VITC Vitacost.Com, Inc. (MM)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-34468

 

VITACOST.COM, INC. (Exact Name of Registrant as Specified in Its Charter)

 

Delaware	37-1333024
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
5400 Broken Sound Blvd. - NW, Suite 500, Boca Raton, FL	33487-3521
(Address of Principal Executive Offices)	(Zip Code)

 

(561) 982-4180

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x     No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  x  No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ¨     No  x

 

As of November 1, 2012, the registrant has 33,410,421 shares of common stock outstanding.

 

 

Vitacost.com, Inc. Form 10-Q

 

Table of Contents

 

			Page
PART I.	Financial Information		3
GENERAL
ITEM 1.	Financial Statements (Unaudited)		3
	Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011		3
	Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months ended September 30, 2012 and 2011		4
	Consolidated Statements of Stockholders' Equity for the Nine Months ended September 30, 2012		5
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2012 and 2011		6
	Notes to the Consolidated Financial Statements (Unaudited)		7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		11
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		16
ITEM 4.	Controls and Procedures		17
PART II.	Other Information		17
ITEM 1.	Legal Proceedings		17
ITEM 1A.	Risk Factors		17
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17
ITEM 3.	Defaults Upon Senior Securities		17
ITEM 4.	Mine Safety Disclosures		17
ITEM 5.	Other Information		17
ITEM 6.	Exhibits		18

 

 

PART I.         FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS

 

Vitacost.com, Inc.

Consolidated Balance Sheets

(unaudited)

 

		As of
		September 30, 2012				December 31, 2011
		(In thousands, except par value)
Assets
Current Assets
Cash and cash equivalents		$	35,007			$	12,939
Accounts receivable, net			2,800				2,169
Inventory			31,214				34,822
Prepaid expenses			1,371				1,912
Other receivables			3,029				264
Other assets			74				2,344
Total current assets			73,495				54,450
Property and equipment, net			33,653				33,629
Restricted cash			225				225
Deposits			245				125
Goodwill			2,200				2,200
Total assets		$	109,818			$	90,629
Liability and Stockholders' Equity
Current Liabilities
Accounts payable		$	27,340			$	30,250
Deferred revenue			4,453				4,573
Accrued expenses			8,403				6,425
Total current liabilities			40,196				41,248
Deferred tax liability			336				574
Total liabilities			40,532				41,822
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.00001 per share; 25,000 shares authorized ; no shares issued and outstanding			-				-
Common stock, par value $.00001 per share; 100,000 shares authorized ; 33,410 and 27,975 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively			-				-
Additional paid-in capital			108,476				76,262
Warrants			4,262				-
Accumulated deficit			(43,452	)			(27,455	)
Total stockholders' equity			69,286				48,807
Total liabilities and stockholders' equity		$	109,818			$	90,629

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Vitacost.com, Inc.

Consolidated Statements of Operations and Comprehensive Income

(unaudited)

 

		For  the Three Months Ended								For  the Nine Months Ended
		September 30,								September 30,
		2012				2011				2012				2011
		(In thousands, except per share)
Net sales		$	82,218			$	63,456			$	245,688			$	193,109
Cost of goods sold			63,453				49,024				188,783				148,837
Gross profit			18,765				14,432				56,905				44,272
Operating expenses:
Fulfillment			8,476				5,603				24,692				15,639
Sales and marketing			8,017				6,391				25,153				16,767
General and administrative			7,478				7,797				23,147				23,125
			23,971				19,791				72,992				55,531
Operating loss			(5,206	)			(5,359	)			(16,087	)			(11,259	)
Other income			78				11				129				36
Loss before income taxes			(5,128	)			(5,348	)			(15,958	)			(11,223	)
Income tax (expense) benefit			(13	)			7				(39	)			(40	)
Net loss		$	(5,141	)		$	(5,341	)		$	(15,997	)		$	(11,263	)
Basic per share information:
Net loss available to common stockholders		$	(0.15	)		$	(0.19	)		$	(0.49	)		$	(0.41	)
Weighted average shares outstanding			33,364				27,836				32,414				27,806
Diluted per share information:
Net loss available to common stockholders		$	(0.15	)		$	(0.19	)		$	(0.49	)		$	(0.41	)
Weighted average shares outstanding			33,364				27,836				32,414				27,806
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities			-				-				-				20
Other comprehensive income			-				-				-				20
Comprehensive loss		$	(5,141	)		$	(5,341	)		$	(15,997	)		$	(11,243	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Vitacost.com, Inc.

Consolidated Statements of Stockholders' Equity

(unaudited)

 

										Additional
		Common Stock								Paid-In								Accumulated
		Shares				Amount				Capital				Warrants				Deficit				Total
		(In thousands)
Balance, December 31, 2011			27,975			$	-			$	76,262			$	-			$	(27,455	)		$	48,807
Net loss			-				-				-				-				(15,997	)			(15,997	)
Stock options exercised			515				-				1,313				-				-				1,313
Stock-based compensation expense			-				-				1,524				-				-				1,524
Stock issued in private placement, net			4,920				-				29,377				-				-				29,377
Warrants issued in private placement, net			-				-				-				4,262				-				4,262
Balance at September 30, 2012			33,410			$	-			$	108,476			$	4,262			$	(43,452	)		$	69,286

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Vitacost.com, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

