Attached files
file | filename |
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EX-31.2 - Vitacost.com, Inc. | v166188_ex31-2.htm |
EX-32.1 - Vitacost.com, Inc. | v166188_ex32-1.htm |
EX-32.2 - Vitacost.com, Inc. | v166188_ex32-2.htm |
EX-31.1 - Vitacost.com, Inc. | v166188_ex31-1.htm |
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, 2009
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 ¨ No x.
Indicate
by checkmark 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 time period that the registrant was required to
submit and post such files). Yes ¨ No x
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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer x
|
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
October 31, 2009, 27,488,353 shares of the registrant’s common stock were
outstanding.
Vitacost.com,
Inc.
Table
of Contents
Page
|
|||||
PART
I.
|
FINANCIAL
INFORMATION
|
2 | |||
ITEM
1.
|
FINANCIAL
STATEMENTS
|
2 | |||
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
13 | |||
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
21 | |||
ITEM
4T.
|
CONTROLS
AND PROCEDURES
|
21 | |||
PART
II.
|
OTHER
INFORMATION
|
21 | |||
ITEM
1.
|
LEGAL
PROCEEDINGS
|
21 | |||
ITEM
1A.
|
RISK
FACTORS
|
22 | |||
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
40 | |||
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
41 | |||
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
41 | |||
ITEM
5.
|
OTHER
INFORMATION
|
42 | |||
ITEM
6.
|
EXHIBITS
|
42 |
i
PART
I.
|
FINANCIAL
INFORMATION
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
Vitacost.com,
Inc.
Condensed
Consolidated Balance Sheets
September
30, 2009 and December 31, 2008
September
30,
|
||||||||
2009
|
December
31,
|
|||||||
Assets
|
(unaudited)
|
2008
|
||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 48,382,910 | $ | 61,326 | ||||
Accounts
receivable
|
1,071,811 | 842,523 | ||||||
Other
receivables
|
722,356 | 645,451 | ||||||
Related
party receivable
|
- | 215,241 | ||||||
Inventory,
net
|
23,872,776 | 21,662,746 | ||||||
Prepaid
expenses
|
1,583,220 | 656,975 | ||||||
Deferred
tax asset
|
1,645,605 | 1,179,288 | ||||||
Total
current assets
|
77,278,678 | 25,263,550 | ||||||
Property
and Equipment, net
|
20,760,395 | 19,305,832 | ||||||
Goodwill
|
2,200,000 | 2,200,000 | ||||||
Intangible
assets, net
|
10,571 | 13,947 | ||||||
Deferred
tax asset
|
4,033,923 | - | ||||||
Deposits
|
1,913,927 | 85,207 | ||||||
8,158,421 | 2,299,154 | |||||||
Total
assets
|
$ | 106,197,494 | $ | 46,868,536 | ||||
Liabilities
and Stockholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Line
of credit
|
$ | - | $ | 9,412,630 | ||||
Current
maturities of notes payable
|
1,085,843 | 983,032 | ||||||
Current
maturities of capital lease obligation
|
51,874 | 58,343 | ||||||
Accounts
payable
|
15,689,012 | 15,769,909 | ||||||
Deferred
revenue
|
2,802,129 | 2,379,298 | ||||||
Accrued
expenses
|
5,157,171 | 2,620,760 | ||||||
Income
taxes payable
|
558,176 | 29,252 | ||||||
Total
current liabilities
|
25,344,205 | 31,253,224 | ||||||
Notes
payable, less current maturities
|
5,098,250 | 5,740,436 | ||||||
Notes
payable, related party
|
1,500,000 | 2,000,000 | ||||||
Capital
lease obligation, less current maturities
|
- | 37,698 | ||||||
Deferred
tax liability
|
2,358,782 | 167,368 | ||||||
Interest
rate swap liability
|
531,450 | 704,840 | ||||||
Total
liabilities
|
34,832,687 | 39,903,566 | ||||||
Commitments
and Contingencies
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $.00001 per share; authorized 25,000,000;
|
||||||||
no
shares issued and outstanding at September 30, 2009
|
||||||||
and
December 31, 2008
|
- | - | ||||||
Common
stock, par value $.00001 per share; 100,000,000
authorized,
|
||||||||
27,488,353
and 23,188,380 shares outstanding at September 30,
|
||||||||
2009
and December 31, 2008, respectively
|
275 | 232 | ||||||
Additional
paid-in capital
|
71,352,235 | 11,457,241 | ||||||
Note
receivable from exercise of options
|
- | (1,165,625 | ) | |||||
Retaining
earnings (deficit)
|
12,297 | (3,326,878 | ) | |||||
Total
stockholders' equity
|
71,364,807 | 6,964,970 | ||||||
Total
liabilities and stockholders' equity
|
$ | 106,197,494 | $ | 46,868,536 |
See Notes
to Condensed Consolidated Financial Statements.
2
Vitacost.com,
Inc.
Condensed
Consolidated Statements of Operations
For
the Three and Nine Months Ended September 30, 2009 and 2008
(unaudited)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 48,353,730 | $ | 36,744,385 | $ | 141,516,249 | $ | 105,436,567 | ||||||||
Cost
of goods sold
|
33,287,677 | 27,918,219 | 96,353,173 | 78,799,336 | ||||||||||||
Gross
profit
|
15,066,053 | 8,826,166 | 45,163,076 | 26,637,231 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Fulfillment
|
2,294,965 | 2,005,604 | 6,027,153 | 5,698,818 | ||||||||||||
Sales
and marketing
|
3,694,433 | 3,088,069 | 9,970,962 | 9,501,434 | ||||||||||||
General
and administrative
|
15,779,586 | 3,662,270 | 23,951,561 | 10,304,487 | ||||||||||||
21,768,984 | 8,755,943 | 39,949,676 | 25,504,739 | |||||||||||||
Operating
(loss) income
|
(6,702,931 | ) | 70,223 | 5,213,400 | 1,132,492 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
20,790 | 21,127 | 63,044 | 63,381 | ||||||||||||
Interest
expense
|
(219,163 | ) | (239,077 | ) | (457,975 | ) | (546,249 | ) | ||||||||
Other
income (expense)
|
2,520 | 3,960 | 26,392 | 13,812 | ||||||||||||
(195,853 | ) | (213,990 | ) | (368,539 | ) | (469,056 | ) | |||||||||
(Loss)
income before income taxes
|
(6,898,784 | ) | (143,767 | ) | 4,844,861 | 663,436 | ||||||||||
Income
tax benefit (expense)
|
3,048,808 | - | (1,505,686 | ) | (92,597 | ) | ||||||||||
Net
(loss) income
|
$ | (3,849,976 | ) | $ | (143,767 | ) | $ | 3,339,175 | $ | 570,839 | ||||||
Basic
per share information:
|
||||||||||||||||
Net
(loss) income available to common
|
||||||||||||||||
stockholders
|
$ | (0.17 | ) | $ | (0.01 | ) | $ | 0.14 | $ | 0.02 | ||||||
Weighted
average shares outstanding
|
23,231,356 | 23,188,380 | 23,130,239 | 23,188,380 | ||||||||||||
Diluted
per share information:
|
||||||||||||||||
Net
(loss) income available to common
|
||||||||||||||||
stockholders
|
$ | (0.17 | ) | $ | (0.01 | ) | $ | 0.14 | $ | 0.02 | ||||||
Weighted
average shares outstanding
|
23,231,356 | 23,188,380 | 23,648,641 | 23,202,308 |
See Notes
to Condensed Consolidated Financial Statements.
3
Vitacost.com,
Inc.
Condensed
Consolidated Statement of Stockholders' Equity
For
the Nine Months Ended September 30, 2009 (unaudited)
Note
|
||||||||||||||||||||||||
Additional
|
Receivable
|
Retained
|
||||||||||||||||||||||
Common
Stock
|
Paid-In
|
From
Exercise
|
Earnings
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
of
Options
|
(Deficit)
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2008
|
23,188,380 | $ | 232 | $ | 11,457,241 | $ | (1,165,625 | ) | $ | (3,326,878 | ) | $ | 6,964,970 | |||||||||||
Stock
options exercised
|
62,000 | 1 | 13,810 | - | - | 13,811 | ||||||||||||||||||
Stock
repurchased and retired
|
(360,000 | ) | (4 | ) | (499,996 | ) | - | - | (500,000 | ) | ||||||||||||||
Stock
based compensation
|
- | |||||||||||||||||||||||
expense
|
- | - | 11,238,809 | - | - | 11,238,809 | ||||||||||||||||||
Income
tax benefit from stock
|
||||||||||||||||||||||||
options
exercised
|
- | - | 2,036,564 | - | - | 2,036,564 | ||||||||||||||||||
Stock
issued in intial public offering
|
||||||||||||||||||||||||
net
of offering costs of $6.0 million (1)
|
4,597,973 | 46 | 47,105,807 | - | - | 47,105,853 | ||||||||||||||||||
Repayment
of note receivable
|
- | - | - | 1,165,625 | - | 1,165,625 | ||||||||||||||||||
Net
income
|
- | - | - | - | 3,339,175 | 3,339,175 | ||||||||||||||||||
Balance,
September 30, 2009
|
27,488,353 | $ | 275 | $ | 71,352,235 | $ | - | $ | 12,297 | $ | 71,364,807 |
(1)
Includes 169,528 shares related to the exercise of options in connection with
the initial public offering.
See Notes
to Condensed Consolidated Financial Statements.
4
Vitacost.com,
Inc.
Condensed
Consolidated Statements of Cash Flows
For
the Nine Months Ended September 30, 2009 and 2008 (unaudited)
2009
|
2008
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
income
|
$ | 3,339,175 | $ | 570,839 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
2,512,237 | 2,044,278 | ||||||
Amortization
|
3,376 | 18,933 | ||||||
Change
in fair value of interest rate swap
|
(173,390 | ) | (203,984 | ) | ||||
Stock
based compensation expense
|
11,238,809 | 211,630 | ||||||
Deferred
taxes
|
(2,308,826 | ) | - | |||||
Increase
(decrease) in inventory allowance
|
(82,377 | ) | 399,617 | |||||
Loss
on disposition of property and equipment
|
||||||||
and
other assets
|
108,963 | 56,937 | ||||||
Changes
in assets and liabilities:
|
||||||||
Increase
(decrease) in:
|
||||||||
Accounts
receivable
|
(229,288 | ) | (714,682 | ) | ||||
Other
receivables
|
(76,905 | ) | 241,583 | |||||
Inventory
|
(2,127,653 | ) | (4,375,348 | ) | ||||
Prepaid
expenses
|
(926,245 | ) | (6,203 | ) | ||||
Accounts
payable
|
(251,861 | ) | (42,509 | ) | ||||
Deferred
revenue
|
422,831 | 484,275 | ||||||
Accrued
expenses
|
2,361,117 | 434,784 | ||||||
Income
taxes payable
|
528,924 | (27,403 | ) | |||||
Net
cash provided by (used in) operating activities
|
14,338,887 | (907,253 | ) | |||||
Cash
Flows From Investing Activities
|
||||||||
Proceeds
from disposition of property, equipment
|
||||||||
and
intangible assets
|
956,110 | 173,361 | ||||||
Advance
to related party
|
- | (215,241 | ) | |||||
Proceeds
from repayment of related party advance
|
215,241 | - | ||||||
Payments
for the purchase of property and equipment
|
(4,406,044 | ) | (4,572,968 | ) | ||||
(Increase)
decrease in deposits
|
(1,828,720 | ) | 46,952 | |||||
Net
cash used in investing activities
|
(5,063,413 | ) | (4,567,896 | ) | ||||
Cash
Flows From Financing Activities
|
||||||||
Principal
payments on note payable
|
(818,946 | ) | (730,439 | ) | ||||
Borrowings
on related party note payable
|
- | 2,575,000 | ||||||
Repayments
on related party note payable
|
(500,000 | ) | (575,000 | ) | ||||
Net
borrowings (repayments) on line of credit
|
(9,412,630 | ) | 4,311,752 | |||||
Repayments
on capital lease obligation
|
(44,167 | ) | (50,647 | ) | ||||
Repayment
of note receivable from exercise of stock options
|
1,165,625 | - | ||||||
Proceeds
from the exercise of stock options
|
13,811 | - | ||||||
Tax
benefit from stock based compensation
|
2,036,564 | - | ||||||
Net
proceeds from the initial public offering
|
47,105,853 | - | ||||||
Payments
for redemption of common stock
|
(500,000 | ) | - | |||||
Net
cash provided by financing activities
|
39,046,110 | 5,530,666 | ||||||
Net
increase
|
48,321,584 | 55,517 | ||||||
Cash
and cash equivalents:
|
||||||||
Beginning
|
61,326 | 675 | ||||||
Ending
|
$ | 48,382,910 | $ | 56,192 |
(Continued)
5
Vitacost.com,
Inc.
Consolidated
Statements of Cash Flows (Continued)
For
the Nine Months Ended September 30, 2009 and 2008 (unaudited)
2009
|
2008
|
|||||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Cash
payments for:
|
||||||||
Interest
|
$ | 631,365 | $ | 526,969 | ||||
Income
taxes
|
$ | 1,020,000 | $ | 70,000 | ||||
Supplemental
Schedule of Noncash Investing and Financing Activities
|
||||||||
Property
and equipment purchased through notes payable
|
$ | 625,829 | $ | - | ||||
Note
receivable for exercise of options
|
$ | - | $ | 1,165,625 |
See Notes
to Condensed Consolidated Financial Statements.
6
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
1.
|
Nature
of Business and Significant Accounting
Policies
|
Nature of
business: Vitacost.com, Inc. (“Vitacost” or the “Company”) is
principally involved in the distribution of nutritional supplements as an
internet-based retailer. Vitacost was incorporated in 1994 and
entered the internet-based retailing area in 1999. Vitacost sells a
proprietary and internally developed line of nutraceuticals as well as a
selection of other manufacturers’ brand-name vitamin products. The
Company distributes products from two primary locations in North Carolina and
Nevada.
Basis of
Presentation: The accompanying unaudited condensed
consolidated financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of
America for interim financial reporting and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and
related footnotes that would normally be required by accounting principles
generally accepted in the United States of America for complete financial
reporting. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements for the year ended December 31, 2008.
The
accompanying unaudited condensed consolidated financial statements include all
adjustments (consisting of a normal and recurring nature) that management
considers necessary for a fair statement of financial information for the
interim periods. Interim results are not necessarily indicative of
the results that may be expected for the remainder of the year ending December
31, 2009.
The
Company’s revenues are typically highest in the first quarter of its fiscal year
due to health conscious behaviors of its customers.
