Vitacost.com, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Vitacost.com, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Vitacost.com, Inc.	v237546_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Vitacost.com, Inc.	v237546_ex31-2.htm
EX-32.2 - EXHIBIT 32.2 - Vitacost.com, Inc.	v237546_ex32-2.htm
EX-31.1 - EXHIBIT 31.1 - Vitacost.com, Inc.	v237546_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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 November 7, 2011, the registrant has 27,855,560 shares of common stock outstanding.

Vitacost.com, Inc. Form 10-Q

Table of Contents

		Page

PART I.	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS	3
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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Vitacost.com, Inc.

Consolidated Balance Sheets

(unaudited)

	As of
Assets	September 30, 2011			December 31, 2010
Current Assets
Cash and cash equivalents	$	12,763,275		$	11,951,643
Securities available-for-sale		-			10,912,392
Accounts receivable, net		1,088,318			440,033
Other receivables		132,902			1,087,311
Inventory		31,907,920			29,827,929
Prepaid expenses		1,703,027			1,361,230
Other assets		2,418,015			3,553,089
Total current assets		50,013,457			59,133,627

Property and equipment, net		36,021,736			38,011,314
Goodwill		2,200,000			2,200,000
Intangible assets, net		1,573			4,946
Deposits		110,243			114,308
Restricted cash		225,000			-
Total assets	$	88,572,009		$	99,464,195

Liability and Stockholders' Equity
Current Liabilities
Current maturities of notes payable	$	-		$	58,888
Accounts payable		26,089,851			23,892,044
Deferred revenue		3,303,465			2,134,305
Accrued expenses		6,476,774			10,671,865
Total current liabilities		35,870,090			36,757,102

Deferred tax liability		560,822			521,389
Total liabilities	$	36,430,912		$	37,278,491

Commitments and contingencies

Stockholders' Equity
Preferred stock, par value $.00001 per share; authorized 25,000,000;
no shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively		-			-
Common stock, par value $.00001 per share; authorized 100,000,000;
27,855,553 and 27,780,453 shares issued and outstanding at
September 30, 2011 and December 31, 2010, respectively		279			278
Additional paid-in capital		76,027,916			74,829,972
Accumulated other comprehensive loss		-			(20,207	)
Accumulated deficit		(23,887,098	)		(12,624,339	)
Total stockholders' equity		52,141,097			62,185,704
Total liabilities and stockholders' equity	$	88,572,009		$	99,464,195

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

Vitacost.com, Inc.

Consolidated Statements of Operations

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Net sales	$	63,456,069		$	50,312,049		$	193,109,312		$	161,440,092
Cost of goods sold		49,023,522			37,794,402			148,837,402			118,844,402
Gross profit		14,432,547			12,517,647			44,271,910			42,595,690

Operating expenses:
Fulfillment		5,603,074			4,378,196			15,639,166			12,463,418
Sales and marketing		6,391,048			5,218,037			16,767,340			14,095,511
General and administrative		7,831,685			11,798,367			23,124,634			23,158,280
		19,825,807			21,394,600			55,531,140			49,717,209

Operating (loss) income		(5,393,260	)		(8,876,953	)		(11,259,230	)		(7,121,519	)

Other income (expense):
Interest income		1,650			32,984			24,256			93,853
Interest expense		(170	)		(104,474	)		(2,885	)		(381,731	)
Other income		9,180			8,190			14,533			24,271
		10,660			(63,300	)		35,904			(263,607	)
Loss before income taxes		(5,382,600	)		(8,940,253	)		(11,223,326	)		(7,385,126	)
Income tax benefit (expense)		42,053			3,310,688			(39,433	)		2,839,625
Net loss	$	(5,340,547	)	$	(5,629,565	)	$	(11,262,759	)	$	(4,545,501	)

Basic per share information:
Net loss available to common stockholders	$	(0.19	)	$	(0.20	)	$	(0.41	)	$	(0.16	)
Weighted average shares outstanding		27,836,102			27,755,453			27,805,703			27,680,870

Diluted per share information:
Net loss available to common stockholders	$	(0.19	)	$	(0.20	)	$	(0.41	)	$	(0.16	)
Weighted average shares outstanding		27,836,102			27,755,453			27,805,703			27,680,870

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

Vitacost.com, Inc.