		For the Nine Months Ended September 30,
		2012				2011
		(In thousands)
Cash Flows From Operating Activities
Net loss		$	(15,997	)		$	(11,263	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			4,764				4,569
Amortization of premium on debt securities available-for-sale			-				72
Realized gain on the sale of securities available-for-sale			-				(1	)
Stock-based compensation expense			1,524				1,112
Deferred taxes			(238	)			39
Loss on disposition of property and equipment and other assets			46				32
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(631	)			(648	)
Other receivables			(2,765	)			954
Inventory			3,608				(2,080	)
Prepaid expenses			541				(341	)
Deposits			(120	)			4
Other assets			2,270				1,135
Increase (decrease) in:
Accounts payable			(2,910	)			2,198
Deferred revenue			(120	)			1,169
Accrued expenses			1,979				(4,195	)
Net cash used in operating activities			(8,049	)			(7,244	)
Cash Flows From Investing Activities
Proceeds from disposition of property and equipment			74				-
Payments for the purchase of property and equipment			(4,909	)			(2,608	)
Increase in restricted cash			-				(225	)
Proceeds from maturities of securities available-for-sale			-				10,861
Net cash (used in) provided by investing activities			(4,835	)			8,028
Cash Flows From Financing Activities
Proceeds from private placement, net			33,639				-
Principal payments on notes payable			-				(59	)
Proceeds from the exercise of stock options			1,313				86
Net cash provided by financing activities			34,952				27
Net increase in cash and cash equivalents			22,068				811
Cash and cash equivalents:
Beginning of year			12,939				11,952
End of period		$	35,007			$	12,763
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest		$	-			$	3
Income taxes		$	-			$	-

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Vitacost.com, Inc.

Notes to the Consolidated Financial Statements

(unaudited)

 

1.  Nature of Business, Significant Accounting Policies and Recent Accounting Guidance

 

Nature of Business

 

Vitacost.com, Inc.  (“Vitacost” or the “Company”) is a leading online retailer of health and wellness products, including dietary supplements such as vitamins, minerals, herbs and other botanicals, amino acids and metabolites, as well as cosmetics, organic body and personal care products, pet products, sports nutrition and health foods. Vitacost was incorporated in 1994 and began its online retail activity in 1999.  Vitacost sells an internally developed proprietary line of nutraceuticals as well as a wide selection of other manufacturers’ brand-name health and wellness products.  The Company ships products from two distribution centers located in Lexington, North Carolina and Las Vegas, Nevada.

 

Basis of presentation

 

The accompanying unaudited consolidated financial statements of Vitacost as of September 30, 2012, and for the three and nine months ended September 30, 2012 and 2011, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information along with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In management’s opinion, Vitacost has made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair presentation of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2012, or for any other period. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in Vitacost’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Form 10-K”).

 

Significant Accounting Policies

 

Principles of consolidation :

 

The consolidated financial statements include the accounts of Vitacost and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Reclassifications :

 

Reclassifications to the 2011 Consolidated Statements of Operations have been made to conform to the 2012 presentation.

 

Earnings per share :

 

The Company computed earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by giving effect to all potentially dilutive common shares, including stock options and warrants. The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the three and nine months ended September 30, 2012 and 2011:

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
		(In thousands)								(In thousands)
Weighted-average shares outstanding - basic			33,364				27,836				32,414				27,806
Effect of dilutive securities			-				-				-				-
Weighted-average shares outstanding - diluted			33,364				27,836				32,414				27,806

 

 

For the periods where the Company reported losses, all common stock equivalents are excluded from the computation of diluted earnings per share, since the result would be antidilutive. Securities that were not included in the calculation of diluted earnings per share because to do so would have been antidilutive for the periods presented, are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
		(In thousands)								(In thousands)
Stock options			2,248				2,648				2,248				2,648
Warrants			1,681				-				1,681				-
Total antidilutive common stock equivalents excluded from diluted earnings per share			3,929				2,648				3,929				2,648

 

Restricted cash :

 

Restricted cash consists of cash pledged as collateral to secure a vendor obligation.

 

Fair value of financial instruments :

 

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1:

Quoted market prices in active markets for identical assets or liabilities.

 

Level 2:

Observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3:

Unobservable inputs that are not corroborated by market data.

 

The carrying amounts of other financial instruments, including cash, cash equivalents, accounts receivable, other receivables and accounts payable approximate fair value due to the short maturity of these instruments. Cash and cash equivalents are a Level 1 instrument within the fair value hierarchy.

 

Concentration of credit risk :

 

The Company’s cash and cash equivalents were held by one major financial institution and for certain accounts exceed federally insured limits. These cash and cash equivalent balances could be impacted if the underlying financial institution fails or is subjected to other adverse conditions in the financial markets.  To date, the Company has experienced no loss or lack of access to its cash and cash equivalents.

 

Recent Accounting Guidance

 

Recently adopted accounting guidance :

 

On January 1, 2012, the Company adopted provisions of the authoritative guidance related to changes to fair value measurement and disclosure. Specifically, the guidance includes clarification about when the concept of highest and best use is applicable to fair value measurements, requires quantitative disclosures about inputs used and qualitative disclosures about the sensitivity of recurring Level 3 measurements, and requires the classification of all assets and liabilities measured at fair value in the fair value hierarchy, including those assets and liabilities which are not recorded at fair value but for which fair value is disclosed. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

On January 1, 2012, the Company adopted provisions of the authoritative guidance related to the changes to the presentation of comprehensive income. Specifically, the guidance gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected to present components of net income and other comprehensive income in a single continuous statement. The components of other comprehensive income are presented net of the related tax effects. Other than the changes in presentation, the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

2. Private Placement

 