Earnings per
share: Basic earnings per share are computed 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. The
following table reconciles basic weighted-average shares outstanding to diluted
weighted-average shares outstanding for the three and nine months ended
September 30, 2009 and 2008:
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Weighted-average
shares outstanding - basic
|
23,231,356 | 23,188,380 | 23,130,239 | 23,188,380 | ||||||||||||
Stock
options
|
- | - | 518,402 | 13,928 | ||||||||||||
Weighted-average
shares outstanding - diluted
|
23,231,356 | 23,188,380 | 23,648,641 | 23,202,308 |
7
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
1.
|
Nature
of Business and Significant Accounting Policies
(continued)
|
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 could potentially dilute
earnings per share in the future, but which 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,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Antidilutive
common stock equivalents
|
||||||||||||||||
excluded
from diluted earnings per share
|
2,695,880 | 3,087,200 | 1,345,600 | 1,926,000 |
Derivative financial
instruments: The Company’s risk management policy is to use
derivative financial instruments, as appropriate, to manage the interest expense
related to the debt with variable interest rates. These instruments
are not designated as hedges; accordingly, gains and losses related to fair
value are reflected in the statements of income at each reporting
date. During 2007, the Company entered into two interest rate swap
agreements with total notional amounts of $3,360,000 and $1,849,263,
respectively. These swaps require the Company to pay fixed rate of
6.81% and 6.85%, respectively, and receive a floating interest payment based on
LIBOR plus 1.4% and 1.75%, respectively. During 2008, the Company
entered into another interest rate swap agreement with a total notional amount
of $2,573,884, which requires the Company to pay a fixed rate of 6.03% and
receive a floating interest payment based on LIBOR plus 2.5%. As of
September 30, 2009, these interest rate swaps had a fair value of
$(531,450). Changes in fair value are included in interest expense in
the accompanying statements of operations. The fair value of the
interest rate derivatives is based on valuation models that take into account
items such as maturity dates, interest rate yield curves, our creditworthiness
and that of the counterparty and other data. The data sources that
are significant are level 2 in the fair value hierarchy as defined by the
relevant accounting literature.
Concentration of credit
risk: The Company’s cash and cash equivalents are held by one
major financial institution; however, risk of loss is mitigated by the size, the
financial health of the institution and intervention by the U.S. Government into
the banking system in the current year.
Recent accounting
pronouncements: In March 2008, the Financial Accounting
Standards Board (FASB) amended and expanded the disclosure requirements relating
to accounting for derivative instruments and hedging activities. The
additional disclosures are required to better convey the purpose of derivative
use in terms of risks that the entity is intending to manage. The
additional disclosures include the fair values of derivative instruments and
their gains and losses with the intent to provide a more complete picture of the
location in the financial statements of both the derivative positions existing
at period end and the effect of using derivatives during the reporting period;
credit-risk–related contingent features to provide information on the potential
effect on an entity’s liquidity; and cross-referencing within the footnotes to
help financial statement users locate important information about derivative
instruments. The enhanced disclosure requirements are effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.
In April
of 2009, the FASB amended the disclosure requirements about fair value of
financial instruments. Disclosures about fair value of financial
instruments are required for interim reporting periods of publicly traded
companies as well as in annual financial statements. As this
pronouncement is only disclosure-related, it will not have an impact on our
financial position and results of operations. However, this
pronouncement will require increased disclosures concerning our financial
instruments.
8
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
1.
|
Nature
of Business and Significant Accounting Policies
(continued)
|
In April
of 2009, the FASB amended the disclosure requirements about fair value of
financial instruments. Disclosures about fair value of financial
instruments are required for interim reporting periods of publicly traded
companies as well as in annual financial statements. As this
pronouncement is only disclosure-related, it will not have an impact on our
financial position and results of operations.
The
Company evaluated subsequent events through November 16, 2009, the date of
filing this Quarterly Report on Form 10-Q with the Securities and Exchange
Commission.
Reclassifications: Certain
amounts in the 2008 consolidated statement of operations have been reclassified
to conform to the 2009 presentation with no effect on net income.
Note
2.
|
Inventory
|
Inventory
consists of the following as of September 30, 2009 and December 31,
2008:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 6,765,394 | $ | 4,032,270 | ||||
Work-in-process
|
174,034 | 711,639 | ||||||
Finished
goods
|
17,177,479 | 17,245,345 | ||||||
24,116,907 | 21,989,254 | |||||||
Less:
Inventory reserve
|
244,131 | 326,508 | ||||||
$ | 23,872,776 | $ | 21,662,746 |
Note
3.
|
Property
and Equipment
|
Property
and equipment consists of the following as of September 30, 2009 and December
31, 2008:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Buildings
and building improvements
|
$ | 7,904,870 | $ | 7,822,974 | ||||
Furniture,
fixtures and equipment
|
12,399,356 | 11,808,971 | ||||||
Computers
|
3,322,046 | 2,534,694 | ||||||
Software
|
2,687,929 | 1,831,346 | ||||||
Leasehold
improvements
|
838,523 | 813,481 | ||||||
Land
|
460,000 | 460,000 | ||||||
27,612,724 | 25,271,466 | |||||||
Less
accumulated depreciation
|
8,286,341 | 5,965,634 | ||||||
19,326,383 | 19,305,832 | |||||||
Construction
-in-progress
|
1,434,012 | - | ||||||
$ | 20,760,395 | $ | 19,305,832 |
Construction-in-progress
consists of $1,434,012 related to the acquisition and implementation of computer
software that is expected by to be complete in November 2009.
9
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
4. Line of
Credit
On August
3, 2007, the Company entered into a loan and security agreement with a financial
institution with maximum borrowings equal to the lesser of $8,000,000 or the
borrowing base amount which is based on a percentage of eligible inventories as
outlined in the agreement. Borrowings made on the loan were used to
repay term loans with a different financial institution. The initial
term of the agreement will be through August 2010 with the option to renew year
to year unless terminated by either party. The agreement also
provides for letters of credit up to $1,000,000. Borrowings bear interest
at a rate equal to 1-month LIBOR plus 1.75% (2.00% and 2.19% as of September 30,
2009 and December 31, 2008, respectively). The line of credit is
collateralized by all personal property of the Company excluding
equipment. Under the agreement, the Company must maintain certain
ratios. Borrowings outstanding as of September 30, 2009 and
December 31, 2008 were $0 and $9,412,630, respectively, which at December 31,
2008 includes $3,928,932 of checks, issued which have not cleared the
bank. The Company utilized $3,570,698 of the proceeds from its
initial public offering to pay down the line of credit during the three months
ended September 30, 2009.
Note
5. Stock Option
Plan
A summary
of stock option activity related to common stock for the nine months ended
September 30, 2009 and 2008 is follows:
2009
|
2008
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Exercise
|
Exercise
|
|||||||||||||||
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
Outstanding
at beginning of year
|
2,722,400 | $ | 4.07 | 3,045,200 | $ | 4.31 | ||||||||||
Granted
|
469,200 | 11.72 | 186,000 | 7.50 | ||||||||||||
Exercised
|
(231,528 | ) | 2.03 | - | - | |||||||||||
Cancelled
|
(154,192 | ) | 3.49 | - | - | |||||||||||
Forfeited
|
(110,000 | ) | 4.77 | (144,000 | ) | 7.12 | ||||||||||
Outstanding
at period end
|
2,695,880 | 5.58 | 3,087,200 | 4.48 | ||||||||||||
Exercisable
at period end
|
2,608,246 | $ | 5.60 | 2,962,960 | $ | 3.47 |
The
weighted average grant date fair value for options granted during nine months
ended September 30, 2009 and 2008 was $9.08 and $1.91,
respectively.
In
connection with the exercise of stock options in 2007, one stockholder purchased
the options through a Board approved loan with the Company in the amount of
$1,165,625. The loan including accrued interest was repaid in
September 2009. As of September 30, 2009 and December 31, 2008, there
was approximately $1,171,227 and $1,196,000, respectively, of total unrecognized
compensation cost, net of estimated forfeitures related to stock options granted
under the Company’s stock incentive plan, which is expected to be recognized
over a weighted average period of 3.54 years.
10
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
5.
|
Stock
Option Plan (Continued)
|
On June
30, 2009 the Company amended the employment agreements of certain of its named
executive officers including its Chief Executive Officer and Chief Financial
Officer. Pursuant to the amendments, upon completion of an effective
registration statement, all stock options currently owned by these officers
would be fully vested and nonforfeitable and 430,000 additional fully vested
nonforfeitable options would be issued to these officers. Based upon
the completion of its initial public offering on September 23, 2009, the Company
has accounted for the changes in the terms of the existing options as a
modification under stock based compensation accounting and has recorded
additional compensation expense of $7,976,304 for the three months ended
September 30, 2009. In connection with the grant of the 430,000
additional options, the Company recorded $2,920,560 of stock compensation
expense.
Note
6.
|
Stockholders’
Equity
|
On May 4,
2009, the Company repurchased and retired 320,000 shares of its common stock
from a shareholder for $1.56 per share.
On August
21, 2009, the Board of Directors approved a 4-for-5 reverse stock split of the
Company’s common stock which was effected on September 17, 2009. All
shares and per share information referenced throughout the consolidated
financial statements have been retroactively adjusted to reflect this reverse
stock split.
Note
7.
|
Income
Taxes
|
The
Company files income tax returns in the U.S. federal jurisdiction and various
state and local jurisdictions. Pursuant to applicable statutes of limitation,
returns open for adjustment by the IRS are the consolidated federal income tax
returns for tax years ended December 31, 2004, December 31, 2005, December 31,
2006 and December 31, 2007. However, material amounts of net
operating loss (“NOL”) carryforwards exist at the consolidated level,
originating from the 1996-2000 and 2002-2005 tax years. Although the tax
returns from the years of NOL origination prior to 2004 are not currently within
the statute of limitations of the IRS, their future use will open the returns to
audit exposure, specifically verification of the returns generating said
NOL's. As such, the Company’s open years for consolidated federal returns
are the tax years ended December 31, 1996 through December 31, 2008. This
same range also represents the vast majority of open years for state
returns.
A number
of years may elapse before an uncertain tax position is audited and finally
resolved. Settlement of any particular position would usually require the
use of cash. The resolution of a matter would be recognized as an
adjustment to the provision for income taxes and the effective tax rate in the
period of resolution.
For the
nine months ended September 30, 2009 and 2008, the Company recorded
approximately $1,505,000 and $93,000 related to its provision for income
taxes. The Company’s effective tax rate for 2009 as compared to 2008 is
affected primarily by tax deductible compensation expense associated with
incentive stock options, a reduction in its state income tax rate and the tax
benefit associated with net operating loss
carryforwards.
11
Vitacost.com,
Inc
Notes
to Condensed Consolidated Financial Statements (unaudited)
Note
7.
|
Income
Taxes (Continued)
|
For the
three months ended September 30, 2009, incident to the initial public offering,
employees exercised incentive stock options and sold the stock in a
disqualifying disposition. A portion of the tax benefit associated with the sale
of the stock has been recognized as an income tax benefit in the current
quarter. Generally, incentive stock options provide employees with
significant tax benefits by allowing the employee to exercise stock options
without being taxed on the intrinsic value on the exercise date provided the
employee owns the stock for specified periods of time. Since the employer
will not receive a tax benefit upon the exercise of incentive stock options,
unless there is a disqualifying disposition, the compensation expense associated
with incentive stock options is treated as a permanent difference between book
and tax accounting and consequently affects the effective tax rate of the
Company. For the quarter ended September 30, 2009, the disqualifying
disposition of the incentive stock options resulted in a related tax benefit of
$764,074 which has been recorded as a reduction in income taxes payable and an
increase in additional paid-in capital in the accompanying consolidated balance
sheet.
In
addition to the tax benefit related to the disqualifying dispositions, for the
three months ended September 30, 2009, the Company recognized a $3,776,816
deferred tax benefit related to stock compensation expense of $10,896,864
recognized in connection with its initial public offering (see Note
5).
Due to
the Company having significant net operating loss carryforwards, the tax benefit
associated with previous exercises of non-qualified stock options was not
recorded as it did not reduce taxes payable. For the nine months ended
September 30, 2009, the Company has net income taxes payable due to the
utilization of its net operating losses; accordingly, the tax benefit related to
the previous and current exercise of non-qualified options has been recorded as
a reduction in income taxes payable and an increase in additional paid-in
capital in the accompanying consolidated balance sheet in the amount of
$1,272,490.
Note
8.
|
Related
Party Transactions
|
On June
17, 2008, the Company entered into an unsecured promissory note in the amount of
$400,000 with a Board member. The note bears interest at the greater
of one-month LIBOR plus 3.0% or 8.00% for the first six months and increases by
0.5% per month to a maximum interest rate of 13.0%. The loan was
repaid in full in June 2009. Interest expense on the loan during the
nine months ended September 30, 2009 and 2008 was $19,322 and $8,000,
respectively.
On July
15, 2008, the Company entered into an unsecured promissory note in the amount of
$1,600,000 with a Board member. The note bears interest at the
greater of one-month LIBOR plus 3.0% (3.25% as of September 30, 2009) or 8.00%
for the first six months and increases by 0.5% per month to a maximum interest
rate of 13.0%. The note matures on June 16, 2014, subject to
repayment terms based on the Company meeting certain financial covenants as
described in the promissory note agreement. Additionally, if the
Company is in default of the promissory note, the lender may convert the
outstanding balance into common stock at $6.25 per share as described in the
promissory note agreement. Interest expense on the loan during the
nine months ending September 30, 2009 and 2008 was $91,708 and $21,333,
respectively.
In
September 2008, the Company granted an unsecured loan of $215,241 to the former
Chief Executive Officer. The loan bears interest at one-month LIBOR
plus 2.75% and was to be repaid in full upon a successful initial public
offering. The loan was paid in full in September 2009.
12
Note
9.
|
Contingencies
|
The
Company is involved in various legal actions arising in the ordinary course of
business. In the opinion of management, none of these claims will
have a material, adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
During
June 2009, the Company entered into a commitment for the purchase of
approximately $6,298,000 of equipment for a distribution
facility. The equipment is expected to be placed in service in
January 2010. Additionally, the Company has executed a proposal
letter with a bank for $5,038,495 to finance a portion of the
equipment. The Company could draw on the loan through February 2010,
making interest only payments. Thereafter, the loan would be payable
in twenty quarterly payments, bear interest at 90-day LIBOR plus 3.5%, and be
collateralized by the equipment purchased.
Note
10.
|
Initial
Public Offering
|
On
September 23, 2009, the Company’s initial public offering of common stock, in
which 11.0 million shares of common stock were sold to the public at an
offering price of $12.00 per share, was effective and closed on September 29,
2009. The offering included approximately 4.4 million shares
sold by the Company and approximately 6.6 million shares sold by selling
stockholders. The net proceeds to the Company from this offering were
approximately $47.1 million, after deducting underwriting discounts and
commissions and offering expenses. The Company utilized approximately
$3.6 million of the proceeds from the offering to satisfy outstanding balances
on the line of credit.
