The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands except share and per share amounts)
Nature of the Business
Nutrisystem, Inc. (the Company or Nutrisystem), a provider of weight management products and services, offers nutritionally balanced
weight loss programs designed for women, men, and seniors, as well as the Nutrisystem® D® program, specifically designed to help people with type 2 diabetes who want to lose weight and manage their diabetes. The Nutrisystem® programs are
based on over 40 years of nutrition research and on the science of the low glycemic index. The Companys pre-packaged foods are sold directly to weight loss program participants primarily through the Internet and telephone (including the
redemption of prepaid program cards), referred to as the direct channel, through QVC, a television shopping network, and retail programs.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Presentation of Financial Statements
The Companys consolidated financial statements include 100% of the assets and liabilities of Nutrisystem, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Interim Financial Statements
The Companys consolidated financial statements as of and for the three and nine months ended September 30, 2013 and 2012 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Companys financial position and results of operations for these interim periods. Accordingly, readers of
these consolidated financial statements should refer to the Companys audited consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP), and the related notes thereto, for the
year ended December 31, 2012, which are included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2012 as certain footnote disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted from this report pursuant to the rules of the Securities and Exchange Commission (the SEC). The results of operations for the three and nine months ended September 30, 2013 are not
necessarily indicative of the results to be expected for the year ending December 31, 2013.
Cash and Cash Equivalents and Short Term Investments
Cash equivalents include only securities having a maturity of three months or less at the time of purchase. At September 30, 2013 and
December 31, 2012, demand accounts and money market accounts comprised all of the Companys cash and cash equivalents.
Short term investments
at September 30, 2013, consist of investments in government and agency securities and corporate debt securities. Short term investments at December 31, 2012, consisted of investments in corporate debt securities and time deposits with original
maturities of greater than three months at the time of purchase. The Company classifies these investments as available-for-sale securities. These investments are reported at fair value with the related unrealized gains and losses included in
accumulated other comprehensive income, a component of stockholders equity, net of related tax effects.
6
At September 30, 2013, cash and cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Cash
|
|
$
|
16,396
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
16,396
|
|
Money market account
|
|
|
1,957
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,957
|
|
Government and agency securities
|
|
|
16,226
|
|
|
|
30
|
|
|
|
(15
|
)
|
|
|
16,241
|
|
Corporate debt securities
|
|
|
6,520
|
|
|
|
33
|
|
|
|
(29
|
)
|
|
|
6,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,099
|
|
|
$
|
63
|
|
|
$
|
(44
|
)
|
|
$
|
41,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, cash and cash equivalents and short term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Cash
|
|
$
|
9,323
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,323
|
|
Money market account
|
|
|
6,863
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,863
|
|
Corporate debt securities
|
|
|
1,692
|
|
|
|
14
|
|
|
|
(24
|
)
|
|
|
1,682
|
|
Time deposits
|
|
|
1,519
|
|
|
|
4
|
|
|
|
0
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,397
|
|
|
$
|
18
|
|
|
$
|
(24
|
)
|
|
$
|
19,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
Fixed
assets are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are generally two to seven years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the estimated useful life of the asset or the related lease term. Expenditures for repairs and maintenance are charged to expense as incurred, while major renewals and improvements are capitalized.
Included in fixed assets is the capitalized cost of internal-use software and website development incurred during the application development stage.
Capitalized costs are amortized using the straight-line method over the estimated useful life of the asset, which is generally two to five years. Costs incurred related to planning or maintenance of internal-use software and website development are
charged to expense as incurred. The net book value of capitalized software was $11,861 and $10,511 at September 30, 2013 and December 31, 2012, respectively.
Revenue Recognition
Revenue from direct to consumer
product sales is recognized when the earnings process is complete, which is upon transfer of title to the product. 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. 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 Companys website or via telephone by the customer and the product is shipped to the customer. Revenue from the retail programs is recognized typically when the product is received at the sellers location.
