UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549 

 

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FORM 10-Q

 

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(Mark One)

 

☒

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

 

For the quarterly period ended June 30, 2014

 

OR

 

☐

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

 

Commission File Number: 001-34468

 

 

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VITACOST.COM, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

(561) 982-4180

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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 ☒ 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 ☒
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 ☒

 

As of August 4, 2014, the registrant has 34,224,991 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
		Balance Sheets as of June 30, 2014 and December 31, 2013	3
		Statements of Comprehensive Loss for the Three and Six Months ended June 30, 2014 and 2013	4
		Statement of Stockholders' Equity for the Six Months ended June 30, 2014	5
		Statements of Cash Flows for the Six Months ended June 30, 2014 and 2013	6
		Notes to Financial Statements (Unaudited)	7
	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	17
	ITEM 1.	Legal Proceedings	17
	ITEM 1A.	Risk Factors	18
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	ITEM 3.	Defaults Upon Senior Securities	19
	ITEM 4.	Mine Safety Disclosures	19
	ITEM 5.	Other Information	19
	ITEM 6.	Exhibits	20

   

 

PART I.         FINANCIAL INFORMATION

 

ITEM 1.         FINANCIAL STATEMENTS

 

VITACOST.COM, INC.

BALANCE SHEETS

(Unaudited - In thousands, except par value)

 

		As of
		June 30, 2014				December 31, 2013
Assets
Current Assets
Cash and cash equivalents		$	28,006			$	24,799
Accounts receivable, net			2,898				1,486
Inventory			37,377				37,143
Prepaid expenses			1,571				902
Other current assets			376				567
Total current assets			70,228				64,897
Property and equipment, net			28,235				30,288
Other assets			3,075				3,192
Total assets		$	101,538			$	98,377
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable		$	34,158			$	29,357
Deferred revenue			4,973				4,634
Accrued expenses			7,871				6,326
Total current liabilities			47,002				40,317
Deferred tax liability			428				402
Total liabilities			47,430				40,719
Commitments and contingencies (Note 6)
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; 34,054 and 34,050 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively			-				-
Additional paid-in capital			115,780				113,658
Warrants			4,347				4,347
Accumulated deficit			(66,019	)			(60,347	)
Total stockholders' equity			54,108				57,658
Total liabilities and stockholders' equity		$	101,538			$	98,377

 

 

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

 

  

VITACOST.COM, INC.

STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited - In thousands, except per share)

 

 

		For the Three Months Ended								For the Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
Net sales		$	104,228			$	97,234			$	209,058			$	194,990
Cost of goods sold			79,852				75,535				161,563				150,662
Gross profit			24,376				21,699				47,495				44,328
Operating expenses:
Fulfillment			8,595				8,660				17,859				17,576
Sales and marketing			8,094				8,610				16,794				17,026
General and administrative			9,467				8,829				18,542				17,132
			26,156				26,099				53,195				51,734
Operating loss			(1,780	)			(4,400	)			(5,700	)			(7,406	)
Other income			31				37				54				57
Loss before income taxes			(1,749	)			(4,363	)			(5,646	)			(7,349	)
Income tax expense			(13	)			(13	)			(26	)			(26	)
Net loss		$	(1,762	)		$	(4,376	)		$	(5,672	)		$	(7,375	)
Basic and diluted per share information:
Net loss attributable to common stockholders		$	(0.05	)		$	(0.13	)		$	(0.17	)		$	(0.22	)
Weighted average shares outstanding			34,054				33,612				34,053				33,566
Comprehensive loss		$	(1,762	)		$	(4,376	)		$	(5,672	)		$	(7,375	)

 

      

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

 

  

VITACOST.COM, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited - In thousands)

 

										Additional
		Common Stock								Paid-In								Accumulated
		Shares				Amount				Capital				Warrants				Deficit				Total
Balance at December 31, 2013			34,050			$	-			$	113,658			$	4,347			$	(60,347	)		$	57,658
Net loss			-				-				-				-				(5,672	)			(5,672	)
Stock options exercised			4				-				24				-				-				24
Stock-based compensation expense			-				-				1,572				-				-				1,572
RSUs issued in lieu of cash for 2013 bonus			-				-				526				-				-				526
Balance at June 30, 2014			34,054			$	-			$	115,780			$	4,347			$	(66,019	)		$	54,108

 

 

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

 

 

VITACOST.COM, INC.

