UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549




FORM
      10-Q




(Mark
One)




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




For
the quarterly period ended June 30, 2010




OR




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




Commission
File Number: 001-34468




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





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





(561)
982-4180


(Registrant’s
Telephone Number, Including Area Code)





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




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




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




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes   ̈    No
x




As
of  August 2, 2010, 27,757,460 shares of the registrant’s common stock
were outstanding.








Vitacost.com,
Inc.




Table
of Contents




PagePART
      I.
                FINANCIAL
      INFORMATION
                
                1ITEM
      1.
                FINANCIAL
      STATEMENTS
                
                1ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                
                12ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                
                17ITEM
      4.
                CONTROLS
      AND PROCEDURES
                
                17PART
      II.
                OTHER
      INFORMATION
                
                18ITEM
      1.
                LEGAL
      PROCEEDINGS
                
                18ITEM
      1A.
                RISK
      FACTORS
                
                18ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                
                18ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES
                
                18ITEM
      4.
                [REMOVED
      AND RESERVED.]
                
                18ITEM
      5.
                OTHER
      INFORMATION
                
                18ITEM
      6.
                EXHIBITS
                
                19SIGNATURES












PART
I.       FINANCIAL
INFORMATION




ITEM
1.       FINANCIAL
STATEMENTS




Vitacost.com, Inc.
 
 Consolidated
Balance Sheets
 June
30, 2010 and December 31, 2009
  June
      30,2010
                  
                  
                  December
      31,Assets
                  
                  (unaudited)
                  
                  
                  2009Current
      AssetsCash
      and cash equivalents
                  
                  $
                  5,200,757
                  
                  
                  $
                  8,658,157Securities
      available for sale
                  
                  
                  35,173,777
                  
                  
                  
                  35,787,227Accounts
      receivable
                  
                  
                  850,565
                  
                  
                  
                  735,355Other
      receivables
                  
                  
                  1,107,741
                  
                  
                  
                  1,055,372Inventory,
      net
                  
                  
                  30,603,063
                  
                  
                  
                  28,096,884Prepaid
      expenses
                  
                  
                  2,816,430
                  
                  
                  
                  1,988,538Deferred
      tax asset
                  
                  
                  1,067,966
                  
                  
                  
                  1,167,724Total
      current assets
                  
                  
                  76,820,299
                  
                  
                  
                  77,489,257Property
      and equipment, net
                  
                  
                  33,854,239
                  
                  
                  
                  21,961,903Goodwill
                  
                  
                  2,200,000
                  
                  
                  
                  2,200,000Intangible
      assets, net
                  
                  
                  7,196
                  
                  
                  
                  9,446Deposits
                  
                  
                  191,568
                  
                  
                  
                  4,656,128Deferred
      tax asset
                  
                  
                  1,377,605
                  
                  
                  
                  1,361,8173,776,369
                  
                  
                  
                  8,227,391Total
      assets
                  
                  $
                  114,450,907
                  
                  
                  $
                  107,678,551Liability
      and Stockholders' EquityCurrent
      LiabilitiesLine
      of credit
                  
                  $
                  1,322,075
                  
                  
                  $
                  3,458,183Current
      maturities of notes payable
                  
                  
                  1,107,881
                  
                  
                  
                  1,090,969Current
      maturities of capital lease obligations
                  
                  
                  4,935
                  
                  
                  
                  35,452Accounts
      payable
                  
                  
                  23,975,073
                  
                  
                  
                  18,052,495Deferred
      revenue
                  
                  
                  754,461
                  
                  
                  
                  1,919,352Accrued
      expenses
                  
                  
                  5,198,090
                  
                  
                  
                  3,282,476Income
      taxes payable
                  
                  
                  -
                  
                  
                  
                  51,221Total
      current liabilities
                  
                  
                  32,362,515
                  
                  
                  
                  27,890,148Notes
      payable, less current maturities
                  
                  
                  4,254,340
                  
                  
                  
                  4,820,042Interest
      rate swap liability
                  
                  
                  517,194
                  
                  
                  
                  468,719Total
      liabilities
                  
                  $
                  37,134,049
                  
                  
                  $
                  33,178,909Commitments
      and ContingenciesStockholders'
      EquityPreferred
      stock, par value $.00001 per share; authorized 25,000,000;no
      shares issued and outstanding at June 30, 2010 and December 31,
      2009
                  
                  
                  -
                  
                  
                  
                  -Common
      stock, par value $.00001 per share; authorized
100,000,000;27,755,453
      and 27,488,353 shares issued and outstanding atJune
      30, 2010 and December 31, 2009, respectively
                  
                  
                  278
                  
                  
                  
                  275Additional
      paid-in capital
                  
                  
                  73,661,567
                  
                  
                  
                  71,932,256Accumulated
      other comprehensive income
                  
                  
                  3,838
                  
                  
                  
                  -Retained
      earnings
                  
                  
                  3,651,175
                  
                  
                  
                  2,567,111Total
      stockholders' equity
                  
                  
                  77,316,858
                  
                  
                  
                  74,499,642Total
      liabilities and stockholders' equity
                  
                  $
                  114,450,907
                  
                  
                  $
                  107,678,551
 See Notes
to Consolidated Financial Statements.
  1
  Vitacost.com, Inc.
 
 Consolidated
Statements of Operations
 For
the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)
 
 Three
      Months Ended
                
                
                Six
      Months Ended2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      sales
                
                $
                53,951,899
                
                
                $
                47,278,486
                
                
                $
                111,128,043
                
                
                $
                93,162,519Cost
      of goods sold
                
                
                39,691,912
                
                
                
                32,183,374
                
                
                
                80,500,282
                
                
                
                63,065,496Gross
      profit
                
                
                14,259,987
                
                
                
                15,095,112
                
                
                
                30,627,761
                
                
                
                30,097,023Operating
      expenses:Fulfillment
                
                
                3,782,845
                
                
                
                2,026,028
                
                
                
                6,985,951
                
                
                
                3,732,188Sales
      and marketing
                
                
                5,134,178
                
                
                
                3,150,962
                
                
                
                8,883,448
                
                
                
                6,298,129General
      and administrative
                
                
                7,342,990
                
                
                
                4,088,490
                
                
                
                12,969,927
                
                
                
                8,150,37516,260,013
                
                
                
                9,265,480
                
                
                
                28,839,326
                
                
                
                18,180,692Operating
      (loss) income
                
                
                (2,000,026
                )
                
                
                5,829,632
                
                
                
                1,788,435
                
                
                
                11,916,331Other
      income (expense):Interest
      income
                
                
                32,360
                
                
                
                21,127
                
                
                
                60,869
                
                
                
                42,254Interest
      expense
                
                
                (150,136
                )
                
                
                (56,552
                )
                
                
                (277,256
                )
                
