Attached files
file | filename |
---|---|
EX-32.2 - Vitacost.com, Inc. | v193684_ex32-2.htm |
EX-31.2 - Vitacost.com, Inc. | v193684_ex31-2.htm |
EX-31.1 - Vitacost.com, Inc. | v193684_ex31-1.htm |
EX-32.1 - Vitacost.com, Inc. | v193684_ex32-1.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 June 30, 2010
OR
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 001-34468
VITACOST.COM,
INC.
(Exact
Name of Registrant as Specified in Its
Charter)
|
Delaware
|
37-1333024
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
5400
Broken Sound Blvd. - NW, Suite 500, Boca Raton, FL
|
33487-3521
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(561)
982-4180
(Registrant’s
Telephone Number, Including Area Code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter time period that the registrant was required to
submit and post such files). Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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 August 2, 2010, 27,757,460 shares of the registrant’s common stock
were outstanding.
Vitacost.com,
Inc.
Table
of Contents
Page
|
|||
|
|||
PART
I.
|
FINANCIAL
INFORMATION
|
1
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
1
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
12
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
17
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
17
|
|
PART
II.
|
OTHER
INFORMATION
|
18
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
18
|
|
ITEM
1A.
|
RISK
FACTORS
|
18
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
18
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
18
|
|
ITEM
4.
|
[REMOVED
AND RESERVED.]
|
18
|
|
ITEM
5.
|
OTHER
INFORMATION
|
18
|
|
ITEM
6.
|
EXHIBITS
|
19
|
|
SIGNATURES
|
PART
I. FINANCIAL
INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
Consolidated
Balance Sheets
June
30, 2010 and December 31, 2009
June
30,
|
||||||||
2010
|
December
31,
|
|||||||
Assets
|
(unaudited)
|
2009
|
||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 5,200,757 | $ | 8,658,157 | ||||
Securities
available for sale
|
35,173,777 | 35,787,227 | ||||||
Accounts
receivable
|
850,565 | 735,355 | ||||||
Other
receivables
|
1,107,741 | 1,055,372 | ||||||
Inventory,
net
|
30,603,063 | 28,096,884 | ||||||
Prepaid
expenses
|
2,816,430 | 1,988,538 | ||||||
Deferred
tax asset
|
1,067,966 | 1,167,724 | ||||||
Total
current assets
|
76,820,299 | 77,489,257 | ||||||
Property
and equipment, net
|
33,854,239 | 21,961,903 | ||||||
Goodwill
|
2,200,000 | 2,200,000 | ||||||
Intangible
assets, net
|
7,196 | 9,446 | ||||||
Deposits
|
191,568 | 4,656,128 | ||||||
Deferred
tax asset
|
1,377,605 | 1,361,817 | ||||||
3,776,369 | 8,227,391 | |||||||
Total
assets
|
$ | 114,450,907 | $ | 107,678,551 | ||||
Liability
and Stockholders' Equity
|
||||||||
Current
Liabilities
|
||||||||
Line
of credit
|
$ | 1,322,075 | $ | 3,458,183 | ||||
Current
maturities of notes payable
|
1,107,881 | 1,090,969 | ||||||
Current
maturities of capital lease obligations
|
4,935 | 35,452 | ||||||
Accounts
payable
|
23,975,073 | 18,052,495 | ||||||
Deferred
revenue
|
754,461 | 1,919,352 | ||||||
Accrued
expenses
|
5,198,090 | 3,282,476 | ||||||
Income
taxes payable
|
- | 51,221 | ||||||
Total
current liabilities
|
32,362,515 | 27,890,148 | ||||||
Notes
payable, less current maturities
|
4,254,340 | 4,820,042 | ||||||
Interest
rate swap liability
|
517,194 | 468,719 | ||||||
Total
liabilities
|
$ | 37,134,049 | $ | 33,178,909 | ||||
Commitments
and Contingencies
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock, par value $.00001 per share; authorized 25,000,000;
|
||||||||
no
shares issued and outstanding at June 30, 2010 and December 31,
2009
|
- | - | ||||||
Common
stock, par value $.00001 per share; authorized
100,000,000;
|
||||||||
27,755,453
and 27,488,353 shares issued and outstanding at
|
||||||||
June
30, 2010 and December 31, 2009, respectively
|
278 | 275 | ||||||
Additional
paid-in capital
|
73,661,567 | 71,932,256 | ||||||
Accumulated
other comprehensive income
|
3,838 | - | ||||||
Retained
earnings
|
3,651,175 | 2,567,111 | ||||||
Total
stockholders' equity
|
77,316,858 | 74,499,642 | ||||||
Total
liabilities and stockholders' equity
|
$ | 114,450,907 | $ | 107,678,551 |
See Notes
to Consolidated Financial Statements.