Deferred revenue consists primarily of unredeemed prepaid gift cards and unshipped frozen foods. When a customer orders the Nutrisystem® Select®
program, two separate shipments are delivered. The first shipment contains Nutrisystems standard shelf-stable food. The second shipment contains the frozen foods and is generally delivered within a week of a customers order. Both
shipments qualify as separate units of accounting and the fair value is based on estimated selling prices of both units.
Direct to consumer customers may
return unopened shelf-stable products within 30 days of purchase in order to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the order is canceled within 14 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.
7
The Company reviews the reserves for customer returns at each reporting period and adjusts them to reflect data
available at that time. To estimate reserves for returns, the Company considers actual return rates in preceding periods and changes in product offerings or marketing methods that might impact returns going forward. To the extent the estimate of
returns changes, the Company will adjust the reserve, which will impact the amount of product sales revenue recognized in the period of the adjustment. The provision for estimated returns for the three and nine months ended September 30, 2013
was $2,532 and $9,020, respectively, and $2,511 and $8,668 for the three and nine months ended September 30, 2012, respectively. The reserve for estimated returns incurred but not received and processed was $934 and $652 at September 30,
2013 and December 31, 2012, respectively, and has been included in other accrued expenses and current liabilities in the accompanying consolidated balance sheets.
Revenue from product sales includes amounts billed for shipping and handling and is presented net of 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 were $460 and $1,662 for the three and nine months ended September 30, 2013, respectively, and $355 and $2,075
for the three and nine months ended September 30, 2012, respectively. Shipping-related costs are included in cost of revenue in the accompanying consolidated statements of operations.
Dependence on Suppliers
Approximately 15% and 12% of
inventory purchases for the nine months ended September 30, 2013 were from two suppliers. The Company has supply arrangements with these suppliers that require the Company to make minimum purchases. For the nine months ended September 30,
2012, these suppliers provided approximately 16% and 13% of inventory purchases. In the three months ended September 30, 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 90% of its orders are shipped by one third-party provider.
Vendor Rebates
One of the Companys 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 vendor. The estimated rebate is recorded as a receivable from the vendor 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 three and nine months ended September 30, 2013, the Company reduced cost of
revenue by $205 and $897, respectively, for these rebates. For the comparable periods of 2012, cost of revenue was reduced by $310 and $1,257, respectively. A receivable of $0 and $637 at September 30, 2013 and December 31, 2012, respectively,
has been recorded in receivables in the accompanying consolidated balance sheets. At September 30, 2013, no receivable has been recorded as the Company is currently evaluating whether the rebates can be achieved for the rebate period based on
current purchasing levels. 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.
Fair Value of Financial Instruments
A three-tier fair
value hierarchy has been established by the Financial Accounting Standards Board (FASB) to prioritize the inputs used in measuring fair value. These tiers are as follows:
Level 1Valuations based on quoted prices for identical assets and liabilities in active markets.
Level 2Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Valuations based on unobservable inputs reflecting the Companys own assumptions, consistent with reasonably available assumptions made
by other market participants. These valuations require significant judgment.
8
The fair values of the Companys Level 1 instruments are based on quoted prices in active exchange markets
for identical assets. The Company had no Level 2 or 3 instruments at September 30, 2013 and December 31, 2012.