Consolidated Statements of Stockholders' Equity and Comprehensive Income

(unaudited)

					Additional		Accumulated Other
	Common Stock				Paid-In		Comprehensive			Accumulated
	Shares		Amount		Capital		Income			Deficit			Total
Balance, December 31, 2010		27,780,453	$	278	$	74,829,972	$	(20,207	)	$	(12,624,339	)	$	62,185,704
Comprehensive income:														-
Net loss		-		-		-		-			(11,262,759	)		(11,262,759	)
Unrealized gain related to
securities available-for-sale		-		-		-		20,207			-			20,207
Comprehensive loss														(11,242,552	)
Stock options exercised		75,100		1		85,583		-			-			85,584
Stock-based compensation
expense		-		-		1,112,361		-			-			1,112,361
Balance, September 30, 2011		27,855,553	$	279	$	76,027,916	$	-		$	(23,887,098	)	$	52,141,097

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

Vitacost.com, Inc.

Consolidated Statements of Cash Flows

(unaudited)

	For the Nine Months Ended September 30,
	2011			2010
Cash Flows From Operating Activities
Net loss	$	(11,262,759	)	$	(4,545,501	)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation		4,565,753			3,749,961
Amortization of intangibles		3,373			3,260
Amortization of premium on debt securities available-for-sale		72,016			521,767
Realized gain on the sale of securities available-for-sale		(779	)		-
Change in fair value of interest rate swap		-			63,571
Stock-based compensation expense		1,112,361			885,964
Deferred taxes		39,433			(2,541,918	)
Loss (gain) on disposition of property and equipment and other assets		32,319			(71,294	)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable		(648,285	)		(419,448	)
Other receivables		954,409			(209,841	)
Inventory		(2,079,991	)		(1,957,713	)
Prepaid expenses		(341,797	)		(2,206,390	)
Other assets		1,135,074			-
Increase (decrease) in:
Accounts payable		2,197,807			3,026,968
Deferred revenue		1,169,160			999,047
Accrued expenses		(4,195,091	)		6,643,356
Income taxes payable		-			(51,221	)
Net cash (used in) provided by operating activities		(7,246,997	)		3,890,568
Cash Flows From Investing Activities
Proceeds from disposition of property, equipment and intangible assets		-			155,582
Payments for the purchase of property and equipment		(2,608,494	)		(12,772,860	)
Decrease in deposits		4,065			159,610
Increase in restricted cash		(225,000	)		-
Purchases of securities available-for-sale		-			(26,567,020	)
Proceeds from maturities of securities available-for-sale		10,861,362			25,127,620
Net cash provided by (used in) investing activities		8,031,933			(13,897,068	)
Cash Flows From Financing Activities
Principal payments on notes payable		(58,888	)		(823,710	)
Net borrowings on line of credit		-			4,541,817
Repayments on capital lease obligation		-			(35,452	)
Proceeds from the exercise of stock options		85,584			847,117
Tax benefit from stock based compensation		-			532,724
Net cash provided by financing activities		26,696			5,062,496
Net increase (decrease) in cash and cash equivalents		811,632			(4,944,004	)
Cash and cash equivalents:
Beginning of period		11,951,643			8,658,157
Ending of period	$	12,763,275		$	3,714,153

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

Vitacost.com, Inc.

Consolidated Statements of Cash Flows (continued)

(unaudited)

	For the Nine Months Ended September 30,
	2011		2010
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	2,885	$	291,287
Income taxes	$	-	$	1,422,025

Supplemental Schedule of Noncash Investing and Financing Activities
Equipment purchased not yet paid	$	-	$	2,203,439
Application of deposits towards purchases of equipment	$	-	$	4,380,875

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

Vitacost.com, Inc.

Notes to the Consolidated Financial Statements

(unaudited)

Note 1. Nature of Business and Significant Accounting Policies

Nature of business: Vitacost.com, Inc. (“Vitacost” or the “Company”) is an internet-based retailer of nutritional supplements. Vitacost was incorporated in 1994 and began its internet-based retail activity in 1999. Vitacost sells an internally developed proprietary line of nutraceuticals as well as a wide selection of other manufacturers’ brand-name health and wellness products. The Company ships products from two distribution centers located in Lexington, North Carolina and Las Vegas, Nevada.