                
                (238,812
                )Other
      income (expense)
                
                
                4,482
                
                
                
                1,267
                
                
                
                16,079
                
                
                
                23,872(113,294
                )
                
                
                (34,158
                )
                
                
                (200,308
                )
                
                
                (172,686
                )(Loss)
      income before income taxes
                
                
                (2,113,320
                )
                
                
                5,795,474
                
                
                
                1,588,127
                
                
                
                11,743,645Income
      tax benefit (expense)
                
                
                692,060
                
                
                
                (2,256,809
                )
                
                
                (504,063
                )
                
                
                (4,554,494
                )Net
      (loss) income
                
                $
                (1,421,260
                )
                
                $
                3,538,665
                
                
                $
                1,084,064
                
                
                $
                7,189,151Basic
      per share information:Net
      (loss) income available to common stockholders
                
                $
                (0.05
                )
                
                $
                0.15
                
                
                $
                0.04
                
                
                $
                0.31Weighted
      average shares outstanding
                
                
                27,730,690
                
                
                
                22,880,780
                
                
                
                27,642,960
                
                
                
                22,880,780Diluted
      per share information:Net
      (loss) income available to common stockholders
                
                $
                (0.05
                )
                
                $
                0.15
                
                
                $
                0.04
                
                
                $
                0.31Weighted
      average shares outstanding
                
                
                27,730,690
                
                
                
                23,476,033
                
                
                
                28,448,891
                
                
                
                23,481,562
 See Notes
to Consolidated Financial Statements.
 2
 
 Vitacost.com, Inc.
 
 Consolidated
Statements of Stockholders' Equity
 For
the Six Months Ended June 30, 2010 (unaudited)
  Additional
                
                
                Accumulated
      OtherCommon
      Stock
                
                
                Paid-In
                
                
                Comprehensive
                
                
                RetainedShares
                
                
                Amount
                
                
                Capital
                
                
                Income
                
                
                Earnings
                
                
                TotalBalance,
      December 31, 2009
                
                
                27,488,353
                
                
                $
                275
                
                
                $
                71,932,256
                
                
                
                -
                
                
                $
                2,567,111
                
                
                $
                74,499,642Stock
      options exercised
                
                
                267,100
                
                
                
                3
                
                
                
                847,114
                
                
                
                -
                
                
                
                -
                
                
                
                847,117Stock
      based compensationexpense
                
                
                -
                
                
                
                -
                
                
                
                349,473
                
                
                
                -
                
                
                
                -
                
                
                
                349,473Income tax benefit on stockoptions
      exercised
                
                
                -
                
                
                
                -
                
                
                
                532,724
                
                
                
                -
                
                
                
                -
                
                
                
                532,724Unrealized
      gains related tosecurities available
      for sale
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                $
                3,838
                
                
                
                -
                
                
                
                3,838Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,084,064
                
                
                
                1,084,064Balance,
      June 30, 2010
                
                
                27,755,453
                
                
                $
                278
                
                
                $
                73,661,567
                
                
                $
                3,838
                
                
                $
                3,651,175
                
                
                $
                77,316,858
 
 See Notes
to Consolidated Financial Statements.
  3
  Vitacost.com,
      Inc.Consolidated
      Statements of Cash FlowsFor the Six
      Months Ended June 30, 2010 and 2009
    (unaudited)2010
                
                
                2009Cash Flows From Operating
      ActivitiesNet
      income
                
                $
                1,084,064
                
                
                $
                7,189,151Adjustments to reconcile net
      income to net cashprovided by operating
      activities:Depreciation
                
                
                2,403,344
                
                
                
                1,700,052Amortization of
      intangibles
                
                
                2,250
                
                
                
                2,251Amortization of premium on debt
      securities available for sale
                
                
                334,631
                
                
                
                -Change in fair value of interest
      rate swap
                
                
                48,475
                
                
                
                (191,287
                )Stock based compensation
      expense
                
                
                349,473
                
                
                
                226,301Deferred
      taxes
                
                
                83,970
                
                
                
                950,000Provision for inventory
      reserve
                
                
                239,894
                
                
                
                (98
                )(Gain) loss on disposition of
      property and equipment and other assets
                
                
                -
                
                
                
                (1,078
                )Changes in assets and
      liabilities:(Increase) decrease
      in:Accounts
      receivable
                
                
                (115,210
                )
                
                
                (266,604
                )Other
      receivables
                
                
                (52,369
                )
                
                
                (134,007
                )Inventory
                
                
                (2,746,073
                )
                
                
                (2,875,171
                )Prepaid
      expenses
                
                
                (827,892
                )
                
                
                (1,055,141
                )Increase (decrease)
      in:Accounts
      payable
                
                
                5,922,578
                
                
                
                (2,511,121
                )Deferred
      revenue
                
                
                (1,164,891
                )
                
                
                59,392Accrued
      expenses
                
                
                1,915,614
                
                
                
                290,424Income taxes
      payable
                
                
                (51,221
                )
                
                
                2,452,859Net cash
      provided by operating activities
                
                
                7,426,637
                
                
                
                5,835,923Cash Flows From Investing
      ActivitiesProceeds from disposition of
      property, equipmentand intangible
      assets
                
                
                14,057
                
                
                
                12,932Payments for the purchase of
      property and equipment
                
                
                (14,309,737
                )
                
                
                (3,450,321
                )Decrease (increase) in
      deposits
                
                
                4,464,560
                
                
                
                (105,322
                )Purchase of securities available
      for sale
                
                
                (12,022,343
                )
                
                
                -Proceeds from maturities of
      securities available for sale
                
                
                12,305,000
                
                
                
                -Net cash used
      in investing activities
                
                
                (9,548,463
                )
                
                
                (3,542,711
                )Cash Flows From Financing
      ActivitiesPrincipal payments on notes
      payable
                
                
                (548,790
                )
                
                
                (546,698
                )Net borrowings on line of
      credit
                
                
                (2,136,108
                )
                
                
                (1,801,135
                )Repayments on related party note
      payable
                
                
                -
                
                
                
                (500,000
                )Repayments on capital lease
      obligation
                
                
                (30,517
                )
                
                
                (28,055
                )Proceeds from the exercise of
      stock options
                
                
                847,117
                
                
                
                13,813Stock based tax
      benefit
                
                
                532,724
                
                
                
                1,058,584Payments for redemption of common
      stock
                
                
                -
                
                
                
                (500,000
                )Net cash used
      in financing activities
                
                
                (1,335,574
                )
                
                
                (2,303,491
                )Net
      decrease
                
                
                (3,457,400
                )
                
                
                (10,279
                )Cash and cash
      equivalents:Beginning
                
                
                8,658,157
                
                
                
                61,326Ending
                
                $
                5,200,757
                
                
                $
                51,047(Continued)
  4
  Vitacost.com,
Inc.
 
