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 March 31, 2013

 

OR

 

¨

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

 

Commission File Number: 001-34468

 

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

 

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

 

(561) 982-4180

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company ¨

(Do not check if a 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 May 3, 2013, the registrant has 33,604,121 shares of common stock outstanding.

 

 

Vitacost.com, Inc. Form 10-Q

 

Table of Contents

 

		Page
PART I.	Financial Information	3
GENERAL
ITEM 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012	3
	Consolidated Statements of Comprehensive Loss for the Three Months ended March 31, 2013 and 2012	4
	Consolidated Statement of Stockholders' Equity for the Three Months ended March 31, 2013	5
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2013 and 2012	6
	Notes to the Consolidated Financial Statements (Unaudited)	7
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	15
ITEM 4.	Controls and Procedures	15
PART II.	Other Information	16
ITEM 1.	Legal Proceedings	16
ITEM 1A.	Risk Factors	16
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
ITEM 3.	Defaults Upon Senior Securities	16
ITEM 4.	Mine Safety Disclosures	16
ITEM 5.	Other Information	16
ITEM 6.	Exhibits	17

 

 

PART I.         FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS

 

VITACOST.COM, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

		As of
		March 31, 2013				December 31, 2012
		(In thousands, except par value)
Assets
Current Assets
Cash and cash equivalents		$	29,961			$	32,152
Accounts receivable, net			2,932				2,613
Inventory			41,360				33,319
Prepaid expenses			1,545				1,270
Other receivables			1,260				2,054
Restricted cash			225				-
Other assets			83				93
Total current assets			77,366				71,501
Property and equipment, net			33,300				33,491
Restricted cash			250				225
Deposits			236				246
Goodwill			2,200				2,200
Total assets		$	113,352			$	107,663
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable		$	35,671			$	28,696
Deferred revenue			4,802				5,414
Accrued expenses			7,544				6,545
Total current liabilities			48,017				40,655
Deferred tax liability			363				350
Total liabilities			48,380				41,005
Commitments and contingencies
Stockholders' Equity
Preferred stock, par value $.00001 per share; 25,000 shares authorized; no shares issued and outstanding			-				-
Common stock, par value $.00001 per share; 100,000 shares authorized; 33,602 and 33,500 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively			-				-
Additional paid-in capital			110,335				109,022
Warrants			4,262				4,262
Accumulated deficit			(49,625	)			(46,626	)
Total stockholders' equity			64,972				66,658
Total liabilities and stockholders' equity		$	113,352			$	107,663

 

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

 

 

VITACOST.COM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

 

		For the Three Months Ended
		March 31,
		2013				2012
		(In thousands, except per share)
Net sales		$	97,756			$	83,592
Cost of goods sold			75,127				64,444
Gross profit			22,629				19,148
Operating expenses:
Fulfillment			8,915				8,414
Sales and marketing			8,417				9,133
General and administrative			8,303				8,174
			25,635				25,721
Operating loss			(3,006	)			(6,573	)
Other income			20				32
Loss before income taxes			(2,986	)			(6,541	)
Income tax expense			(13	)			(13	)
Net loss		$	(2,999	)		$	(6,554	)
Basic and diluted per share information:
Net loss available to common stockholders		$	(0.09	)		$	(0.21	)
Weighted average shares outstanding			33,519				30,591
Other comprehensive income			-				-
Comprehensive loss		$	(2,999	)		$	(6,554	)

 

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

 

 

VITACOST.COM, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited)

 

										Additional
		Common Stock								Paid-In								Accumulated
		Shares				Amount				Capital				Warrants				Deficit				Total
Balance at December 31, 2012			33,500			$	-			$	109,022			$	4,262			$	(46,626	)		$	66,658
Net loss			-				-				-				-				(2,999	)			(2,999	)
Stock options exercised			102				-				538				-				-				538
Stock-based compensation expense			-				-				775				-				-				775
Balance at March 31, 2013			33,602			$	-			$	110,335			$	4,262			$	(49,625	)		$	64,972

 

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

 

 