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 forward-looking statements.
Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenue or performance, capital
expenditures, financing needs 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. Important
factors that could cause our actual 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 downturn or
recession;
|
|
·
|
difficulty
expanding our manufacturing and distribution
facilities;
|
|
·
|
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;
|
13
|
·
|
costs
of compliance and our failure to comply with government
regulations;
|
|
·
|
our
inability to defend intellectual property
claims;
|
|
·
|
our
failure to keep pace with the demands of our customers for new
products;
|
|
·
|
disruptions
in our manufacturing system, including our information technology systems,
or losses of manufacturing certifications;
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 and direct marketer, based on annual sales volume, of
health and wellness products such as vitamins, dietary supplements, minerals,
herbs, anti-oxidants, organic body and personal care products and sports
nutrition and health foods. We offer our customers a selection of over 23,000
SKUs from over 1,000 third-party brands, such as New Chapter, Atkins, Nature’s
Way, Twinlab, Burt’s Bees and Kashi and our own proprietary brands,
Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI),
Best of All, Smart Basics and Walker Diet. We sell these products directly to
consumers through our website, www.vitacost.com, as well as through our
catalogs. Our website and catalogs allow customers to easily browse and purchase
products at prices, on average, 30% to 60% lower than manufacturers’ suggested
retail prices. We strive to offer our customers the broadest product selection
supported by current scientific and medical research at the best value, while
providing superior customer service and timely and accurate
delivery.
Our
success is driven primarily by our ability to attract new customers and grow our
product offerings. Our customers are typically individuals seeking value in
their purchases of health and wellness products. Our active customer base, which
we define as customers who have purchased from us within the last 12 months, has
steadily increased from approximately 270,000 at the end of 2005 to
approximately 1,035,000 as of September 30, 2009. For the first three quarters
of 2009, our per-customer acquisition cost, determined by dividing our
acquisition-related marketing costs by the number of gross new customers, was
$12.68 On average, our customers make purchases from us two to three times a
year, and over the last twelve months, our average order value has ranged
between $72 and $77. Our 2008 customer surveys reveal that over 95% of
respondents are likely to reorder, citing as key factors our product selection
and quality, competitive prices and speed and accuracy of shipment.
We began
operations in 1994 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 our proprietary vitamins and supplements under our NSI brand. In
2000, we began operations under the name Vitacost.com, Inc. During 2008, we
began manufacturing certain proprietary products in-house and currently have the
capacity to produce in excess of one billion tablets and capsules annually.
Since our inception, we have shipped over ten million orders to our
customers.
Sources
of Revenue
We derive
our revenue principally through the sale of product and freight billed to
customers associated with the shipment of product. Our primary source of revenue
is the sale of products. For the nine months ended September 30, 2009, product
net sales accounted for approximately 93% of our total net sales, as compared to
92% for the nine months ended September 30, 2008. Freight billed to customers
for the nine months ended September 30, 2009 accounted for approximately 7% of
our total net sales, as compared to 8% for the nine months ended September 30,
2008.
Cost
of Goods Sold and Operating Expenses
Cost of Goods Sold. Cost of
goods sold consists primarily of the cost of the product and the cost of
shipping the product to the customer.
14
Fulfillment. Fulfillment
expenses include the costs of warehouse supplies, equipment, maintenance,
employees and rent.
Sales and Marketing. Sales
and marketing expenses include advertising and promotional expenditures, website
referral expenditures, including third-party content license fees, traditional
media advertising, catalog expenses and payroll related expenses for personnel
engaged in marketing, sales, website development and maintenance, and new
product research, development and introduction. We expense advertising costs as
incurred.
General and Administrative.
General and administrative expenses consist of management and executive
compensation, customer service compensation, credit card fees, professional
services and general corporate expenses, such as depreciation, amortization,
telephone expenses, office supplies and repairs and maintenance on office
equipment.
Results
of Operations
The
following table sets forth certain condensed consolidated statements of
operation data as a percentage of net sales for the three and nine months ended
September 30, 2009 and 2008, respectively:
Three
Months Ended
September
30,
(unaudited)
|
Nine
Months Ended
September
30,
(unaudited)
|
|||||||||||||||||
2008
|
2009
|
2008
|
2009
|
|||||||||||||||
Net
sales
|
100.0 |
%
|
100.0 | 100.0 |
%
|
100.0 | ||||||||||||
Cost
of goods sold
|
76.0 | 68.8 | 74.7 | 68.1 | ||||||||||||||
Gross
profit
|
24.0 | 31.2 | 25.3 | 31.9 | ||||||||||||||
Operating
expenses:
|
||||||||||||||||||
Fulfillment
|
5.5 | 4.7 | 5.4 | 4.3 | ||||||||||||||
Sales
and marketing
|
8.4 | 7.6 | 9.0 | 7.0 | ||||||||||||||
General
and administrative
|
10.0 | 32.6 | 9.8 | 16.9 | ||||||||||||||
Total
operating expense
|
23.9 | 44.9 | 24.2 | 28.2 | ||||||||||||||
Operating
income (loss)
|
0.1 | (13.9 | ) | 1.1 | 3.7 | |||||||||||||
Net
(loss) income
|
(0.4 | ) | (8.0 | ) | 0.5 | 2.4 |
During
2008, we transitioned the manufacturing of our proprietary capsules and tablets
from third-party manufacturers to in-house manufacturing and experienced
approximately $3.2 million in losses related to this transition phase. We
believe that over the next 12 to 18 months that the manufacturing of our
proprietary capsules and tablets will add additional incremental gross
profit.
Comparison
of Three Months Ended September 30, 2009 to Three Months Ended September 30,
2008
Net Sales. Net
sales increased by $11.7 million, or 31.6%, to $48.4 million for the three
months ended September 30, 2009 from $36.7 million for the three months ended
September 30, 2008.
A summary
of net sales for the three months ended September 30, 2009 and 2008 is as
follows (in thousands):
Three
Months Ended
September
30,
(unaudited)
|
$
Increase
|
%
Increase
|
||||||||||||||
2008
|
2009
|
|||||||||||||||
Third-party
product (1)
|
$ | 22,622 | $ | 30,192 | $ | 7,570 | 33.5 | % | ||||||||
NSI
and other proprietary product
|
11,305 | 14,694 | 3,389 | 30.0 | ||||||||||||
Billing
freight
|
2,817 | 3,468 | 651 | 23.1 | ||||||||||||
$ | 36,744 | $ | 48,354 | $ | 11,610 | 31.6 | % |
15
(1) Third-party
product includes advertising and fees earned from affiliate programs of
approximately $424,000 million and $406,000 for the three months ended September
30, 2009 and 2008, respectively.
Net sales
of our proprietary products, including our NSI-branded products, increased by
$3.4 million, or 30.0%, from $11.3 million for the three months ended September
30, 2008 to $14.7 million for the three months ended September 30, 2009, and
sales of third-party products increased by $7.6 million, or 33.5%, from $22.6
million for the three months ended September 30, 2008 to $30.2 million for the
three months ended September 30, 2009. The increase in net sales was primarily
the result of the net increase in our customer base and from an increase in
average order value. Our customer base increased from approximately 757,000
active customers at September 30, 2008 to approximately 1,035,000 active
customers at September 30, 2009. Although prices remain competitive in the
supplement market, our overall average order value, including freight billed to
customers, increased from $73 for the three months ended September 30, 2008 to
$76 for the three months ended September 30, 2009 due to customers ordering more
products per order.
We
believe that the significant increases in our customer base and number of
customer orders are primarily due to consistently providing good value,
selection, timeliness and accurate delivery of customer orders, and the
scientific and educational content of our website. We believe that we will
continue to grow our customer base and number of customer orders at rates at or
above the growth rates of the overall health and wellness market.
Cost of Goods Sold. Cost of
goods sold increased by $5.3 million, or 19.2%, to $33.2 million for the three
months ended September 30, 2009 from $27.9 million for the three months ended
September 30, 2008. As a percentage of net sales, cost of goods sold decreased
to 68.8% for 2009 from 76.0% for 2008 primarily due to selling higher margin
products.
Gross Profit. As a result of
the changes discussed in net sales and cost of goods sold, gross profit
increased by $6.2 million, or 70.7%, to $15.1 million for the three months ended
September 30, 2009 from $8.8 million for the three months ended September 30,
2008 and gross profit as a percentage of net sales increased to 31.2% in 2009
from 24.0% in 2008. Additionally, shipping costs, net of freight billed to
customers, decreased by $2.0 million or 71.3% to $0.8 million for the three
months ended September 30, 2009 from $2.8 million for the three months ended
September 30, 2008 despite a 31.6% increase in sales for the same
periods.
Our gross
profit is affected by product mix, consumer and competitor price elasticity, and
increased purchasing power due to higher sales volume of third-party product and
the raw materials used for manufacturing our proprietary products. Our increase
in gross profit and gross profit as a percentage of sales for the three months
ended September 30, 2009, compared to the three months ended September 30, 2008,
was primarily due to increased purchasing power due to higher sales volume of
third-party product and the raw materials used for manufacturing our proprietary
products.
Fulfillment. Fulfillment
expense increased $0.3, or 14.4%, to $2.3 million for the three months ended
September 30, 2009 from $2.0 million for the three months ended September 30,
2008. As a percentage of net sales, fulfillment expense decreased to 4.7% for
2009 from 5.5% for 2008. This decrease in fulfillment expense as a percentage of
net sales was primarily attributable to utilization of excess fulfillment
capacity.
Sales and Marketing. Sales
and marketing expense increased $0.6, or 19.6%, to $3.7 million for the three
months ended September 30, 2009 from $3.1 million for the three months ended
September 30, 2008. The aggregate dollar increase in sales and marketing expense
is the result of certain incentive programs and on-line advertising that are
variable and, therefore, increase as volume increases. As a percentage of sales,
sales and marketing expense decreased to 7.6% for 2009 from 8.4% for 2008, due
primarily to reducing less effective marketing programs.
General and Administrative.
General and administrative expenses increased $12.1, or 330.9%, to $15.8 million
for the three months ended September 30, 2009 from $3.7 million for the three
months ended September 30, 2008. As a percentage of sales, general and
administrative expenses increased to 32.6% for 2009 from 10.1% for 2008,
primarily due to stock-based compensation expense incurred in connection with
IPO Executive Stock Option Grants as described
below. Excluding this $10.9 million of stock based
compensation expense, general and administrative expenses increased $1.2
million, or 32.0%, to $4.9 million for the three months ended September 30, 2009
from $3.7 million for the three months ended September 30, 2008. As a
percentage of sales, general and administrative expenses would have remained
flat at 10.1% for 2009 and 2008.
16
Stock-based Compensation Expense in
Connection with IPO Executive Stock Option Grants. On June 30,
2009, we amended the employment agreements of certain of our named executive
officers, including our Chief Executive Officer and Chief Financial and
Accounting Officer. Pursuant to the amendments, upon completion of our initial
public offering, all stock options currently owned by these officers became
fully vested and nonforfeitable. Additionally, we issued additional fully
vested, nonforfeitable options to these officers. In connection with the full
vesting of the existing stock options and issuance of the new stock options, we
recorded an aggregate non-cash expense of $10.9 million in the third quarter of
2009, included in general and administrative expenses.
Interest Expense. Interest
expense decreased $20,000, or 8.3%, to $219,000 for the three months ended
September 30, 2009 from $239,000 for the three months ended September 30,
2008.
Income Tax Benefit (expense).
Income tax benefit increased by $3.0 million, or 100.%, to $3.0 million for the
three months ended September 30, 2009. The change is primarily the result of
operating income of $4,301,000, net of stock based compensation expense of
$11,013,000 for the three months ended September 30, 2009 compared to $140,000,
net of stock based compensation of $70,000 million for the three months ended
September 30, 2008.
Comparison
of Nine Months Ended September 30, 2009 to Nine Months Ended September 30,
2008
Net Sales. Net
sales increased by $36.1 million, or 34.2%, to $141.5 million for the nine
months ended September 30, 2009 from $105.4 million for the nine months ended
September 30, 2008.
A summary
of net sales for the nine months ended September 30, 2009 and 2008 is as follows
(in thousands):
Nine Months Ended
September 30,
(unaudited)
|
$
Increase
|
%
Increase
|
||||||||||||||
2008
|
2009
|
|||||||||||||||
Third-party
product (1)
|
$ | 64,377 | $ | 88,520 | $ | 24,143 | 37.5 | % | ||||||||
NSI
and other proprietary product
|
33,060 | 43,033 | 9,973 | 30.2 | ||||||||||||
Billing
freight
|
8,000 | 9,963 | 1,963 | 24.5 | ||||||||||||
$ | 105,437 | $ | 141,516 | $ | 36,079 | 34.2 | % |
(1) Third-party
product includes advertising and fees earned from affiliate programs of
approximately $1.5 million and $1.1 for the nine months ended September 30, 2009
and 2008, respectively.
Net sales
of our proprietary products, including our NSI-branded products, increased by
$10.0 million, or 30.2%, from $33.0 million for the nine months ended September
30, 2008 to $43.0 million for the nine months ended September 30, 2009, and
sales of third-party products increased by $24.1 million, or 37.5%, from $64.4
million for the nine months ended September 30, 2008 to $88.5 million for the
nine months ended September 30, 2009. The increase in net sales was primarily
the result of the net increase in our customer base and from an increase in
average order value. Our customer base increased from approximately 757,000
active customers at September 30, 2008 to approximately 1,035,000 active
customers at September 30, 2009. Although prices remain competitive in the
supplement market, our overall average order value, including freight billed to
customers, increased from $73 for the nine months ended September 30, 2008 to
$75 for the nine months ended September 30, 2009 due to customers ordering more
products per order.
We
believe that the significant increases in our customer base and number of
customer orders are primarily due to consistently providing good value,
selection, timeliness and accurate delivery of customer orders, and the
scientific and educational content of our website. We believe that we will
continue to grow our customer base and number of customer orders at rates at or
above the growth rates of the overall health and wellness
market.
17
Cost of Goods Sold. Cost of
goods sold increased by $17.6 million, or 22.3%, to $96.4 million for the nine
months ended September 30, 2009 from $78.8 million for the nine months ended
September 30, 2008. As a percentage of net sales, cost of goods sold decreased
to 68.1% for 2009 from 74.7% for 2008 primarily due to selling higher margin
products.