STATEMENTS OF CASH FLOWS

(Unaudited - In thousands)

 

 

		For the Six Months Ended June 30,
		2014				2013
Cash Flows From Operating Activities
Net loss		$	(5,672	)		$	(7,375	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			3,174				3,309
Stock-based compensation expense			1,572				1,315
Deferred income taxes			26				26
Loss on disposition of property and equipment and other assets			-				(15	)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			(1,412	)			(530	)
Other current assets			191				885
Inventory			(234	)			(5,734	)
Prepaid expenses			(669	)			(312	)
Other assets			(33	)			80
Increase (decrease) in:
Accounts payable			4,766				7,180
Deferred revenue			339				(209	)
Accrued expenses			2,004				2,642
Net cash provided by operating activities			4,052				1,262
Cash Flows From Investing Activities
Proceeds from disposition of property and equipment			-				21
Payments for the purchase of property and equipment			(869	)			(3,433	)
Increase in restricted cash			-				(250	)
Net cash used in investing activities			(869	)			(3,662	)
Cash Flows From Financing Activities
Proceeds from the exercise of stock options			24				671
Net cash provided by financing activities			24				671
Net increase (decrease) in cash and cash equivalents			3,207				(1,729	)
Cash and cash equivalents:
Beginning of year			24,799				32,152
End of period		$	28,006			$	30,423
Supplemental Schedule of Noncash Activities
RSUs issued in lieu of cash for 2013 bonus		$	526			$	-
Equipment purchased not yet paid		$	102			$	-

   

 

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

 

  

VITACOST.COM, INC.

NOTES TO 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 healthy living 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 a proprietary line of healthy living products as well as a wide selection of other manufacturers’ brand-name goods.  The Company ships products from two distribution centers located in Lexington, North Carolina and Las Vegas, Nevada.

 

Basis of presentation 

 

The accompanying unaudited financial statements of Vitacost as of June 30, 2014, and for the three and six months ended June 30, 2014 and 2013, 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 statement 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 six months ended June 30, 2014 are not necessarily indicative of the results for the entire fiscal year ending December 31, 2014, or for any other period. These unaudited financial statements should be read in conjunction with the 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, 2013 (the “Form 10-K”).

 

Significant Accounting Policies

 

Reclassifications:

 

Reclassifications on the 2013 statement of cash flows have been made to conform to the 2014 presentation.

   

Earnings per share:

 

The Company computed earnings per share by dividing its net loss 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, warrants and restricted stock units (“RSUs”). The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding for the three and six months ended June 30, 2014 and 2013:

 

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
		(In thousands)								(In thousands)
Weighted-average shares outstanding - basic			34,054				33,612				34,053				33,566
Effect of dilutive securities			-				-				-				-
Weighted-average shares outstanding - diluted			34,054				33,612				34,053				33,566

 

 

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								Six Months Ended
		June 30,								June 30,
		2014				2013				2014				2013
		(In thousands)								(In thousands)
Stock options			2,986				2,732				2,986				2,732
Warrants			1,681				1,681				1,681				1,681
Restricted stock units			277				-				277				-
Total antidilutive common stock equivalents excluded from diluted earnings per share			4,944				4,413				4,944				4,413

 

Restricted cash:

 

Restricted cash consists of cash pledged as collateral to a vendor.

 

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 value. 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 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 issued during the period that had or would have had a material impact on the Company’s financial statements.

 

2. Inventory

 

Inventory consisted of the following as of June 30, 2014 and December 31, 2013:

 

 

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Bulk and other		$	942			$	872
Finished goods			36,435				36,271
		$	37,377			$	37,143

 

 

 

 

3. Property and Equipment

 

Property and equipment consisted of the following as of June 30, 2014 and December 31, 2013:

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Buildings and building improvements		$	12,863			$	12,863
Furniture, fixtures and equipment			26,439				26,917
Computers			4,748				5,076
Software			9,132				9,335
Leasehold improvements			2,827				2,823
Land			460				460
			56,469				57,474
Less accumulated depreciation			(29,326	)			(27,921	)
			27,143				29,553
Construction-in-progress			1,092				735
		$	28,235			$	30,288

 

 

4. Other Assets

 

Other assets consisted of the following as of June 30, 2014 and December 31, 2013:

 