The following table summarizes
the Companys financial assets measured at fair value at September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Money market account
|
|
$
|
1,957
|
|
|
$
|
1,957
|
|
Government and agency securities
|
|
|
16,241
|
|
|
|
16,241
|
|
Corporate debt securities
|
|
|
6,524
|
|
|
|
6,524
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
24,722
|
|
|
$
|
24,722
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys financial assets measured at fair value at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value
|
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
Money market account
|
|
$
|
6,863
|
|
|
$
|
6,863
|
|
Corporate debt securities
|
|
|
1,682
|
|
|
|
1,682
|
|
Time deposits
|
|
|
1,523
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,068
|
|
|
$
|
10,068
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
The
Company uses the two-class method to calculate earnings per share (EPS) as the unvested restricted stock issued under the Companys equity incentive plans are participating shares with nonforfeitable rights to dividends. Under the
two-class method, earnings per common share are computed by dividing the sum of distributed earnings to common stockholders and undistributed earnings allocated to common stockholders by the weighted average number of common shares outstanding for
the period. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities based on the number of weighted average shares outstanding during the period. Undistributed losses are not
allocated to unvested restricted stock as the restricted stockholders are not obligated to share in the losses. The following table sets forth the computation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Net income
|
|
$
|
356
|
|
|
$
|
2,590
|
|
|
$
|
6,075
|
|
|
$
|
2,224
|
|
Net income allocated to unvested restricted stock
|
|
|
(10
|
)
|
|
|
(91
|
)
|
|
|
(147
|
)
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income allocated to common shares
|
|
$
|
346
|
|
|
$
|
2,499
|
|
|
$
|
5,928
|
|
|
$
|
1,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,983
|
|
|
|
27,562
|
|
|
|
27,974
|
|
|
|
27,442
|
|
Effect of dilutive securities
|
|
|
278
|
|
|
|
239
|
|
|
|
186
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
28,261
|
|
|
|
27,801
|
|
|
|
28,160
|
|
|
|
27,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per common share
|
|
$
|
0.01
|
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per common share
|
|
$
|
0.01
|
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the three and nine months ended September 30, 2013, common stock equivalents representing 405,979 and 1,041,797 shares
of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive. In the three and nine months ended September 30, 2012, common stock
equivalents representing 953,515 and 854,158 shares of common stock, respectively, were excluded from weighted average shares outstanding for diluted income per common share purposes because the effect would be anti-dilutive.
9
Cash Flow Information
The Company made payments for income taxes of $340 and $50 in the nine months ended September 30, 2013 and 2012, respectively. Interest payments in the
nine months ended September 30, 2013 and 2012 were $91 and $700, respectively. For the nine months ended September 30, 2013, the Company had non-cash capital additions of $343 for unpaid invoices in accounts payable and accrued expenses.
For the nine months ended September 30, 2012, the Company had non-cash capital additions of $404 for unpaid invoices in accounts payable and accrued expenses.
Recently Issued Accounting Pronouncements
In July 2013,
the FASB issued Accounting Standards Update (ASU) 2013-11 which provides that an unrecognized tax benefit, or portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction of a deferred tax asset
for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. If an applicable deferred tax asset is not available or the tax law does not require the company to use and the company does not expect to use the applicable
deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability in the financial statements and should not be combined with an unrelated deferred tax asset. ASU 2013-11 is effective for annual reporting periods,
and interim periods within those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date; however, retrospective application is permitted. The
Company is in the process of evaluating the impact of this standard on its consolidated financial statements.
In February 2013, the FASB issued ASU
2013-02 which requires companies to present information about reclassifications out of accumulated other comprehensive income in a single note or on the face of the financial statements. The updated standard is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2012, with early adoption permitted. The adoption of this standard did not impact the Companys consolidated financial statements.
Use of Estimates
The preparation of financial statements
in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and operating expenses during
the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
On November 8, 2012, the Company entered into a $40,000 secured revolving credit
facility, as amended, (the Credit Facility) with a lender. The Credit Facility can be drawn upon through November 8, 2015, at which time all amounts must be repaid. There were no borrowings outstanding at September 30, 2013.
The Credit Facility provides for interest at either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate will be the
highest of (i) the Administrative Agents prime rate, (ii) 0.50% percent above the Federal Funds Rate and (iii) the LIBOR rate for deposits in dollars for a one-month interest period as determined three business days prior to
such date, plus 1.50%. The applicable margin is subject to adjustment based on the Companys consolidated fixed charge coverage ratio and ranges from 0.25-1.25% per year for base rate loans and from 1.75-2.75% per year for LIBOR rate
loans. The Company will also pay an unused line fee. The unused line fee is subject to adjustment based on the Companys consolidated fixed charge coverage ratio and ranges from 0.25-0.375% per year. During the three and nine months ended
September 30, 2013, the Company incurred no interest expense and $26 and $91 in an unused line fee, respectively. In the comparable periods of 2012, the Company incurred $234 and $557 in interest and $53 and $159 in unused line fees,
respectively. Interest payments and unused line fees are classified within interest expense, net in the accompanying consolidated statements of operations.