Basis of presentation: The accompanying unaudited consolidated financial statements of Vitacost as of September 30, 2011, and for the three and nine months ended September 30, 2011, have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information along with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for annual financial statements. In management’s opinion, Vitacost has made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair presentation of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2011, 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, 2010 (the “Form 10-K”).

Reclassifications on the 2010 Consolidated Statements of Operations have been made to conform to the 2011 presentation.

Principles 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 computed earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share were computed by giving effect to all potentially dilutive common shares, including stock options. The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the three and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Weighted-average shares outstanding - basic		27,836,102		27,755,453		27,805,703		27,680,870
Effect of dilutive securities		-		-		-		-
Weighted-average shares outstanding - diluted		27,836,102		27,755,453		27,805,703		27,680,870

For periods where the Company reported income, common stock equivalents related to employee stock-based compensation were not included in the computation of diluted earnings per share to the extent that their exercise price exceeded the market value, since the result would be antidilutive. For the periods where the Company reported losses, all common stock equivalents are excluded from the computation of diluted earnings per share, since the result would be antidilutive.

Securities that could potentially dilute earnings per share in the future, but which were not included in the calculation of diluted earnings per share because to do so would have been antidilutive for the periods presented, are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Antidilutive common stock equivalents excluded
from diluted earnings per share		2,647,697		2,216,491		2,647,697		2,216,491

Restricted cash: Restricted cash consist of cash pledged as collateral to secure a vendor obligation.

Fair value of financial instruments: The Financial Accounting Standards Board (FASB) issued authoritative guidance that 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 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 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. The guidance 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.

The Company’s investments in securities available-for-sale were valued based on observable market based inputs that were corroborated by market data and were therefore considered a level 2 investment within the fair value 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.

Concentration of credit risk: The Company’s cash and cash equivalents were held by one major financial institution. These cash and cash equivalent balances could be impacted if the underlying financial institution fails or is subjected to other adverse conditions in the financial markets. To date the Company has experienced no loss or lack of access to its cash and cash equivalents.

Recently Adopted and Recently Issued Accounting Guidance:

Recently Adopted Accounting Standards

On January 1, 2011, the Company adopted provisions of the authoritative guidance related to disclosure requirements for fair value measurements. Specifically, the changes required a reporting entity to disclose, in the reconciliation of fair value measurements using significant unobservable inputs (Level 3), separate information about purchases, sales, issuances, and settlements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2011, the Company adopted provisions of the authoritative guidance related to the testing of goodwill for impairment. These changes required an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not that a goodwill impairment exists based on qualitative factors. This will result in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. Based on the most recent impairment review of the Company’s goodwill at December 31, 2010, the adoption of these changes did not have an impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards

In May 2011, the FASB issued changes to fair value measurement and disclosure. These changes both clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. These changes become effective for the Company on January 1, 2012 and they are not expected to have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. These changes become effective for the Company on January 1, 2012. The Company is currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income. Other than the change in presentation, they are not expected to have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more likely than not goodwill will be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. This updated guidance becomes effective for the Company for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating this guidance, however it does not expect the adoption will have a material impact on the Company’s consolidated financial statements.

Note 2. Inventory

Inventory consists of the following as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010
Raw materials	$	3,678,428	$	2,898,955
Work in process		2,784,630		4,585,946
Finished goods		25,444,862		22,343,028
	$	31,907,920	$	29,827,929

Note 3. Property and Equipment

Property and equipment consists of the following as of September 30, 2011 and December 31, 2010:

	September 30,			December 31,
	2011			2010
Buildings and building improvements	$	12,273,491		$	8,072,716
Furniture, fixtures and equipment		20,780,421			20,830,220
Computers		2,609,535			2,334,427
Software		7,095,154			5,836,948
Leasehold improvements		2,615,361			2,379,597
Land		460,000			460,000
		45,833,962			39,913,908
Less accumulated depreciation		(13,510,232	)		(10,488,361	)
		32,323,730			29,425,547
Construction-in-progress		3,698,006			8,585,767
	$	36,021,736		$	38,011,314

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

Note 4. Stock Option Plans

In September 2011, the Company obtained approval of the 2011 Incentive Compensation Plan (the “Plan”) which replaced the 2007 Stock Award Plan (the “2007 Plan”). The 2007 Plan, however, will continue to govern awards previously granted under it. The Plan share reserve includes the sum of 6,000,000 shares of the Company’s common stock, plus (i) any shares of its common stock which have been reserved but not issued pursuant to any awards granted under the 2007 Plan, and (ii) the number of shares subject to outstanding awards under the 2007 Plan that expire or otherwise terminate without having been exercised in full, or are forfeited to or repurchased by the Company.