Gross Profit. As a result of
the changes discussed in net sales and cost of goods sold, gross profit
increased by $18.6 million, or 69.5%, to $45.2 million for the nine months ended
September 30, 2009 from $26.6 million for the nine months ended September 30,
2008 and gross profit as a percentage of net sales increased to 31.9% in 2009
from 25.3% in 2008. Additionally, shipping costs, net of freight billed to
customers, decreased by $1.2 million or 38.6% to $2.1 million for the nine
months ended September 30, 2009 from $3.3 million for the nine months ended
September 30, 2008 despite a 34.2% increase in sales for the same
periods.
Our gross
profit is affected by product mix, consumer and competitor price elasticity, and
increased purchasing power due to higher sales volume of third-party product and
the raw materials used for manufacturing our proprietary products. Our increase
in gross profit and gross profit as a percentage of sales for the nine months
ended September 30, 2009, compared to the nine months ended September 30, 2008,
was primarily due to increased purchasing power due to higher sales volume of
third-party product and the raw materials used for manufacturing our proprietary
products. Although past performance is no guarantee of future results, we
believe, based on current trends, we will be able to sustain the improved gross
margins that contributed to our gross profit levels for the nine months ended
September 30, 2009.
Fulfillment. Fulfillment
expense increased $0.3 million, or 5.8%, to $6.0 million for the nine months
ended September 30, 2009 from $5.7 million for the nine months ended September
30, 2008. As a percentage of net sales, fulfillment expense decreased to 4.3%
for 2009 from 5.4% for 2008. This decrease in fulfillment expense as a
percentage of net sales was primarily attributable to utilization of excess
fulfillment capacity.
Sales and Marketing. Sales
and marketing expense increased $0.5 million, or 5.0%, to $10.0 million for the
nine months ended September 30, 2009 from $9.5 million for the nine months ended
September 30, 2008. The aggregate dollar increase in sales and marketing expense
is the result of certain incentive programs and on-line advertising that are
variable and, therefore, increase as volume increases. As a percentage of sales,
sales and marketing expense decreased to 7.0% for 2009 from 9.0% for 2008, due
primarily to reducing less effective marketing programs.
General and Administrative.
General and administrative expenses increased $13.6 million, or 132.44%, to
$24.0 million for the nine months ended September 30, 2009 from $10.3 million
for the nine months ended September 30, 2008, primarily due to stock-based
compensation expense in connection with IPO Executive Stock Option Grants as
described below. As a percentage of sales, general and administrative
expenses increased to 16.9% for 2009 from 9.8% for 2008. Excluding
this $10.9 million of stock based compensation expense, general and
administrative expenses increased $2.7 million, or 26.7%, to $13.1 million for
the nine months ended September 30, 2009 from $10.3 million for the nine months
ended September 30, 2008, while as a percentage of sales, general and
administrative expenses excluding the $10.9 million of stock based compensation
decreased to 9.2% for 2009 from 9.8% for 2008, primarily due to better
utilization of fixed related costs.
Stock-based Compensation Expense in
Connection with IPO Executive Stock Option Grants. On June 30,
2009, we amended the employment agreements of certain of our named executive
officers, including our Chief Executive Officer and Chief Financial and
Accounting Officer. Pursuant to the amendments, upon completion of our initial
public offering, all stock options currently owned by these officers became
fully vested and nonforfeitable. Additionally, we issued additional fully
vested, nonforfeitable options to these officers. In connection with the full
vesting of the existing stock options and issuance of the new stock options, we
recorded an aggregate non-cash expense of $10.9 million in the third quarter of
2009.
Interest Expense. Interest
expense decreased $88,000, or 16.2%, to $458,000 for the nine months ended
September 30, 2009 from $546,000 for the nine months ended September 30, 2008.
The change is primarily a result of the change in the fair value of interest
rate swaps into which we have entered. Changes in the fair value of the interest
rate swaps are included in interest expense.
18
Income Tax Benefit (expense).
Income tax expense increased by $1.4 million, or 1,526.1%, to $1.5 million for
the nine months ended September 30, 2009 from $93,000 for the nine months ended
September 30, 2008. The change is primarily the result of operating income of
$5.2 million for the nine months ended September 30, 2009 compared to $1.1
million for the nine months ended September 30, 2008.
Cash and Cash
Equivalents. Cash and cash equivalents increased by
$48.3 million or 78,795% to $48.4 million as of September 30, 2009 from $61,000
as of December 31, 2008. This is primarily a result of net proceeds
received from the intial public offering completed in September
2009.
Property and
Equipment. Net property and equipment increased by $1.5
million, or 8.0%, to $20.8 million as of September 30, 2009, from $19.3 million
as of December 31, 2008. The Company purchased machinery and equipment for their
manufacturing and distribution facilities.
Current Liabilities. The line
of credit balance decreased by $9.4 million, or 100%, to no outstanding balance
as of September 30, 2009 from $9.4 million as of December 31, 2008. A
portion of the proceeds generated from the initial public offering were used to
pay off the line of credit.
Comparison
of Nine Months Ended September 30, 2009 to Nine Months Ended September 30,
2008
Net Cash Provided by (Used in)
Operating Activities. For the nine months ended September 30, 2009, net
cash provided by (used in) operations was $14.3 million compared to $(0.9)
million for the nine months ended September 30, 2008, primarily as a result of
net income of $3.3 million, net of stock based compensation expense of $11.2
million for the nine months ended September 30, 2009 compared to $0.6 million
for the nine months ended September 30, 2008, net of $0.2 million in stock based
compensation expense. Additionally, inventory increased by $2.1 million for the
nine months ended September 30, 2009 compared to an increase of $4.4 for the
nine months ended September 30, 2008, and an increase in accrued expenses of
$2.4 million for the nine months ended September 30, 2009 compared to an
increase of $0.4 million for the nine months ended September 30,
2008. The increase in accrued expenses is partially due to costs
incurred as a result of the initial public offering in September
2009.
Net Cash Provided by (Used in)
Investing Activities. For the nine months ended September 30, 2009, net
cash used in investing activities was $5.1 million compared to $4.6 million for
the nine months ended September 30, 2008. Our investing activities consisted
primarily of the acquisition of machinery and equipment for the manufacturing
and distribution facilities in North Carolina and Nevada.
Net Cash Provided by (Used in)
Financing Activities. For the nine months ended September 30, 2009, net
cash provided by financing activities was $39.0 million compared to $5.5 million
for the nine months ended September 30, 2008. During 2009, we received
approximately $47.1 million in proceeds, net of issuance costs of $6.0 million,
for the sale of common stock in connection with our initial public offering
which was completed on September 29, 2009. Excluding the effect of
our initial public offering, financing activities for the nine months ended
September 30, 2009 consisted primarily of repayments of a line of credit of $9.4
million, as well as repayments of notes payable of $1.3
million. Additionally, the Company received $1.6 million during
the nine months ended September 30, 2009 as a repayment of a note receivable
from the exercise of stock options. During the nine months ended
September 30, 2008, cash provided by financing activities consisted primarily of
$4.3 million of borrowings on a line of credit, and $2.6 million of borrowings
on notes payable from related parties.
Liquidity
and Capital Resources
Since our
inception through 2006, we had primarily funded our operations through the sale
of equity securities and cash generated from operations. During 2007, we funded
operations and investments in manufacturing and distribution facilities, as well
as the related equipment, primarily through entering into loan agreements, as
referenced above, and cash generated from operations.
19
The
significant components of our working capital are cash and cash equivalents,
inventory and accounts receivable, primarily from credit cards processors,
reduced by accounts payable, accrued expenses and our line of credit. 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, while we
typically have extended payment terms with our suppliers. At September 30, 2009,
we had $48.4 million in cash and cash equivalents and a working capital surplus
of $51.9 million compared with $61,326 in cash and cash equivalents and working
capital deficit of approximately $6.0 million at December 31, 2008. The $57.9
million increase in working capital was primarily the result of the proceeds of
our initial public offering and cash flows from operations.
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.
We
believe that cash and cash equivalents currently on hand and cash flows from
operations will be sufficient to continue our operations for the next 12 months.
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
levels of the inventory we maintain;
and
|
|
·
|
other
factors relating to our business.
|
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.
Reverse
Stock Split
On July
31, 2009 our stockholders approved an amendment to our Amended and Restated
Articles of Incorporation to effect a four-for-five reverse stock split of our
common stock. On September 17, 2009, we effected the reverse stock
split. All shares and per-share information referenced throughout
this quarterly report on Form 10-Q have been retroactively adjusted to reflect
this reverse stock split.
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 generally accepted accounting principles of the U.S.
(GAAP).
20
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 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 most critical accounting policies pertain to
revenue recognition, stock based compensation, inventories, income taxes,
goodwill and intangible assets. In applying such policies, we exercise our best
judgment and best estimates. For a further discussion of these Critical
Accounting Policies and Estimates, as well as a description of our other
significant accounting policies, see “Notes to Financial Statements–Note 1.” of
our Prospectus that forms a part of our Registration Statement on Form S-1, as
amended, which Prospectus was filed pursuant to Rule 424(b)(4) on September 23,
2009 (Registration No. 333-143926).
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 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 4T.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Chief
Financial and Accounting Officer, evaluated the effectiveness of our disclosure
controls and procedures as of September 30, 2009. The term “disclosure controls
and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of September 30, 2009, our Chief Executive
Officer and Chief Financial and Accounting Officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the
Exchange Act that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART
II.
|
OTHER
INFORMATION
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
We are
not subject to any litigation other than routine litigation of a nature
customary for companies of our size. We have had no significant litigation and
have not been the subject of any product liability litigation. We have
instituted a number of actions as plaintiff against certain third-party vitamin
manufacturers who have refused to sell products to us due to the level of
discounts we offer relative to other retailers distributing their products.
These actions seek to compel them to sell products to us.
21
ITEM
1A. RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully
consider the risks described below and the other information in this Quarterly
Report on Form 10-Q. If any of such risks actually occur, our business,
operating results or financial condition could be adversely affected. In those
cases, the trading price of our common stock could decline and you may lose all
or part of your investment.
Risks
Relating to Our Business
We
may incur product liability claims, which could increase our costs and/or
adversely affect our business, reputation, financial condition or results of
operations.
As a
retailer, formulator and manufacturer of products designed for human
consumption, we are subject to product liability claims if the use of our
products, whether manufactured by us or by our third-party manufacturer, is
alleged to have resulted in illness or injury or if our products include
inadequate instructions or warnings. Our products consist of vitamins, minerals,
herbs and other ingredients that are classified as foods or dietary supplements
and generally are not subject to pre-market regulatory approval or clearance in
the U.S. by the FDA or other governmental authorities. Our products could
contain spoiled or contaminated substances, and some of our products contain
ingredients that do not have long histories of human consumption. Previously
unknown adverse reactions resulting from human consumption of these ingredients
could occur. In addition, some of our products are produced by third-party
manufacturers. As a distributor of products manufactured by third parties, we
may also be liable for various product liability claims for products that we do
not manufacture. We could be subject to product liability claims, including
among others, that our products include insufficient instructions for use or
inadequate warnings concerning possible side effects or interactions with other
substances. Any product liability claim against us could result in increased
costs and, therefore, adversely affect our reputation with our customers, which
in turn could adversely affect our business, financial condition or results of
operations.
Unfavorable
publicity or consumer acceptance of our products or of nutritional supplements
generally could reduce our sales.
We are
highly dependent upon consumer acceptance of the safety, efficacy and quality of
our products, as well as similar products distributed by other companies.
Consumer acceptance of products can be significantly influenced by scientific
research or findings, national media attention and other publicity about product
use. A product may be received favorably, resulting in high sales associated
with that product that may not be sustainable as consumer preferences change. In
addition, recent studies have challenged the safety or benefit of certain
nutritional supplements and dietary ingredients. Future scientific research or
publicity could be unfavorable to our industry or any of our particular products
and may not be consistent with earlier favorable research or publicity. A future
research report or publicity that is perceived by our consumers as less than
favorable or that questions earlier favorable research or publicity could have a
material adverse effect on our ability to generate revenue. Adverse publicity in
the form of published scientific research, statements by regulatory authorities
or otherwise, whether or not accurate, that associates consumption of our
products or any other similar products with illness or other adverse effects, or
that questions the benefits of our or similar products, or that claims that such
products are ineffective could have a material adverse effect on our business,
reputation, financial condition or results of operations.
If
we permit our Chief Operations Architect to act as one of our executive officers
or directors without the consent of The NASDAQ Stock Market, including through
the exercise of policy making authority, our shares may be delisted which could
materially reduce the liquidity and price of our shares.
As a
condition to the initial and continued listing of our common stock on The NASDAQ
Global Market, Mr. Wayne F. Gorsek, our founder, is prohibited from acting as
one of our executive officers or directors for an indefinite period of time. The
NASDAQ Stock Market imposed this listing condition in response to a 2001 U.S.
District Court finding that Mr. Gorsek violated antifraud and anti-touting
provisions of federal securities laws. Mr. Gorsek founded our business and
served as our Chief Executive Officer until he resigned in January 2007. Between
January 2007 and July 2008, Mr. Gorsek served as a consultant, and in July 2008,
we appointed Mr. Gorsek as our Chief Operations Architect. In June 2009, Mr.
Gorsek’s board-approved responsibilities were limited to assisting us with our
marketing, distribution, manufacturing, customer service and information
technology departments in an effort to further our business plan, and no longer
include the exercise of policy-making authority. If we permit Mr. Gorsek to act
as one of our executive officers or directors without the consent of The NASDAQ
Stock Market, including through the exercise of policy-making authority, NASDAQ
could deem us to be in violation of the conditions to our listing and could
commence proceedings to delist our shares from The NASDAQ Global Market. If our
shares are delisted, the liquidity and price of our shares could be materially
reduced, which could have a material adverse effect on our business, financial
condition or results of operations.
22
Our
Chief Operations Architect, who founded our business and has contributed to our
historical growth and success, is prohibited from acting as one of our executive
officers or directors for an indefinite period of time which could limit our
ability to implement our growth strategy.
Our
historical growth and success is attributable, in part, to our Chief Operations
Architect, Mr. Wayne F. Gorsek. In June 2009, Mr. Gorsek’s board-approved
responsibilities were limited to assisting with our marketing, distribution,
manufacturing, customer service and information technology departments in an
effort to further our business plan, and no longer include the exercise of
policy-making authority. As a condition to the initial and continued listing of
our common stock on The NASDAQ Global Market, Mr. Gorsek is prohibited from
acting as one of our executive officers or directors for an indefinite period of
time. We cannot assure you that we will be able to operate as successfully as in
the past without his management leadership, which could have a material adverse
effect on our business, financial condition or results of
operations.
If
we lose or are unable to obtain key personnel, our business, financial condition
or results of operations could be materially adversely affected.