On February 16, 2012, the Company entered into a Purchase Agreement (the “Purchase Agreement”) by and among Vitacost, JHH Capital, LLC, an entity affiliated with Jeffrey Horowitz, our Chief Executive Officer (“JHH”), Great Hill Equity Partners III, L.P. (“Great Hill III”), Great Hill Equity Partners IV, L.P. (“Great Hill IV”), Great Hill Investors, LLC (“Great Hill Investors”), Freshford Partners, LP (“Freshford Partners”), Freshford Master Fund, Ltd (“Freshford Master Fund”) and Baron Small Cap Fund (“Baron” and, together with JHH, Great Hill III, Great Hill IV, Great Hill Investors, Freshford Partners, Freshford Master Fund, collectively, the “Investors”) pursuant to which the Investors purchased, and Vitacost sold, an aggregate of 4.9 million shares of the Company’s common stock at a purchase price of $7.04 per share, and warrants to purchase an aggregate of 1.7 million shares of the Company’s common stock for an aggregate purchase price of $34.8 million. The warrants have an exercise price of $7.04 per share and a term of four years. The net proceeds of $33.6 million, after the deduction of fees of $1.2 million incurred in connection with the transaction, were allocated between common stock and warrants based on their relative fair values as of the purchase date.

 

 

3. Inventory

 

Inventory consists of the following as of September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
		(In thousands)
Raw materials		$	-			$	2,959
Work in process and bulk			1,331				2,591
Finished goods			29,883				29,272
		$	31,214			$	34,822

 

On August 28, 2012, the Company entered into an agreement to outsource its manufacturing operations and lease its manufacturing facilities to a third party provider effective September 1, 2012. In connection with the outsourcing of its manufacturing operations, the Company sold certain inventory to the third party provider which will be used to manufacture products for the Company. The total selling price was $2.2 million, which will be paid in six monthly payments of $0.4 million with the first payment due on October 1, 2012. The Company incurred a loss of $0.1 million on the sale of the inventory.

 

4. Property and Equipment

 

Property and equipment consists of the following as of September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
		(In thousands)
Buildings and building improvements		$	12,759			$	12,428
Furniture, fixtures and equipment			24,149				21,594
Computers			3,380				2,709
Software			7,887				7,235
Leasehold improvements			2,670				2,620
Land			460				460
			51,305				47,046
Less accumulated depreciation			(19,700	)			(14,995	)
			31,605				32,051
Construction-in-progress			2,048				1,578
		$	33,653			$	33,629

 

Construction-in-progress was primarily related to the upgrade of the Company’s Lexington, North Carolina distribution facility.

 

5. Stock Option Plan

 

In September 2011, the Company obtained approval of the 2011 Incentive Compensation Plan (the “Plan”), which replaced the 2007 Stock Award Plan (the “2007 Plan”). The 2007 Plan, however, will continue to govern awards previously granted under it. The Plan share reserve includes the sum of 6.0 million shares of the Company’s common stock, plus (i) any shares of its common stock which have been reserved but not issued pursuant to any awards granted under the 2007 Plan, and (ii) the number of shares subject to outstanding awards under the 2007 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to or repurchased by the Company.

 

 

A summary of the Company’s stock option activity related to common stock for the nine months ended September 30, 2012 and 2011 is as follows: 

 

		2012								2011
						Weighted-								Weighted-
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
		(In thousands except exercise price)
Outstanding at beginning of period			4,262			$	5.69				2,718			$	6.42
Granted			2,094				6.73				1,585				4.10
Exercised			(515	)			2.55				(75	)			1.14
Forfeited			(550	)			6.64				(5	)			9.72
Outstanding at period end			5,291			$	6.61				4,223			$	5.64
Exercisable at period end			2,248			$	6.86				2,648			$	6.05

 

As of September 30, 2012 and September 30, 2011, there was $7.8 million and $4.7 million, respectively, of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the Company’s stock incentive plans, which is expected to be recognized over a weighted average period of 3.27 and 2.94 years, respectively.

 

6.    Contingencies

 

Securities Class Action

 

On May 24, 2010, a punitive class action complaint was filed in the United States District Court for the Southern District of Florida against the Company and certain current and former officers and directors by a stockholder on behalf of herself and other stockholders who purchased Vitacost common stock between September 24, 2009 and April 20, 2010, captioned Miyahira v. Vitacost.com, Inc., Ira P. Kerker, Richard P. Smith, Stewart Gitler, Allen S. Josephs, David N. Ilfeld, Lawrence A. Pabst, Eran Ezra, and Robert G. Trapp, Case 9:10-cv-80644-KLR. After being appointed to represent the purported class of shareholders, the lead plaintiffs filed an amended complaint asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder against Vitacost, its current and former officers and directors, and the underwriters of its initial public offering (“IPO”). On December 12, 2011, the Court granted defendants’ motion to dismiss the complaint, and granted plaintiffs leave to amend.

 

On January 11, 2012, lead plaintiff filed its second amended complaint asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 against Vitacost, its current and former officers and directors, and its underwriters. Lead plaintiff purports to bring its action on behalf of investors who purchased stock in connection with or traceable to the Company’s IPO between September 24, 2009 and April 20, 2010. The complaint alleges that defendants violated the federal securities laws during the period by, among other things, disseminating false and misleading statements and/or concealing material facts concerning the Company’s current and prospective business and financial results. The complaint also alleges that as a result of these actions the Company’s stock price was artificially inflated during the class period. The complaint seeks unspecified compensatory damages, costs, and expenses.

 

On June 25, 2012 the Southern District of Florida entered its order granting defendants’ motion to dismiss in full and dismissing the second amended complaint with prejudice. On July 23, 2012, lead plaintiff filed notice of appeal to the Eleventh Circuit of the order granting defendants’ motion to dismiss. Plaintiff-Appellant filed its opening appellate brief on September 17, 2012, and Defendant-Appellees filed their responding brief on October 29, 2012.