1
Consolidated
Statements of Operations
For
the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
$ | 53,951,899 | $ | 47,278,486 | $ | 111,128,043 | $ | 93,162,519 | ||||||||
Cost
of goods sold
|
39,691,912 | 32,183,374 | 80,500,282 | 63,065,496 | ||||||||||||
Gross
profit
|
14,259,987 | 15,095,112 | 30,627,761 | 30,097,023 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Fulfillment
|
3,782,845 | 2,026,028 | 6,985,951 | 3,732,188 | ||||||||||||
Sales
and marketing
|
5,134,178 | 3,150,962 | 8,883,448 | 6,298,129 | ||||||||||||
General
and administrative
|
7,342,990 | 4,088,490 | 12,969,927 | 8,150,375 | ||||||||||||
16,260,013 | 9,265,480 | 28,839,326 | 18,180,692 | |||||||||||||
Operating
(loss) income
|
(2,000,026 | ) | 5,829,632 | 1,788,435 | 11,916,331 | |||||||||||
Other
income (expense):
|
||||||||||||||||
Interest
income
|
32,360 | 21,127 | 60,869 | 42,254 | ||||||||||||
Interest
expense
|
(150,136 | ) | (56,552 | ) | (277,256 | ) | (238,812 | ) | ||||||||
Other
income (expense)
|
4,482 | 1,267 | 16,079 | 23,872 | ||||||||||||
(113,294 | ) | (34,158 | ) | (200,308 | ) | (172,686 | ) | |||||||||
(Loss)
income before income taxes
|
(2,113,320 | ) | 5,795,474 | 1,588,127 | 11,743,645 | |||||||||||
Income
tax benefit (expense)
|
692,060 | (2,256,809 | ) | (504,063 | ) | (4,554,494 | ) | |||||||||
Net
(loss) income
|
$ | (1,421,260 | ) | $ | 3,538,665 | $ | 1,084,064 | $ | 7,189,151 | |||||||
Basic
per share information:
|
||||||||||||||||
Net
(loss) income available to common stockholders
|
$ | (0.05 | ) | $ | 0.15 | $ | 0.04 | $ | 0.31 | |||||||
Weighted
average shares outstanding
|
27,730,690 | 22,880,780 | 27,642,960 | 22,880,780 | ||||||||||||
Diluted
per share information:
|
||||||||||||||||
Net
(loss) income available to common stockholders
|
$ | (0.05 | ) | $ | 0.15 | $ | 0.04 | $ | 0.31 | |||||||
Weighted
average shares outstanding
|
27,730,690 | 23,476,033 | 28,448,891 | 23,481,562 |
See Notes
to Consolidated Financial Statements.
2
Consolidated
Statements of Stockholders' Equity
For
the Six Months Ended June 30, 2010 (unaudited)
Additional
|
Accumulated
Other
|
|||||||||||||||||||||||
Common
Stock
|
Paid-In
|
Comprehensive
|
Retained
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Earnings
|
Total
|
|||||||||||||||||||
Balance,
December 31, 2009
|
27,488,353 | $ | 275 | $ | 71,932,256 | - | $ | 2,567,111 | $ | 74,499,642 | ||||||||||||||
Stock
options exercised
|
267,100 | 3 | 847,114 | - | - | 847,117 | ||||||||||||||||||
Stock
based compensation expense |
- | - | 349,473 | - | - | 349,473 | ||||||||||||||||||
Income tax benefit on stock options
exercised |
- | - | 532,724 | - | - | 532,724 | ||||||||||||||||||
Unrealized
gains related to securities available
for sale |
- | - | - | $ | 3,838 | - | 3,838 | |||||||||||||||||
Net
income
|
- | - | - | - | 1,084,064 | 1,084,064 | ||||||||||||||||||
Balance,
June 30, 2010
|
27,755,453 | $ | 278 | $ | 73,661,567 | $ | 3,838 | $ | 3,651,175 | $ | 77,316,858 |
See Notes
to Consolidated Financial Statements.
3
Consolidated
Statements of Cash Flows
|
||||||||
For the Six
Months Ended June 30, 2010 and 2009
(unaudited)
|
||||||||
2010
|
2009
|
|||||||
Cash Flows From Operating
Activities
|
||||||||
Net
income
|
$ | 1,084,064 | $ | 7,189,151 | ||||
Adjustments to reconcile net
income to net cash
|
||||||||
provided by operating
activities:
|
||||||||
Depreciation
|
2,403,344 | 1,700,052 | ||||||
Amortization of
intangibles
|
2,250 | 2,251 | ||||||
Amortization of premium on debt
securities available for sale
|
334,631 | - | ||||||
Change in fair value of interest
rate swap
|
48,475 | (191,287 | ) | |||||
Stock based compensation
expense
|
349,473 | 226,301 | ||||||
Deferred
taxes
|
83,970 | 950,000 | ||||||
Provision for inventory
reserve
|
239,894 | (98 | ) | |||||
(Gain) loss on disposition of
property and equipment and other assets
|
- | (1,078 | ) | |||||
Changes in assets and
liabilities:
|
||||||||
(Increase) decrease
in:
|
||||||||
Accounts
receivable
|
(115,210 | ) | (266,604 | ) | ||||
Other
receivables
|
(52,369 | ) | (134,007 | ) | ||||
Inventory
|
(2,746,073 | ) | (2,875,171 | ) | ||||
Prepaid
expenses
|
(827,892 | ) | (1,055,141 | ) | ||||
Increase (decrease)
in:
|
||||||||
Accounts
payable
|
5,922,578 | (2,511,121 | ) | |||||
Deferred
revenue
|
(1,164,891 | ) | 59,392 | |||||
Accrued
expenses
|
1,915,614 | 290,424 | ||||||
Income taxes
payable
|
(51,221 | ) | 2,452,859 | |||||
Net cash
provided by operating activities
|
7,426,637 | 5,835,923 | ||||||
Cash Flows From Investing
Activities
|
||||||||
Proceeds from disposition of
property, equipment
|
||||||||
and intangible
assets
|
14,057 | 12,932 | ||||||
Payments for the purchase of
property and equipment
|
(14,309,737 | ) | (3,450,321 | ) | ||||
Decrease (increase) in
deposits
|
4,464,560 | (105,322 | ) | |||||
Purchase of securities available
for sale
|
(12,022,343 | ) | - | |||||
Proceeds from maturities of
securities available for sale
|
12,305,000 | - | ||||||
Net cash used
in investing activities
|
(9,548,463 | ) | (3,542,711 | ) | ||||
Cash Flows From Financing
Activities
|
||||||||
Principal payments on notes
payable
|
(548,790 | ) | (546,698 | ) | ||||
Net borrowings on line of
credit
|
(2,136,108 | ) | (1,801,135 | ) | ||||
Repayments on related party note
payable
|
- | (500,000 | ) | |||||
Repayments on capital lease
obligation
|
(30,517 | ) | (28,055 | ) | ||||
Proceeds from the exercise of
stock options
|
847,117 | 13,813 | ||||||
Stock based tax
benefit
|
532,724 | 1,058,584 | ||||||
Payments for redemption of common
stock
|
- | (500,000 | ) | |||||
Net cash used
in financing activities
|
(1,335,574 | ) | (2,303,491 | ) | ||||
Net
decrease
|
(3,457,400 | ) | (10,279 | ) | ||||
Cash and cash
equivalents:
|
||||||||
Beginning
|
8,658,157 | 61,326 | ||||||
Ending
|
$ | 5,200,757 | $ | 51,047 | ||||
(Continued)
|
||||||||
4
Vitacost.com,
Inc.