Our
success depends to a significant degree upon the continued contributions of our
executive officers and other key personnel. Although we have employment
agreements with our executive officers, we cannot guarantee that such persons
will remain affiliated with us. If any of our key personnel were to cease their
affiliation with us, our operating results could suffer. Further, we do not
maintain key person life insurance on any of our executive officers. If we lose
or are unable to obtain the services of key personnel, our business, financial
condition or results of operations could be materially and adversely
affected.
If
we are unable to effectively manage our growth and expansion plans, we could be
unable to implement our business strategy.
Our
growth and expansion plan, which includes expanding the manufacturing of our
proprietary NSI-branded products, expanding product offerings and increasing our
customer base, requires significant management time and operational and
financial resources. There is no assurance that we have the operational and
financial resources to manage our growth. This is especially true as we continue
to manufacture more of our own products. In addition, rapid growth in our
headcount and operations may place a significant strain on our management and
our administrative, operational and financial infrastructure. Further, we are in
the process of implementing a new enterprise resource planning system which we
believe will help us manage our growth effectively. We may experience delays in
implementing this system or this system may not function as expected. Failure to
adequately manage our growth could have a material adverse effect on our
business, financial condition or results of operations.
We
may be unable to secure additional space to expand our distribution platform and
manufacturing capabilities on terms favorable to us, if at all, which could
limit our growth strategy.
Within
the next 12 to 18 months, we anticipate that we will require additional space to
expand our distribution platform and, within approximately six months
thereafter, we will require additional space to expand our manufacturing
capabilities. There can be no assurances that we will locate and secure such
additional space on terms that are favorable to us or in locations that will
facilitate our growth strategy. Our failure to do so could result in increased
expenses or otherwise delay or limit our ability to implement our growth
strategy which could have a material adverse effect on our business, financial
condition or results of operations.
23
An
unexpected interruption or shortage in the supply or significant increase in the
cost of raw materials could limit our ability to manufacture our products, which
could reduce our sales and our margins.
An
unexpected interruption of supply or a significant increase in the cost of raw
materials, whether to us or to our contract manufacturers for any reason, such
as regulatory requirements, import restrictions, loss of certifications,
disruption of distribution channels as a result of weather, terrorism or acts of
war, or other events, could result in significant cost increases and/or
shortages of our products. Our inability to obtain a sufficient amount of
products or to pass through higher cost of products we offer could have a
material adverse effect on our business, financial condition or results of
operations.
We
rely on third-party carriers as part of our inventory fulfillment and order
delivery processing, and these third parties may fail to meet shipping schedules
or requirements which could limit our ability to manufacture our products, which
could reduce our sales and our margins.
We cannot
control all of the factors that might affect our timely and cost-effective
procurement of products from our vendors and delivery of our products to our
customers. We rely on third-party carriers both for the delivery of raw
materials and inventory and for the shipment of our products to our customers.
Consequently, we are subject to risks of these carriers, including increased
fuel costs, security concerns, labor disputes, union organizing activity and
inclement weather. Any disruption in the ability of these carriers to timely
deliver raw materials to us and products to our customers could damage our
reputation and brand and result in customer dissatisfaction. This could, in
turn, materially and adversely affect our business, financial condition or
results of operations.
The
current global economic downturn or recession could adversely affect our
industry and, therefore, restrict our future growth.
The
current global economic downturn or recession could negatively affect our sales
because many consumers consider the purchase of our products discretionary. We
cannot predict the timing or duration of the economic slowdown or recession or
the timing or strength of a subsequent recovery, worldwide, or in the specific
end markets we serve. If the markets for our products significantly deteriorate
due to the economic situation, our business, financial condition or results of
operations could be materially and adversely affected.
Instability
in financial markets could adversely affect our ability to access capital
markets which could limit our ability to fund our operating costs if we do not
generate sufficient cash from operations.
As a
result of the global downturn in economic conditions, the availability of
capital has been severely restricted. From time to time, we may access debt or
equity capital markets. Any restriction on our ability to access capital markets
could limit our ability to pursue our growth strategy and could negatively
affect our business, financial condition or results of operations.
We
depend upon certain third-party suppliers and manufactures; if these suppliers
or manufacturers do not provide us materials or products when and as needed and
we are unable to efficiently obtain alternative supply sources, we could be
unable to manufacture our products, and our business, financial condition or
results of operations may be materially adversely affected.
We rely
upon third-party suppliers for certain ingredients and raw materials. The
principal ingredients or raw materials required in our operations are vitamins,
minerals, herbs and packaging components. We purchase these materials from
third-party suppliers located in the U.S., Japan, China, India, Italy, Spain,
France and Germany. Furthermore, although we manufacture most of our proprietary
products in-house, we engage third-party manufacturers to produce our
proprietary products that are in the form of soft-gels, liquids and powders.
With the exception of a supply agreement for coenzyme Q-10 (CoQ10), we do not
have contracts in place with any third-party supplier or manufacturer that
ensures minimum production or purchase. Disruption in the operations of any such
third-party supplier or manufacturer can occur for a number of reasons, many of
which are beyond our control, such as regulatory requirements, import
restrictions, loss of certifications, power interruptions, fires, hurricanes,
drought or other climate-related events, war or other events. If any of our
third-party suppliers or manufacturers become unable or unwilling to continue to
provide us supplies or products in the required volumes and quality levels or in
a timely manner, we would be required to identify and obtain acceptable
replacement supply or product sources. If we are unable to efficiently obtain
alternative sources, our business, financial condition or results of operations
may be materially adversely affected.
24
The
content of our website and direct mailing pieces could expose us to significant
liability which could reduce our profits.
Because
we post product information and other content on our website and in our direct
mailing pieces, we face potential liability for, among other things, copyright
infringement, patent infringement, trademark infringement, defamation,
unauthorized practice of medicine, false or misleading advertising and other
claims based on the nature and content of the materials we post. Although we
maintain general liability insurance, our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed. Any imposition of liability that is not covered by
insurance, or is in excess of insurance coverage, could materially adversely
affect our business, financial condition or results of operations.
We
depend primarily upon search engines and other online sources to increase
traffic to our website, and need to convert this traffic into customers in a
cost-effective manner; our failure to do so could reduce our sales.
Our
success depends on our ability to attract visitors to our website and convert
them into customers in a cost-effective manner. We utilize search engines and
other online sources as a means to direct traffic to our website. Our website is
included in search results as a result of both paid search listings, where we
purchase specific search terms that result in the inclusion of our website in
the search result, and algorithmic searches that depend upon the searchable
content in our website. Search engines and other online sources revise their
algorithms from time to time in an attempt to optimize their search
results.
If one or
more of the search engines or other online sources which we use to direct
traffic to our website were to modify its general methodology for how it
displays our website, fewer visitors may visit our website, which could have a
material adverse effect on our business and results of operations. Further, if
any free search engine which we use to direct traffic to our website begins
charging fees for listing or placement, or if one or more of the search engines
or other online sources on which we rely for purchased listings, modifies or
terminates its relationship with us, the traffic to our website could decrease
and our expenses could increase which could have a material adverse effect on
our business, financial condition or results of operations.
We
may not be able to maintain our domain name, which may result in confusion to
existing and new customers and lost sales and, therefore, could have a material
adverse effect on our business, financial condition or results of
operations.
Maintaining
our Internet domain name is critical to our success. Under current domain name
registration practices, no other entity may obtain an identical domain name but
can obtain a similar or identical name with a different suffix, such as “.net”
or “.org,” or with a different country designation, such as “.jp” for Japan. We
have not registered our domain name with each of the suffixes or jurisdictions
available. As a result, third parties may use domain names that are similar to
our domain name, which may result in confusion to existing and new customers and
lost sales. Failure to maintain our domain name’s uniqueness could have a
material adverse effect on our business, financial condition or results of
operations.
If
we experience product recalls, we may incur significant and unexpected costs and
damage to our reputation and, therefore, could have a material adverse effect on
our business, financial condition or results of operations.
We may be
subject to product recalls, withdrawals or seizures if any of the products we
formulate, manufacture or sell are believed to cause injury or illness or if we
are alleged to have violated governmental regulations in the manufacture,
labeling, promotion, sale or distribution of our products. A recall, withdrawal
or seizure of any of our products could materially and adversely affect consumer
confidence in our brands and lead to decreased demand for our products. In
addition, a recall, withdrawal or seizure of any of our products would require
significant management attention, would likely result in substantial and
unexpected expenditures and could materially and adversely affect our business,
financial condition or results of operations.
25
Our
inability to safely and efficiently conduct manufacturing operations or comply
with health and safety regulations could materially and adversely affect our
business, financial condition or results of operations.
In April
2008, we completed construction of our manufacturing facility located in
Lexington, North Carolina. We currently manufacture approximately 75% of our
proprietary products at this facility. In the future, we expect to manufacture
substantially all of our proprietary products. Prior to commencing manufacturing
at this facility, we relied upon third-party manufacturers to manufacture all of
our products. Therefore, prior to April 2008, we had no experience in
manufacturing. As a result, we could experience difficulties in organizing the
manufacturing processes, including raw material procurement, material and
product contamination, labor relations, manufacturing efficiencies and
compliance with applicable laws and regulations. Failure in any of these areas
could result in product recalls or manufacturing shutdowns. Additionally,
manufacturing a significant portion of our products at this single facility
concentrates our risk in the event there is any significant disruption in our
operations or shutdown of this facility. Further, our operations are subject to
environmental and health and safety laws and regulations, and some of our
operations require environmental permits and controls to prevent and limit
pollution of the environment. Any disruptions in our manufacturing operations
would have a material adverse effect on our business, financial condition or
results of operations and we could incur significant costs as a result of
violations of, or liabilities under, environmental laws and regulations, or to
maintain compliance with such environmental laws, regulations, or permit
requirements.
Complying
with new and existing government regulation, both in the U.S. and abroad, could
significantly increase our costs and limit our ability to manufacture our
products.
The
processing, formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of our products are subject to regulation by several U.S.
federal agencies, including the FDA, the FTC, the Postal Service, the Consumer
Product Safety Commission, the Department of Agriculture and the Environmental
Protection Agency, as well as various state, local and international laws and
agencies of the localities in which our products are sold. Government
regulations may prevent or delay the introduction or require the reformulation
of our products.
The FDA
regulates, among other things, the manufacture, composition, safety, labeling,
marketing and distribution of dietary supplements (including vitamins, minerals,
herbs, and other dietary ingredients for human use). The FDA may not accept the
evidence of safety we present for new dietary supplements we wish to market, or
they may determine that a particular dietary supplement or ingredient that we
currently market presents an unacceptable health risk. If that occurs, we could
be required to cease distribution of and/or recall supplements or products
containing that ingredient.
The FDA
may also determine that certain advertising and promotional claims, statements
or activities are not in compliance with applicable laws and regulations and may
determine that a particular statement is an unacceptable drug claim or an
unauthorized version of a food or dietary supplement “health claim.” Failure to
comply with FDA or other regulatory requirements could prevent us from marketing
particular dietary supplement products or subject us to administrative, civil or
criminal penalties.
The FTC
exercises jurisdiction over the advertising of dietary supplements and has
instituted numerous enforcement actions against dietary supplement companies for
failing to have adequate substantiation for claims made in advertising or for
using false or misleading advertising claims. The FTC routinely polices the
market for deceptive dietary supplement advertising and accepts and reviews
complaints from the public concerning such advertising.
The FTC
also regulates deceptive advertising claims and promotional offers of savings
compared to “regular” prices. The National Advertising Division, or NAD, of the
Council of Better Business Bureaus oversees an industry-sponsored
self-regulatory system that permits competitors to resolve disputes over
advertising claims, including promotions for savings off of regular prices. The
NAD has no enforcement authority of its own but may refer promotions to the FTC
that the NAD views as violating FTC guides or rules. Violations of these orders
could result in substantial monetary penalties.
Additional
or more stringent regulations of dietary supplements and other products have
been considered from time to time. For example, the U.S. House of
Representatives recently passed the Food Safety Enhancement Act of 2009 (H.R.
2749), which if enacted in its current form, would :
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impose
an annual registration of all facilities holding, processing, or
manufacturing food, including dietary
supplements;
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increase
FDA inspections of all dietary supplement companies, including us, by
establishing a minimum inspection
frequency;
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require
all dietary supplement companies, including us, to be subject to
warrantless searches for up to three
years;
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maintain
country of origin labeling for all dietary
supplements;
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empower
the Secretary of Health and Human Services to order the immediate
cessation of distribution, or a recall, of any food or dietary supplement
product; and
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provide
FDA officials with the authority to detain food products for up to 60 days
upon the belief that such products are misbranded or
adulterated.
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The bill
also creates risk of criminal liability for anyone who knowingly violates
misbranding and adulteration provisions under the Federal Food, Drug and
Cosmetic Act. If enacted into law, this bill would cause us to pay more for
regulatory compliance and to be at greater risk of civil and criminal liability.
We are not able to predict the enactment of this bill or the nature of any
future laws, regulations, repeals or interpretations or to predict the effect
additional governmental regulation would have on our business in the future.
These developments could require reformulation of certain products to meet new
standards, product recalls, discontinuation of production of certain products
not amenable to reformulation, additional record-keeping requirements, increased
documentation of the properties of certain products, additional or different
labeling, additional scientific substantiation, adverse event reporting or other
new requirements. Any such developments could increase our costs significantly,
restrict our ability to sell our products, delay our ability to deliver products
on time, result in customer migration to other suppliers, or otherwise have a
material adverse effect on our business, financial condition and results of
operations. For example, the Dietary Supplement and Nonprescription Drug
Consumer Protection Act, requiring mandatory adverse event reporting for all
dietary supplements and over-the-counter drugs sold in the U.S., was recently
signed into law. This law could materially increase our record keeping and
documentation costs. In addition, the FDA has issued revised final rules on Good
Manufacturing Practice (GMP), creating new requirements for manufacturing,
packaging or holding of dietary ingredients and dietary supplements. These
regulations require dietary supplements to be prepared, packaged and held in
compliance with stricter rules, and require quality control provisions similar
to those in the drug GMP regulations. We or our third-party manufacturers may
not be able to comply with the new rules without incurring additional expenses,
which could be significant.
In
Europe, non-compliance by us or others of relevant legislation can result in
regulators bringing administrative or, in some cases, criminal proceedings. For
example, in the U.K., it is common for regulators, including the Medicines and
Healthcare Products Regulatory Agency Enforcement & Intelligence Group, to
prosecute retailers and manufacturers for non-compliance with legislation
governing foodstuffs and medicines. European Union (EU) regulations and
directives are implemented and enforced by individual member states and, so,
enforcement priorities and applicable law can occur in multiple countries at one
time. Failure by us, the manufacturers or suppliers to comply with applicable
legislation could result in prosecution and have a material adverse effect on
our business, financial condition and results of operations.