 Consolidated
Statements of Cash Flows (Continued)
 For
the Three Months Ended June 30, 2010 and 2009 (unaudited)
 
 2010
                
                
                2009Supplemental
      Disclosures of Cash Flow InformationCash
      payments for:Interest
                
                $
                228,781
                
                
                $
                430,099Income
      taxes
                
                $
                1,422,025
                
                
                $
                -Supplemental
      Schedule of Noncash Investing and Financing ActivitiesProperty
      and equipment purchased through notes payable
                
                $
                -
                
                
                $
                279,571
  See Notes
to Consolidated Financial Statements.
  5
  Note 1.  Nature of Business and Significant
Accounting Policies
  Nature of
business:  Vitacost.com, Inc.  (“Vitacost” or the “Company”)
is involved in the distribution of nutritional supplements as an internet-based
retailer.  Vitacost was incorporated in 1994 and entered the
internet-based retailing area in 1999.  Vitacost sells a proprietary
and internally developed line of nutraceuticals as well as a selection of other
manufacturers’ brand-name vitamin products.  The Company distributes
products from two primary locations in North Carolina and Nevada.
 
 Basis of
presentation:  The accompanying unaudited consolidated financial
statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America for interim
financial reporting and Rule 10-01 of Regulation S-X.  Accordingly,
they do not include all of the information and related footnotes that would
normally be required by accounting principles generally accepted  in
the United States of America for complete financial reporting.  These
unaudited consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the year ended
December 31, 2009.
 
 The
accompanying unaudited consolidated financial statements include all adjustments
(consisting of a normal recurring nature) that management considers necessary
for a fair statement of financial information for the interim
periods.  Interim results are not necessarily indicative of the
results that may be expected for the remainder of the year ending December 31,
2010.
 
 Principals of
consolidation:  The consolidated financial statements include
the accounts of Vitacost and any wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
 
 Earnings per
share:  The Company computes earnings per share by dividing net
income by the weighted-average number of common shares outstanding during the
period.  Diluted earnings per share is computed by giving effect to
all potentially dilutive common shares, including stock options. The following
table reconciles basic weighted-average shares outstanding to diluted
weighted-average shares outstanding for the three and six months ended June 30,
2010 and 2009:
  Three Months
      Ended June 30,
                                    
                                    
                                    Six Months
      Ended June 30,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2010
                                    
                                    
                                    2009Weighted-average shares
      outstanding -basic
                                    
                                    
                                    27,730,690
                                    
                                    
                                    
                                    22,880,780
                                    
                                    
                                    
                                    27,642,960
                                    
                                    
                                    
                                    22,880,780Stock
      options
                                    
                                    
                                    -
                                    
                                    
                                    
                                    595,253
                                    
                                    
                                    
                                    805,931
                                    
                                    
                                    
                                    600,782Weighted-average shares
      outstanding -diluted
                                    
                                    
                                    27,730,690
                                    
                                    
                                    
                                    23,476,033
                                    
                                    
                                    
                                    28,448,891
                                    
                                    
                                    
                                    23,481,562
 For the
periods where the Company reported losses, all common stock equivalents are
excluded from the computation of diluted earnings per share, since the result
would be antidilutive.  Securities that could potentially dilute
earnings per share in the future, but which were not included in the calculation
of diluted earnings per share because to do so would have been antidilutive for
the periods presented, are as follows:
  Three Months
      Ended June 30,
                                
                                
                                Six Months
      Ended June 30,2010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009Antidilutive common stock
      equivalents excluded fromdiluted earnings per
      share
                                
                                
                                1,354,833
                                
                                
                                
                                1,732,243
                                
                                
                                
                                481,000
                                
                                
                                
                                1,732,243
 Securities available for
sale: Available-for-sale securities consist of investment grade municipal
debt securities not classified as trading or
held-to-maturity.  Available-for-sale securities are stated at fair
value and unrealized holding gains and losses, net of the related deferred tax
effect, are reported as a separate component of stockholders'
equity.  Premiums and discounts on investments in debt securities are
amortized over the contractual lives of those securities.  The method
of amortization results in a constant effective yield on those securities (the
interest method).  Interest on debt securities is recognized in income
as earned.  Realized gains and losses, including losses from declines
in value of specific securities determined by management to be
other-than-temporary, are included in income.  Realized gains and
losses are determined on the basis of the average cost of the securities
sold. The aggregate fair value of securities available for sale as of June
30, 2010 and December 31, 2009 is $35,173,777 and $35,787,227 respectively,
which approximates cost.   The fair value of available-for-sale
securities by contractual maturity as of June 30, 2010, is as
follows:
  6
 
 June
      30,2010Due
      within one year
                
                $
                9,358,745Due
      after one year through three years
                
                
                4,850,238Due
      after three years
                
                
                20,964,794$
                35,173,777
 Derivative financial
instruments:  The Company’s risk management policy is to use
derivative financial instruments, as appropriate, to manage the interest expense
related to the debt with variable interest rates.  These instruments
are not designated as hedges for financial reporting purposes; accordingly,
gains and losses related to fair value are reflected in the statement of
operations at each reporting date.  During 2007, the Company entered
into two interest rate swap agreements with initial notional amounts of
$3,360,000 and $1,849,263, respectively.  These swaps require the
Company to pay a fixed rate of 6.81% and 6.85%, respectively, and receive a
floating interest payment based on LIBOR plus 1.4% and 1.75%,
respectively.  During 2008, the Company entered into another interest
rate swap agreement with an initial notional amount of $2,573,884, which
requires the Company to pay a fixed rate of 6.03%, and receive a floating
interest payment based on LIBOR plus 2.5%.  As of June 30, 2010 and
December 31, 2009, these interest rate swaps had a fair value of ($517,194) and
($468,719), respectively.  Changes in fair value are included in
interest expense in the accompanying statements of operations.  The
fair value of the interest rate derivatives is based on valuation models that
take into account items such as maturity dates, interest rate yield curves, the
Company’s creditworthiness and that of the counterparty and other
data.  The data sources that are significant are level 2 in the fair
value hierarchy as defined by the relevant accounting literature.
 
 Fair value of financial
instruments:  In September 2006, the Financial Accounting
Standards Board (FASB) issued authoritative guidance which defines fair value,
establishes a framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements.  The Company adopted the guidance at the beginning of
fiscal year 2008.  The guidance applies to all assets and liabilities
that are being measured and reported on a fair value basis.  It
requires new disclosure that establishes a framework for measuring fair value in
GAAP and expands disclosure about fair value measurements.  This
statement enables the reader of the financial statements to assess the inputs
used to develop those measurements by establishing a hierarchy for ranking the
quality and reliability of the information used to determine fair
values.  The statement requires that assets and liabilities carried at
fair value will be classified and disclosed in one of the following three
categories:
  Level
      1:
              Quoted
      market prices in active markets for identical assets or
      liabilities.
  Level
      2:
              Observable
      market based inputs or unobservable inputs that are corroborated by market
      data.
  Level
      3:
              Unobservable
      inputs that are not corroborated by market
data.
  In
determining the appropriate levels, the Company performs a detailed analysis of
the assets and liabilities that are subject to the guidance.
 