		June 30,				December 31,
		2014				2013
		(In thousands)
Goodwill		$	2,200			$	2,200
Intangible assets, net			450				600
Restricted cash			250				250
Deposits			175				142
		$	3,075			$	3,192

 

5. Stock-Based Compensation

 

A summary of the Company’s stock option activity for the six months ended June 30, 2014 and 2013 is as follows:

 

 

		2014								2013
						Weighted-								Weighted-
						Average								Average
						Exercise								Exercise
		Shares				Price				Shares				Price
		(In thousands, except exercise price)
Outstanding at beginning of period			4,980			$	7.01				5,209			$	6.40
Granted			843				5.98				585				7.25
Exercised			(4	)			6.61				(122	)			5.51
Forfeited or expired			(203	)			7.79				(580	)			5.73
Outstanding at period end			5,616			$	6.82				5,092			$	6.60
Exercisable at period end			2,986			$	6.89				2,732			$	6.82

 

 

As of June 30, 2014, there was approximately $6.8 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 3.61 years.

  

 

RSUs are converted into shares of common stock upon vesting which is time based. These awards generally vest over a maximum five years. The cost of these awards is determined using the fair value of the Company’s common stock on the date of the grant and compensation expense is recognized over the vesting period.

 

A summary of the Company’s restricted stock unit activity for the six months ended June 30, 2014 is as follows:  

 

 

						Weighted-
						Average
		Number of				Grant Date
		Awards				Fair Value
			(In thousands, except exercise price)
Outstanding at beginning of period			-			$	-
Granted			277				5.77
Vested			-				-
Forfeited			-				-
Outstanding at period end			277			$	5.77

 

As of June 30, 2014, there was approximately $0.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to RSUs granted under the Company’s stock incentive plan, which is expected to be recognized over the weighted-average period of 3.17 years.

 

6.    Contingencies

 

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 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 June 30, 2014. 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 matters 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, its liability, if any, under any pending litigation or administrative proceedings would not materially affect its financial condition, results of operations or cash flows.

 

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 $1.8 million was established against its net deferred tax assets for the six months ended June 30, 2014. This amount was in addition to the $21.4 million valuation allowance that was recorded as of December 31, 2013.

 

8. Subsequent Events

 

Merger Agreement:

 

On July 1, 2014, the Company, The Kroger Co., an Ohio corporation (“Kroger”), and Vigor Acquisition Corp, a Delaware corporation and wholly owned subsidiary of Kroger (“Purchaser”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, Purchaser agreed to commence a cash tender offer to acquire all of the shares of the Company’s common stock for a purchase price of $8.00 per share, net to the holder thereof in cash (the “Offer Price”), without interest thereon and subject to any required tax withholding, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements, collectively constitute the “Offer”) contained in the Schedule TO filed by Purchaser and Kroger with the Securities and Exchange Commission on July 18, 2014, as amended on August 1, 2014. The Offer expires at 5:00 PM, New York City time, on August 15, 2014, unless the Offer is extended.

 

The closing of the Offer and Merger (defined below) are subject to certain conditions, including the tender of at least a majority of the outstanding shares of the Company’s common stock and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act (the termination of the waiting period was granted on July 25, 2014). The transaction is not subject to a financing condition.

 

 

Following the completion of the Offer, Purchaser will merge with and into the Company, with the Company surviving as a wholly owned subsidiary of Kroger, pursuant to the procedure provided for under Section 251(h) of the General Corporation Law of the State of Delaware (the “DGCL”) without any stockholder approvals (the “Merger”). As a result of the Merger, the separate corporate existence of Purchaser will cease, and the Company will continue as the surviving corporation of the Merger. In the Merger, each outstanding share of the Company’s common stock (other than shares of common stock owned by the Company, Kroger or Purchaser, or shares of common stock with respect to which appraisal rights have been properly exercised under the DGCL) will be converted into the right to receive an amount in cash equal to the Offer Price.