Consolidated
Statements of Cash Flows (Continued)
For
the Three Months Ended June 30, 2010 and 2009 (unaudited)
2010
|
2009
|
|||||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Cash
payments for:
|
||||||||
Interest
|
$ | 228,781 | $ | 430,099 | ||||
Income
taxes
|
$ | 1,422,025 | $ | - | ||||
Supplemental
Schedule of Noncash Investing and Financing Activities
|
||||||||
Property
and equipment purchased through notes payable
|
$ | - | $ | 279,571 |
See Notes
to Consolidated Financial Statements.
5
Nature of
business: Vitacost.com, Inc. (“Vitacost” or the “Company”)
is 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 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 consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the year ended
December 31, 2009.
The
accompanying unaudited consolidated financial statements include all adjustments
(consisting of a normal 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,
2010.
Principals of
consolidation: The consolidated financial statements include
the accounts of Vitacost and any wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Earnings per
share: The Company computes earnings per share by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed by giving effect to
all potentially dilutive common shares, including stock options. The following
table reconciles basic weighted-average shares outstanding to diluted
weighted-average shares outstanding for the three and six months ended June 30,
2010 and 2009:
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Weighted-average shares
outstanding -
basic
|
27,730,690 | 22,880,780 | 27,642,960 | 22,880,780 | ||||||||||||
Stock
options
|
- | 595,253 | 805,931 | 600,782 | ||||||||||||
Weighted-average shares
outstanding -
diluted
|
27,730,690 | 23,476,033 | 28,448,891 | 23,481,562 |
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 June 30,
|
Six Months
Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Antidilutive common stock
equivalents excluded from
|
||||||||||||||||
diluted earnings per
share
|
1,354,833 | 1,732,243 | 481,000 | 1,732,243 |
Securities available for
sale: Available-for-sale securities consist of investment grade municipal
debt securities not classified as trading or
held-to-maturity. Available-for-sale securities are stated at fair
value and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders'
equity. Premiums and discounts on investments in debt securities are
amortized over the contractual lives of those securities. The method
of amortization results in a constant effective yield on those securities (the
interest method). Interest on debt securities is recognized in income
as earned. Realized gains and losses, including losses from declines
in value of specific securities determined by management to be
other-than-temporary, are included in income. Realized gains and
losses are determined on the basis of the average cost of the securities
sold. The aggregate fair value of securities available for sale as of June
30, 2010 and December 31, 2009 is $35,173,777 and $35,787,227 respectively,
which approximates cost. The fair value of available-for-sale
securities by contractual maturity as of June 30, 2010, is as
follows:
6
June
30,
|
||||
2010
|
||||
Due
within one year
|
$ | 9,358,745 | ||
Due
after one year through three years
|
4,850,238 | |||
Due
after three years
|
20,964,794 | |||
$ | 35,173,777 |
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 for financial reporting purposes; accordingly,
gains and losses related to fair value are reflected in the statement of
operations at each reporting date. During 2007, the Company entered
into two interest rate swap agreements with initial notional amounts of
$3,360,000 and $1,849,263, respectively. These swaps require the
Company to pay a 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 an initial 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 June 30, 2010 and
December 31, 2009, these interest rate swaps had a fair value of ($517,194) and
($468,719), respectively. 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, the
Company’s 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.
Fair value of financial
instruments: In September 2006, the Financial Accounting
Standards Board (FASB) issued authoritative guidance which defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. The Company adopted the guidance at the beginning of
fiscal year 2008. The guidance applies to all assets and liabilities
that are being measured and reported on a fair value basis. It
requires new disclosure that establishes a framework for measuring fair value in
GAAP and expands disclosure about fair value measurements. This
statement enables the reader of the financial statements to assess the inputs
used to develop those measurements by establishing a hierarchy for ranking the
quality and reliability of the information used to determine fair
values. The statement requires that assets and liabilities carried at
fair value will be classified and disclosed in one of the following three
categories:
|
Level
1:
|
Quoted
market prices in active markets for identical assets or
liabilities.
|
|
Level
2:
|
Observable
market based inputs or unobservable inputs that are corroborated by market
data.
|
|
Level
3:
|
Unobservable
inputs that are not corroborated by market
data.
|
In
determining the appropriate levels, the Company performs a detailed analysis of
the assets and liabilities that are subject to the guidance.
The
Company’s investment in securities available for sale are valued based on
observable market based inputs that are corroborated by market data and are
therefore considered a level 2 item.
The
Company’s interest rate swaps are pay-fixed, receive-variable interest rate
swaps based on LIBOR swap rate. The LIBOR swap rate is observable at
commonly quoted intervals for the full term of the swaps and therefore is
considered a level 2 item. For the six month period ended June 30,
2010, the application of valuation techniques applied to similar assets and
liabilities has been consistent and there have been no significant transfers
within the first two levels of the hierarchy.
The
carrying amounts of other financial instruments, including cash, cash
equivalents, accounts receivable, other receivables, accounts payable and
short-term borrowings approximate fair value due to the short maturity of these
instruments. The carrying amount of long-term debt approximates fair
value because the interest rates fluctuate with market interest rates or the
fixed rates are based on current rates offered to the Company for debt with
similar terms and maturities.
7
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 and financial health of the institution.