 

The Company records provisions in its consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of September 30, 2012, the Company has concluded that it is not probable that a loss has been incurred and is unable to estimate the possible loss or range of loss that could result from an unfavorable verdict. Therefore, the Company has not provided any amounts in the consolidated financial statements for an unfavorable outcome. The Company believes that it has meritorious arguments for affirmation of the Southern District of Florida’s order that it will raise in the appeal. It is possible that the Company’s consolidated financial statements could be materially adversely affected by an unfavorable outcome.

 

Other matters

 

In addition to the matter described above, the Company is involved in litigation and administrative proceedings primarily arising in the normal course of its business. In the opinion of the Company, except as set forth above, its liability, if any, under any other pending litigation or administrative proceedings would not materially affect its financial condition, results of operations or cash flows. Furthermore, the Company has not been the subject of any product liability litigation.

 

7. Income Taxes

 

The Company evaluates its deferred tax assets on a regular basis to determine if valuation allowances are required. In its evaluation, the Company considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences and available tax planning strategies that could be implemented, if required.  Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard.  Based on the Company’s evaluation, a valuation allowance of $4.6 million was established against its net deferred tax assets for the nine months ended September 30, 2012. This amount was in addition to the $11.2 million valuation allowance that was recorded as of December 31, 2011.

 

 

ITEM 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

 

This Quarterly Report on Form 10-Q contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, expected outcomes of litigation, and other information that is not historical information. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential," "continue," "seek" or the negative of these terms or other comparable terminology or by discussions of strategy.

 

All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and beliefs, but they are inherently uncertain. We may not realize our expectations and our beliefs may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements and are subject to change due to inherent risks and uncertainties such as those disclosed or incorporated by reference to our filings with the Securities and Exchange Commission (“SEC”). Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from the forward-looking statements are set forth in this Quarterly Report on Form 10-Q, under the heading "Risk Factors" and include, among others:

 

•

the current global economic climate;

 

•

significant competition in our industry;

 

•

unfavorable publicity or consumer perception of our products on the Internet;

 

•

the incurrence of material product liability and product recall costs;

 

•

costs of compliance and our failure to comply with government regulations;

 

•

our inability to successfully defend intellectual property claims;

 

•

our failure to keep pace with the changing demands and preferences of our customers for new products;

 

•

disruptions in our information technology systems; and

 

•

the lack of long-term experience with human consumption of some of our products with innovative ingredients.

 

Overview

 

We are a leading online retailer, based on annual sales volume, of health and wellness products, including dietary supplements such as vitamins, minerals, herbs and other botanicals, amino acids and metabolites (which we refer to as “VMHS”), as well as cosmetics, organic body and personal care products, pet products, sports nutrition and health foods. We sell these products directly to consumers primarily through our website, www.vitacost.com . We strive to offer our customers the broadest selection of healthy living products, while providing superior customer service and timely and accurate delivery.

 

We were incorporated in Delaware in May 1994 and began operations as a catalog retailer of third-party vitamins and supplements under the name Nature’s Wealth Company. In 1999, we launched Vitacost.com and introduced a line of proprietary vitamins and supplements. In 2000, we began operations under the name Vitacost.com, Inc. In September 2009, we completed our Initial Public Offering.

 

Private Placement

 

On February 16, 2012, we entered into the Purchase Agreement pursuant to which the Investors purchased, and we sold, an aggregate of 4.9 million shares of our common stock at a purchase price of $7.04 per share, and warrants to purchase an aggregate of 1.7 million shares of common stock for an aggregate purchase price of $34.8 million. The warrants have an exercise price of $7.04 per share and a term of four years. A portion of the proceeds from the financing are being used to expand and optimize our distribution network. Of this amount, an estimated $5.0 million is being used to complete the upgrade of our existing distribution centers. A substantial portion of the upgrade was completed as of September 30, 2012. The remainder of the upgrade is expected to continue into 2013. In addition, an estimated $15.0 million may be used to invest in and stock a third distribution center to support our sales growth. We initially intended to begin investing in a new facility in the second half of 2012, but due to the significant increase in our capacity associated with the distribution center expansions in North Carolina and Nevada, we are now evaluating an investment in a new facility in 2013. We intend to use the remaining proceeds from the financing for general operations.

 

 

Manufacturing Outsourcing

 

On August 28, 2012, we entered into an agreement to outsource our manufacturing operations and lease our manufacturing facilities to a third party provider effective September 1, 2012. Approximately forty percent of our proprietary products were supplied by contract manufactures, and this transaction outsources the remaining portion. We do not expect the transaction to have a material impact on our results from operations. We expect the transaction to have approximately a $4.0 million to $5.0 million positive impact on cash flows from operating activities through the reduction of proprietary inventory levels.

 

Trends and Other Factors Affecting Our Business

 

We continue to experience increased levels of competition as the health and wellness industry shifts towards a greater internet presence. This competitive environment continues to drive margin pressure as deep discounting results from aggressive customer acquisition and retention actions. We continue to respond to the increased levels of competition by expanding our product offerings through the introduction of new and diverse products, improving our customer service and support, improving our reliability and speed of delivery and by adjusting our product mix and pricing.

 

The health and wellness industry continues to benefit from positive demographic trends, with an aging population, and trends affecting health and lifestyle preferences, with an increasingly health conscious consumer. In addition, the increasing cost of traditional healthcare has helped bolster demand for natural products to help ward off more expensive medical visits and prescription drugs. Changes in these trends and other factors that we may not foresee may also impact our business, including potential regulatory actions by the Food and Drug Administration (“FDA”) and the Federal Trade Commission (“FTC”) that may affect the viability of certain products that we offer.