 The
Company’s investment in securities available for sale are valued based on
observable market based inputs that are corroborated by market data and are
therefore considered a level 2 item.
 
 The
Company’s interest rate swaps are pay-fixed, receive-variable interest rate
swaps based on LIBOR swap rate.  The LIBOR swap rate is observable at
commonly quoted intervals for the full term of the swaps and therefore is
considered a level 2 item.  For the six month period ended June 30,
2010, the application of valuation techniques applied to similar assets and
liabilities has been consistent and there have been no significant transfers
within the first two levels of the hierarchy.
 
 The
carrying amounts of other financial instruments, including cash, cash
equivalents, accounts receivable, other receivables, accounts payable and
short-term borrowings approximate fair value due to the short maturity of these
instruments.  The carrying amount of long-term debt approximates fair
value because the interest rates fluctuate with market interest rates or the
fixed rates are based on current rates offered to the Company for debt with
similar terms and maturities.
  7
 Concentration of credit
risk:  The Company’s cash and cash equivalents are held by one
major financial institution; however, risk of loss is mitigated by the size and
financial health of the institution.
  Recent accounting
pronouncements: In January 2010, authoritative guidance was issued
requiring enhanced disclosures for fair value measurements.  Entities
are required to separately disclose the amounts and reasons of significant
transfers in and out of the first two levels of the fair value hierarchy.
Entities are also required to present information about purchases, sales,
issuance and settlements of fair value measurements within the third level of
the fair value hierarchy on a gross basis.  As this guidance is
disclosure related only, the adoption of this guidance did not have a material
impact on the Company’s consolidated financial statements.
  Note
2. Inventory
  Inventory
consists of the following as of June 30, 2010 and December 31,
2009:
  June
      30,
                
                
                December
      31,2010
                
                
                2009Raw
      materials
                
                $
                4,265,108
                
                
                $
                4,734,772Work
      in process
                
                
                3,604,981
                
                
                
                3,687,426Finished
      goods
                
                
                23,324,625
                
                
                
                20,026,44331,194,714
                
                
                
                28,448,641Less:
      Inventory reserve
                
                
                591,651
                
                
                
                351,757$
                30,603,063
                
                
                $
                28,096,884
 
 Note
3. Property and Equipment
  Property
and equipment consists of the following as of June 30, 2010 and December 31,
2009:
 
 June
      30,
                
                
                December
      31,2010
                
                
                2009Buildings
      and building improvements
                
                $
                8,022,896
                
                
                $
                7,904,870Furniture,
      fixtures and equipment
                
                
                19,810,937
                
                
                
                12,912,917Computers
                
                
                4,100,624
                
                
                
                3,644,992Software
                
                
                6,493,140
                
                
                
                4,800,157Leasehold
      improvements
                
                
                2,315,401
                
                
                
                1,117,712Land
                
                
                460,000
                
                
                
                460,00041,202,998
                
                
                
                30,840,648Less
      accumulated depreciation
                
                
                11,777,364
                
                
                
                9,374,01929,425,634
                
                
                
                21,466,629Construction-in-progress
                
                
                4,428,605
                
                
                
                495,274$
                33,854,239
                
                
                $
                21,961,903
 Construction-in-progress
primarily relates to the expansion project of the Lexington, NC distribution
facility.  The project is expected to be completed in
2011.
 
 Note
4. Notes Payable
 
 In
February 2007 and in connection with the purchase of a new distribution center
in North Carolina, the Company entered into a promissory note in the amount of
$3,360,000.  The promissory note is to be repaid in monthly payments
of principal and interest at a rate equal to one-month LIBOR plus 1.4% (1.75 %
and 1.63% as of June 30, 2010 and December 31, 2009, respectively) with final
payment of $2,699,166 due on February 14, 2014.  The loan is
collateralized by the property purchased with a depreciated cost of $3,760,412
as of June 30, 2010.  The note contains certain restrictive covenants,
which require minimum financial ratios, including funded debt to EBITDA and a
fixed coverage ratio.  As of June 30, 2010, the Company was in
compliance with these covenants.  Borrowings outstanding as of June
30, 2010 and December 31, 2009 were $3,074,216 and 3,121,903,
respectively.
   8
  On April
23, 2007, the Company entered into a promissory note in the amount of $1,535,467
with a bank to finance the purchase of machinery and equipment.  The note
bears interest at one-month LIBOR plus 1.75% (2.10 % and 1.98% as of June 30,
2010 and December 31, 2009, respectively) and is payable in 60 monthly principal
and interest payments.  The note contains certain restrictive covenants,
which require minimum financial ratios, including funded debt to EBITDA and a
fixed coverage ratio.  The note is collateralized by the equipment that was
purchased with a depreciated cost of $1,016,734 as of June 30, 2010.   On
October 11, 2007, the note was amended to increase borrowings by $313,796,
totaling $1,849,263.  Borrowings outstanding as of June 30, 2010 and
December 31, 2009 were $862,990 and $1,047,916, respectively.
 
 On
November 13, 2007, the Company entered into a promissory note in the amount of
$2,521,797 with a bank to finance the purchase of machinery and
equipment.  The note bears interest at one-month LIBOR plus 2.5% (2.85
% and 2.73% as of June 30, 2010 and December 31, 2009, respectively) and is
payable in 60 monthly principal and interest payments.  The note was
amended on December 19, 2007 to increase the balance to
$2,617,509.  The note is collateralized by equipment purchased with a
depreciated cost of $1,742,259 as of June 30, 2009.  Borrowings
outstanding on the note as of June 30, 2010 and December 31, 2009 were
$1,308,755 and $1,570,506, respectively.
 
 June
      30,
                
                
                December
      31,2010
                
                
                2009Note
      payable to a bank, payable in monthly installments of principal
      andinterest
      at 1-month LIBOR plus 1.4% (1.75% as of June 30,2010),
      collateralized by land and building.
                