Recent accounting
pronouncements: In January 2010, authoritative guidance was issued
requiring enhanced disclosures for fair value measurements. Entities
are required to separately disclose the amounts and reasons of significant
transfers in and out of the first two levels of the fair value hierarchy.
Entities are also required to present information about purchases, sales,
issuance and settlements of fair value measurements within the third level of
the fair value hierarchy on a gross basis. As this guidance is
disclosure related only, the adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements.
Note
2. Inventory
Inventory
consists of the following as of June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Raw
materials
|
$ | 4,265,108 | $ | 4,734,772 | ||||
Work
in process
|
3,604,981 | 3,687,426 | ||||||
Finished
goods
|
23,324,625 | 20,026,443 | ||||||
31,194,714 | 28,448,641 | |||||||
Less:
Inventory reserve
|
591,651 | 351,757 | ||||||
$ | 30,603,063 | $ | 28,096,884 |
Note
3. Property and Equipment
Property
and equipment consists of the following as of June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Buildings
and building improvements
|
$ | 8,022,896 | $ | 7,904,870 | ||||
Furniture,
fixtures and equipment
|
19,810,937 | 12,912,917 | ||||||
Computers
|
4,100,624 | 3,644,992 | ||||||
Software
|
6,493,140 | 4,800,157 | ||||||
Leasehold
improvements
|
2,315,401 | 1,117,712 | ||||||
Land
|
460,000 | 460,000 | ||||||
41,202,998 | 30,840,648 | |||||||
Less
accumulated depreciation
|
11,777,364 | 9,374,019 | ||||||
29,425,634 | 21,466,629 | |||||||
Construction-in-progress
|
4,428,605 | 495,274 | ||||||
$ | 33,854,239 | $ | 21,961,903 |
Construction-in-progress
primarily relates to the expansion project of the Lexington, NC distribution
facility. The project is expected to be completed in
2011.
Note
4. Notes Payable
In
February 2007 and in connection with the purchase of a new distribution center
in North Carolina, the Company entered into a promissory note in the amount of
$3,360,000. The promissory note is to be repaid in monthly payments
of principal and interest at a rate equal to one-month LIBOR plus 1.4% (1.75 %
and 1.63% as of June 30, 2010 and December 31, 2009, respectively) with final
payment of $2,699,166 due on February 14, 2014. The loan is
collateralized by the property purchased with a depreciated cost of $3,760,412
as of June 30, 2010. The note contains certain restrictive covenants,
which require minimum financial ratios, including funded debt to EBITDA and a
fixed coverage ratio. As of June 30, 2010, the Company was in
compliance with these covenants. Borrowings outstanding as of June
30, 2010 and December 31, 2009 were $3,074,216 and 3,121,903,
respectively.
8
On April
23, 2007, the Company entered into a promissory note in the amount of $1,535,467
with a bank to finance the purchase of machinery and equipment. The note
bears interest at one-month LIBOR plus 1.75% (2.10 % and 1.98% as of June 30,
2010 and December 31, 2009, respectively) and is payable in 60 monthly principal
and interest payments. The note contains certain restrictive covenants,
which require minimum financial ratios, including funded debt to EBITDA and a
fixed coverage ratio. The note is collateralized by the equipment that was
purchased with a depreciated cost of $1,016,734 as of June 30, 2010. On
October 11, 2007, the note was amended to increase borrowings by $313,796,
totaling $1,849,263. Borrowings outstanding as of June 30, 2010 and
December 31, 2009 were $862,990 and $1,047,916, respectively.
On
November 13, 2007, the Company entered into a promissory note in the amount of
$2,521,797 with a bank to finance the purchase of machinery and
equipment. The note bears interest at one-month LIBOR plus 2.5% (2.85
% and 2.73% as of June 30, 2010 and December 31, 2009, respectively) and is
payable in 60 monthly principal and interest payments. The note was
amended on December 19, 2007 to increase the balance to
$2,617,509. The note is collateralized by equipment purchased with a
depreciated cost of $1,742,259 as of June 30, 2009. Borrowings
outstanding on the note as of June 30, 2010 and December 31, 2009 were
$1,308,755 and $1,570,506, respectively.
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Note
payable to a bank, payable in monthly installments of principal
and
|
||||||||
interest
at 1-month LIBOR plus 1.4% (1.75% as of June 30,
|
||||||||
2010),
collateralized by land and building.
|
$ | 3,074,716 | $ | 3,121,903 | ||||
Note
payable to a bank, bearing interest at 1-month LIBOR plus
1.75%,
|
||||||||
(2.10%
as of June 30, 2010), payable in monthly installments of
|
||||||||
principal
and interest through March 2012, collateralized by
equipment
|
862,990 | 1,047,916 | ||||||
Note
payable to a bank, payable in monthly installments of principal
and
|
||||||||
interest
at 1-month LIBOR plus 2.5% (2.85% as of June 30,
|
||||||||
2010),
collateralized by equipment
|
1,308,755 | 1,570,506 | ||||||
Note
payable to a financial institution, payable in monthly installments
of
|
||||||||
principal
and interest through July 2011, at a fixed rate of
6.98%,
|
||||||||
unsecured
|
115,760 | 170,686 | ||||||
5,362,221 | 5,911,011 | |||||||
Less
current maturities
|
1,107,881 | 1,090,969 | ||||||
$ | 4,254,340 | $ | 4,820,042 |
Aggregate
future maturities required on long-term debt as of June 30, 2010 are as
follows:
Year
Ending
|
||||
December
31,
|
||||
2010
|
$ | 542,179 | ||
2011
|
1,064,105 | |||
2012
|
940,645 | |||
2013
|
116,265 | |||
2014
|
2,699,027 | |||
$ | 5,362,221 |
9
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. The initial term of the
agreement was through July 2010, which has been extended 90 days through October
2010. The Company is currently in the process of renewing the
agreement under similar terms and conditions for at least one year from the date
of expiration of the 90 day extension 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 one-month LIBOR
plus 2.75% (3.10% and 2.98% as of June 30, 2010 and December 31, 2009,
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 June 30, 2010 and December 31, 2009 were $1,322,075 and $3,458,183,
respectively, which includes $1,322,075 and $753,183, respectively, of checks
issued which have not cleared the bank. Amounts available on the line
of credit as of June 30, 2010 were $6,677,925.
