Vitacost.com went public in October 2009. This transaction was particularly notable because many analysts considered it a sign that the financial crisis had passed. The last time Vitacost.com issued earnings guidance was July 2010, when the company said it expected to have annualized sales around $220 million. This guidance was lower than expectations, but the company’s outlook was still fairly rosy. The real news was still to come…
 
In August, Vitacost.com’s CEO left the company in what was described as a “mutual separation.” Then in October its CFO left without explanation. In December, the company sent a letter to the Securities & Exchange Commission (SEC) saying its financial statements could not be relied upon to provide an accurate picture of the company’s financial health, dating all the way back to 1994. Its shares were trading at $5.70 at the time, but trading was halted in the stock and has yet to resume as of the writing of this column. Then in January reports emerged that the company was considering a pre-packaged bankruptcy, leaving most of the financial community somewhat perplexed.
 
Vitacost.com is as large as Internet retailers of supplements go, holding about a 20% share of sales, according to Nutrition Business Journal market data. That being the case, the impact of this crisis on the nutrition industry should be limited. Most of the recent revelations about the company’s financial health have come under the helm of its new management, which appears to be focused on sorting out the problems with the company. In fact, they claim business is continuing as usual at the company. The company depends on having access to a wide variety of brands and products, so if it goes into pre-packaged bankruptcy, its suppliers will likely already have worked out deals.
 
Why Bankruptcy?
 
So why is Vitacost.com considering bankruptcy in the first place? Typically, a company only files for bankruptcy if its debt payments are larger than it can afford. But Vitacost.com had $37 million in debt, and almost $40 million in cash and securities in the bank. Now, the company did say that its financial statements could not be relied upon, but it had indicated in filings with the SEC that its problems stemmed from defects in its corporate organizational and formation documents, as well as stock splits and share issuances prior to its IPO. So if Vitacost.com’s problems are related to its equity position instead of its debts, why would it consider bankruptcy filings? Any answers are just speculation, but it is important to know that when the company disclosed it was considering a pre-packaged bankruptcy, it also said it was considering a lawsuit.
 
There are several clues in the statements that have been released. First, the company said its financial statements could not be relied upon dating back to 1994, which is when the company was founded. Since the company has implied that its problems lie in the Articles of Incorporation, it may be a matter of the company only having a certain number of authorized shares, and that shares or options it issued exceeded the allowed amount. Also, the company is incorporated in Delaware, which typically only requires a company’s name, address, registered agent and the number of shares authorized in its Articles of Incorporation. There are of course other issues that could create a problem, including different share classes with various voting rights and powers, restrictions on authorization of shares, etc. However, most of these issues could cause the financial statements to be misrepresented because it is difficult to tell how much of the company’s earnings are represented by each share.
 
None of these answer the bankruptcy question fully, however litigation might. It is possible that clauses in the company’s early corporate documents have created a significant liability for the company, but had one of these issues come to light it would have likely triggered a special filing with the SEC.
 
Important Hearings May Determine Vitacost.com’s Future
 
At this point, every potential explanation is still just speculation. However, there are some significant dates coming for Vitacost.com that could provide more insight, including a hearing with NASDAQ, in which the company will appeal the recent de-listing of its stock. The company has maintained that it should continue to be publicly traded in the stock markets and specifically on NASDAQ, but the recent issues have caused the company to be out of compliance with the exchange’s requirements. 
 
While the company’s operations may be unaffected due to its low debt load, there is no doubt its stock price will be affected once trading is resumed. Hopefully Vitacost.com can emerge from all of its problems with a new sense of transparency and strength, because after all it has been one of this sector’s biggest success stories.