A summary of the Company’s stock option activity related to common stock for the nine months ended September 30, 2011 and 2010 is as follows:

	2011					2010
				Weighted-					Weighted-
				Average					Average
				Exercise					Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of period		2,717,530		$	6.42		2,745,880		$	5.67
Granted		1,585,000			4.10		447,250			9.36
Exercised		(75,100	)		1.14		(267,100	)		2.95
Forfeited		(4,500	)		9.72		(121,300	)		7.56
Outstanding at period end		4,222,930		$	5.64		2,804,730		$	6.41
Exercisable at period end		2,647,697		$	6.05		2,216,490		$	5.76

As of September 30, 2011 and September 30, 2010, there was $4,688,633 and $2,803,513, respectively, of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the Company’s stock incentive plans, which is expected to be recognized over a weighted average period of 2.94 and 2.02 years, respectively.

During the quarter ended September 30, 2011, the Company recorded an out of period adjustment to increase stock-based compensation expense by $424,048 related to a stock-based option grant that occured in June 2011 under the Company’s 2007 Stock Award Plan, the terms of which provided for the immediate vesting of certain options under the grant. The adjustment was to expense the portion of the award which vested immediately at the grant date. The Company concluded that the adjustment is not material to the current or previously reported consolidated financial statements.

Note 5. Contingencies

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 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. 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 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 October 19, 2010, the Southern District of Florida appointed a lead plaintiff to represent the purported class of shareholders. Lead plaintiff filed an amended complaint on February 15, 2011. The amended complaint additionally named as defendants the Company’s underwriters for its initial public offering and the Company’s former registered independent public accounting firm, added additional claims of alleged false and misleading statements and/or omissions under both the Securities Act and the Exchange Act, and expanded the class period to extend as late as December 7, 2010. On April 28, 2011, lead plaintiff filed a notice of dismissal without prejudice of the accountant defendants, and on May 4, 2011 the court dismissed the former registered independent public accounting firm without prejudice. The remaining defendants filed their motion to dismiss the amended complaint on April 28, 2011. Lead plaintiff filed an opposition to the motion to dismiss on June 20, 2011 and defendants’ filed their reply on July 20, 2011.

The Company records provisions in its consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As of September 30, 2011, 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, and has been so advised by counsel, that it has meritorious defenses to the complaint pending against it and will vigorously defend against it. It is possible that the Company’s consolidated balance sheets, statements of operations, or cash flows could be materially adversely affected by an unfavorable outcome.

Other matters

In addition to the matter described above, the Company is involved in litigation and administrative proceedings primarily arising in the normal course of its business. During the quarter ended September 30, 2011, the Company accrued $288,500 related to a software litigation settlement offer. In the opinion of the Company, except as set forth above, its liability, if any, under any other pending litigation or administrative proceedings, even if determined adversely, 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.

Note 6. Income Taxes

The Company evaluates its deferred tax assets on a regular basis to determine if valuation allowances are required. In its evaluation, the Company considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences and available tax planning strategies that could be implemented, if required. Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard. Based on the Company’s evaluation, a valuation allowance of $4,010,943 was established against its net deferred tax assets for the nine months ended September 30, 2011. This amount was in addition to the $6,352,312 valuation allowance that was recorded as of December 31, 2010.

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

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

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

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

the current global economic 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 successfully defend intellectual property claims;

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

disruptions in our 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 internet-based retailer, based on annual sales volume, of health and wellness products including vitamins, dietary supplements, minerals, herbs, anti-oxidants, organic products, personal care products, sports nutrition, and health foods. We sell these products directly to consumers through our website, www.vitacost.com. Our website allows 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.

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 Nutraceutical Sciences Institute (“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. Beginning in March 2011, we began the process of transitioning our NSI brand to a new Vitacost label which is expected to be completed on by the end of fiscal year 2011.

Trends and Other Factors Affecting Our Business

We continue to experience increased levels of 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. We continue to respond to the increased levels of competition by expanding our product offerings through the introduction of new and diverse products, improving our customer service and support, improving our reliability and speed of delivery and by adjusting our product mix and pricing.