 

Sources of Revenue

 

We derive our revenue principally through the sale of products and freight billed to customers associated with the shipment of products. Net product sales accounted for approximately 96% and 97% of our total net sales, for the nine months ended September 30, 2012 and 2011, respectively, with freight comprising the remainder.

 

Cost of Goods Sold and Operating Expenses

 

Cost of Goods Sold. Cost of goods sold consists primarily of the cost of the product sold and the cost of shipping the product to the customers.

 

Fulfillment .  Fulfillment expenses include the costs of warehousing and shipping supplies, machinery and equipment, maintenance, employees, professional services and rent.

 

Sales and Marketing. Sales and marketing expenses include online advertising and promotional expenditures, including third-party content license fees, affiliates and partners’ commissions, traditional media advertising, print expenses and payroll related expenses for personnel engaged in marketing, sales, customer service, and website development and maintenance. We expense advertising costs as incurred.

 

General and Administrative. General and administrative expenses consist of executive compensation, information technology expenses, credit card processing fees, legal fees, professional services, employee expenses and general corporate expenses.

 

Results of Operations

 

The following table sets forth certain condensed consolidated statements of operations data as a percentage of net sales for the three and nine months ended September 30, 2012 and 2011, respectively:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		(unaudited)								(unaudited)
		2012				2011				2012				2011
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			77.2				77.3				76.8				77.1
Gross profit			22.8				22.7				23.2				22.9
Operating expenses:
Fulfillment			10.3				8.8				10.1				8.1
Sales and marketing			9.8				10.1				10.2				8.7
General and administrative			9.1				12.3				9.4				12.0
Total operating expense			29.2				31.2				29.7				28.8
Operating loss			(6.3	)			(8.4	)			(6.5	)			(5.8	)
Net loss			(6.3	)%			(8.4	)%			(6.5	)%			(5.8	)%

 

 

Comparison of Three Months Ended September 30, 2012 to Three Months Ended September 30, 2011

 

		Three Months Ended
		September 30,
		(unaudited)								$				%
		2012				2011				Increase				Increase
		(In thousands)
Third-party products		$	61,492			$	46,753			$	14,739				31.5	%
Proprietary products			17,846				14,679				3,167				21.6
Freight			2,880				2,024				856				42.3
Net sales			82,218				63,456				18,762				29.6
Cost of goods sold			63,453				49,024				14,429				29.4
Gross profit		$	18,765			$	14,432			$	4,333				30.0	%

 

Net Sales .  Net sales increased approximately $18.8 million, or 29.6 %, to $82.2 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Net sales of our third-party products increased $14.7 million, or 31.5%, to $61.5 million for the three months ended September 30, 2012. Net sales of our proprietary products increased $3.2 million, or 21.6%, to $17.8 million for the three months ended September 30, 2012, and freight increased $0.9 million, or 42.3%, to $2.9 million for the three months ended September 30, 2012.

  

The increase in net sales was primarily the result of an increase in our customer base and the number of shipped orders compared to the three months ended September 30, 2011. As of September 30, 2012, we had 2.0 million active customers, an increase of 62.0% from September 30, 2011. For the three months ended September 30, 2012, we shipped 1.2 million orders, which represents a 36.8% increase over the three months ended September 30, 2011. The growth in active customers and the number of shipped orders was due to a greater emphasis on new customer acquisition, as we expanded our marketing activities and promotional offers and grew our network of affiliates and partners during the quarter. In the second half of 2011 we began distributing our products on Amazon.com and we launched our Refer-A-Friend campaign, both of which continue to be significant drivers of our new customer growth.

 

Cost of Goods Sold . Cost of goods sold increased approximately $14.4 million, or 29.4%, to $63.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. As a percentage of net sales, cost of goods sold remained relatively flat for the three months ended September 30, 2012 when compared to the three months ended September 30, 2011.

 

Gross Profit .  Gross profit increased approximately $4.3 million, or 30.0%, to $18.8 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. Excluding the $0.1 million loss on the sale of inventory related to the outsourcing of manufacturing operations, gross margin was 22.9% for the three months ended September 30, 2012 compared to 22.7% for the three months ended September 30, 2011. The increase in gross margin was primarily related to the reduction in our shipping costs per order, as we implemented a program to reduce shipping expenses in the latter part of 2011. The increase in gross margin was slightly offset by a reduction in product margin, primarily due to increased promotions.

 

Fulfillment . Fulfillment expense increased approximately $2.9 million, or 51.3%, to $8.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. As a percentage of net sales, fulfillment expense increased to 10.3% for the three months ended September 30, 2012 compared to 8.8% for the three months ended September 30, 2011. The period-over-period increase in fulfillment expense as a percentage of sales was primarily attributable to a lower average order value in the quarter. Additionally, the increase was also due to fees associated with our freight reduction program and increased employee primarily expenses associated with the fulfillment centers upgrade project, which are intended to deliver fulfillment cost efficiencies. We are investing in and aggressively working to improve our fulfillment efficiency.