 

Merger Agreement Litigation: 

 

Three purported class action lawsuits have been filed on behalf of the Company’s stockholders against various defendants including the Company, the Company Board, Kroger and Purchaser, in connection with the proposed Merger. Those cases are captioned Ernst v. Vitacost.com, et. al., Case No. 2014 CA 008318 AJ (Fla. Cir. Ct., Palm Beach Cnty., July 7, 2014); Heim v. Vitacost.com, et. al., Case No. 9883-VCP (Del. Ch. Ct. July 15, 2014); and Takis P. Dionisos v. Vitacost.com. et. al., Case No. 9945-VCP, (Del. Ch. Ct. July 24, 2014). The complaints allege, generally, that the Company Board breached their fiduciary duties to the Company’s stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell the Company through an allegedly defective process, for an unfair price, and on unfair terms. The Dionisos complaint also alleges that the Company Board failed to disclose material information regarding the proposed Merger. The lawsuits seek, among other things, equitable relief enjoining the consummation of the proposed Merger, rescission of the proposed Merger (to the extent the proposed Merger has already been consummated), damages, and attorneys’ fees and costs.

 

On July 24, 2014, the Dionisos plaintiff filed a motion for preliminary injunction. On July 31, 2014, the Heim lawsuit and Dionisos lawsuit were consolidated into a single action in the Delaware Court of Chancery. A hearing on the motion for preliminary injunction is set for August 11, 2014 in the Delaware Court of Chancery.

 

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 decision. It is possible that the Company’s financial statements could be materially adversely affected by an unfavorable outcome.

 

 

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 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 and future 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 healthy living products, including dietary supplements such as vitamins, minerals, herbs and other botanicals (which we refer to as “vitamins and 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 competitive prices, while providing superior customer service and timely delivery.

 

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. (the “Company”, “Vitacost”, or “Vitacost.com”). In September 2009, the Company completed its 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.

 

Trends and Other Factors Affecting Our Business

 

We continue to experience intense competition as the healthy living 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.

 

 

While the overall healthy living industry continues to benefit from positive demographic trends, with an aging population, trends affecting health and lifestyle preferences, and an increasingly health conscious consumer, our VMHS sales have been negatively impacted by weakness in the overall industry. 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 97% and 96% of our total net sales for the three months ended June 30, 2014 and 2013, 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 product sold and the cost of shipping the product 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, affiliates and partners’ commissions, traditional media advertising, print expenses and payroll related expenses for personnel engaged in marketing, sales, customer service and merchandising. 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 statements of operations data as a percentage of net sales for the periods indicated:  

  

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		(unaudited)								(unaudited)
		2014				2013				2014				2013
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			76.6				77.7				77.3				77.3
Gross profit			23.4				22.3				22.7				22.7
Operating expenses:
Fulfillment			8.2				8.9				8.5				9.0
Sales and marketing			7.8				8.9				8.0				8.7
General and administrative			9.1				9.1				8.9				8.8
Total operating expense			25.1				26.9				25.4				26.5
Operating loss			(1.7	)			(4.6	)			(2.7	)			(3.8	)
Net loss			(1.7	)%			(4.6	)%			(2.7	)%			(3.8	)%

 

Comparison of Three Months Ended June 30, 2014 to Three Months Ended June 30, 2013

 

		Three Months Ended
		June 30,								$				%
		(unaudited)								Increase				Increase
		2014				2013				(Decrease)				(Decrease)
		(In thousands)
Third-party products		$	80,181			$	73,305			$	6,876				9.4	%
Proprietary products			20,527				20,105				422				2.1
Freight			3,520				3,824				(304	)			(7.9	)
Net sales			104,228				97,234				6,994				7.2
Cost of goods sold			79,852				75,535				4,317				5.7
Gross profit		$	24,376			$	21,699			$	2,677				12.3	%

 

 

Net Sales.  Net sales increased $7.0 million, or 7.2%, to $104.2 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Net sales of our third-party products increased $6.9 million, or 9.4%, to $80.2 million for the three months ended June 30, 2014. Net sales of our proprietary products increased $0.4 million, or 2.1%, to $20.5 million for the three months ended June 30, 2014, and freight decreased $0.3 million, or 7.9%, to $3.5 million for the three months ended June 30, 2014.

  

The increase in net sales of our third-party and proprietary products was primarily the result of an increase in our customer base and the number of shipped orders compared to the three months ended June 30, 2013. As of June 30, 2014, we had 2.3 million active customers, an increase of 8.0% from June 30, 2013. During the three months ended June 30, 2014, we shipped 1.4 million orders which represented a 4.5% increase over the three months ended June 30, 2013. Our Amazon.com channel represented 3.1% and 2.9% of net sales for the three months ended June 30, 2014 and 2013, respectively. This was partially offset by a decrease in freight revenue as a greater percentage of orders qualified for free shipping.    