The vitamin and supplement industry continues to benefit from positive demographic trends, with an aging population, and trends affecting health and lifestyle preferences, with an increasingly health conscious consumer. In addition, the increasing cost of traditional healthcare has helped bolster demand for natural products to help ward off more expensive medical visits and prescription drugs. Changes in these trends and other factors that we may not foresee may also impact our business, including potential regulatory actions by the FDA and the FTC that may affect the viability of a given product 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 97% and 93% of our total net sales, for the nine months ended September 30, 2011 and 2010, 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 supplies, equipment, maintenance, employees and rent.

Sales and Marketing. Sales and marketing expenses include advertising and promotional expenditures, including third-party content license fees, 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 management and executive compensation, information technology expenses, credit card fees, professional services and general corporate expenses.

Results of Operations

The following table sets forth certain condensed consolidated statements of operations data as a percentage of net sales for the three and nine months ended September 30, 2011 and 2010, respectively:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(unaudited)						(unaudited)
	2011			2010			2011			2010
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		77.3			75.1			77.1			73.6
Gross profit		22.7			24.9			22.9			26.4
Operating expenses:
Fulfillment		8.8			8.7			8.1			7.7
Sales and marketing		10.1			10.4			8.7			8.7
General and administrative		12.3			23.5			12.0			14.3
Total operating expense		31.2			42.5			28.8			30.8
Operating loss		(8.5	)		(17.6	)		(5.8	)		(4.4	)
Net loss		(8.4	)%		(11.2	)%		(5.8	)%		(2.8	)%

Comparison of Three Months Ended September 30, 2011 to Three Months Ended September 30, 2010

	Three Months Ended
	September 30,				$			%
	(unaudited)				Increase			Increase
	2011		2010		(Decrease)			(Decrease)
Third-party products	$	46,753,345	$	34,296,477	$	12,456,868			36.3	%
Proprietary products		14,678,667		13,415,863		1,262,804			9.4
Freight		2,024,057		2,599,709		(575,652	)		(22.1	)
Net sales		63,456,069		50,312,049		13,144,021			26.1
Cost of goods sold		49,023,522		37,794,402		11,229,120			29.7
Gross profit	$	14,432,547	$	12,517,647	$	1,914,901			15.3	%

Net Sales. Net sales increased approximately $13.1 million, or 26.1 %, to $63.5 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Net sales of our third-party products increased $12.5 million, or 36.3% to $46.8 million for the three months ended September 30, 2011. Third-party products include advertising and fees earned from affiliate programs of an insignificant amount for the three months ended September 30, 2011 and $0.1 million for the three months ended September 30, 2010. Net sales of our proprietary products increased $1.3 million, or 9.4%, to $14.7 million for the three months ended September 30, 2011, and freight decreased $0.6 million, or 22.1%, to $2.0 million for the three months ended September 30, 2011.

The increase in net sales was primarily the result of an increase in our customer base and the number of shipped orders compared to the three months ended September 30, 2010. Sales growth was negatively impacted by promotional activities, including “free shipping” and other discounts on both proprietary and third-party products. Free shipping and other promotional offers are expected for the foreseeable future.

Cost of Goods Sold. Cost of goods sold increased approximately $11.2 million, or 29.7%, to $49.0 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. As a percentage of net sales, cost of goods sold increased to 77.3% for the three months ended September 30, 2011 from 75.1% for the three months ended September 30, 2010 primarily due to a shift in product mix to higher cost third-party products. We expect to see this trend continue as third party product offerings continue to outpace new proprietary product launches.

Gross Profit. As a result of the changes discussed in net sales and cost of goods sold, gross profit increased approximately $1.9 million, or 15.3%, to $14.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. Gross profit as a percentage of net sales decreased to 22.7% for the three months ended September 30, 2011 from 24.9% for the three months ended September 30, 2010.

Fulfillment. Fulfillment expense increased approximately $1.2 million, or 28.0%, to $5.6 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. As a percentage of net sales, fulfillment expense remained relatively flat at 8.8% for the three months ended September 30, 2011 compared to 8.7% for the three months ended September 30, 2010. The increase in fulfillment expense was primarily attributable to an increase in shipped orders when compared to the same period in the prior year and expenses to a consultant related to a contingent fee arrangement on freight savings. Also, included in the three months ended September 30, 2011 were recruiting fees of $0.1 million related to the hiring of our new Chief Operating Officer in August 2011. We expect improved fulfillment expense as a percentage of sales in 2012 as we continue to implement initiatives to improve efficiencies.