10
The Credit Facility contains financial and other covenants including a minimum consolidated fixed charge ratio, a
minimum consolidated tangible net worth and a minimum consolidated liquidity ratio, and includes limitations on, among other things, capital expenditures, additional indebtedness, acquisitions, stock repurchases and restrictions on paying dividends
in certain circumstances. As of September 30, 2013, the Company was in compliance with all covenants contained in the Credit Facility. Any obligations under the Credit Facility by the Company, as well as certain banking services and hedging
obligations, are secured by substantially all of the assets of the Company and certain subsidiaries.
At September 30, 2013, the Company had $148 of
unamortized debt issuance costs associated with the Credit Facility that are being amortized over the remaining term of the Credit Facility.
Common Stock
The Company issued 900 and 6,768 shares of common stock upon the exercise of stock options in the nine months ended September 30, 2013 and 2012,
respectively. During the nine months ended September 30, 2013 and 2012, employees surrendered to the Company 68,781 and 92,801 shares of common stock, respectively, valued at $623 and $1,036, respectively, in satisfaction of minimum tax
withholding obligations associated with the vesting of equity awards. Subsequent to the approval of the Amended and Restated 2008 Long-Term Incentive Plan in September 2012, any of such shares are now included in treasury stock. Previously, these
shares were retired. Also, in the nine months ended September 30, 2013 and 2012, the Company issued 50,610 and 64,508 shares of common stock, respectively, as compensation to board members and third-party marketing vendors pursuant to their
respective contracts. Costs recognized for these stock grants issued and those previously issued were $650 and $552 for the nine months ended September 30, 2013 and 2012, respectively. During each of the quarters in the periods ended
September 30, 2013 and 2012, the Company paid a dividend of $0.175 per share to all stockholders of record.
Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock issuable in series upon resolution of the Board of Directors. Unless otherwise required by law,
the Board of Directors can, without stockholder approval, issue preferred stock in the future with voting and conversion rights that could adversely affect the voting power of the common stock. The issuance of preferred stock may have the effect of
delaying, averting or preventing a change in control of the Company.
5.
|
SHARE-BASED COMPENSATION EXPENSE
|
The following table summarizes the Companys stock option
activity during the nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life (years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, January 1, 2013
|
|
|
633,801
|
|
|
$
|
11.92
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
535,853
|
|
|
|
8.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(900
|
)
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(374,345
|
)
|
|
|
13.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2013
|
|
|
794,409
|
|
|
$
|
8.91
|
|
|
|
6.27
|
|
|
$
|
4,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2013
|
|
|
31,868
|
|
|
$
|
17.09
|
|
|
|
4.38
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest at September 30, 2013
|
|
|
774,117
|
|
|
$
|
8.90
|
|
|
|
6.27
|
|
|
$
|
4,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2013, the Company determined that 40,281 stock options granted in 2012 were void as they exceeded a per person annual
award limit and entered into a corrected stock option agreement with respect to those stock options. The change did not have a material impact on the Companys consolidated financial statements but did reduce the number of stock options
outstanding as of January 1, 2013. The Company recorded compensation expense of $84 and $276 in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2013, respectively, for stock option
awards. During the three and nine months ended September 30, 2012, the Company
11
recorded compensation expense of $41 and $1,109, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 30, 2013 was $0 and $7,
respectively, and $21 and $64, respectively, for the comparable periods of 2012.