                $
                3,074,716
                
                
                $
                3,121,903Note
      payable to a bank, bearing interest at 1-month LIBOR plus
      1.75%,(2.10%
      as of June 30, 2010), payable in monthly installments ofprincipal
      and interest  through March 2012, collateralized by
      equipment
                
                
                862,990
                
                
                
                1,047,916Note
      payable to a bank, payable in monthly installments of principal
      andinterest
      at 1-month LIBOR plus 2.5% (2.85% as of June 30,2010),
      collateralized by equipment
                
                
                1,308,755
                
                
                
                1,570,506Note
      payable to a financial institution, payable in monthly installments
      ofprincipal
      and interest  through July 2011, at a fixed rate of
      6.98%,unsecured
                
                
                115,760
                
                
                
                170,6865,362,221
                
                
                
                5,911,011Less
      current maturities
                
                
                1,107,881
                
                
                
                1,090,969$
                4,254,340
                
                
                $
                4,820,042
  Aggregate
future maturities required on long-term debt as of June 30, 2010 are as
follows:
  Year
      EndingDecember
      31,2010
                
                $
                542,1792011
                
                
                1,064,1052012
                
                
                940,6452013
                
                
                116,2652014
                
                
                2,699,027$
                5,362,221
  9
   Line of Credit: On
August 3, 2007, the Company entered into a loan and security agreement with a
financial institution with maximum borrowings equal to the lesser of $8,000,000
or the borrowing base amount which is based on a percentage of eligible
inventories as outlined in the agreement.  The initial term of the
agreement was through July 2010, which has been extended 90 days through October
2010.  The Company is currently in the process of renewing the
agreement under similar terms and conditions for at least one year from the date
of expiration of the 90 day extension  unless terminated by either
party.  The agreement also provides for letters of credit up to
$1,000,000.  Borrowings bear interest at a rate equal to one-month LIBOR
plus 2.75% (3.10% and 2.98% as of June 30, 2010 and December 31, 2009,
respectively).  The line of credit is collateralized by all personal
property of the Company excluding equipment.  Under the agreement, the
Company must maintain certain ratios.   Borrowings outstanding as
of June 30, 2010 and December 31, 2009 were $1,322,075 and $3,458,183,
respectively, which includes $1,322,075 and $753,183, respectively, of checks
issued which have not cleared the bank.  Amounts available on the line
of credit as of June 30, 2010 were $6,677,925.
 
 Note
5.        Stock Option Plan
 
 A summary
of our stock option activity related to common stock for the six months ended
June 30, 2010 and 2009 is as follows:
 
 2010
                
                
                2009Weighted-
                
                
                
                
                
                Weighted-Average
                
                
                
                
                
                AverageExercise
                
                
                
                
                
                ExerciseShares
                
                
                Price
                
                
                Shares
                
                
                PriceOutstanding
      at beginning of period
                
                
                2,745,880
                
                
                $
                5.67
                
                
                
                2,722,400
                
                
                $
                4.07Granted
                
                
                247,250
                
                
                
                9.72
                
                
                
                29,200
                
                
                
                7.50Exercised
                
                
                (267,100
                )
                
                
                2.95
                
                
                
                (52,400
                )
                
                
                7.50Forfeited
                
                
                (12,900
                )
                
                
                7.93
                
                
                
                (110,000
                )
                
                
                4.25Outstanding
      at period end
                
                
                2,713,130
                
                
                
                6.27
                
                
                
                2,589,200
                
                
                
                3.86Exercisable
      at period end
                
                
                2,139,515
                
                
                $
                5.76
                
                
                
                2,080,697
                
                
                $
                3.64
 The
weighted average grant date fair value for options granted during the six months
ended June 30, 2010 was $6.52.
 
 As of
June 30, 2010 and 2009, there was approximately $2,292,615 and $1,045,000,
respectively, of total unrecognized compensation cost, net of estimated
forfeitures related to stock options granted under the Company’s stock incentive
plan, which is expected to be recognized over a weighted average period of 1.37
years.
  Note
6.    Contingencies
  Except as
set forth below, we are not subject to any litigation other than routine
litigation of a nature customary for companies of our size. Except as set forth
below, we have had no significant litigation and have not been the subject of
any product liability litigation.
 
 Securities Class
Action
 
 On May
24, 2010, a putative class action complaint was filed in the United States
District Court for the Southern District of Florida against us and certain
current and former officers and directors by a stockholder on behalf of herself
and other stockholders who purchased our common stock between September 24, 2009
and April 20, 2010, captioned Miyahira v. Vitacost.com, Inc., Ira P. Kerker,
Richard P. Smith, Stewart Gitler, Allen S. Josephs, David N. Ilfeld, Lawrence A
Pabst, Eran Ezra, and Robert G. Trapp, Case 9:10-cv-80644-KLR.  The
complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder.  The complaint
alleges that defendants violated the federal securities laws during the period
by, among other things, disseminating false and misleading statements and/or
concealing material facts concerning our current and prospective business and
financial results.  The complaint also alleges that as a result of
these actions our stock price was artificially inflated during the class
period.  The complaint seeks unspecified compensatory damages, costs,
and expenses.  We believe plaintiff's allegations are without merit
and we plan to vigorously defend against them.
   10
  
 Derivative Action and
Shareholder Demand
 
 On July
16, 2010 we received a letter from a shareholder's counsel demanding that our
board of directors take action against certain current and former officers and
directors.  The factual allegations in the letter mirror those in the
class action lawsuit discussed above.  On July 20, 2010, a complaint
was filed by an alleged shareholder in the Circuit Court of the 15th Judicial
Circuit for Palm Beach County, Florida, purportedly on our
behalf.  The suit names our directors and certain officers as
defendants. The factual allegations in this lawsuit mirror those in the class
action lawsuit as well, and the claims are for breach of fiduciary duty, unjust
enrichment, abuse of control, gross mismanagement, insider trading, and waste of
corporate assets.  The complaint seeks disgorgement, restitution,
costs, expenses, and non-monetary equitable relief.  We are currently
evaluating the best course of action to take in response to the demand letter
and the derivative complaint.
 
 
 Note
7. Income Taxes
  The
effective tax rate for the six months ended June 30, 2010 was 31.7% compared to
38.7% for the six months ended June 30, 2009.  The decrease is
primarily related to the disqualifying disposition of incentive stock options
exercised during the six months ended June 30, 2010, which resulted in a related
tax benefit.
 
  Note
8. Subsequent Events
  On August
3, 2010, the Company entered into an agreement for management consulting
services to be provided to the Company for a period of six
months.  The Company is required to pay $140,000 over the term of the
agreement, with an additional $140,000 due if certain conditions of the
agreement are met.  The Company will also grant 200,000 nonqualified
stock options in connection with the agreement.





11





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




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




This
quarterly report on Form 10-Q contains forward-looking statements.
Forward-looking statements include statements concerning our plans, objectives,
goals, strategies, future events, future revenue or performance, capital
expenditures, financing needs and other information that is not historical
information. In some cases, you can identify forward-looking statements by
terminology such as “may,” “will,” “should,” “could,” “expect,” “plan,”
“anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential,”
“continue,” “seek” or the negative of these terms or other comparable
terminology or by discussions of strategy.