Sales and Marketing. Sales and marketing expense increased approximately $1.2 million, or 22.5%, to $6.4 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. As a percentage of net sales, expenses decreased to 10.1% for the three months ended September 30, 2011 from 10.4% for the three months ended September 30, 2010. The increase in sales and marketing expense was primarily due to $0.7 million in severance payment to our former Chief Marketing Officer and $0.2 million in recruiting fees related to the hiring of our new Chief Marketing Officer. The remaining increase of $0.3 million related to increased online advertising and employee compensation costs partially offset by decreases in print advertising. The decrease on a percentage basis was primarily due improved advertising efficiencies as we moved advertising expenditures towards online programs and away from print programs during 2011. We expect print advertising expenditures to continue to decline throughout the remainder of 2011 with the savings being reinvested in online programs to further increase the focus of the business around serving online customers. Moreover, we expect increased hiring through 2012 as we continue to expand our marketing team.

General and Administrative. General and administrative expenses decreased approximately $4.0 million, or 33.6 %, to $7.8 million for the three months ended September 30, 2011 compared to the three months ended September 30, 2010. As a percentage of net sales, expenses decreased to 12.3% for the three months ended September 30, 2011 from 23.5% for the three months ended September 30, 2010. Included in the 2011 amount were $0.8 million in expenses consisting of the following: $0.4 million primarily related to the Company’s equity capitalization issue, $0.3 million related to a software litigation settlement offer and $0.1 million for an adjustment to the severance settlements for our former Chief Executive Officer and former Chief Financial Officer. Included in the 2010 amount were $6.1 million in expenses consisting of the following: $3.5 million for settlement of the derivative lawsuit, $1.2 million in accrued severance to our former Chief Executive Officer, $0.8 million in fees associated with the class action lawsuit, conclusion of the proxy solicitation and other matters, and $0.7 million in proxy reimbursement fees to Great Hill Partners. We expect these charges to decrease going forward as our equity capitalization issue was rectified in September 2011 and our Board of Directors concluded its strategic review in June 2011. Excluding the aforementioned items in both periods, general and administrative expenses increased $1.3 million period-over-period. The increase period-over-period was primarily attributable to increased employee compensation costs of $0.7 million due to headcount growth in critical departments, increased stock-based compensation expense of $0.3 million, increased credit card fees of $0.2 million due to higher sales, and additional on-going expenses.

Income Tax. In our continuing assessment of the need for a valuation allowance, in accordance with applicable guidance, we considered our cumulative pre-tax loss after three years, adjusting for permanent items and the potential for accumulated taxable losses in 2011, given our results for the nine months ended September 30, 2011. Accordingly, we considered our history of recent losses and potential loss in 2011 to be relevant to our analysis. Based on this assessment, we increased our valuation allowance by $1.9 million for the three months ended September 30, 2011, to an aggregate total of $10.4 million.

Income tax benefit decreased approximately $3.3 million for the three months ended September 30, 2011. This was a result of recognizing a loss before income taxes of $5.4 million and an additional valuation allowance of $1.9 million for the three months ended September 30, 2011 compared to a loss before income taxes of $8.9 million and no valuation allowance for the three months ended September 30, 2010.

Comparison of Nine Months Ended September 30, 2011 to Nine Months Ended September 30, 2010

	Nine Months Ended
	September 30,				$			%
	(unaudited)				Increase			Increase
	2011		2010		(Decrease)			(Decrease)
Third-party products	$	139,853,946	$	106,647,316	$	33,206,630			31.1	%
Proprietary products		46,650,095		44,312,499		2,337,596			5.3
Freight		6,605,271		10,480,277		(3,875,006	)		(37.0	)
Net sales		193,109,312		161,440,092		31,669,221			19.6
Cost of goods sold		148,837,402		118,844,402		29,993,000			25.2
Gross profit	$	44,271,910	$	42,595,690	$	1,676,221			3.9	%

Net Sales. Net sales increased approximately $31.7 million, or 19.6%, to $193.1 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Net sales of third-party products increased $33.2 million, or 31.1% to $139.9 million for the nine months ended September 30, 2011. Third-party products include advertising and fees earned from affiliate programs of an insignificant amount for the nine months ended September 30, 2011 and $0.7 million for the nine months ended September 30, 2010. Net sales of our proprietary products increased $2.3 million, or 5.3% to $46.7 million for the nine months ended September 30, 2011, and freight decreased $3.9 million, or 37.0%, to $6.6 million for the nine months ended September 30, 2011.