In
Europe, broad regulations and directives on health and nutrition claims were
recently adopted. These regulations cover claims that can be made for foods
(including supplements). Certain claims, such as those regarding general
well-being, behavioral functions and weight-loss, may be prohibited or require
prior approval. Unless subject to derogation, products that include certain
claims cannot be lawfully marketed in EU member states absent preapproval.
Applicable derogations under EU directives can enlarge the period within which
we may seek approval for products containing claims. An approval must proceed
through the European Food Safety Authority (EFSA), and the process includes the
submission of a detailed dossier in support of the product claims. Lengthy
delays within the new EU framework have been reported. This may severely impact
our European marketing and expansion efforts. We also anticipate the enactment
of legislation that could significantly impact the formulation of our products.
The legislation is expected to include dosage restrictions for certain vitamin
and mineral supplements. The legislation may lead to some of our products being
recalled or discontinued.
27
In
addition, a European Union Directive governing product safety requires
manufacturers to notify regulators about unsafe products and gives regulators in
each member state the power to order product recalls. As a result, the number of
product recalls in Europe has increased substantially. A product recall in
Europe could have a material adverse effect on our business, financial condition
and results of operations.
Complying
with proposed healthcare reform legislation could increase our costs and have a
material adverse effect on our business, financial condition or results of
operations.
Healthcare
reform legislation is currently being debated in Congress. One of the bills
being debated would require employers to contribute either 72.5% of premiums for
individual full-time employees or 65% of premiums for full-time employees on
family plans to a qualifying health plan, or contribute to a national health
trust fund on behalf of employees. This proposed requirement is phased in after
a company’s payroll exceeds $250,000 at 2% of annual payroll and up to 8% for
firms with payrolls in excess of $400,000 and so we would be subject to the
proposed new requirement. We currently contribute 60% towards individual
premiums for full-time and hourly employees. We believe this coverage would be a
qualifying employer health benefits package with all essential benefits as
defined in the pending legislation, and as a result, we would be required to
increase fixed costs for individuals from 60% to the mandated 72.5% for
individual full-time employees, if the pending legislation is enacted in its
current form. In addition, we currently contribute solely to full-time
individual associate premiums and not to any portion of an associate’s optional
addition of a family plan. If the healthcare legislation is enacted in its
proposed form, we would be required to increase fixed costs by contributing 65%
in total for an associate’s family health coverage plan. Thus, passage of
healthcare reform legislation that imposes contribution requirements for
individuals and families that are at the same or a higher level than those
currently being debated in Congress would increase our fixed costs and lower our
profits, and could have a material adverse effect on our business, financial
condition or results of operations.
The
Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003
imposes certain obligations on the senders of commercial emails, which could
minimize the effectiveness of our email marketing campaign, and establishes
financial penalties for non-compliance, which could increase the costs of our
business and, could have a material adverse effect on our business, financial
condition or results of operations.
In
December 2003, the Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or the CAN-SPAM Act, was enacted. The CAN-SPAM Act
establishes certain requirements for commercial email messages and penalizes
commercial email message transmissions that are intended to deceive the
recipient as to source or content. The CAN-SPAM Act, among other things,
requires that senders of commercial emails allow recipients to opt out of
receiving future emails from the sender. The ability of our customers’ to opt
out of receiving commercial emails may minimize the effectiveness of our email
marketing campaign. Moreover, non-compliance with the CAN-SPAM Act carries
significant financial penalties. If we were found to be in violation of the
CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or
foreign laws regulating the distribution of commercial email, we could be
required to pay penalties, which could have a material adverse effect on our
business, result of operations, financial condition and cash flows.
28
Taxation
risks could subject us to liability for past sales, increase our costs and cause
our future sales to decrease.
We do not
collect sales or other taxes on shipments of most of our goods into most states
in the U.S. Proposed federal legislation would subject each facility used in the
manufacture and distribution of dietary supplements to an annual tax and
reporting requirement. The proceeds of the tax would be dedicated to increased
inspections of companies that manufacture, distribute and hold dietary
supplements. Taxes of this kind could adversely affect our ability to remain in
business, could restrict the type or kind of products we sell or could require
significant expenditures to ensure compliance. Currently, U.S. Supreme Court
decisions restrict the imposition of obligations to collect state and local
sales and use taxes with respect to sales made over the Internet. However, a
number of states, as well as the U.S. Congress, have been considering
initiatives that could limit or supersede the Supreme Court’s position regarding
sales and use taxes on Internet sales. If any of these initiatives were
successful, we could be required to collect sales and use taxes in additional
states. The imposition by state and local governments of various taxes upon
Internet commerce could create administrative burdens for us, reduce our
competitive advantage over traditional retailers and decrease our future sales.
Our warehousing and expected manufacturing centers, and any future expansion of
them, along with other aspects of our evolving business, may result in
additional sales and other tax obligations. One or more states or foreign
countries may seek to impose sales or other tax collection obligations on
out-of-jurisdiction eCommerce companies. Effective June 2008, New York imposed
such a sales tax obligation requirement on online retailers that use New York
residents to directly or indirectly refer potential customers, via a link on an
Internet website or otherwise, to the online retailer. A successful assertion by
one or more states or foreign countries that we should collect sales or other
taxes on the sale of merchandise or services could result in substantial tax
liabilities for past sales, decrease our ability to compete with traditional
retailers and otherwise harm our business, financial condition or results of
operations.
Unfavorable
changes to government regulations, service interruptions or adverse consumer
attitudes about online commerce could have a material adverse effect on our
business, financial condition or results of operation by impeding the growth and
use of the Internet and thereby decreasing revenue.
During
the fiscal year ended December 31, 2008, approximately 86% of our orders were
placed online. As the role and importance of online commerce has grown in the
U.S., there have been continuing efforts to increase the legal and regulatory
obligations and restrictions on companies conducting commerce through the
Internet, primarily in the areas of taxation, consumer privacy, restrictions on
imports and exports, customs, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts and other
communications, consumer protection, the provision of online payment services,
broadband residential Internet access and the characteristics and quality of
products and services, which could increase the cost of conducting business over
the Internet. In addition, consumer unwillingness or inability to use the
Internet to conduct business, due to adverse regulation, security concerns,
service interruptions or otherwise, could materially reduce our growth.
Governmental laws and regulations, service interruptions or adverse attitudes
about online commerce could increase the costs and liabilities associated with
our online commerce activities, increase the price of our product to consumers,
or reduce traffic to our website. Unfavorable resolution of these issues could
have a material adverse effect on our business, financial condition or results
of operations.
Our
network and communications systems are vulnerable to system interruption and
damage, which could limit our ability to operate our business and could have a
material adverse effect on our business, financial condition or results of
operations.
Our
ability to receive and fulfill orders promptly and accurately is critical to our
success and largely depends on the efficient and uninterrupted operation of our
computer and communications hardware and software systems. We experience
periodic system interruptions that impair the performance of our transaction
systems or make our website inaccessible to our customers. These systems
interruptions may prevent us from efficiently accepting and fulfilling orders,
sending out promotional emails and other customer communications in a timely
manner, introducing new products and features on our website, promptly
responding to customers, or providing services to third parties. Frequent or
persistent interruptions in our services could cause current or potential
customers to believe that our systems are unreliable, which could cause them to
avoid our website, drive them to our competitors, and harm our reputation. To
minimize future system interruptions, we must continue to add software and
hardware and to improve our systems and network infrastructure to accommodate
increases in website traffic and sales volume and to replace aging hardware and
software. We may be unable to promptly and effectively upgrade and expand our
systems and integrate additional functionality into our existing systems. In
addition, upgrades to our system may cause existing systems to fail or operate
incorrectly. Any unscheduled interruption in our services could result in fewer
orders, additional operating expenses, or reduced customer satisfaction, any of
which would harm our business, financial condition and operating results. In
addition, the timing and cost of upgrades to our systems and infrastructure may
substantially affect our ability to maintain profitability.
Our
systems and operations and those of our suppliers and Internet service
providers, are vulnerable to damage or interruption from fire, flood,
earthquakes, power loss, server failure, telecommunications and Internet service
failure, acts of war or terrorism, computer viruses and denial-of-service
attacks, physical or electronic break-ins, sabotage, human error and similar
events. Any of these events could lead to system interruptions, order
fulfillment delays, and loss of critical data for us, our suppliers, or our
Internet service providers, and could prevent us from accepting and fulfilling
customer orders. Any significant interruption in the availability or
functionality of our website or our customer processing, distribution, or
communications systems, for any reason, could seriously harm our business,
financial condition, and operating results. The occurrence of any of these
factors could have a material adverse effect on our business, financial
condition or results of operations.
29
Inability
of our retail customers to access consumer credit markets could adversely affect
sales of our products and could have a material adverse effect on our business,
financial condition or results of operations.
Many of
our customers use credit cards to pay for our products and services. Because of
the current global economic downturn, credit card issuers have tightened their
consumer lending standards which has resulted in decreased credit card limits
and increased interest rates and fees. If our customers lose access to consumer
credit or determine that the use of credit is prohibitively expensive, our
business, financial condition or results of operations could be materially and
adversely affected.
We
are subject to a number of risks related to credit card payments we accept
which, if we fail to be in compliance with applicable credit card rules and
regulations, will result in additional fees, fines and ultimately the revocation
of the right to use the credit card company, which could have a material adverse
effect on our business, financial condition or results of
operations.
In 2008,
approximately 97% of our orders were paid for using a credit card or debit card.
For credit and debit card payments, we pay interchange and other fees, which may
increase over time and raise our operating costs and lower our profit margins.
We are also subject to payment card association operating rules, certification
requirements and rules governing electronic funds transfers, which could change
or be reinterpreted to make it difficult or impossible for us to comply. If we
fail to comply with these rules or requirements, we may be subject to fines and
higher transaction fees and lose our ability to accept credit and debit card
payments from our customers. In addition, we have and may continue to suffer
losses as a result of orders placed with fraudulent credit and debit card data.
We do not carry insurance against the risk of credit card fraud, so the failure
to adequately control fraudulent credit card transactions could reduce our net
revenue and our gross profit percentage. We have implemented technology to help
us detect the fraudulent use of credit card information. Under current
practices, a merchant is liable for fraudulent credit card transactions when the
merchant does not obtain a cardholder’s signature. A failure to adequately
control fraudulent credit card transactions would result in significantly higher
credit card-related costs and could have a material adverse effect on our
business, financial condition or results of operations.
We
may incur significant costs to protect our customers’ personal information, and
may incur liability if such personal information is misappropriated, which could
increase our costs, harm our reputation and reduce our sales.
If our
customers’ personal or credit card information is misappropriated by us or third
parties that breach our network security, we could be subject to liability. This
liability could include claims for unauthorized purchases with credit card
information, impersonation or other similar fraud claims or damages for alleged
violations of state or federal laws governing security protocols for the
safekeeping of customers’ personal or credit card information. This liability
could also include claims for other misuses of personal information, including
unauthorized marketing purposes. These claims could result in litigation against
us. Liability for misappropriation of this information could adversely affect
our business, financial condition or operating results. In addition, the FTC and
state agencies have been investigating various Internet companies regarding
their use of customers’ personal information. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if government agencies investigate our privacy practices.
We rely
on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information such as customer credit card numbers. We cannot
provide assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments will not result in a
compromise or breach of the algorithms that we use to protect our customers’
transaction data. If any such compromise of our security were to occur, it could
harm our reputation, business, prospects, financial condition and results of
operations. A party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
We may be required to expend significant capital and other resources to protect
against such security breaches or to resolve problems caused by such breaches.
We cannot assure you that our security measures will prevent security breaches
or that failure to prevent such security breaches will not harm our business,
financial condition or results of operations.
30
Laws
or regulations relating to privacy and data protection may adversely affect the
growth of our Internet business or our marketing efforts, which could reduce our
sales and cause us to incur significant costs.
We are
subject to increasing regulation at the federal, state and international levels
relating to privacy and the use of personal user information. For example, we
are subject to various telemarketing laws that regulate the manner in which we
may solicit future suppliers and customers. Such regulations, along with
increased governmental or private enforcement, may increase the cost of growing
our business. In addition, many jurisdictions have laws that limit the use of
personal information gathered online or offline or require companies to
establish privacy policies. The FTC has adopted regulations regarding the
collection and use of personal identifying information obtained from children
under thirteen years of age. Proposed legislation in this country and existing
laws in foreign countries require companies to establish procedures to notify
users of privacy and security policies, obtain consent from users for the
collection and use of personal information, and/or provide users with the
ability to access, correct and delete personal information stored by us. From
time to time, Congress has proposed legislation regarding data security and
privacy protection. Any enacted data protection regulations may restrict our
ability to collect demographic and personal information, which could be costly
or harm our marketing efforts, and could require us to implement new and
potentially costly processes, procedures and/or protective
measures.
Our
failure to protect our intellectual property rights could reduce our sales and
increase our costs.
We have
invested significant resources to promote our brand name. We currently have 11
issued patents, 3 patents pending, 68 issued
U.S. trademark registrations and 16 pending U.S. trademark applications
with the U.S. Patent and Trademark Office for proprietary products and
processes. We have also received various European Community, Japan, Hong Kong
Australia and South Korea registrations for the trademarks CSI,
Vitacost, WALKER DIET, Nutraceutical Sciences Institute and NSI. We may not
always be able to successfully enforce a trademark against competitors or
against challenges by others. Our failure to successfully protect a trademark
could diminish the value and effectiveness of our past and future marketing
efforts and could cause customer confusion. This could in turn adversely affect
our revenue and profitability. In addition, because of the differences in
foreign trademark laws concerning proprietary rights, a trademark may not
receive the same degree of protection in foreign countries as it does in the
U.S. Furthermore, although we own 11 issued patents, these patents may not
adequately protect our products because the patents typically relate to
formulations. Accordingly, they could be circumvented through minor alterations
in formulation. Our failure to adequately protect our intellectual property
rights could have a material adverse affect our business, financial condition or
results of operations. Our inability to defend against intellectual
property claims could increase our costs and limit our ability to manufacture
our products.
We may in
the future be subject to intellectual property litigation and infringement
claims, which could cause us to incur significant expenses, be involved in
protracted litigation or prevent us from manufacturing, selling or using some
aspect of our products. Claims of intellectual property infringement may also
require us to enter into costly royalty or license agreements. Alternatively, we
may be unable to obtain necessary royalty or license agreements on terms
acceptable to us, if at all. Claims that our technology or products infringe on
intellectual property rights of others could be costly and would divert the
attention of our management and key personnel, which in turn could adversely
affect our business, financial condition or results of operations.
Third
parties could use our trademarks as keywords in Internet search engine
advertising programs, which may direct potential customers to competitors’
websites, which, in turn, could result in decreased sales and could harm our
reputation.