 VITACOST.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the Three Months Ended March 31,
		2013				2012
		(In thousands)
Cash Flows From Operating Activities
Net loss		$	(2,999	)		$	(6,554	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,655				1,554
Stock-based compensation expense			775				492
Deferred income taxes			13				13
Loss on disposition of property and equipment and other assets			3				17
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(319	)			(9	)
Other receivables			794				(61	)
Inventory			(8,041	)			(1,675	)
Prepaid expenses			(275	)			(263	)
Deposits			10				(33	)
Other assets			10				4
Increase (decrease) in:
Accounts payable			6,975				445
Deferred revenue			(612	)			(700	)
Accrued expenses			999				1,886
Net cash used in operating activities			(1,012	)			(4,884	)
Cash Flows From Investing Activities
Proceeds from disposition of property, equipment			2				55
Payments for the purchase of property and equipment			(1,469	)			(2,422	)
Increase in restricted cash			(250	)			-
Net cash used in investing activities			(1,717	)			(2,367	)
Cash Flows From Financing Activities
Proceeds from private placement, net			-				33,639
Proceeds from the exercise of stock options			538				1,244
Net cash provided by financing activities			538				34,883
Net (decrease) increase in cash and cash equivalents			(2,191	)			27,632
Cash and cash equivalents:
Beginning of year			32,152				12,939
End of period		$	29,961			$	40,571

 

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

 

 

VITACOST.COM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

Nature of Business  

 

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

 

Basis of presentation 

 

The accompanying unaudited consolidated financial statements of Vitacost as of March 31, 2013, and for the three months ended March 31, 2013 and 2012, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information along with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In management’s opinion, Vitacost has made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair presentation of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2013, or for any other period. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in Vitacost’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “Form 10-K”).

 

Significant Accounting Policies

 

Principles of consolidation:

 

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

   

Earnings per share:

 

The Company computed earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by giving effect to all potentially dilutive common shares, including stock options and warrants. The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the three months ended March 31, 2013 and 2012:

 

		Three Months Ended March 31,
		2013				2012
		(In thousands)
Weighted-average shares outstanding - basic			33,519				30,591
Effect of dilutive securities			-				-
Weighted-average shares outstanding - diluted			33,519				30,591

 

 

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

 

		Three Months Ended March 31,
		2013				2012
		(In thousands)
Stock options			2,682				2,325
Warrants			1,681				1,681
Total antidilutive common stock equivalents excluded from diluted earnings per share			4,363				4,006

 

Restricted cash:

 

Restricted cash consists of cash pledged as collateral to secure vendor obligations.

 

Fair value of financial instruments:

 

Existing accounting guidance defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and requires disclosures about fair value measurements. The guidance applies to all assets and liabilities that are being measured and reported on a fair value basis. It requires disclosure that establishes a framework for measuring fair value in GAAP and about fair value measurements. This guidance 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. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

Level 1:

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

 

Level 2:

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

 

Level 3:

Unobservable inputs that are not corroborated by market data.

 

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

 

Concentration of credit risk:

 

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

 

Recently Adopted and Recently Issued Accounting Guidance

 

The Company did not adopt any accounting guidance nor was there any new accounting guidance during the period that had or would have a material impact on the Company’s consolidated financial statements.

 

2. Private Placement

 

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

 

 

3. Inventory

 

Inventory consists of the following as of March 31, 2013 and December 31, 2012:  

 

		March 31,				December 31,
		2013				2012
		(In thousands)
Bulk and other		$	770			$	761
Finished goods			40,590				32,558
		$	41,360			$	33,319

 

4. Property and Equipment

 

Property and equipment consists of the following as of March 31, 2013 and December 31, 2012:

 

		March 31,				December 31,
		2013				2012
		(In thousands)
Buildings and building improvements		$	12,857			$	12,759
Furniture, fixtures and equipment			24,264				24,157
Computers			3,791				3,387
Software			7,808				7,778
Leasehold improvements			2,751				2,670
Land			460				460
			51,931				51,211
Less accumulated depreciation			(22,700	)			(21,045	)
			29,231				30,166
Construction-in-progress			4,069				3,325
		$	33,300			$	33,491

 

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

 

5. Stock Option Plan

 

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

 

A summary of the Company’s stock option activity related to common stock for the three months ended March 31, 2013 and 2012 is as follows:

 

		2013								2012
						Weighted-								Weighted-
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
		(In thousands except exercise price)
Outstanding at beginning of period			5,209			$	6.40				4,262			$	5.69
Granted			510				7.15				1,653				6.95
Exercised			(102	)			5.27				(337	)			3.69
Forfeited or expired			(322	)			4.99				(89	)			6.87
Outstanding at period end			5,295			$	6.58				5,489			$	6.18
Exercisable at period end			2,682			$	6.88				2,325			$	6.46

 

 

As of March 31, 2013 there was $7.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the Company’s stock incentive plans, which is expected to be recognized over a weighted average period of 3.60 years.