The increase in net sales was primarily the result of an increase in our customer base and the number of shipped orders compared to the nine months ended September 30, 2010. Sales growth was negatively impacted by promotional activities, including “free shipping” and other discounts on both proprietary and third-party products. Free shipping and other promotional offers are expected for the foreseeable future.

Cost of Goods Sold. Cost of goods sold increased approximately $30.0 million, or 25.2%, to $148.8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. As a percentage of net sales, cost of goods sold increased to 77.1% for the nine months ended September 30, 2011 from 73.6% for the nine months ended September 30, 2010 primarily due to a shift in product mix to higher cost third-party products. We expect to see this trend continue as third party product offerings continue to outpace new proprietary product launches.

Gross Profit. As a result of the changes discussed in net sales and cost of goods sold, gross profit increased approximately $1.7 million, or 3.9%, to $44.3 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Gross profit as a percentage of net sales decreased to 22.9% for the nine months ended September 30, 2011 from 26.4% for the nine months ended September 30, 2010.

Fulfillment. Fulfillment expense increased approximately $3.2 million, or 25.5%, to $15.6 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. As a percentage of net sales, fulfillment expense increased to 8.1% for the nine months ended September 30, 2011 from 7.7% for the nine months ended September 30, 2010. The increase in fulfillment expense was primarily attributable to an increase in shipped orders when compared to the same period in the prior year and expenses to a consultant related to a contingent fee arrangement on freight savings. Additionally, there were higher operating costs at our distribution centers as a result of operating inefficiencies. The operating inefficiencies were primarily attributable to temporary warehouse systems optimization problems and a significant unanticipated shift to products requiring special handling (e.g. liquids and glass packaging) resulting in higher labor costs. These inefficiencies began in 2010 and continued into 2011. Moreover, included in the nine months ended September 30, 2011 were recruiting fees of $0.1 million related to the hiring of our current Chief Operating Officer in August 2011. We expect improved fulfillment expense as a percentage of sales in 2012 as we continue to implement initiatives to improve efficiencies.

Sales and Marketing. Sales and marketing expense increased approximately $2.7 million, or 19.0%, to $16.8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. As a percentage of net sales, expenses remained flat at 8.7% for the nine months ended September 30, 2011 and the nine months ended September 30, 2010. The increase in sales and marketing expense was primarily due to $0.7 million in severance payment to our former Chief Marketing Officer and $0.2 million in recruiting fees related to the hiring of our new Chief Marketing Officer. The remaining increase of $1.8 million related to increased online advertising and employee compensation costs partially offset by decreases in print advertising. We expect print advertising expenditures to continue to decline throughout the remainder of 2011 with the savings being reinvested in online programs to further increase the focus of the business around serving online customers. Moreover, we expect increased hiring through 2012 as we continue to expand our marketing team.

General and Administrative. General and administrative expenses remained relatively constant at $23.1 million compared to the nine months ended September 30, 2010. As a percentage of net sales, general and administrative expenses decreased to 12.0% for the nine months ended September 30, 2011 from 14.3% for the nine months ended September 30, 2010. Included in the 2011 amount were $2.5 million in expenses consisting of the following: $2.1 million in expenses primarily related to the equity capitalization issue and the strategic review, $0.3 million related to a software litigation settlement offer and $0.1 million for an adjustment to the severance settlements for our former Chief Executive Officer and former Chief Financial Officer. Included in the 2010 amount were $7.6 million in expenses consisting of the following: $3.5 million for settlement of the derivative lawsuit, $2.2 million in fees associated with the class action lawsuit, conclusion of the proxy solicitation and other matters, $1.2 million in accrued severance to our former Chief Executive Officer, and $0.7 million in proxy reimbursement fees to Great Hill Partners. We expect these charges to decrease going forward as our equity capitalization issue was rectified in September 2011 and our Board of Directors concluded its strategic review in June 2011. Excluding aforementioned items in both periods, general and administrative expenses increased $5.0 million period-over-period. The increase period-over-period was primarily attributable to increased employee compensation costs of $3.8 million due to headcount growth in critical departments, increased credit card fees of $0.6 million due to higher sales, increased stock-based compensation expense of $0.3 million, and additional on-going expenses.