Competitors
and other third parties could purchase our trademarks and confusingly similar
terms as keywords in Internet search engine advertising programs and in the
resulting sponsored link advertisements which may divert potential customers to
their websites. Preventing such unauthorized use is difficult. Further, the
legal precedent on whether such activity infringes on our intellectual property
varies significantly within the United States and in other countries. If we are
unable to protect our trademarks or confusingly similar terms from such
unauthorized use, competitors and other third parties could drive potential
online customers away from our website, which could result in a loss of sales
and have a material adverse effect on our business, financial condition or
results of operations.
31
We
operate in a highly competitive industry, and our failure to compete effectively
could adversely affect our market share, financial condition and growth
prospects.
The U.S.
vitamins and dietary supplements industry is a large and highly fragmented
industry. Our competitors include specialty retailers, supermarkets, drugstores,
mass merchants, multi-level marketing organizations, online merchants,
mail-order companies and a variety of other participants in the industry. The
principle elements of competition in the industry are price, selection and
distribution channel offerings. We believe that the market is also highly
sensitive to the introduction of new products, including various prescription
drugs, which may rapidly capture a significant share of the market. In the U.S.,
we also compete for sales with heavily advertised national brands manufactured
by large pharmaceutical and food companies, as well as other retailers. In
addition, as some products gain market acceptance, we experience increased
competition for those products as more participants enter the market. Our
manufacturing operations compete with manufacturers of third-party nutritional
supplements. Certain of our competitors are larger than us and have longer
operating histories, larger customer bases, greater brand recognition and
greater resources for marketing, advertising and product promotion. They may be
able to secure inventory from vendors on more favorable terms, operate with a
lower cost structure or adopt more aggressive pricing policies. In addition, our
competitors may be more effective and efficient in introducing new products. We
may not be able to compete effectively, and our attempt to do so may require us
to increase marketing and/or reduce our prices, which may result in lower
margins. Failure to effectively compete could adversely affect our market share,
financial condition and growth prospects.
Our
failure to efficiently respond to changing consumer preferences and demand for
new products and services could significantly harm our product sales, inventory
management and customer relationships and our business, results of operations
and financial condition could be materially and adversely affected.
Our
continued success depends, in part, on our ability to anticipate and respond to
changing consumer trends and preferences. We may not be able to respond in a
timely or commercially appropriate manner to these changes. Our failure to
accurately predict these trends could negatively impact our inventory levels,
sales and consumer opinion of us as a source for the latest products. The
success of our new product offerings depends upon a number of factors, including
our ability to:
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accurately
anticipate customer needs;
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innovate
and develop new products;
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successfully
commercialize new products in a timely
manner;
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competitively
price our products;
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procure
and maintain products in sufficient volumes and in a timely manner;
and
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differentiate
our product offerings from those of our
competitors.
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If we do
not introduce new products, make enhancements to existing products or maintain
the appropriate inventory levels to meet customers’ demand in a timely manner,
our business, results of operations and financial condition could be materially
and adversely affected.
Our
sales in international markets expose us to certain risks relating to commencing
and maintaining operations in new and foreign jurisdictions, which could
increase our costs, subject us to political risk and negatively affect our
business.
In 2008,
approximately 2% of our net sales were generated internationally. As part of our
business strategy, we intend to expand our international presence. Our
international operations are subject to a number of risks inherent to operations
in foreign countries, and any expansion of our international operations will
increase the magnitude of these risks. These risks include, among other
things:
32
·
|
political
and economic instability of foreign
markets;
|
·
|
foreign
governments’ restrictive trade
policies;
|
·
|
exchange
controls;
|
·
|
the
imposition of, or increase in, duties, taxes, government royalties or
non-tariff barriers;
|
·
|
fluctuation
in foreign currency exchange rates;
|
·
|
increased
costs in maintaining international marketing efforts and customer
relations;
|
·
|
difficulties
in enforcement of intellectual property rights;
and
|
·
|
problems
entering international markets with different cultural bases and consumer
preferences.
|
Any of
these risks could have a material adverse effect on our international operations
and our growth strategy.
Insurance
coverage, even where available, may not be sufficient to cover losses we may
incur, which could increase our costs and lower our profits.
Our
business exposes us to the risk of liabilities arising out of our products and
operations. For example, we may be liable for claims brought by users of our
products or by employees, customers or other third parties for personal injury
or property damage occurring in the course of our operations. Our operations are
subject to closure and loss due to power outages, Internet and telephone line
failures, work stoppages and acts of nature. We seek to minimize these risks
through various insurance policies from third-party insurance carriers. However,
our insurance coverage is subject to large individual claim deductibles,
individual claim and aggregate policy limits and other terms and conditions. Our
estimate of retained-insurance liabilities is subject to change as new events or
circumstances develop that might materially impact the ultimate cost to settle
these losses. We cannot assure you that our insurance will be sufficient to
cover our losses. We do not view insurance, by itself, as a material mitigant to
these business risks. Any losses that are not completely covered by our
insurance could have a material adverse effect on our business, financial
condition or results of operations.
The
insurance industry has become more selective in offering certain types of
liability insurance coverage, and we may not be able to maintain our existing
coverage or obtain increased coverage in the future, which could increase our
costs and reduce our profits.
The
insurance industry has become more selective in offering certain types of
insurance, including product liability, product recall and property casualty
insurance. While we believe our current insurance policies provide us adequate
coverage for our current business operations, there can be no assurance that we
will be able to maintain such coverage or obtain comparable coverage on terms
and conditions favorable to us, if at all. Further, as we expand our business,
we expect to correspondingly increase our insurance coverage, and there can be
no assurance that we will be able to obtain such increased coverage if and when
needed.
Our
manufacturing operations are located in a single location and our inventory is
concentrated in two warehouse locations, which exposes us to the risk of natural
disasters or other force majeure events. Losses at either location could
adversely affect our manufacturing operations, product distributions, sales and
consumer satisfaction.
33
We house
our manufacturing operations and one of our two distribution warehouses at a
facility located in Lexington, North Carolina. We also operate a
distribution and warehouse facility located in Las Vegas, Nevada. Any
significant disruption in either of these locations for any reason, such as a
fire, flood, hurricanes, earthquakes or similar events, could adversely affect
our manufacturing operations, product distributions, sales and consumer
satisfaction.
Our
quarterly results of operations may fluctuate in the future. As a result, we may
fail to meet or exceed the expectations of investors or securities analysts,
which could cause our stock price to decline.
Our
quarterly revenue and results of operations may fluctuate as a result of a
variety of factors, many of which are outside of our control. If our quarterly
revenue or results of operations fall below the expectations of investors or
securities analysts, the price of our common stock could decline substantially.
Fluctuations in our results of operations may be due to a number of factors,
including, but not limited to, those listed below and identified throughout this
“Risk Factors” section in this prospectus:
●
|
our
ability to retain and increase sales to existing customers and attract new
customers;
|
●
|
changes
in the volume and mix of dietary supplements and health and wellness
products sold in a particular
quarter;
|
●
|
the
timing and success of new dietary supplement introductions or
reformulations by us or our
competitors;
|
●
|
changes
in our pricing policies or those of our
competitors;
|
●
|
competition,
including entry into the market by new competitors including traditional
brick and mortar retailers and new product offerings by existing
competitors;
|
●
|
the
amount and timing of expenditures related to expanding our operations,
research and development or introducing new
products;
|
●
|
changes
in the payment terms for our products and services;
and
|
●
|
the
purchasing cycles of our customers.
|
Most of
our expenses are relatively fixed in the short-term, and our expense levels are
based in part on our expectations regarding future revenue levels. As a result,
if revenue for a particular quarter is below our expectations, we may not be
able to proportionally reduce operating expenses for that quarter, causing a
disproportionate effect on our expected results of operations for that quarter.
Due to the foregoing factors, and the other risks discussed in this prospectus,
investors should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of our future performance.
If
we are unable to sufficiently increase our revenue to offset increased costs as
we expand our business, we may experience operating losses, net losses or
negative cash flows.
We
incurred operating losses and net losses in each year of operation until 2006.
We expect operating expenses and working capital requirements to increase
substantially as we expand our business. We expect our costs of product
development, sales and marketing, research and development, manufacturing and
general and administrative expenses to increase substantially as a result of our
planned expansion. If we are unable to continue to sufficiently increase our
revenue to offset these increased costs, we will not maintain profitability and
may experience operating losses, net losses or negative cash flows.
If
we do not manage the cash proceeds from our initial public offering properly, we
could be required to register as an investment company and become subject to
substantial regulation that would interfere with our ability to conduct our
business.
34
We
received net cash proceeds of approximately $47.1 million from our initial
public offering, representing in excess of 40% of our assets. The
Investment Company Act of 1940 requires the registration of companies which are
engaged primarily in the business of investing, reinvesting or trading in
securities, or which are engaged in the business of investing, reinvesting,
owning, holding or trading in securities and which own or propose to acquire
investment securities with a value of more than 40% of its assets on an
unconsolidated basis (other than U.S. government securities and cash). We are
not engaged primarily in the business of investing, reinvesting or trading in
securities, and we invest our cash and cash equivalents in U.S. government
securities and money market funds to the extent necessary to take advantage of
the 40% safe harbor. To manage our cash holdings, we invest in short-term
instruments consistent with prudent cash management and the preservation of
capital and not primarily for the purpose of maximizing investment returns. U.S.
government securities and money market funds generally yield lower rates of
income than other short-term instruments in which we have invested to date.
Accordingly, investing substantially all of our cash and cash equivalents in
U.S. government securities and money market funds could result in lower levels
of interest income and net income.
If we
were deemed an investment company and were unable to rely upon a safe harbor or
exemption under the Investment Company Act, we would, among other things, be
prohibited from engaging in certain businesses or issuing certain securities and
we could be subject to civil and criminal penalties for
noncompliance.
Risks
Related to Our Indebtedness
If
we fail to comply with the various covenants contained in our bank financing
documents, we may be in default thereunder, which could limit our ability to
fund our operations.
As of
September 30, 2009, we had borrowed approximately $7.7 million under certain
term, revolving and other credit facilities. If we default on any of the
financial or operating covenants in any of our agreements evidencing such credit
facilities and are unable to obtain an amendment or waiver, the lenders could
cause all amounts outstanding under these agreements to be due and payable
immediately and, if secured, proceed to foreclose on the collateral securing the
indebtedness. Our assets or cash flow may not be sufficient to repay fully the
borrowings under our different forms of indebtedness, either upon maturity or if
accelerated upon an event of default. In addition, any event of default or
declaration of acceleration under one debt instrument could also result in an
event of default under one or more of our other debt instruments. A default or
potential acceleration could impact our ability to attract and retain customers
and could negatively impact trade credit availability and terms, which could
have a material adverse effect on our business, financial condition or results
of operations.
Our
flexibility in operating our business and our ability to repay our indebtedness
may be limited as a result of certain covenant restrictions in the agreements
governing our indebtedness, which could have a material adverse effect on our
business, financial condition or results of operations.
The
agreements governing our indebtedness contain a number of restrictive covenants
that impose significant restrictions on us. Compliance with these restrictive
covenants will limit our flexibility in operating our business. Failure to
comply with these covenants could give rise to an event of default under these
agreements. These covenants restrict, among other things, our ability
to:
·
|
incur
additional indebtedness and guarantee
obligations;
|
·
|
create
liens;
|
·
|
engage
in mergers, consolidations, liquidations or the creation of
subsidiaries;
|
·
|
change
the nature of our business;
|
·
|
make
equity investments or loans;
|
|
·
|
sell,
lease or otherwise dispose of certain
assets;
|
35
·
|
engage
in transactions with affiliates;
|
·
|
pay
dividends, make distributions or redeem any equity
securities;
|
·
|
modify
our organizational documents or certain debt
documents;
|
·
|
change
our accounting treatment and reporting
practices;
|
·
|
engage
in speculative transactions;
|
·
|
prepay
certain indebtedness; and
|
·
|
allow
debt to be designated as senior
debt.
|
Further,
our senior lender has a priority lien on substantially all of our assets and a
mortgage on our Lexington, North Carolina property. If we default on our
indebtedness, our lender may exercise any and all remedies available to secured
parties, including, but not limited to, taking possession of those assets which
secure the lender’s lien.
We
have entered into hedging strategies to mitigate our interest rate exposure;
these strategies may not be effective and may adversely affect our earnings and
may expose us to counterparty risks.
Our risk
management policy is to use derivative financial instruments, as appropriate, to
manage the interest expense related to the variable interest rate on our debt.
We have entered into three interest rate swap agreements and may pursue
additional types of hedging strategies in the future. We expect hedging to
assist us in mitigating and reducing our exposure to higher interest expenses,
and, to a lesser extent, losses in book value from adverse changes in interest
rates. Our hedging activity will vary in scope based on the level and volatility
of interest rates, the type of assets held and financing sources used and other
changing market conditions. There is no assurance, however, that a hedging
strategy will insulate us from the interest rate risks to which we are exposed,
and there is no assurance that the implementation of any hedging strategy will
have the desired impact on our results of operations or financial condition. In
addition, these hedging strategies may adversely affect us, because hedging
activities involve an expense that we will incur regardless of the effectiveness
of the hedging activity.
·
|
Interest
rate hedging may fail to protect or could adversely affect us because,
among other things:
|
·
|
interest
rate hedging can be expensive, particularly during periods of rising and
volatile interest rates;
|
·
|
available
interest rate hedges may not correspond directly with the interest rate
risk for which we seek protection;
|
·
|
the
duration of the hedge may not match the duration of the related
liability;
|
·
|
the
credit quality of the party owing money on the hedge may be downgraded to
such an extent that it impairs our ability to sell or assign our side of
the hedging transaction; and
|
·
|
the
party owing money in the hedging transaction may default on its obligation
to pay.
|
We have
entered into three interest rate swap agreements in an effort to hedge against
future increases in interest rates on certain of our debt obligations. Should an
interest rate swap agreement counterparty be unable to make required payments
pursuant to the agreement, the hedged liability would cease to be hedged for the
remaining term of the interest rate swap agreement. In addition, we may be at
risk for any collateral held by a hedging counterparty to an interest rate swap
agreement, should the counterparty become insolvent or file for bankruptcy. Our
hedging transactions, which are intended to limit losses, may actually adversely
affect our earnings, which could adversely affect our financial condition and
results of operations.
36
Risks
Related to our Common Stock
Prior
to September 24, 2009, there was no public market for our common stock, and it
is possible that no trading market will be maintained.
Prior to
our initial public offering and listing on The NASDAQ Global Market on September
24, 2009, there had not been a public market for our common stock. Therefore,
stockholders should be aware that they cannot benefit from information about
prior market history as to their decision to invest. There can be no assurance
that a trading market will develop for our common stock or, if such a market
does develop, how liquid that market might become or whether it will be
maintained.