All
forward-looking statements, including, without limitation, our examination of
historical operating trends, are based upon our current expectations and various
assumptions. We believe there is a reasonable basis for our expectations and
beliefs, but they are inherently uncertain. We may not realize our expectations
and our beliefs may not prove correct. Actual results could differ materially
from those described or implied by such forward-looking statements. Important
factors that could cause our actual results to differ materially from the
forward-looking statements are set forth in this quarterly report on Form 10-Q,
under the heading “Risk Factors” and include, among others:





·
            the current global economic
      downturn or recession;




·
            difficulty expanding our
      manufacturing and distribution
  facilities;




·
            significant competition in our
      industry;




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




·
            the incurrence of material
      product liability and product recall
  costs;




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




·
            our inability to defend
      intellectual property
claims;




·
            our failure to keep pace with the
      demands of our customers for new
  products;




·
            disruptions in our manufacturing
      system, including our information technology systems, or losses of
      manufacturing certifications;
and




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




Overview




We are a
leading online retailer and direct marketer, based on annual sales volume, of
health and wellness products such as vitamins, dietary supplements, minerals,
herbs, anti-oxidants, organic body and personal care products and sports
nutrition and health foods. We offer our customers a selection of approximately
40,000 SKUs from over 1,800 third-party brands, such as New Chapter, Atkins,
Nature’s Way, Twinlab, Burt’s Bees and Kashi and our own proprietary brands,
Nutraceutical Sciences Institute (NSI), Cosmeceutical Sciences Institute (CSI),
Best of All, Smart Basics and Walker Diet. We sell these products directly to
consumers through our website, www.vitacost.com, as well as through our
catalogs. Our website and catalogs allow customers to easily browse and purchase
products at prices, on average, 30% to 60% lower than manufacturers’ suggested
retail prices. We strive to offer our customers the broadest product selection
of healthy living products at the best value, while providing superior customer
service and timely and accurate delivery.






12




We began
operations in 1994 as a catalog retailer of third-party vitamins and supplements
under the name Nature’s Wealth Company. In 1999, we launched Vitacost.com and
introduced our proprietary vitamins and supplements under our NSI brand. In
2000, we began operations under the name Vitacost.com, Inc. During 2008, we
began manufacturing certain proprietary products in-house and currently have the
capacity to produce in excess of one billion tablets and capsules annually.
Since our inception, we have shipped over ten million orders to our
customers.




Sources
of Revenue




We derive
our revenue principally through the sale of product and freight billed to
customers associated with the shipment of product. Our primary source of revenue
is the sale of products. For the six months ended June 30, 2010, product net
sales accounted for approximately 93% of our total net sales with freight
comprising the remainder. The ratio of product sales and freight remained
unchanged compared to the six months ended June 30, 2009.




Cost
of Goods Sold and Operating Expenses




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




Fulfillment.  Fulfillment
expenses include the costs of warehouse supplies, equipment, maintenance,
employees and rent.




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




General and Administrative.
General and administrative expenses consist of management and executive
compensation, credit card fees, professional services and general corporate
expenses, such as depreciation, amortization, telephone expenses, office
supplies, repairs and maintenance on office equipment and new product research
and development.




Results
of Operations




The
following table sets forth certain condensed consolidated statements of
operations data as a percentage of net sales for the three and six months ended
June 30, 2010 and 2009, respectively:





Three
      Months Ended
                                                          
                                                          
                                                          Six
      Months EndedJune
      30,
                                                          
                                                          
                                                          June
      30,(unaudited)
                                                          
                                                          
                                                          (unaudited)2010
                                                          
                                                          
                                                          2009
                                                          
                                                          
                                                          2010
                                                          
                                                          
                                                          2009Net
      sales
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          100.0
                                                          
                                                          
                                                          
                                                          100.0
                                                          %
                                                          
                                                          
                                                          100.0Cost
      of goods sold
                                                          
                                                          
                                                          73.6
                                                          
                                                          
                                                          
                                                          68.1
                                                          
                                                          
                                                          
                                                          72.4
                                                          
                                                          
                                                          
                                                          67.7Gross
      profit
                                                          
                                                          
                                                          26.4
                                                          
                                                          
                                                          
                                                          31.9
                                                          
                                                          
                                                          
                                                          27.6
                                                          
                                                          
                                                          
                                                          32.3Operating
      expenses:Fulfillment
                                                          
                                                          
                                                          7.0
                                                          
                                                          
                                                          
                                                          4.3
                                                          
                                                          
                                                          
                                                          6.3
                                                          
                                                          
                                                          
                                                          4.0Sales
      and marketing
                                                          
                                                          
                                                          9.5
                                                          
                                                          
                                                          
                                                          6.7
                                                          
                                                          
                                                          
                                                          8.0
                                                          
                                                          
                                                          
                                                          6.8General
      and administrative
                                                          
                                                          
                                                          13.6
                                                          
                                                          
                                                          
                                                          8.6
                                                          
                                                          
                                                          
                                                          11.7
                                                          
                                                          
                                                          
                                                          8.7Total
      operating expense
                                                          
                                                          
                                                          30.1
                                                          
                                                          
                                                          
                                                          19.6
                                                          
                                                          
                                                          
                                                          26.0
                                                          
                                                          
                                                          
                                                          19.5Operating
      (loss) income
                                                          
                                                          
                                                          (3.7
                                                          )
                                                          
                                                          
                                                          12.3
                                                          
                                                          
                                                          
                                                          1.6
                                                          
                                                          
                                                          
                                                          12.8Net
      (loss) income
                                                          
                                                          
                                                          (2.6
                                                          )
                                                          
                                                          
                                                          7.5
                                                          
                                                          
                                                          
                                                          1.0
                                                          
                                                          
                                                          
                                                          7.7


13





Comparison
of Three Months Ended June 30, 2010 to Three Months Ended June 30,
2009





Three
      Months EndedJune
      30,(unaudited)
                                  
                                  
                                  $
                                  
                                  
                                  %2010
                                  
                                  
                                  2009
                                  
                                  
                                  Increase
                                  
                                  
                                  IncreaseThird-party
      product
                                  
                                  $
                                  35,203
                                  
                                  
                                  $
                                  29,956
                                  
                                  
                                  $
                                  5,247
                                  
                                  
                                  
                                  17.5
                                  %Nutraceutical
      Sciences Institute and other proprietary products
                                  
                                  
                                  15,007
                                  
                                  
                                  
                                  14,334
                                  
                                  
                                  
                                  673
                                  
                                  
                                  
                                  4.7
                                  %Billed
      shipping and handling
                                  
                                  
                                  3,742
                                  
                                  
                                  