Income Tax. In our continuing assessment of the need for a valuation allowance, in accordance with applicable guidance, we considered our cumulative pre-tax loss after three years, adjusting for permanent items and the potential for accumulated taxable losses in 2011, given our results for the nine months ended September 30, 2011. Accordingly, we considered our history of recent losses and potential loss in 2011 to be relevant to our analysis. Based on this assessment, we increased our valuation allowance by $4.0 million for the nine months ended September 30, 2011, to an aggregate total of $10.4 million.

Income tax benefit decreased approximately $2.9 million for the nine months ended September 30, 2011. This was a result of recognizing a loss before income taxes of $11.2 million and an additional valuation allowance of $4.0 million for the nine months ended September 30, 2011 compared to a loss before income taxes of $7.4 million and no valuation allowance for the three months ended September 30, 2010.

Liquidity and Capital Resources

The significant components of our working capital are cash and cash equivalents, inventory and accounts receivable, primarily from credit card processors, reduced by accounts payable and accrued expenses. Cash and cash equivalents consist of cash and money market accounts. The working capital characteristics of our business allow us to collect cash from sales to customers within a few business days of the related sale. At September 30, 2011, we had a working capital surplus of approximately $14.1 million.

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 inventory we maintain; and

	·	other factors relating to our business.

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 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.

Net cash used in operations for the nine months ended September 30, 2011 was approximately $7.2 million. Included in this amount were payments related to settlement of the derivative lawsuit, equity capitalization issue, strategic review, proxy solicitation, and severance paid to our former Chief Executive Officer and Chief Marketing Officer. These amounts were partially offset by refunds of our estimated 2010 tax payments and certain freight charges. We do not expect the same level of these payments to continue going forward. The net effect of the aforementioned items reduced our cash flow from operations for the nine months ended by approximately $7.7 million. At September 30, 2011, we had approximately $12.8 million in cash and cash equivalents. 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.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP.

The preparation of these financial statements requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Critical accounting policies are those that are the most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies pertain to revenue recognition, income taxes, stock-based compensation, contingences, inventories, and goodwill. 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 SEC on June 16, 2011 for the year ended December 31, 2010.

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.

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 has 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

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Form 10-Q, we evaluated, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon this evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our disclosure controls and procedures include components of our internal control over financial reporting. Our management, including our Chief Executive Officer and Interim Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are 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 the Company have been detected.

PART II.	OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Refer to Note 5 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, 2010, 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 on 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.	[REMOVED AND RESERVED]

ITEM 5.	OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

Exhibits
3.1	Certificate of Incorporation of the Registrant (1)
3.2	Bylaws of the Registrant (2)
10.1	Vitacost.com, Inc. 2011 Incentive Compensation Plan (3)
10.2	Employment Agreement between Vitacost.com, Inc. and David Zucker, dated August 22, 2011 (4)
10.3	Employment Agreement between Vitacost.com, Inc. and Robert Wegner, dated August 4, 2011 (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.

*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 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2011.

(2) Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2011.

(3) Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed with the SEC on September 8, 2011.

(4) Filed as an Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 22, 2011.

(5) Filed as an Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 9, 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/ Stephen E. Markert, Jr.
		Name: Stephen E. Markert, Jr.
		Title: Interim Chief Financial Officer

Date: November 8, 2011

INDEX TO EXHIBITS

Exhibits
3.1	Certificate of Incorporation of the Registrant (1)
3.2	Bylaws of the Registrant (2)
10.1	Vitacost.com, Inc. 2011 Incentive Compensation Plan (3)
10.2	Employment Agreement between Vitacost.com, Inc. and David Zucker, dated August 22, 2011 (4)
10.3	Employment Agreement between Vitacost.com, Inc. and Robert Wegner, dated August 4, 2011 (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.

*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 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2011.

(2) Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2011.

(3) Filed as an Exhibit to Registrant’s Current Report on Form 8-K filed with the SEC on September 8, 2011.

(4) Filed as an Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 22, 2011.

(5) Filed as an Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the SEC on August 9, 2011.

* Filed herewith.

Vitacost.com, Inc. - FORM 10-Q - November 8, 2011

Attached files

Vitacost.com, Inc. Reports