem 2015 Annual Report Download - page 50

Revenue from product sales includes amounts billed for shipping and handling and is presented net of estimated
returns and billed sales tax. Revenue from the retail programs is also net of any trade allowances, reclamation
reserves or broker commissions. Revenue from shipping and handling charges was $2,561, $2,013 and $2,000 in
2015, 2014 and 2013, respectively. Shipping-related costs are included in cost of revenue in the accompanying
consolidated statements of operations.
Dependence on Suppliers
In 2015, approximately 19% and 17% of inventory purchases were from two suppliers. The Company has a
supply arrangement with one of these suppliers that requires the Company to make minimum purchases. In 2014,
these suppliers provided approximately 14% and 17% of inventory purchases and in 2013, approximately 12%
and 14% of inventory purchases (see Note 8). In 2013, a charge of $5,000 was recorded to settle certain disputes
that had arisen with a supplier over a legacy contract. This charge is included in cost of revenue in the
accompanying consolidated statements of operations.
The Company outsources 100% of its fulfillment operations to a third-party provider and more than 96% of its
orders are shipped by one third-party provider.
Supplier 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 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. The rebate period is June 1 through May 31 of
each year. For the years ended December 31, 2015, 2014 and 2013, the Company reduced cost of revenue by
$698, $883 and $1,068 respectively, for these rebates. At December 31, 2015, no receivable was recorded but at
December 31, 2014 $360 was recorded in receivables in the accompanying consolidated balance sheets. Effective
June 1, 2015, the Company entered into a new agreement with the supplier that includes lower initial pricing and
higher levels of purchases required to earn rebates resulting in the Company projecting as of December 31, 2015
that no rebate will be earned. Historically, the actual rebate received from the supplier 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 $104,621, $89,304 and $77,396 in 2015, 2014 and 2013, 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, 2015 and 2014, $3,311 and $1,958,
respectively, of costs have been prepaid for future advertisements and promotions.
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
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