 

6.    Contingencies

 

Securities Class Action:

 

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

 

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

 

On June 25, 2012, the Southern District of Florida entered its order granting defendants’ motion to dismiss in full and dismissing the second amended complaint with prejudice. On July 23, 2012, lead plaintiff filed a notice of appeal to the Eleventh Circuit of the order granting defendants’ motion to dismiss. On May 5, 2013, the Eleventh Circuit issued its opinion affirming the dismissal. The deadline for lead plaintiff to file a petition for writ of certiorari in the U.S. Supreme Court is August 5, 2013.

 

The Company records provisions in its consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of March 31, 2013, the Company has concluded that it is not probable that a loss has been incurred and is unable to estimate the possible loss or range of loss that could result from an unfavorable verdict. Therefore, the Company has not provided any amounts in the consolidated financial statements for an unfavorable outcome. The Company believes that it has meritorious arguments for affirmation of the Southern District of Florida’s order that it has raised in the appeal. It is possible that the Company’s consolidated financial statements could be materially adversely affected by an unfavorable outcome.

 

Sales or Other Taxes:  

 

A number of states have sought to impose sales or other tax collection obligations on online retailers. Certain states have imposed such a sales tax obligation requirement on remote online retailers that use residents of that state to directly or indirectly refer potential customers, via a link on an internet website or other means, to the online retailer for a commission-based fee. There is still significant uncertainty as to whether or how existing laws governing these matters apply to Vitacost and how these laws will be interpreted for the Company and other online retailers. As a result, it is currently not possible to determine the ultimate outcome as to whether such potential obligations apply to the Company under its specific facts and circumstances. Because the Company does not believe that it is probable such potential obligations are applicable to its specific facts and circumstances, it has not accrued for such potential obligations as of March 31, 2013. The Company is also currently unable to estimate the amount of the loss, if any, should such potential obligations apply. The eventual outcome of a successful assertion by one or more states that the Company should collect sales or other taxes may be materially different from any provisions or disclosures the Company has previously made and could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

 

Other matters:

 

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

 

7. Income Taxes

 

The Company evaluates its deferred tax assets on a regular basis to determine if valuation allowances are required. In its evaluation, the Company considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences and available tax planning strategies that could be implemented, if required.  Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard.  Based on the Company’s evaluation, a valuation allowance of $1.0 million was established against its net deferred tax assets for the three months ended March 31, 2013. This amount was in addition to the $16.8 million valuation allowance that was recorded as of December 31, 2012.

 

 

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

 

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

 

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

 

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

 

•

significant competition in our industry;

 

•

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

 

•

the incurrence of material product liability and product recall costs;

 

•

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

 

•

our inability to successfully defend intellectual property claims;

 

•

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

 

•

the current global economic climate;

 

•

disruptions in our information technology systems; and

 

•

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

 

Overview

 

We are a leading online retailer of health and wellness products, including dietary supplements such as vitamins, minerals, herbs and other botanicals (which we refer to as “vitamins and dietary supplements”), as well as cosmetics, natural personal care products, pet products, sports nutrition and health foods. We sell these products directly to consumers primarily through our website, www.vitacost.com . We strive to offer our customers the broadest selection of healthy living products at extremely competitive prices, while providing superior customer service.

 

We were incorporated in Delaware in May 1994 and began operations as a catalog retailer of third-party vitamins and supplements under the name Nature’s Wealth Company. In 1999, we launched Vitacost.com and introduced our proprietary vitamins and supplements. In 2000, we began operating under the name Vitacost.com, Inc. In September 2009 we completed our Initial Public Offering.  On September 28, 2011, Vitacost.com, Inc. completed a restructuring whereby it merged with and into Vitacost Merger Corporation, a wholly owned subsidiary of Vitacost.com, Inc., with Vitacost Merger Corporation surviving the merger. The surviving company continues to operate the business under the name Vitacost.com, Inc.