                                  2,988
                                  
                                  
                                  
                                  754
                                  
                                  
                                  
                                  25.2
                                  %Net
      sales
                                  
                                  
                                  53,952
                                  
                                  
                                  
                                  47,278
                                  
                                  
                                  
                                  6,674
                                  
                                  
                                  
                                  14.1
                                  %Cost
      of goods sold
                                  
                                  
                                  39,692
                                  
                                  
                                  
                                  32,183
                                  
                                  
                                  
                                  7,509
                                  
                                  
                                  
                                  23.3
                                  %Gross
      profit
                                  
                                  $
                                  14,260
                                  
                                  
                                  $
                                  15,095
                                  
                                  
                                  $
                                  (835
                                  )
                                  
                                  
                                  -5.5
                                  %




Net Sales.  Net
sales increased by $6.7 million, or 14.1%, to $54.0 million for the three months
ended June 30, 2010 from $47.3 million for the three months ended June 30,
2009. Net sales of our proprietary products, including our NSI-branded
products, increased by $673,000, or 4.7%, from $14.3 million for the three
months ended June 30, 2009 to $15.0 million for the three months ended June 30,
2010, and sales of third-party products increased by $5.2 million, or 17.5%,
from $30.0 million for the three months ended June 30, 2009 to $35.2 million for
the three months ended June 30, 2010. Third-party product includes
advertising and fees earned from affiliate programs of approximately $186,000
and $512,000 for the three months ended June 30, 2010 and 2009,
respectively.





The
increase in net sales was primarily the result of an increase in our customer
base and the number of shipped orders compared to the three months ended June
30, 2009. Sales were negatively impacted in the early part of the quarter as we
continued to work through the manufacturing logistics issue previously disclosed
in the first quarter. During the process of reducing the level of back orders to
normalized levels, we reduced marketing spending to not exacerbate the
fulfillment issue on our proprietary products. Sales were also negatively
impacted in the latter part of the second quarter from an increased competitive
environment as many companies offered deep discounts. We responded and increased
promotional spending including offering “free shipping” with various order sizes
and product combinations.





Cost of Goods Sold. Cost of
goods sold increased by $7.5 million, or 23.3%, to $39.7 million for the three
months ended June 30, 2010 from $32.2 million for the three months ended June
30, 2009. As a percentage of net sales, cost of goods sold
increased to  73.6% for the three months ended June 30, 2010
from  68.1% for the three months ended June 30, 2009 primarily due to
a shift in product mix to higher cost third-party product and higher shipping
costs due to an increased level of split shipped orders as we continued to work
down the backlog of orders mentioned above in the early part of the
quarter.




Gross
Profit.  Gross profit decreased by $835,125, or 5.5%, to $14.3
million for the three months ended June 30, 2010 from $15.1 million for the
three months ended June 30, 2009 and gross profit as a percentage of net sales
decreased to 26.4% in the three months ended June 30, 2010 from 31.9% in the
three months ended June 30, 2009.




Fulfillment. Fulfillment
expense increased $1.8 million, or 86.7%, to $3.8 million for the three months
ended June 30, 2010 from $2.0 million for the three months ended June 30, 2009.
As a percentage of net sales, fulfillment expense increased to 7.0% for the
three months ended June 30, 2010 from 4.3% for the three months ended June 30,
2009. The increase in fulfillment expense was primarily attributable to
increased sales volume and operating duplicate distribution centers in Las Vegas
in the early part of the quarter in order to ensure there were no disruptions to
our service levels during transition to the new distribution
center.




Sales and Marketing . Sales
and marketing expense increased approximately $2.0 million, or 62.9%, to $5.1
million for the three months ended June 30, 2010 from $3.2 million for the three
months ended June 30, 2009. As a percentage of sales, sales and marketing
expense increased to 9.5% for the three months ended June 30, 2010 from 6.7% for
the three months ended June 30, 2009. The increase in sales and marketing
expense was primarily due to increased spending on renting of certain customer
lists of approximately $650,000, on-line advertising of approximately $600,000
and an increase in staffing levels in our call center to meet increased call
volume of approximately $200,000.





General and Administrative.
General and administrative expenses increased $3.3 million, or 79.6%, to $7.3
million for the three months ended June 30, 2010 from $4.1 million for the three
months ended June 30, 2009. The increase was primarily due to the proxy
solicitation and other non-recurring items of approximately $1.4 million,
increased depreciation expense primarily relating to the Las Vegas distribution
center and other costs associated with being a public company.


14





Interest Expense. Interest
expense increased approximately $93,600, or 165.5%, to $150,100 for the three
months ended June 30, 2010 from $56,500 for the three months ended June 30,
2009. The increase was primarily a result of the change in the fair value of our
interest rate swaps.




Income Tax Benefit (Expense).
In the second quarter 2010, we recorded an income tax benefit of $692,000
compared to an income tax expense of $2.3 million for the three months ended
June 30, 2009.  This is a result of our recognizing a loss before
income taxes of $2,113,320 for the three months ended June 30, 2010 compared to
income before taxes of $5,795,474 for the three months ended June 30, 2009 and a
decrease in the effective tax rate to 32.7% from 38.9% primarily related to the
disqualifying disposition of incentive stock options exercised in the three
month period ended June 30, 2010





Comparison
of Six Months Ended June 30, 2010 to Six Months Ended June 30, 2009





Six
      Months EndedJune
      30,(unaudited)
                                                    
                                                    
                                                    $
                                                    
                                                    
                                                    %2010
                                                    
                                                    
                                                    2009
                                                    
                                                    
                                                    Increase
                                                    
                                                    
                                                    IncreaseThird-party
      product
                                                    
                                                    $
                                                    72,351
                                                    
                                                    
                                                    $
                                                    58,329
                                                    
                                                    
                                                    $
                                                    14,022
                                                    
                                                    
                                                    
                                                    24.0
                                                    %Nutraceutical
      Sciences Institute and other proprietary products
                                                    
                                                    
                                                    30,896
                                                    
                                                    
                                                    
                                                    28,339
                                                    
                                                    
                                                    
                                                    2,557
                                                    
                                                    
                                                    
                                                    9.0
                                                    %Billed
      shipping and handling
                                                    
                                                    
                                                    7,881
                                                    
                                                    
                                                    
                                                    6,494
                                                    
                                                    
                                                    
                                                    1,387
                                                    
                                                    
                                                    
                                                    21.4
                                                    %Net
      sales
                                                    
                                                    
                                                    111,128
                                                    
                                                    
                                                    
                                                    93,162
                                                    
                                                    
                                                    
                                                    17,966
                                                    
                                                    
                                                    
                                                    19.3
                                                    %Cost
      of goods sold
                                                    
                                                    
                                                    80,500
                                                    
                                                    
                                                    