Note
5. Stock Option Plan
A summary
of our stock option activity related to common stock for the six months ended
June 30, 2010 and 2009 is as follows:
2010
|
2009
|
|||||||||||||||
Weighted-
|
Weighted-
|
|||||||||||||||
Average
|
Average
|
|||||||||||||||
Exercise
|
Exercise
|
|||||||||||||||
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
Outstanding
at beginning of period
|
2,745,880 | $ | 5.67 | 2,722,400 | $ | 4.07 | ||||||||||
Granted
|
247,250 | 9.72 | 29,200 | 7.50 | ||||||||||||
Exercised
|
(267,100 | ) | 2.95 | (52,400 | ) | 7.50 | ||||||||||
Forfeited
|
(12,900 | ) | 7.93 | (110,000 | ) | 4.25 | ||||||||||
Outstanding
at period end
|
2,713,130 | 6.27 | 2,589,200 | 3.86 | ||||||||||||
Exercisable
at period end
|
2,139,515 | $ | 5.76 | 2,080,697 | $ | 3.64 |
The weighted average grant date fair value for options granted during the six months ended June 30, 2010 was $6.52.
As of
June 30, 2010 and 2009, there was approximately $2,292,615 and $1,045,000,
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 1.37
years.
Note
6. Contingencies
Except as
set forth below, we are not subject to any litigation other than routine
litigation of a nature customary for companies of our size. Except as set forth
below, we have had no significant litigation and have not been the subject of
any product liability litigation.
Securities Class
Action
On May
24, 2010, a putative class action complaint was filed in the United States
District Court for the Southern District of Florida against us and certain
current and former officers and directors by a stockholder on behalf of herself
and other stockholders who purchased our common stock between September 24, 2009
and April 20, 2010, captioned Miyahira v. Vitacost.com, Inc., Ira P. Kerker,
Richard P. Smith, Stewart Gitler, Allen S. Josephs, David N. Ilfeld, Lawrence A
Pabst, Eran Ezra, and Robert G. Trapp, Case 9:10-cv-80644-KLR. The
complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder. The complaint
alleges that defendants violated the federal securities laws during the period
by, among other things, disseminating false and misleading statements and/or
concealing material facts concerning our current and prospective business and
financial results. The complaint also alleges that as a result of
these actions our stock price was artificially inflated during the class
period. The complaint seeks unspecified compensatory damages, costs,
and expenses. We believe plaintiff's allegations are without merit
and we plan to vigorously defend against them.
10
Derivative Action and
Shareholder Demand
On July
16, 2010 we received a letter from a shareholder's counsel demanding that our
board of directors take action against certain current and former officers and
directors. The factual allegations in the letter mirror those in the
class action lawsuit discussed above. On July 20, 2010, a complaint
was filed by an alleged shareholder in the Circuit Court of the 15th Judicial
Circuit for Palm Beach County, Florida, purportedly on our
behalf. The suit names our directors and certain officers as
defendants. The factual allegations in this lawsuit mirror those in the class
action lawsuit as well, and the claims are for breach of fiduciary duty, unjust
enrichment, abuse of control, gross mismanagement, insider trading, and waste of
corporate assets. The complaint seeks disgorgement, restitution,
costs, expenses, and non-monetary equitable relief. We are currently
evaluating the best course of action to take in response to the demand letter
and the derivative complaint.
Note
7. Income Taxes
The
effective tax rate for the six months ended June 30, 2010 was 31.7% compared to
38.7% for the six months ended June 30, 2009. The decrease is
primarily related to the disqualifying disposition of incentive stock options
exercised during the six months ended June 30, 2010, which resulted in a related
tax benefit.
Note
8. Subsequent Events
On August
3, 2010, the Company entered into an agreement for management consulting
services to be provided to the Company for a period of six
months. The Company is required to pay $140,000 over the term of the
agreement, with an additional $140,000 due if certain conditions of the
agreement are met. The Company will also grant 200,000 nonqualified
stock options in connection with the agreement.
On August 16, 2010, the Company
announced the separation of its Chief Executive Officer (“CEO”) and the
appointment of an interim CEO. The Company is currently assessing severance
due the former CEO in accordance with the terms of his employment
agreement.
11
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;
|
|
·
|
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 approximately
40,000 SKUs from over 1,800 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
of healthy living products at the best value, while providing superior customer
service and timely and accurate delivery.
12
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 six months ended June 30, 2010, product net
sales accounted for approximately 93% of our total net sales with freight
comprising the remainder. The ratio of product sales and freight remained
unchanged compared to the six months ended June 30, 2009.
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.
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, customer service, website development and
maintenance. We expense advertising costs as incurred.
General and Administrative.
General and administrative expenses consist of management and executive
compensation, credit card fees, professional services and general corporate
expenses, such as depreciation, amortization, telephone expenses, office
supplies, repairs and maintenance on office equipment and new product research
and development.