 

Cost of Goods Sold. Cost of goods sold increased $4.3 million, or 5.7%, to $79.9 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. As a percentage of net sales, cost of goods sold was 76.6% for the three months ended June 30, 2014 compared to 77.7% for the three months ended June 30, 2013.

 

Gross Profit. Gross profit increased $2.7 million, or 12.3%, to $24.4 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Gross margin increased to 23.4% for the three months ended June 30, 2014 compared to 22.3% for the three months ended June 30, 2013. The increase in gross margin was primarily due to an increase in third party product margin, partially offset by a reduction in our freight margin due to an increase in the percentage of orders that qualified for free shipping versus the year ago period.

 

Fulfillment. Fulfillment expense remained relatively flat at $8.6 million for the three months ended June 30, 2014 compared to $8.7 million for the three months ended June 30, 2013. As a percentage of net sales, fulfillment expense decreased to 8.2% for the three months ended June 30, 2014 compared to 8.9% for the three months ended June 30, 2013. Included in fulfillment expense are fees related to our freight savings program, which expired in mid-June 2014. Excluding these fees, fulfillment expense was 7.8% of sales for the three months ended June 30, 2014 compared to 8.2% for the three months ended June 30, 2013. Fulfillment cost per order, excluding fees related to the freight savings program, was down 3% period-over-period, due to productivity initiatives in our fulfillment centers.

 

Sales and Marketing. Sales and marketing expense decreased $0.5 million, or 6.0%, to $8.1 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. As a percentage of net sales, sales and marketing expense decreased to 7.8% for the three months ended June 30, 2014 from 8.9% for the three months ended June 30, 2013. The decrease in sales and marketing expense was primarily due to a decrease in print advertising of $0.3 million, decreased online advertising of $0.3 million and decreased personnel related expenses of $0.2. This was partially offset by a $0.3 million increase in broadcast advertising associated with our television advertising test. The period-over-period decrease in the sales and marketing expense as a percentage of sales was primarily due to increased sales leverage and decreased customer acquisition costs.

 

General and Administrative. General and administrative expense increased $0.6 million, or 7.2%, to $9.5 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. As a percentage of net sales, general and administrative remained flat at 9.1% for the three months ended June 30, 2014 and 2013. Included in the June 30, 2014 amount were $0.6 million of expenses associated with the pending KROGER transaction. Excluding the expenses associated with the pending KROGER transaction, general and administrative expenses remained flat period-over-period. As a percentage of net sales, excluding the $0.6 million in expenses associated with the pending KROGER transaction, general and administrative expense was 8.5% of net sales for the three months ended June 30, 2014 compared to 9.1% of net sales for the three months ended June 30, 2013. The period-over-period decrease in the general and administrative expense as a percentage of sales was primarily due to increased sales leverage.

 

 

Comparison of Six Months Ended June 30, 2014 to Six Months Ended June 30, 2013

 

		Six Months Ended
		June 30,								$				%
		(unaudited)								Increase				Increase
		2014				2013				(Decrease)				(Decrease)
		(In thousands)
Third-party products		$	160,857			$	147,850			$	13,007				8.8	%
Proprietary products			41,040				39,487				1,553				3.9
Freight			7,161				7,653				(492	)			(6.4	)
Net sales			209,058				194,990				14,068				7.2
Cost of goods sold			161,563				150,662				10,901				7.2
Gross profit		$	47,495			$	44,328			$	3,167				7.1	%

 

Net Sales.  Net sales increased $14.1 million, or 7.2%, to $209.1 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Net sales of our third-party products increased $13.0 million, or 8.8%, to $160.9 million for the six months ended June 30, 2014. Net sales of our proprietary products increased $1.6 million, or 3.9%, to $41.0 million for the six months ended June 30, 2014, and freight decreased $0.5 million, or 6.4%, to $7.2 million for the six months ended June 30, 2014.

  

The increase in net sales of our third-party and proprietary products was primarily the result of an increase in our customer base and the number of shipped orders compared to the six months ended June 30, 2013. As of June 30, 2014, we had 2.3 million active customers, an increase of 8.0% from June 30, 2013. During the six months ended June 30, 2014, we shipped 2.9 million orders which represented a 6.2% increase over the six months ended June 30, 2013. Our Amazon.com channel represented 3.4% and 3.1% of net sales for the six months ended June 30, 2014 and 2013, respectively. This was offset by a decrease in freight revenue as a greater percentage of orders qualified for free shipping.