Volatility
of our stock price could adversely affect an investment in our common
stock.
The
market price of our common stock could fluctuate significantly as a result of,
among other things:
·
|
quarterly
and annual variations in our operating
results;
|
·
|
the
level and quality of research analyst coverage for our common stock,
changes in financial estimates or investment recommendations by securities
analysts following our business or failure to meet such
estimates;
|
·
|
the
financial disclosure we may provide to the public, any changes in such
disclosure or our failure to meet such
disclosure;
|
·
|
the
public’s response to our press releases, our other public announcements
and our filings with the Securities and Exchange
Commission;
|
·
|
various
market factors or perceived market factors, including rumors, whether or
not correct, involving us, our customers, our suppliers or our
competitors;
|
·
|
changes
in accounting standards, policies, guidance, interpretations or
principles;
|
·
|
sales
of common stock by our directors, officers or significant
stockholders;
|
·
|
introductions
of new products or new pricing policies by us or by our
competitors;
|
·
|
recruitment
or departure of key personnel;
|
·
|
developments
with respect to intellectual property
rights;
|
·
|
acquisitions
or strategic alliances by us or our
competitors;
|
·
|
changes
in shipping costs;
|
·
|
short
sales, hedging and other derivative transactions in shares of our common
stock;
|
|
·
|
the
operating and stock price performance of other companies that investors
may deem comparable to us;
|
37
·
|
broad
market conditions and trends in the eCommerce industry and the economy as
a whole; and
|
·
|
other
events or factors, including those resulting from war, incidents of
terrorism or responses to such
events.
|
Fluctuations
in the price of our common stock could contribute to the loss of all or part of
a stockholder’s investment. Any of the factors listed above could have a
material adverse effect on an investment in our common stock. In addition,
stocks of Internet-related and eCommerce companies have historically experienced
significant price and volume fluctuations that may have been unrelated or
disproportionate to these companies’ operating performance. Public announcements
by us or other such companies concerning, among other things, performance,
accounting practices or legal problems could cause the market price of our
common stock to decline regardless of our actual operating performance. We could
be the subject of securities class action litigation due to future stock price
volatility, which could divert management’s attention and adversely affect our
results of operations.
Future
sales of our common stock, or the perception that such future sales may occur,
may cause our stock price to decline and impair our ability to obtain capital
through future stock offerings.
In
connection with our initial public offering, we, along with our officers,
directors and certain stockholders, have agreed prior to the commencement of
this offering, subject to limited exceptions, not to sell or transfer any shares
of common stock for 180 days after September 23, 2009 without the consent of
Jefferies & Company, Inc. and Oppenheimer & Co. Inc. However, Jefferies
& Company, Inc. and Oppenheimer & Co. Inc. may release these shares from
these restrictions at any time. In evaluating whether to grant such a request,
Jefferies & Company, Inc. and Oppenheimer & Co. Inc. may consider a
number of factors with a view toward maintaining an orderly market for, and
minimizing volatility in the market price of, our common stock. These factors
include, among others, the number of shares involved, recent trading volume,
stock price, the length of time before the lock-up expires and the reasons for,
and the timing of, the request. We cannot predict what effect, if any, market
sales of shares held by any stockholder or the availability of these shares for
future sale will have on the market price of our common stock.
A total
of approximately 15.6 million shares of common stock may be sold in the public
market by existing stockholders on or about 181 days after September 23, 2009,
subject to applicable volume and other limitations imposed under federal
securities law. Sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock and could materially impair our future
ability to raise capital through offerings of our common stock.
In
addition, as of September 30, 2009, we had outstanding options to purchase
2,695,880 shares of common stock. We registered for offer and sale the shares of
common stock that are reserved for issuance pursuant to options. Shares covered
by such registration statements upon the exercise of stock options or warrants
generally will be eligible for sale in the public market, except that affiliates
will continue to be subject to volume limitations and other requirements of Rule
144. The issuance or sale of such shares could depress the market price of our
common stock.
Given
our limited resources, being a public company will substantially increase our
administrative costs which could materially impact our business, financial
condition or results of operations.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. Sarbanes-Oxley, as well as new rules
subsequently implemented by the Securities and Exchange Commission and The
NASDAQ Stock Market, have required changes in corporate governance practices of
public companies. We expect these new rules and regulations to increase our
legal and financial compliance costs and to make some activities more time
consuming and/or costly. For example, we are migrating our core financial
systems to our new accounting system, and implementing additional internal and
disclosure controls and procedures and corporate governance policies. In
addition, as a public company, we will incur the internal and external costs of
preparing and distributing periodic public reports in compliance with our
obligations under the securities laws. We also expect these new rules and
regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance. These new rules and regulations could
also make it more difficult for us to attract and retain qualified members of
our board of directors, particularly to serve on our audit committee, and
qualified executive officers.
38
Section
404 of Sarbanes-Oxley requires us to include an internal control report with our
annual report on Form 10-K. That report must include management’s assessment of
the effectiveness of our internal control over financial reporting as of the end
of the fiscal year. Additionally, beginning with our annual report on Form 10-K
for the year ending December 31, 2010, our independent registered public
accounting firm will be required to issue a report on management’s assessment of
our internal control over financial reporting and a report on its evaluation of
the operating effectiveness of our internal control over financial reporting.
The material weaknesses and any other deficiencies in internal control that we
currently have identified and that we may identify in the future will need to be
addressed as part of the evaluation of our internal control over financial
reporting and may impair our ability to comply with Section 404. If we are not
able to successfully implement internal control over financial reporting, we may
not be able to accurately and timely report on our financial position, results
of operations or cash flows, which could adversely affect our business and
investor confidence in us.
The
concentration of our capital stock ownership with insiders will likely limit an
investor’s ability to influence corporate matters.
Our
executive officers, directors and affiliated entities controlled by us or these
individuals together beneficially own or control approximately 45% (including
shares owned by Mr. Wayne Gorsek) of our common stock outstanding. Furthermore,
pursuant to the terms of our amended and restated bylaws, certain actions may be
taken with the approval of any stockholder or group of stockholders owning
shares in excess of 10%, including the ability to call a special meeting for the
purpose of electing directors. As a result, certain stockholders will have
substantial influence and control over management and matters that require
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. Corporate actions favored by these
stockholders might be taken even if other stockholders oppose those actions.
This concentration of ownership might also have the effect of delaying or
preventing a change of control of our company that other stockholders may
consider beneficial.
We
will retain broad discretion in using the net proceeds from our initial public
offering and may spend a substantial portion in ways with which investors may
not agree.
Our
management retain broad discretion to allocate the net proceeds of our initial
public offering. The net proceeds may be applied in ways with which our
stockholders may not agree, or which do not increase investment value. We used a
portion of our net proceeds from the offering to repay outstanding indebtedness
owed on our credit facilities and to fund capital expenditures. We anticipate
that we will use the remainder of the net proceeds for working capital and other
general corporate purposes. We have not allocated these remaining net proceeds
for any specific purposes.
Provisions
in our amended and restated certificate of incorporation and bylaws or Delaware
law might discourage, delay or prevent a change of control of our company or
changes in our management and, therefore, depress the trading price of our
stock.
Our
amended and restated certificate of incorporation and bylaws contain provisions
that could depress the trading price of our common stock by acting to
discourage, delay or prevent a change in control of our company or changes in
our management that the stockholders of our company may deem advantageous. These
provisions include:
·
|
our
ability to issue preferred stock with terms that the board of directors
may determine, without stockholder
approval;
|
·
|
advance
notice requirements for stockholder proposals and nominations;
and
|
|
·
|
limitations
on convening stockholder
meetings.
|
39
As
a result of these and other provisions in our amended and restated certificate
of incorporation, the price investors may be willing to pay in the future for
shares of our common stock may be limited.
In
addition, Section 203 of the Delaware General Corporation Law may discourage,
delay or prevent a change in control of our company. Further, certain of our
employment agreements and incentive plans provide for vesting of stock options
and/or payments to be made to the employees thereunder if their employment is
terminated in connection with a change of control, which could discourage, delay
or prevent a merger or acquisition at a premium price.
We
have not declared or paid any cash dividends on our common stock, nor do we
intend to do so, which could depress the trading price of our common
stock.
We have
not declared or paid any cash dividends on our common stock. We currently intend
to retain any future earnings and do not expect to pay any dividend in the
foreseeable future. As a result, investors may only receive a return on
investment in our common stock if the market price of our common stock
increases.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
Unregistered
Sales of Equity Securities
During
the quarter ended September 30, 2009, we made the following sales of
unregistered securities:
·
|
On
September 4, 2009, we issued to the Estate of John Arnst 9,600 shares of
our common stock in connection with the exercise of 40,000 options granted
under our 2000 Stock Option Plan. We did not receive cash
proceeds from the exercise of the options, but instead canceled 30,400
options as payment of the exercise price, in settlement of a litigation
matter. The transaction was deemed to be exempt from
registration under the Securities Act, by virtue of Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions pursuant to
compensation benefits plans and contracts relating to
compensation.
|
·
|
On
September 22, 2009, we issued an aggregate of 169,528 shares of common
stock to certain employees, former employees and officers pursuant to the
exercise of an aggregate of 293,320 options granted under our 2000 Stock
Option Plan. We received cash proceeds of $1,250 from the exercise of
8,000 of these stock options. We did not receive cash proceeds from the
exercise of 285,320 stock options but instead canceled 123,792 stock
options as payment of the exercise price and applicable withholding
taxes. The transactions were deemed to be exempt from
registration under the Securities Act, by virtue of Rule 701 promulgated
under Section 3(b) of the Securities Act as transactions pursuant to
compensation benefits plans and contracts relating to
compensation.
|
·
|
On
September 23, 2009, we issued an aggregate of 440,000 options to purchase
shares of our common stock pursuant to our 2007 Stock Award Plan to
certain officers and directors at an exercise price equal to $12.00 per
share.
|
Use
of Proceeds
On
September 23, 2009, our registration statement on Form S-1 (File No. 333-143926)
was declared effective for our initial public offering, pursuant to which we
registered the offering and sale of up to 5,089,554 shares of common stock by us
(including 661,109 shares to cover the exercise of the underwriters’
over-allotment option) and the associated sale of up to 7,560,446 shares of
common stock by selling stockholders (including 988,891 shares to cover the
exercise of the underwriters’ over-allotment option), at a public offering price
of $12.00 per share. On September 23, 2009, we sold 4,428,445 shares of common
stock for an aggregate offering price of $53,141,340, and the selling
stockholders sold 6,571,555 shares of common stock for an aggregate offering
price of $78,858,660. The joint book-running managers for the offering were
Jefferies & Company, Inc. and Oppenheimer & Co. Inc. On
October 23, 2009, the underwriters’ over-allotment option terminated without
being exercised.
40
As a
result of the offering, we received net proceeds of approximately $47.1 million,
after deducting underwriting discounts and commissions of $3.7 million and
additional offering-related expenses of $2.3 million, for total expenses of $6.0
million. None of such payments were direct or indirect payments to any of our
directors or officers or their associates or to persons owning 10 percent or
more of our common stock or affiliates of ours or direct or indirect payments to
others.
From the
effective date of the registration statement through September 30, 2009, we used
approximately $3.6 million of the offering proceeds to repay indebtedness owing
under our credit facility. The remaining net offering proceeds have
been invested into short-term investment-grade securities and money market
accounts.
There has
been no material change in the planned use of proceeds from our initial public
offering as described in our final prospectus filed with the SEC pursuant to
Rule 424(b).
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
On July
31, 2009, we held our annual meeting of stockholders. At the annual
meeting, holders of shares of the our common stock elected seven individuals to
serve as directors and approved an amendment to our Amended and Restated
Certificate of Incorporation to effect a four-for-five reverse stock split of
our common stock. The tables below set forth the number of shares
that voted “for” and were withheld from voting for the seven individuals elected
to serve as directors, and the number of shares voted “for” and “against” the
reverse stock split and the number of shares which abstained from voting on the
reverse stock split.
Election of Seven
Directors
|
||||
Name of Nominee
|
For
|
Withheld
|
||
Ira
P. Kerker
|
26,607,387
|
14,160
|
||
Stewart
Gitler
|
26,607,387
|
14,160
|
||
Dr.
Allen Josephs
|
15,243,680
|
11,377,867
|
||
Dr.
David Ilfeld
|
26,607,387
|
14,160
|
||
Dr.
Robert Trapp
|
26,607,387
|
14,160
|
||
Dr.
Lawrence Pabst
|
26,607,387
|
14,160
|
||
Eran
Ezra
|
26,607,387
|
14,160
|
Amendment to Certificate of Incorporation to
Effect a Four-for-Five Reverse Stock Split
|
||
For: 15,868,846
|
Against: 10,752,701
|
Abstain: 0
|
41
ITEM
5.
|
OTHER
INFORMATION
|
None.
ITEM
6.
|
EXHIBITS
|
Exhibits
|
||
3(i)(1)
|
Amended
and Restated Certificate of Incorporation of Vitacost.com, Inc.
(1)
|
|
3(i)(2)
|
Amendment
to Amended and Restated Certificate of Incorporation of Vitacost.com, Inc.
(2)
|
|
3(ii)
|
Amended
and Restated Bylaws of Vitacost.com, Inc. (3)
|
|
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.
|
|
(1)
|
Filed
as Exhibit 3(i)(1) to Registrant’s Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 20,
2007.
|
|
(2)
|
Filed
as Exhibit 3(i)(2) to Amendment No. 5 to Registrant’s Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
August 24, 2009.
|
|
(3)
|
Filed
as Exhibit 3(ii) to Amendment No. 5 to Registrant’s Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on August
24, 2009.
|
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.
|
|
/s/ RICHARD P. SMITH
|
|
Richard
P. Smith
|
|
Chief
Financial Officer
|
|
(Principal
Financial Officer and Duly Authorized Signatory
|
|
Date:
November 16, 2009
|
42
INDEX
TO EXHIBITS
Exhibits
|
||
3(i)(1)
|
Amended
and Restated Certificate of Incorporation of Vitacost.com, Inc.
(1)
|
|
3(i)(2)
|
Amendment
to Amended and Restated Certificate of Incorporation of Vitacost.com, Inc.
(2)
|
|
3(ii)
|
Amended
and Restated Bylaws of Vitacost.com, Inc. (3)
|
|
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.
|
|
(1)
|
Filed
as Exhibit 3(i)(1) to Registrant’s Registration Statement on Form S-1
filed with the Securities and Exchange Commission on June 20,
2007.
|
|
(2)
|
Filed
as Exhibit 3(i)(2) to Amendments No. 5 to Registrant’s Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
August 24, 2009.
|
|
(3)
|
Filed
as Exhibit 3(ii) to Amendments No. 5 to Registrant’s Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
August 24, 2009.
|
43