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.