Results
of Operations
The
following table sets forth certain condensed consolidated statements of
operations data as a percentage of net sales for the three and six months ended
June 30, 2010 and 2009, respectively:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
(unaudited)
|
(unaudited)
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
sales
|
100.0 | % | 100.0 | 100.0 | % | 100.0 | ||||||||||
Cost
of goods sold
|
73.6 | 68.1 | 72.4 | 67.7 | ||||||||||||
Gross
profit
|
26.4 | 31.9 | 27.6 | 32.3 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Fulfillment
|
7.0 | 4.3 | 6.3 | 4.0 | ||||||||||||
Sales
and marketing
|
9.5 | 6.7 | 8.0 | 6.8 | ||||||||||||
General
and administrative
|
13.6 | 8.6 | 11.7 | 8.7 | ||||||||||||
Total
operating expense
|
30.1 | 19.6 | 26.0 | 19.5 | ||||||||||||
Operating
(loss) income
|
(3.7 | ) | 12.3 | 1.6 | 12.8 | |||||||||||
Net
(loss) income
|
(2.6 | ) | 7.5 | 1.0 | 7.7 |
13
Comparison
of Three Months Ended June 30, 2010 to Three Months Ended June 30,
2009
Three
Months Ended
|
||||||||||||||||
June
30,
|
||||||||||||||||
(unaudited)
|
$
|
%
|
||||||||||||||
2010
|
2009
|
Increase
|
Increase
|
|||||||||||||
Third-party
product
|
$ | 35,203 | $ | 29,956 | $ | 5,247 | 17.5 | % | ||||||||
Nutraceutical Sciences Institute and other proprietary products | 15,007 | 14,334 | 673 | 4.7 | % | |||||||||||
Billed
shipping and handling
|
3,742 | 2,988 | 754 | 25.2 | % | |||||||||||
Net
sales
|
53,952 | 47,278 | 6,674 | 14.1 | % | |||||||||||
Cost
of goods sold
|
39,692 | 32,183 | 7,509 | 23.3 | % | |||||||||||
Gross
profit
|
$ | 14,260 | $ | 15,095 | $ | (835 | ) | -5.5 | % |
Net Sales. Net
sales increased by $6.7 million, or 14.1%, to $54.0 million for the three months
ended June 30, 2010 from $47.3 million for the three months ended June 30,
2009. Net sales of our proprietary products, including our NSI-branded
products, increased by $673,000, or 4.7%, from $14.3 million for the three
months ended June 30, 2009 to $15.0 million for the three months ended June 30,
2010, and sales of third-party products increased by $5.2 million, or 17.5%,
from $30.0 million for the three months ended June 30, 2009 to $35.2 million for
the three months ended June 30, 2010. Third-party product includes
advertising and fees earned from affiliate programs of approximately $186,000
and $512,000 for the three months ended June 30, 2010 and 2009,
respectively.
The
increase in net sales was primarily the result of an increase in our customer
base and the number of shipped orders compared to the three months ended June
30, 2009. Sales were negatively impacted in the early part of the quarter as we
continued to work through the manufacturing logistics issue previously disclosed
in the first quarter. During the process of reducing the level of back orders to
normalized levels, we reduced marketing spending to not exacerbate the
fulfillment issue on our proprietary products. Sales were also negatively
impacted in the latter part of the second quarter from an increased competitive
environment as many companies offered deep discounts. We responded and increased
promotional spending including offering “free shipping” with various order sizes
and product combinations.
Cost of Goods Sold. Cost of
goods sold increased by $7.5 million, or 23.3%, to $39.7 million for the three
months ended June 30, 2010 from $32.2 million for the three months ended June
30, 2009. As a percentage of net sales, cost of goods sold
increased to 73.6% for the three months ended June 30, 2010
from 68.1% for the three months ended June 30, 2009 primarily due to
a shift in product mix to higher cost third-party product and higher shipping
costs due to an increased level of split shipped orders as we continued to work
down the backlog of orders mentioned above in the early part of the
quarter.
Gross
Profit. Gross profit decreased by $835,125, or 5.5%, to $14.3
million for the three months ended June 30, 2010 from $15.1 million for the
three months ended June 30, 2009 and gross profit as a percentage of net sales
decreased to 26.4% in the three months ended June 30, 2010 from 31.9% in the
three months ended June 30, 2009.
Fulfillment. Fulfillment
expense increased $1.8 million, or 86.7%, to $3.8 million for the three months
ended June 30, 2010 from $2.0 million for the three months ended June 30, 2009.
As a percentage of net sales, fulfillment expense increased to 7.0% for the
three months ended June 30, 2010 from 4.3% for the three months ended June 30,
2009. The increase in fulfillment expense was primarily attributable to
increased sales volume and operating duplicate distribution centers in Las Vegas
in the early part of the quarter in order to ensure there were no disruptions to
our service levels during transition to the new distribution
center.
Sales and Marketing . Sales
and marketing expense increased approximately $2.0 million, or 62.9%, to $5.1
million for the three months ended June 30, 2010 from $3.2 million for the three
months ended June 30, 2009. As a percentage of sales, sales and marketing
expense increased to 9.5% for the three months ended June 30, 2010 from 6.7% for
the three months ended June 30, 2009. The increase in sales and marketing
expense was primarily due to increased spending on renting of certain customer
lists of approximately $650,000, on-line advertising of approximately $600,000
and an increase in staffing levels in our call center to meet increased call
volume of approximately $200,000.
General and Administrative.
General and administrative expenses increased $3.3 million, or 79.6%, to $7.3
million for the three months ended June 30, 2010 from $4.1 million for the three
months ended June 30, 2009. The increase was primarily due to the proxy
solicitation and other non-recurring items of approximately $1.4 million,
increased depreciation expense primarily relating to the Las Vegas distribution
center and other costs associated with being a public company.
14
Interest Expense. Interest
expense increased approximately $93,600, or 165.5%, to $150,100 for the three
months ended June 30, 2010 from $56,500 for the three months ended June 30,
2009. The increase was primarily a result of the change in the fair value of our
interest rate swaps.
Income Tax Benefit (Expense).