 

Sales and Marketing . Sales and marketing expense increased approximately $1.6 million, or 25.4%, to $8.0 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. As a percentage of net sales, expenses decreased to 9.8% for the three months ended September 30, 2012 from 10.1% for the three months ended September 30, 2011. Included in the 2011 amount was $0.9 million in severance and executive recruiting expenses. Excluding these items, sales and marketing expenses increased $2.5 million period-over-period. The increase in sales and marketing was primarily due to fees of $1.3 million paid to affiliates and partners associated with the expanded distribution of our products, increased online advertising of $0.6 million, increased employee expenses of $0.4 million and increased other sales and marketing costs of $0.2 million. We believe sales and marketing expense may increase in the future as we continue to invest in marketing initiatives to drive additional growth in our customer base.

 

General and Administrative . General and administrative expense decreased approximately $0.3 million, or 4.1%, to $7.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. As a percentage of net sales, expenses decreased to 9.1% for the three months ended September 30, 2012 from 12.3% for the three months ended September 30, 2011. Included in the 2012 amount was a $0.1 million severance payment to our former Chief Information Officer and $0.1 million of relocation expenses to our new Chief Information Officer and Chief Technology Officer, offset by $0.3 million related to the release of a litigation accrual. Included in the 2011 amount were $0.8 million in expenses consisting of the following: $0.4 million primarily related to the Company’s equity capitalization issue, $0.3 million related to a litigation settlement offer and $0.1 million for an adjustment to the severance settlements for our former Chief Executive Officer and former Chief Financial Officer. Excluding the aforementioned items in both periods, general and administrative expense increased $0.6 million period over period. The increase was primarily attributable to increased employee compensation costs of $0.3 million due to headcount growth in critical departments and increased credit card fees of $0.3 million due to higher sales. We believe general and administrative expense may increase in the future as we invest in our information technology infrastructure to support our future growth.

 

 

Income Tax . Income tax expense was an insignificant amount and remained flat for the three months ended September 30, 2012 when compared to the same period in the prior year. This was a result of reducing our net deferred tax assets to zero at December 31, 2010 and maintaining a valuation allowance on our deferred tax assets though September 30, 2012.

 

Comparison of Nine Months Ended September 30, 2012 to Nine Months Ended September 30, 2011

 

		Nine Months Ended
		September 30,
		(unaudited)								$				%
		2012				2011				Increase				Increase
		(In thousands)
Third-party product		$	181,303			$	139,854			$	41,449				29.6	%
Proprietary products			54,852				46,650				8,202				17.6
Freight			9,533				6,605				2,928				44.3
Net sales			245,688				193,109				52,579				27.2
Cost of goods sold			188,783				148,837				39,946				26.8
Gross profit		$	56,905			$	44,272			$	12,633				28.5	%

 

Net Sales .  Net sales increased approximately $52.6 million, or 27.2 %, to $245.7 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Net sales of our third-party products increased $41.4 million, or 29.6%, to $181.3 million for the nine months ended September 30, 2012. Net sales of our proprietary products increased $8.2 million, or 17.6%, to $54.9 million for the nine months ended September 30, 2012, and freight increased $2.9 million, or 44.3%, to $9.5 million for the nine months ended September 30, 2012.

 

The increase in net sales was primarily the result of an increase in our customer base and the number of shipped orders compared to the nine months ended September 30, 2011. As of September 30, 2012, we had 2.0 million active customers, an increase of 62.0% from September 30, 2011. For the nine months ended September 30, 2012, we shipped 3.7 million orders, which represents a 42.5% increase over the nine months ended September 30, 2011. The growth in active customers and the number of shipped orders was due to a greater emphasis on new customer acquisition, as we expanded our marketing activities and promotional offers and grew our network of affiliates and partners during the period. In the second half of 2011 we began distributing our products on Amazon.com and we launched our Refer-A-Friend campaign, both of which continue to be significant drivers of our new customer growth.

 

Cost of Goods Sold . Cost of goods sold increased approximately $40.0 million, or 26.8%, to $188.8 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of net sales, cost of goods sold decreased to 76.8% for the nine months ended September 30, 2012 from 77.1% for the nine months ended September 30, 2011.

 

Gross Profit .  Gross profit increased approximately $12.6 million, or 28.5%, to $56.9 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. Excluding the $0.1 million loss on the sale of inventory related to the outsourcing of manufacturing operations, gross margin was 23.2% for the nine months ended September 30, 2012 compared to 22.9% for the nine months ended September 30, 2011. The increase in gross margin was primarily related to the reduction in our shipping costs per order, as we implemented a program to reduce shipping expenses in the latter part of 2011. The increase in gross margin was slightly offset by a reduction in product margin, primarily due to increased promotions.

 

Fulfillment . Fulfillment expense increased approximately $9.1 million, or 57.9%, to $24.7 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of net sales, fulfillment expense increased to 10.1% for the nine months ended September 30, 2012 compared to 8.1% for the nine months ended September 30, 2011. The period-over-period increase in fulfillment expense as a percentage of sales was primarily attributable to a lower average order value in the period. Additionally, the increase was also due to fees associated with our freight reduction program and increased employee expenses primarily associated with the fulfillment centers upgrade project, which are intended to deliver fulfillment cost efficiencies. We are investing in and aggressively working to improve our fulfillment efficiency.

 

Sales and Marketing . Sales and marketing expense increased approximately $8.4 million, or 50.0%, to $25.2 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of net sales, expenses increased to 10.2% for the nine months ended September 30, 2012 from 8.7% for the nine months ended September 30, 2011. Included in the 2011 amount was $0.9 million in severance and executive recruiting expenses. Excluding these items, sales and marketing expenses increased $9.3 million period-over-period. The increase in sales and marketing was primarily due to fees of $4.4 million paid to affiliates and partners associated with the expanded distribution of our products, increased online advertising of $2.2 million, increased employee expenses of $2.0 million, and increased other sales and marketing costs of $0.7 million. We believe sales and marketing expense may increase in the future as we continue to invest in marketing initiatives to drive additional growth in our customer base.