The Company has issued restricted stock to employees generally with
vesting terms ranging from two to five years. The fair value is equal to the market price of the Companys common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following table
summarizes the restricted stock activity for the nine months ended September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
Nonvested, January 1, 2013
|
|
|
830,128
|
|
|
$
|
13.71
|
|
|
|
|
|
Granted
|
|
|
308,337
|
|
|
|
8.72
|
|
|
|
|
|
Vested
|
|
|
(245,245
|
)
|
|
|
12.99
|
|
|
|
|
|
Forfeited
|
|
|
(159,456
|
)
|
|
|
12.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30, 2013
|
|
|
733,764
|
|
|
$
|
12.07
|
|
|
$
|
10,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company grants performance-based and market-based restricted stock units. The performance-based units have
performance conditions and service-based vesting conditions. Each vesting tranche is treated as an individual award and the compensation expense is recognized on a straight-line basis over the requisite service period for each tranche. The requisite
service period is a combination of the performance period and the subsequent vesting period based on continued service. The level of achievement of such goals may cause the actual amount of units that ultimately vest to range from 0% to 150% of the
original units granted. The Company recognizes expense ratably over the vesting period for performance-based restricted stock units when it is probable that the performance criteria specified will be achieved. The fair value is equal to the market
price of the Companys common stock on the date of grant.
In 2012, grants of restricted stock units contained market-based conditions. Market-based
awards entitle employees to vest in a number of units determined by the Companys stock price return as compared to a set of comparator companies over a period, and will range from 0% to 200% of the original units granted. The fair value is
calculated using a Monte Carlo simulation model on the date of grant. Compensation expense is recognized over the derived service periods using the straight-line method regardless of the outcome of the market conditions, so long as the award holder
remains an employee through the requisite service period.
The following table summarizes the restricted stock unit activity for the nine months ended
September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
|
Aggregate
Intrinsic Value
|
|
Nonvested, January 1, 2013
|
|
|
133,190
|
|
|
$
|
11.76
|
|
|
|
|
|
Granted
|
|
|
162,063
|
|
|
|
8.68
|
|
|
|
|
|
Vested
|
|
|
(33,541
|
)
|
|
|
17.53
|
|
|
|
|
|
Forfeited
|
|
|
(29,013
|
)
|
|
|
12.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested, September 30, 2013
|
|
|
232,699
|
|
|
$
|
8.76
|
|
|
$
|
3,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation of $1,057 and $3,105 in the accompanying consolidated statements of operations for the three
and nine months ended September 30, 2013, respectively, and $1,373 and $6,520, respectively, for the comparable periods of 2012 in connection with the issuance of the restricted stock and restricted stock units. As of September 30, 2013,
702,431 shares of restricted stock and 225,588 restricted stock units were expected to vest.
As of September 30, 2013, there was $8,732 of total
unrecognized compensation expense related to unvested share-based compensation arrangements, including market-based units, which is expected to be recognized over a weighted-average period of 1.3 years. The total unrecognized compensation expense
will be fully recognized as expense through the third quarter of 2017.