 

 

Private Placement

 

On February 16, 2012, the Company entered into a Purchase Agreement (the “Purchase Agreement”) by and among Vitacost, JHH Capital, LLC, an entity affiliated with Jeffrey Horowitz, our Chief Executive Officer (“JHH”), Great Hill Equity Partners III, L.P. (“Great Hill III”), Great Hill Equity Partners IV, L.P. (“Great Hill IV”), Great Hill Investors, LLC (“Great Hill Investors”), Freshford Partners, LP (“Freshford Partners”), Freshford Master Fund, Ltd (“Freshford Master Fund”) and Baron Small Cap Fund (“Baron” and, together with JHH, Great Hill III, Great Hill IV, Great Hill Investors, Freshford Partners, Freshford Master Fund, collectively, the “Investors”) pursuant to which the Investors purchased, and Vitacost sold, an aggregate of 4.9 million shares of the Company’s common stock at a purchase price of $7.04 per share, and warrants to purchase an aggregate of 1.7 million shares of the Company’s common stock for an aggregate purchase price of $34.8 million. The warrants have an exercise price of $7.04 per share and a term of four years. The net proceeds of $33.6 million, after the deduction of fees of $1.2 million incurred in connection with the transaction, were allocated between common stock and warrants based on their relative fair values as of the purchase date. A portion of the proceeds from the Private Placement is being used to expand and optimize our distribution network. We spent $4.5 million on the expansion and upgrade of our fulfillment centers in 2012 and expect additional investments in 2013. We are also evaluating an investment in a new distribution facility to support our future sales growth. We intend to use the remaining proceeds from the Private Placement for general operations. 

 

Trends and Other Factors Affecting Our Business

 

We continue to experience intense competition as the vitamin and supplement industry shifts towards a greater internet presence. This competitive environment continues to drive margin pressure as deep discounting results from aggressive customer acquisition and retention actions. In order to differentiate ourselves from our competitors, we are expanding our product offerings through the introduction of new and diverse products, improving our customer service and support, improving our reliability and speed of delivery and by adjusting our product mix and pricing.

 

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

 

Sources of Revenue

 

We derive our revenue principally through the sale of products and freight billed to customers associated with the shipment of products. Net product sales accounted for approximately 96% of our total net sales, for the three months ended March 31, 2013 and 2012, respectively, with freight comprising the remainder.

 

Cost of Goods Sold and Operating Expenses

 

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

 

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

 

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

 

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

 

Results of Operations

 

The following table sets forth certain consolidated statements of operations data as a percentage of net sales for the periods indicated:

 

		Three Months Ended
		March 31,
		(unaudited)
		2013				2012
Net sales			100.0	%			100.0	%
Cost of goods sold			76.9				77.1
Gross profit			23.1				22.9
Operating expenses:
Fulfillment			9.1				10.1
Sales and marketing			8.6				10.9
General and administrative			8.5				9.8
Total operating expense			26.2				30.8
Operating loss			(3.1	)			(7.9	)
Net loss			(3.1	)%			(7.8	)%

 

 

Comparison of Three Months Ended March 31, 2013 to Three Months Ended March 31, 2012

 

		Three Months Ended
		March 31,								$				%
		(unaudited)								Increase				Increase
		2013				2012				(Decrease)				(Decrease)
		(In thousands)
Third-party products		$	74,545			$	61,887			$	12,658				20.5	%
Proprietary products			19,382				18,014				1,368				7.6
Freight			3,829				3,691				138				3.7
Net sales			97,756				83,592				14,164				16.9
Cost of goods sold			75,127				64,444				10,683				16.6
Gross profit		$	22,629			$	19,148			$	3,481				18.2	%

 

Net Sales.  Net sales increased approximately $14.2 million, or 16.9 %, to $97.8 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Net sales of our third-party products increased $12.7 million, or 20.5%, to $74.5 million for the three months ended March 31, 2013. Net sales of our proprietary products increased $1.4 million, or 7.6%, to $19.4 million for the three months ended March 31, 2013, and freight increased $0.1 million, or 3.7%, to $3.8 million for the three months ended March 31, 2013.

  

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 March 31, 2012. As of March 31, 2013, we had 2.1 million active customers, an increase of 25.2% from March 31, 2012. For the three months ended March 31, 2013, we shipped 1.4 million orders, which represents an 8.4% increase over the three months ended March 31, 2012. The growth in active customers and the number of shipped orders was due to continued solid results from our core vitacost.com website with revenues up 22.1% and orders up 17.3% period-over-period, partially offset by a decline in our Amazon.com channel with revenues down 47.4% and orders down 39.2% period-over-period, as we refined our sales strategy for this channel in the latter part of the first quarter of 2012.