 

 

General and Administrative . General and administrative expense remained flat at $23.1 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. As a percentage of net sales, expenses decreased to 9.4% for the nine months ended September 30, 2012 from 12.0% for the nine months ended September 30, 2011. Included in the 2012 amount were $0.5 million in expenses consisting primarily of the following: $0.2 million in severance paid to our former Interim Chief Financial Officer, $0.2 million in fees associated with the financing in the first quarter of 2012, $0.1 million in additional legal expenses associated with the Class Action lawsuit, a $0.1 million severance payment to our former Chief Information Officer, and $0.1 million of relocation expenses to our new Chief Information Officer and Chief Technology Officer, partially offset by $0.3 million related to the release of a litigation accrual. Included in the 2011 amount were $2.5 million in expenses consisting of the following: $2.1 million in expenses primarily related to our equity capitalization issue and strategic review, $0.3 million related to a litigation settlement offer and $0.1 million for an adjustment to the severance settlements for our former Chief Executive Officer and former Chief Financial Officer. Excluding the aforementioned items, general and administrative expense increased $2.0 million period over period. The increase was primarily attributable to increased employee compensation costs of $0.8 million due to headcount growth in critical departments, increased credit card fees of $0.6 million due to higher sales, and increased other administrative costs of $0.6 million. We believe general and administrative expense may increase in the future as we invest in our information technology infrastructure to support our future growth.

 

Income Tax . Income tax expense was an insignificant amount and remained flat for the nine months ended September 30, 2012 when compared to the same period in the prior year. This was a result of reducing our net deferred tax assets to zero at December 31, 2010 and maintaining a valuation allowance on our deferred tax assets though September 30, 2012.

 

Liquidity and Capital Resources

 

Liquidity . The significant components of our working capital are cash and cash equivalents, inventory and accounts receivable, primarily from credit card processors, reduced by accounts payable and accrued expenses. Cash and cash equivalents consist of cash and money market accounts.  The working capital characteristics of our business allow us to collect cash from sales to customers within a few business days of the related sale. At September 30, 2012, we had working capital of approximately $33.3 million.

 

Cash flows from operating activities. Net cash used in operating activities was $8.0 million and $7.2 million for the nine months ended September 30, 2012 and 2011, respectively. The $0.8 million change in operating cash flows was primarily due to our increased net loss.

 

Cash flows from investing activities. Net cash (used in) provided by investing activities was ($4.8) million and $8.0 million for the nine months ended September 30, 2012 and 2011, respectively. The $12.9 million change in cash flows from investing activities was primarily due to a decrease in proceeds from maturities of securities available-for-sale as we liquidated all our securities available-for-sale during the second quarter of 2011 and an increase in our capital expenditures.

 

Cash flows from financing activities. Net cash provided by financing activities was $35.0 million for the nine months ended September 30, 2012 and an insignificant amount for the nine months ended September 30, 2011. The change in cash flows from financing activities was primarily due to the net proceeds of $33.6 million from the financing in the first quarter of 2012 and the increase in proceeds from the exercise of stock options of $1.2 million.

 

Amounts deposited with third party financial institutions exceed the Federal Deposit Insurance Corporation, or FDIC, and Securities Investor Protection Corporation, or SIPC, insurance limits, as applicable. These cash and cash equivalent balances could be impacted if the underlying financial institutions fail or are subjected to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to our cash and cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets.

 

Our future capital requirements will depend on many factors, including:

 

•

the rate of our revenue growth;

 

•

the timing and extent of expenditures to enhance our website, network infrastructure, and transaction processing systems;

 

•

the extent of our advertising and marketing programs;

 

•

the efficiency of our fulfillment process and systems;

 

•

the levels of inventory we maintain; and

 

•

other factors relating to our business.

 

 

On February 16, 2012, we entered into the Purchase Agreement pursuant to which the Investors purchased, and we sold, an aggregate of 4.9 million shares of our common stock at a purchase price of $7.04 per share, and warrants to purchase an aggregate of 1.7 million shares of common stock for an aggregate purchase price of $34.8 million. The warrants have an exercise price of $7.04 per share and a term of four years. A portion of the proceeds from the financing are being used to expand and optimize our distribution network. Of this amount, an estimated $5.0 million is being used to complete the upgrade of our existing distribution centers. A substantial portion of the upgrade was completed as of September 30, 2012. The remainder of the upgrade is expected to continue into 2013. In addition, an estimated $15.0 million may be used to invest in and stock a third distribution center to support our sales growth. We initially intended to begin investing in a new facility in the second half of 2012, but due to the significant increase in our capacity associated with the distribution center expansions in North Carolina and Nevada, we are now evaluating an investment in a new facility in 2013. We intend to use the remaining proceeds from the financing for general operations.

 

On August 28, 2012, we entered into an agreement to outsource our manufacturing operations and lease our manufacturing facilities to a third party provider effective September 1, 2012. Approximately forty percent of our proprietary products were supplied by contract manufactures, and this transaction outsources the remaining portion. We do not expect the transaction to have a material impact on our results from operations. We expect the transaction to have approximately a $4.0 million to $5.0 million positive impact on cash flows from operating activities through the reduction of proprietary inventory levels.

 

At September 30, 2012, we had $35.0 million in cash and cash equivalents. For the nine months ended September 30, 2012, our net cash used in operating activities was $8.0 million which was primarily due to our net loss. We are investing in our growth strategy, which includes increasing our brand and company awareness, expanding our customer base, growing our product assortment and expanding and optimizing our distribution capabilities. As a result, we are working to increase our customers’ lifetime value by increasing the frequency of purchases and improving customer retention, while also improving our operating efficiencies. We believe the implementation of our growth strategy will reduce our net loss and our net cash used in operations in the future.