 

Cost of Goods Sold. Cost of goods sold increased $10.9 million, or 7.2%, to $161.6 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. As a percentage of net sales, cost of goods sold remained flat at 77.3% for the six months ended June 30, 2014 and 2013.

 

Fulfillment. Fulfillment expense increased $0.3 million, or 1.6%, to $17.9 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. As a percentage of net sales, fulfillment expense decreased to 8.5% for the six months ended June 30, 2014 compared to 9.0% for the six months ended June 30, 2013. Included in fulfillment expense are fees related to our freight savings program, which expired in mid-June 2014. Excluding these fees, fulfillment expense was 8.0% of sales for the six months ended June 30, 2014 compared to 8.3% for the six months ended June 30, 2013. Fulfillment cost per order, excluding fees related to the freight savings program, was down 3% period-over-period, due to productivity initiatives in our fulfillment centers.

 

Sales and Marketing. Sales and marketing expense decreased $0.2 million, or 1.4%, to $16.8 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. As a percentage of net sales, sales and marketing expense decreased to 8.0% for the six months ended June 30, 2014 from 8.7% for the six months ended June 30, 2013. The decrease in sales and marketing expense was primarily due to a decrease in print advertising of $0.4 million and decreased personnel related costs of $0.3 million. This was partially offset by a $0.6 million increase in broadcast advertising associated with our television advertising test of $0.6 million. The period-over-period decrease in the sales and marketing expense as a percentage of sales was primarily due to increased sales leverage.

 

General and Administrative. General and administrative expense increased $1.4 million, or 8.2%, to $18.5 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. As a percentage of net sales, general and administrative expense increased to 8.9% for the six months ended June 30, 2014 from 8.8% for the six months ended June 30, 2013. Included in the six months ended June 30, 2014 amount were $0.6 million expenses associated with the pending KROGER transaction. Excluding the expenses associated with the pending KROGER transaction, general and administrative expense increased $0.8 million period-over-period. The increase was primarily due to increased personnel related expenses of $0.4 million and increased credit card fees of $0.3 million associated with higher sales volume. As a percentage of net sales, excluding the $0.6 million in expenses associated with the pending KROGER transaction, general and administrative expense was 8.6% of net sales for the six months ended June 30, 2014 compared to 8.8% of net sales for the six months ended June 30, 2013. The period-over-period decrease in the general and administrative expense as a percentage of sales was primarily due to increased sales leverage.

 

 

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, deferred revenue 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 June 30, 2014, we had working capital of $23.2 million.

 

Cash flows from operating activities. Net cash provided by operating activities was $4.1 million and $1.3 million for the six months ended June 30, 2014 and 2013, respectively. The $2.8 million change in cash flows from operating activities was primarily due to the increase in our inventory turnover and the decrease in our net loss. This was partially offset by the timing of payments to our vendors and the timing of cash receipts from our credit card processors.   

 

Cash flows from investing activities. Net cash used in investing activities was $0.9 million and $3.7 million for the six months ended June 30, 2014 and 2013, respectively. The $2.8 million change in cash flows from investing activities was primarily due to a decrease in our capital expenditures.

 

Cash flows from financing activities. Net cash provided by financing activities was an insignificant amount and $0.7 million for the six months ended June 30, 2014 and 2013, respectively. The $0.7 million change in cash flows from financing activities was primarily due to a decrease in the proceeds from the exercise of our stock options.

 

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 any adverse conditions.

 

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.

 

At June 30, 2014, we had $28.0 million in cash and cash equivalents. For the six months ended June 30, 2014, our net cash provided by operating activities was $4.1 million. 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 increase our net cash provided by 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 financial statements, which have been prepared in accordance with generally accepted accounting principles of the United States (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 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. While our significant accounting policies are described in more detail in the notes to our financial statements, our critical accounting policies pertain to revenue recognition, income taxes, stock-based compensation, contingencies, inventory, goodwill and other intangible assets. 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, 2014 for the year ended December 31, 2013.  

 

Recent Accounting Pronouncement

 

Refer to Note 1 of our financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding recent accounting pronouncements 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., our sales are primarily 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 June 30, 2014 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 and Note 8 Subsequent Events of our 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, 2013, 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 Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on September 28, 2011.
	(2) Filed as 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: August 6, 2014

     

 

 

   

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

 

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