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EX-32.2 - Vitacost.com, Inc.v193684_ex32-2.htm
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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:
 
 
·
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.

 
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.
 
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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.
 
-
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.
 
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.

 
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ITEM 6.       EXHIBITS
 
Exhibits
   
     
3(i)
 
Amended and Restated Certificate of Incorporation of Vitacost.com, Inc. (1)
3(i)
 
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(a)-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(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.
(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.
(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.
(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.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
VITACOST.COM, INC.
   
 
By:  /s/ IRA P. KERKER
 
Name:  Ira P. Kerker
 
Title:  Chief Executive Officer
   
 
By:  /s/ RICHARD P. SMITH
 
Name:  Richard P. Smith
 
Title:  Chief Financial and Accounting Officer
   
 
Date: August 16, 2010

 
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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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