 

We believe that our cash and cash equivalents currently on hand and our net cash flows from operations will be sufficient to continue our operations for the next twelve months, although we may require additional financing in the future in order to execute our operating plan. We cannot predict whether future financing, if any, will be in the form of equity, debt, or a combination of both. We may not be able to obtain additional funds on a timely basis, on acceptable terms or at all.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

 

The preparation of these financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in more detail in the notes to our consolidated financial statements, and our most critical accounting policies, pertain to revenue recognition, income taxes, stock-based compensation, contingencies, inventories and goodwill. In applying such policies, we exercise our best judgment and best estimates. Actual results may differ from these estimates under different assumptions or conditions. For a further discussion of these Critical Accounting Policies and Estimates, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as filed with the SEC on March 15, 2012 for the year ended December 31, 2011.

 

Recently Issued Accounting Standards

 

Refer to Note 1 to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding recently issued accounting standards applicable to us.

 

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk represents the risk of changes in the value of market risk sensitive instruments caused by fluctuations in interest rates, foreign exchange rates and commodity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. However, we do not believe that a change in market interest rates would have a material effect on our results of operations or financial condition. Although we derive a minor portion of our sales outside of the U.S., all of our sales are denominated in U.S. dollars. We have limited exposure to financial market risks, including changes in interest rates and foreign currency exchange rates. Inflation generally affects us by increasing costs of raw materials, labor and equipment. We do not believe that inflation had any material effect on our results of operations in the periods presented in our financial statements.

 

 

ITEM 4.         CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that those controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 during the quarter ended September 30, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Vitacost have been detected.

 

PART II.       OTHER INFORMATION

 

ITEM 1.         LEGAL PROCEEDINGS

 

Refer to Note 6 Contingencies, of our consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion on the nature of the legal proceedings against us, which is incorporated herein by reference.

 

ITEM 1A.   RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2011, which we hereby incorporate by reference into this Quarterly Report on Form 10-Q, and which could materially affect our business, financial condition or operating results.  While we  believe that there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, the risks described in our Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.         MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.         OTHER INFORMATION

 

None.

 

 

ITEM 6.         EXHIBITS

 

	3.1	Certificate of Incorporation of the Registrant (1)
	3.2	Bylaws of the Registrant (2)
	10.1	Employment Agreement between Vitacost.com, Inc. and Joseph R. Topper, Jr., dated August 6, 2012 (3)
	10.1	Manufacturing Agreement between Vitacost.com, Inc. and Nature’s Value Inc., dated August 28, 2012. (4)
	10.2	Facilities Lease Agreement among Vitacost.com, Inc., Nutra-Pharma Manufacturing Corp. and Nature’s Value, Inc., dated August 28, 2012. (5)
	10.3	Equipment Rental Agreement among Vitacost.com, Inc., Nutra-Pharma Manufacturing Corp. and Nature’s Value, Inc., dated August 28, 2012.  (6)
	10.4	Services Agreement among Vitacost.com, Inc. and Nutra-Pharma Manufacturing Corp., dated August 28, 2012. (7)
	*31.1	Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	*31.2	Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	*32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*101.INS	XBRL Instance Document
	*101.SCH	XBRL Taxonomy Extension Schema Document
	*101.CAL	XBRL Taxonomy Calculation Linkbase Document
	*101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	*101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	*101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

(1)

Filed as an Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.

(2)

Filed as an Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.

(3)

Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2012.

(4)

Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(5)

Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(6)

Filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(7)

Filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

   

* Filed herewith.      

       

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		VITACOST.COM, INC.
	By:	/s/ Jeffrey J. Horowitz
		Name:  Jeffrey J. Horowitz
		Title:   Chief Executive Officer
	By:	/s/ Brian D. Helman
		Name:  Brian D. Helman
		Title:   Chief Financial Officer
Date: November 7, 2012

 

 

INDEX TO EXHIBITS

 

Exhibits

 

  

	3.1	Certificate of Incorporation of the Registrant (1)
	3.2	Bylaws of the Registrant (2)
	10.1	Employment Agreement between Vitacost.com, Inc. and Joseph R. Topper, Jr., dated August 6, 2012 (3)
	10.1	Manufacturing Agreement between Vitacost.com, Inc. and Nature’s Value Inc., dated August 28, 2012. (4)
	10.2	Facilities Lease Agreement among Vitacost.com, Inc., Nutra-Pharma Manufacturing Corp. and Nature’s Value, Inc., dated August 28, 2012. (5)
	10.3	Equipment Rental Agreement among Vitacost.com, Inc., Nutra-Pharma Manufacturing Corp. and Nature’s Value, Inc., dated August 28, 2012.  (6)
	10.4	Services Agreement among Vitacost.com, Inc. and Nutra-Pharma Manufacturing Corp., dated August 28, 2012. (7)
	*31.1	Certification of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	*31.2	Certification of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	*32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*101.INS	XBRL Instance Document
	*101.SCH	XBRL Taxonomy Extension Schema Document
	*101.CAL	XBRL Taxonomy Calculation Linkbase Document
	*101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	*101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	*101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

(1)

Filed as an Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.

(2)

Filed as an Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.

(3)

Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 6, 2012.

(4)

Filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(5)

Filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(6)

Filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

(7)

Filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the SEC on August 29, 2012.

   

* Filed herewith.