In the second quarter 2010, we recorded an income tax benefit of $692,000
compared to an income tax expense of $2.3 million for the three months ended
June 30, 2009. This is a result of our recognizing a loss before
income taxes of $2,113,320 for the three months ended June 30, 2010 compared to
income before taxes of $5,795,474 for the three months ended June 30, 2009 and a
decrease in the effective tax rate to 32.7% from 38.9% primarily related to the
disqualifying disposition of incentive stock options exercised in the three
month period ended June 30, 2010
Comparison
of Six Months Ended June 30, 2010 to Six Months Ended June 30, 2009
Six
Months Ended
|
||||||||||||||||
June
30,
|
||||||||||||||||
(unaudited)
|
$
|
%
|
||||||||||||||
2010
|
2009
|
Increase
|
Increase
|
|||||||||||||
Third-party
product
|
$ | 72,351 | $ | 58,329 | $ | 14,022 | 24.0 | % | ||||||||
Nutraceutical Sciences Institute and other proprietary products | 30,896 | 28,339 | 2,557 | 9.0 | % | |||||||||||
Billed
shipping and handling
|
7,881 | 6,494 | 1,387 | 21.4 | % | |||||||||||
Net
sales
|
111,128 | 93,162 | 17,966 | 19.3 | % | |||||||||||
Cost
of goods sold
|
80,500 | 63,065 | 17,435 | 27.6 | % | |||||||||||
Gross
profit
|
$ | 30,628 | $ | 30,097 | $ | 531 | 1.8 | % |
Net Sales. Net
sales increased by $18.0 million, or 19.3%, to $111.1 million for the six months
ended June 30, 2010 from $93.2 million for the six months ended June 30,
2009. Net sales of our proprietary products, including our NSI-branded
products, increased by $2.6 million, or 9.0%, from $28.3 million for the six
months ended June 30, 2009 to $30.9 million for the six months ended June 30,
2010, and sales of third-party products increased by $14.0 million, or 24.0%,
from $58.3 million for the six months ended June 30, 2009 to $72.4 million for
the six months ended June 30, 2010. Third-party product includes
advertising and fees earned from affiliate programs of approximately $529,000
and $1,041,000 for the six months ended June 30, 2010 and 2009,
respectively.
The increase in net sales was primarily the result of an increase
in our customer base and the number of shipped orders compared to the six months
ended June 30, 2009.
Cost of Goods Sold. Cost of
goods sold increased by $17.4 million, or 27.6%, to $80.5 million for the six
months ended June 30, 2010 from $63.1 million for the six months ended June 30,
2009. As a percentage of net sales, cost of goods sold increased to 72.4%
for the six months ended June 30, 2010 from 67.7% for the six months ended June
30, 2009 primarily due to a shift in product mix to higher cost third-party
product and higher shipping costs due to an increased level of split shipped
orders as we worked to reduce the backlog of orders caused by the manufacturing
logistics issue.
15
Gross Profit. As a result of
the changes discussed in net sales and cost of goods sold, gross profit
increased by $531,000, or 1.8%, to $30.6 million for the six months ended June
30, 2010 from $30.1 million for the six months ended June 30, 2009 and gross
profit as a percentage of net sales decreased to 27.6% for the six months ended
June 30,2010 from 32.3% for the six months ended June 30, 2009.
Fulfillment. Fulfillment
expense increased $3.3 million, or 87.2%, to $7.0 million for the six months
ended June 30, 2010 from $3.7 million for the six months ended June 30, 2009. As
a percentage of net sales, fulfillment expense increased to 6.3% for the
six months ended June 30, 2010 from 4.0% for the six months ended June 30, 2009.
The increase in fulfillment expense was primarily attributable to increased
sales volume and operating duplicate distribution centers in Las Vegas in order
to ensure there were no disruptions to our service levels while the new
distribution center was officially opened.
Sales and Marketing. Sales
and marketing expense increased approximately $2.6 million, or 41.0%, to $8.9
million for the six months ended June 30, 2010 from $6.3 million for the six
months ended June 30, 2009. As a percentage of sales, sales and marketing
expense increased to 8.0% for the six months ended June 30, 2010 from 6.8% for
the six months ended June 30, 2009. The increase in sales and
marketing expense was primarily due to increased spending on renting of certain
customer lists of approximately $650,000, on-line advertising of approximately
$800,000 and an increase in staffing levels in our call center to meet increased
call volume of approximately $300,000.
General and Administrative.
General and administrative expenses increased $4.8 million, or 59.1%, to $13.0
million for the six months ended June 30, 2010 from $8.2 million for the six
months ended June 30, 2009. The increase was primarily due to the proxy
solicitation and other non-recurring items of approximately $1.4 million,
increased depreciation expense primarily relating to the Las Vegas distribution
center and other costs associated with being a public company.
Interest Expense. Interest
expense increased approximately $38,500, or 16.1%, to $277,300 for the six
months ended June 30, 2010 from $238,800 for the six months ended June 30,
2009.
Income Tax Benefit (expense)
. Income tax expense decreased by approximately $4.1 million, or 88.9%, to
$504,100 for the six months ended June 30, 2010. The change is primarily the
result of lower income before tax of $1,588,127 for the six months
ended June 30, 2010 compared to $11,742,645 for the six months ended June 30,
2009 and a decrease in the effective tax rate to 31.7% from 38.8% primarily
related to the disqualifying disposition of incentive stock options exercised in
the six months ended June 30, 2010, which resulted in a related tax
benefit.
Liquidity and Capital
Resources 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 June 30, 2010, we had $5,200,757 in cash and cash equivalents and $35,173,777
of securities available for sale and a working capital surplus of $44.5 million
compared with $8,658,157 in cash and cash equivalents and $35,787,227 of
securities available for sale, and working capital surplus of approximately
$49.6 million at December 31, 2009.
During
the six months ended June 30, 2010, the Company expended approximately $14.3
million on property and equipment related primarily to the expansion of the
distribution facilities at Las Vegas, NV and Lexington, NC.
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:
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·
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the rate of our revenue
growth;
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·
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the timing and extent of
expenditures to enhance our website, network infrastructure, and
transaction processing systems;
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·
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the extent of our advertising and
marketing programs;
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·
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the levels of the inventory we
maintain; and
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·
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other factors relating to our
business.