12
6.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
On March 6, 2012, in response to the filing by a competitor of numerous trademark applications containing the term NUTRILITE in various
weight-loss and weight-management classes, the Company sent a cease and desist letter to the competitor claiming that its use of such mark is very similar to the Companys NUTRISYSTEM mark for very similar Company goods and services
in the weight-loss and weight-management industries. The Company alleged that such use would result in confusion amongst consumers with respect to the source of such goods and services and would constitute an infringement of the Companys mark
in violation of the Trademark Act of 1946 (the Lanham Act), as well as various other federal and state laws governing trademarks, unfair competition and deceptive trade practices, and would likely cause dilution of the Companys famous and
distinctive mark. On March 16, 2012, the competitor responded to such letter by filing a complaint for declaratory relief against the Company in the United States District Court for the Western District of Michigan (listed under docket number
1:12-cv-00256-RHB) asking the court to declare that plaintiffs use and registration of its mark does not (i) constitute trademark infringement, federal unfair competition, federal dilution, (ii) violate certain Michigan statutes; and
(iii) constitute common law trademark infringement or common law unfair competition. On April 27, 2012, the Company filed a motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of
subject matter jurisdiction. On May 29, 2012, plaintiff filed its brief in opposition to the Companys motion to dismiss the complaint, and on June 15, 2012 the Company filed its reply brief in support of its motion to dismiss the
complaint. On October 9, 2012, the court denied the Companys motion to dismiss for lack of subject matter jurisdiction. On October 23, 2012, the Company filed its answer and affirmative defenses to plaintiffs complaint for
declaratory relief and counterclaims for trademark infringement in which it (i) denied each of plaintiffs counts in the complaint, (ii) set forth various affirmative defenses to plaintiffs claims, and (iii) asserted by way
of counterclaim claims for trademark infringement and dilution arising from plaintiffs intentional use of a confusingly similar mark for the purpose of unlawfully trading upon the Companys goodwill, good name, and valuable business
identity. On December 20, 2012, the court held a Rule 16 scheduling conference. On December 21, 2012, plaintiff filed its first request for production of documents and things to the Company and plaintiffs first set of interrogatories
to the Company. On February 1, 2013, the Company filed its first request for production of documents directed to plaintiff. On March 8, 2013, (i) plaintiff filed a motion for leave to file its first amended complaint and its
memorandum in support thereof, and (ii) the Company moved for leave to file amended counterclaims and included its memorandum in support thereof. The Company opposed plaintiffs request for leave to amend as futile, and after argument held
April 3, 2013 on plaintiffs motion, the Court granted both plaintiff and the Company leave to file their amended pleadings and declared the pleadings to be filed that same day. As a consequence, plaintiffs amended complaint now
asserts, in the alternative, affirmative claims for trademark infringement and unfair competition under federal law and for violation of the Michigan Consumer Protection Act, and the Companys amended counterclaims now assert federal trademark
infringement, false designation of origin and federal unfair competition, federal trademark dilution, federal cyberpiracy, and state law trademark infringement, unfair competition and other claims. The parties subsequently filed an agreed-upon
motion for entry of a protective order, and on July 12, 2013 the Court issued an order extending the remaining dates in the action for an additional 90 days that, among other things, provides for completion of discovery by December 13,
2013. The Company believes that plaintiffs claims against the Company are without merit and intends to defend the litigation vigorously.
The
Company is also involved in other various claims and routine litigation matters. In the opinion of management, after consultation with legal counsel, the outcomes of such matters are not anticipated to have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows in future years.
Contractual Commitments
The Company has entered into supply agreements with various food vendors. The majority of these agreements provide for annual pricing and annual purchase
obligations, as well as exclusivity in the production of certain products, with terms of five years or less. One agreement also provides rebates if certain volume thresholds are exceeded. The Company anticipates it will meet all annual purchase
obligations in 2013.
The Company recorded income taxes at an estimated effective income tax rate applied to
income before income taxes of 75.6% and 39.9% in the three and nine months ended September 30, 2013. The Company recorded income taxes at an income tax rate applied to income before income taxes of (54.3)% and (88.6)% in the three and nine
months ended September 30, 2012, respectively. The Company offsets taxable income for state tax purposes with net operating loss carryforwards. At December 31, 2012, the Company had net operating loss carryforwards of approximately $14,526
for state tax purposes. For state tax purposes, there is a limitation on the amount of net operating loss carryforwards that can
13
be utilized in a given year to offset state taxable income and management believes that some of the net operating loss carryforwards will be subject to this annual limit in 2013. State net
operating loss carryforwards will begin to expire in 2025. The total amount of gross unrecognized tax benefits as of both September 30, 2013 and December 31, 2012 was $1,474. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective income tax rate is approximately $958.
In the three months ended September 30, 2013, the Company recorded a
charge of $800 to establish a valuation allowance against its deferred tax asset generated for charitable contributions. The Company recorded a valuation allowance to reduce the deferred tax asset to an amount it expects is more likely than not to
be realized due to the short carryforward period for this temporary difference. Based on the projected level of future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not
that the Company will realize these deferred tax assets, net of the valuation allowance.
14