 

Cost of Goods Sold. Cost of goods sold increased approximately $10.7 million, or 16.6%, to $75.1 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage of net sales, cost of goods sold decreased to 76.9% for the three months ended March 31, 2013 from 77.1% for the three months ended March 31, 2012.

 

Gross Profit. Gross profit increased approximately $3.5 million, or 18.2%, to $22.6 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Gross margin increased to 23.1% for the three months ended March 31, 2013 compared to 22.9% for the three months ended March 31, 2012. The increase in gross margin was primarily related to the reduction in our shipping cost per order. This was partially offset by a reduction in product margin; primarily due to increased promotions and a shift in product mix with an increased percentage of sales from third-party products which typically carry a lower gross margin.

 

Fulfillment. Fulfillment expense increased approximately $0.5 million, or 6.0%, to $8.9 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage of net sales, fulfillment expense decreased to 9.1% for the three months ended March 31, 2013 compared to 10.1% for the three months ended March 31, 2012. Included in the 2013 amount was $0.1 million in severance paid to our former Chief Operating Officer. Excluding the aforementioned item, fulfillment expense increased $0.4 million period over period. The increase in fulfillment expense was primarily due to an 8.4% increase in the number of shipped orders in 2013 compared to 2012. The period-over-period decrease in fulfillment expense as a percentage of sales was primarily attributable to a higher average order value in the quarter as well as improved labor productivity and reduced packaging costs. We are investing in and aggressively working to improve our fulfillment efficiency over the long-term.

 

Sales and Marketing. Sales and marketing expense decreased approximately $0.7 million, or 7.8%, to $8.4 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage of net sales, sales and marketing expenses decreased to 8.6% for the three months ended March 31, 2013 from 10.9% for the three months ended March 31, 2012. The decrease in sales and marketing expense was primarily due to a decrease in broadcast advertising of $0.8 million and fees paid to Amazon.com of $0.5 million. This was partially offset by an increase in online advertising of $0.7 million. We believe sales and marketing expense may increase in the future as we continue to invest in marketing initiatives to drive additional growth in our customer base.

 

 

General and Administrative. General and administrative expense increased approximately $0.1 million, or 1.6%, to $8.3 million for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. As a percentage of net sales, general and administrative expenses decreased to 8.5% for the three months ended March 31, 2013 from 9.8% for the three months ended March 31, 2012. Included in the 2012 amount was $0.6 million in expenses consisting primarily of the following: $0.3 million in severance and executive recruiting expenses, $0.2 million in fees associated with the Private Placement in the first quarter of 2012, and $0.1 million in additional legal expenses associated with the Class Action lawsuit. Excluding the aforementioned items in 2012, general and administrative expense increased $0.7 million period-over-period. The increase was primarily attributable to $0.3 million in additional credit card fees associated with higher sales volume and a $0.3 million increase in stock compensation expense. We believe general and administrative expense may increase in the future as we invest in our information technology infrastructure to support our future growth.

 

Income Tax. Income tax expense was an insignificant amount and remained flat for the three months ended March 31, 2013 when compared to the same period in the prior year. This was a result of reducing our net deferred tax assets to zero at December 31, 2010 and maintaining a valuation allowance on our deferred tax assets through March 31, 2013.

 

Liquidity and Capital Resources

 

Liquidity. The significant components of our working capital are cash and cash equivalents, inventory and accounts receivable, primarily from credit card processors, reduced by accounts payable and accrued expenses. Cash and cash equivalents consist of cash and money market accounts.  The working capital characteristics of our business allow us to collect cash from sales to customers within a few business days of the related sale. At March 31, 2013, we had working capital of $29.3 million.

 

Cash flows from operating activities. Net cash used in operating activities was $1.0 million and $4.9 million for the three months ended March 31, 2013 and 2012, respectively. The $3.9 million change in cash flows from operating activities was primarily due to the reduction of our net loss as well as increases in period-over-period changes in accounts payable and inventory of $6.5 million and $6.4 million, respectively.

 

Cash flows from investing activities. Net cash used in investing activities was $1.7 million and $2.4 million for the three months ended March 31, 2013 and 2012, respectively. The $0.7 million change in cash flows from investing activities was primarily due to a decrease in capital expenditures.