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16
We may
require additional financing in the future in order to execute our operating
plan. We cannot predict whether future financing, if any, will be in the form of
equity, debt, or a combination of both. We may not be able to obtain additional
funds on a timely basis, on acceptable terms, or at all.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles of the U.S.
(GAAP).
The
preparation of these financial statements requires estimates and assumptions
that affect the reported amounts of assets and liabilities, revenue and expenses
and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. Critical accounting policies are
those that are the most important to the portrayal of our financial condition
and results of operations and require our most difficult, subjective and complex
judgments as a result of the need to make estimates about the effect of matters
that are inherently uncertain. Our 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, refer to Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form
10-K, as filed with the Securities and Exchange Commission on March 30, 2010 for
the year ended December 31, 2009.
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 United States, all of our sales are denominated in U.S. dollars.
We have limited exposure to financial market risks, including changes in
interest rates and foreign currency exchange rates. Inflation
generally affects us by increasing costs of raw materials, labor and equipment.
We do not believe that inflation had any material effect on our results of
operations in the periods presented in our financial statements.
ITEM 4. CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and our Chief
Financial and Accounting Officer, evaluated the effectiveness of our disclosure
controls and procedures as of June 30, 2010. 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 June 30, 2010, 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.
17
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Except as
set forth below, we are not subject to any litigation other than routine
litigation of a nature customary for companies of our size. Except as set forth
below, we have had no significant litigation and have not been the subject of
any product liability litigation.
Securities Class
Action
On May
24, 2010, a putative class action complaint was filed in the United States
District Court for the Southern District of Florida against us and certain
current and former officers and directors by a stockholder on behalf of herself
and other stockholders who purchased our common stock between September 24, 2009
and April 20, 2010, captioned Miyahira v. Vitacost.com, Inc., Ira P. Kerker,
Richard P. Smith, Stewart Gitler, Allen S. Josephs, David N. Ilfeld, Lawrence A
Pabst, Eran Ezra, and Robert G. Trapp, Case 9:10-cv-80644-KLR. The
complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder. The complaint
alleges that defendants violated the federal securities laws during the period
by, among other things, disseminating false and misleading statements and/or
concealing material facts concerning our current and prospective business and
financial results. The complaint also alleges that as a result of
these actions our stock price was artificially inflated during the class
period. The complaint seeks unspecified compensatory damages, costs,
and expenses. We believe plaintiff's allegations are without merit
and we plan to vigorously defend against them.
Derivative Action and
Shareholder Demand
On July
16, 2010 we received a letter from a shareholder's counsel demanding that our
board of directors take action against certain current and former officers and
directors. The factual allegations in the letter mirror those in the
class action lawsuit discussed above. On July 20, 2010, a complaint
was filed by an alleged shareholder in the Circuit Court of the 15th Judicial
Circuit for Palm Beach County, Florida, purportedly on our
behalf. The suit names our directors and certain officers as
defendants. The factual allegations in this lawsuit mirror those in the class
action lawsuit as well, and the claims are for breach of fiduciary duty, unjust
enrichment, abuse of control, gross mismanagement, insider trading, and waste of
corporate assets. The complaint seeks disgorgement, restitution,
costs, expenses, and non-monetary equitable relief. We are currently
evaluating the best course of action to take in response to the demand letter
and the derivative complaint.
ITEM
1A. RISK FACTORS
In
addition to the risk factors included below, please refer to the Risk Factors
section of our Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2010, for a complete explanation for the risk
factors affecting our business. Other than the risk factors included
below, there have been no material changes from the risk factors previously
disclosed on our Form 10-K, as filed with the Securities and Exchange Commission
on March 30, 2010.
Complying
with healthcare reform legislation could increase our costs and have a material
adverse effect on our business, financial condition or results of
operations.
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The
Patient Protection and Affordable Care Act was signed into law in March
2010. This act may require us to make additional
contributions to the health care programs currently offered to our
employees, which may have an adverse impact on our results of operations
and cash flows.
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ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
During
the quarter ended June 30, 2010, we made no sales of unregistered
securities.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. [REMOVED AND
RESERVED.]
ITEM
5. OTHER INFORMATION
None.
18
ITEM
6. EXHIBITS
Exhibits
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||
3(i)
|
Amended
and Restated Certificate of Incorporation of Vitacost.com, Inc.
(1)
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3(i)
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Amendment
to Amended and Restated Certificate of Incorporation of Vitacost.com, Inc.
(2)
|
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3(ii)
|
Amended
and Restated Bylaws of Vitacost.com, Inc. (3)
|
|
3.1
|
Certificate
of Designation of Series A Junior Participating Preferred Stock of
Vitacost.com, Inc. (4)
|
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4.1
|
Rights
Agreement dated as of March 24, 2010 by and between the Registrant and
Mellon Investor Services LLC, as Rights
Agent. (5)
|
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31.1
|
Certification
of Chief Executive Officer Pursuant to Rule 13(a)-14(a) of the Securities
Exchange Act of 1934 as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
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31.2
|
Certification
of Chief Financial Officer Pursuant to Rule 13(a)-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.
|
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(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.
|
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(4)
|
Filed
as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 24, 2010.
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(5)
|
Filed
as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 24,
2010.
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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.
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|
By: /s/ IRA P.
KERKER
|
|
Name: Ira
P. Kerker
|
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Title: Chief
Executive Officer
|
|
By: /s/ RICHARD P.
SMITH
|
|
Name: Richard
P. Smith
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Title: Chief
Financial and Accounting Officer
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|
Date:
August 16, 2010
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19
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)
|
|
3.1
|
Certificate
of Designation of Series A Junior Participating Preferred Stock of
Vitacost.com, Inc. (4)
|
|
4.1
|
Rights
Agreement dated as of March 24, 2010 by and between the Registrant and
Mellon Investor Services LLC, as Rights
Agent. (5)
|
|
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.
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20