 

Cash flows from financing activities. Net cash provided by financing activities was $0.5 million and $34.9 million for the three months ended March 31, 2013 and 2012, respectively. The $34.3 million change in cash flows from financing activities was primarily due to the decrease in net proceeds of $33.6 million from the Private Placement in the first quarter of 2012 and the decrease in proceeds from the exercise of stock options of $0.7 million.

 

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

 

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

 

	•	the rate of our revenue growth;
	•	the timing and extent of expenditures to enhance our website, network infrastructure, and transaction processing systems;
	•	the extent of our advertising and marketing programs;
	•	the efficiency of our fulfillment process and systems;
	•	the levels of inventory we maintain; and
	•	other factors relating to our business.

 

On February 16, 2012, we entered into the Purchase Agreement pursuant to which the Investors purchased, and we sold, an aggregate of 4.9 million shares of our common stock at a purchase price of $7.04 per share, and warrants to purchase an aggregate of 1.7 million shares of common stock for an aggregate purchase price of $34.8 million. The warrants have an exercise price of $7.04 per share and a term of four years. A portion of the proceeds from the Private Placement is being used to expand and optimize our distribution network. We spent $4.5 million on the expansion and upgrade of our fulfillment centers in 2012 and expect additional investments in 2013. We are also evaluating an investment in a new distribution facility to support our future sales growth. We intend to use the remaining proceeds from the Private Placement for general operations. 

 

At March 31, 2013, we had $30.0 million in cash and cash equivalents. For the three months ended March 31, 2013, our net cash used in operating activities was $1.0 million, which was primarily due to our net loss. We are investing in our growth strategy, which includes increasing our brand and company awareness, expanding our customer base, growing our product assortment and expanding and optimizing our fulfillment centers. As a result, we are working to increase our customers’ lifetime value by increasing the frequency of purchases and improving customer retention, while also improving our operating efficiencies. We believe the implementation of our growth strategy will reduce our net loss and our net cash used in operations in the future.

 

 

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

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with 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 significant accounting policies are described in more detail in the notes to our consolidated financial statements, and our most critical accounting policies, pertain to revenue recognition, income taxes, stock-based compensation, contingencies, inventories and goodwill. In applying such policies, we exercise our best judgment and best estimates. Actual results may differ from these estimates under different assumptions or conditions. For a further discussion of these Critical Accounting Policies and Estimates, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as filed with the SEC on March 4, 2013 for the year ended December 31, 2012.

 

Recently Issued Accounting Standards

 

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

  

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4.         CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 during the quarter ended March 31, 2013 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 

Inherent Limitations on Effectiveness of Controls

 

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

 

PART II.       OTHER INFORMATION

  

ITEM 1.         LEGAL PROCEEDINGS

 

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

 

ITEM 1A.    RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2012, which we hereby incorporate by reference into this Quarterly Report on Form 10-Q, and which could materially affect our business, financial condition or operating results.  While we  believe that there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, the risks described in our Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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

 

None.

 

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.         MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5.         OTHER INFORMATION

 

None.

 

 

ITEM 6.         EXHIBITS

  

	3.1	Certificate of Incorporation of the Registrant (1)
	3.2	Bylaws of the Registrant (2)
	*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 and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*101.INS	XBRL Instance Document
	*101.SCH	XBRL Taxonomy Extension Schema Document
	*101.CAL	XBRL Taxonomy Calculation Linkbase Document
	*101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	*101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	*101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

	(1) Filed as an Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.
	(2) Filed as an Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.
	* Filed herewith.

 

 

SIGNATURES

 

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

 

	VITACOST.COM, INC.
By:	/s/ Jeffrey J. Horowitz
	Name:  Jeffrey J. Horowitz
	Title:   Chief Executive Officer
By:	/s / Brian D. Helman
	Name:  Brian D. Helman
	Title:   Chief Financial Officer
Date: May 8, 2013

 

 

INDEX TO EXHIBITS

 

Exhibits 

 

	3.1	Certificate of Incorporation of the Registrant (1)
	3.2	Bylaws of the Registrant (2)
	*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 and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	*101.INS	XBRL Instance Document
	*101.SCH	XBRL Taxonomy Extension Schema Document
	*101.CAL	XBRL Taxonomy Calculation Linkbase Document
	*101.LAB	XBRL Taxonomy Extension Label Linkbase Document
	*101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	*101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

 

	(1) Filed as an Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.
	(2) Filed as an Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.
	* Filed herewith.