                                                    63,065
                                                    
                                                    
                                                    
                                                    17,435
                                                    
                                                    
                                                    
                                                    27.6
                                                    %Gross
      profit
                                                    
                                                    $
                                                    30,628
                                                    
                                                    
                                                    $
                                                    30,097
                                                    
                                                    
                                                    $
                                                    531
                                                    
                                                    
                                                    
                                                    1.8
                                                    %




Net Sales.  Net
sales increased by $18.0 million, or 19.3%, to $111.1 million for the six months
ended June 30, 2010 from $93.2 million for the six months ended June 30,
2009. Net sales of our proprietary products, including our NSI-branded
products, increased by $2.6 million, or 9.0%, from $28.3 million for the six
months ended June 30, 2009 to $30.9 million for the six months ended June 30,
2010, and sales of third-party products increased by $14.0 million, or 24.0%,
from $58.3 million for the six months ended June 30, 2009 to $72.4 million for
the six months ended June 30, 2010. Third-party product includes
advertising and fees earned from affiliate programs of approximately $529,000
and $1,041,000 for the six months ended June 30, 2010 and 2009,
respectively.








Cost of Goods Sold. Cost of
goods sold increased by $17.4 million, or 27.6%, to $80.5 million for the six
months ended June 30, 2010 from $63.1 million for the six months ended June 30,
2009. As a percentage of net sales, cost of goods sold increased to 72.4%
for the six months ended June 30, 2010 from 67.7% for the six months ended June
30, 2009 primarily due to a shift in product mix to higher cost third-party
product and higher shipping costs due to an increased level of split shipped
orders as we worked to reduce the backlog of orders caused by the manufacturing
logistics issue.


15





Gross Profit. As a result of
the changes discussed in net sales and cost of goods sold, gross profit
increased by $531,000, or 1.8%, to $30.6 million for the six months ended June
30, 2010 from $30.1 million for the six months ended June 30, 2009 and gross
profit as a percentage of net sales decreased to 27.6% for the six months ended
June 30,2010 from 32.3% for the six months ended June 30, 2009.





Fulfillment. Fulfillment
expense increased $3.3 million, or 87.2%, to $7.0 million for the six months
ended June 30, 2010 from $3.7 million for the six months ended June 30, 2009. As
a percentage of net sales, fulfillment expense increased to 6.3% for the
six months ended June 30, 2010 from 4.0% for the six months ended June 30, 2009.
The increase in fulfillment expense was primarily attributable to increased
sales volume and operating duplicate distribution centers in Las Vegas in order
to ensure there were no disruptions to our service levels while the new
distribution center was officially opened.





Sales and Marketing. Sales
and marketing expense increased approximately $2.6 million, or 41.0%, to $8.9
million for the six months ended June 30, 2010 from $6.3 million for the six
months ended June 30, 2009. As a percentage of sales, sales and marketing
expense increased to 8.0% for the six months ended June 30, 2010 from 6.8% for
the six months ended June 30, 2009.  The increase in sales and
marketing expense was primarily due to increased spending on renting of certain
customer lists of approximately $650,000, on-line advertising of approximately
$800,000 and an increase in staffing levels in our call center to meet increased
call volume of approximately $300,000.





General and Administrative.
General and administrative expenses increased $4.8 million, or 59.1%, to $13.0
million for the six months ended June 30, 2010 from $8.2 million for the six
months ended June 30, 2009. The increase was primarily due to the proxy
solicitation and other non-recurring items of approximately $1.4 million,
increased depreciation expense primarily relating to the Las Vegas distribution
center and other costs associated with being a public company.





Interest Expense. Interest
expense increased approximately $38,500, or 16.1%, to $277,300 for the six
months ended June 30, 2010 from $238,800 for the six months ended June 30,
2009.




Income Tax Benefit (expense)
.. Income tax expense decreased by approximately $4.1 million, or 88.9%, to
$504,100 for the six months ended June 30, 2010. The change is primarily the
result of lower income before tax of $1,588,127 for the six months
ended June 30, 2010 compared to $11,742,645 for the six months ended June 30,
2009 and a decrease in the effective tax rate to 31.7% from 38.8% primarily
related to the disqualifying disposition of incentive stock options exercised in
the six months ended June 30, 2010, which resulted in a related tax
benefit.





Liquidity and Capital
Resources The significant components of our working capital are cash and
cash equivalents, inventory and accounts receivable, primarily from credit cards
processors, reduced by accounts payable, accrued expenses and our line of
credit. Cash and cash equivalents consist of cash and money market
accounts.  The working capital characteristics of our business allow
us to collect cash from sales to customers within a few business days of the
related sale, while we typically have extended payment terms with our suppliers.
At June 30, 2010, we had $5,200,757 in cash and cash equivalents and $35,173,777
of securities available for sale and a working capital surplus of $44.5 million
compared with $8,658,157 in cash and cash equivalents and $35,787,227 of
securities available for sale, and working capital surplus of approximately
$49.6  million at December 31, 2009.





During
the six months ended June 30, 2010, the Company expended approximately $14.3
million on property and equipment related primarily to the expansion of the
distribution facilities at Las Vegas, NV and Lexington, NC.




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




We
believe that cash and cash equivalents currently on hand and cash flows from
operations will be sufficient to continue our operations for the next 12 months.
Our future capital requirements will depend on many factors,
including:




·
              the rate of our revenue
      growth;


·
              the timing and extent of
      expenditures to enhance our website, network infrastructure, and
      transaction processing systems;


·
              the extent of our advertising and
      marketing programs;


·
              the levels of the inventory we
      maintain; and


·
            other factors relating to our
      business.


16





We may
require additional financing in the future in order to execute our operating
plan. We cannot predict whether future financing, if any, will be in the form of
equity, debt, or a combination of both. We may not be able to obtain additional
funds on a timely basis, on acceptable terms, or at all.




Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements.




Critical
Accounting Policies and Estimates




Our
discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with generally accepted accounting principles of the U.S.
(GAAP).





The
preparation of these financial statements requires estimates and assumptions
that affect the reported amounts of assets and liabilities, revenue and expenses
and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. Critical accounting policies are
those that are the most important to the portrayal of our financial condition
and results of operations and require our most difficult, subjective and complex
judgments as a result of the need to make estimates about the effect of matters
that are inherently uncertain. Our most critical accounting policies pertain to
revenue recognition, stock based compensation, inventories, income taxes,
goodwill and intangible assets. In applying such policies, we exercise our best
judgment and best estimates. For a further discussion of these Critical
Accounting Policies and Estimates, refer to Management’s Discussion and Analysis
of Financial Condition and Results of Operations in our Annual Report on Form
10-K, as filed with the Securities and Exchange Commission on March 30, 2010 for
the year ended December 31, 2009.




ITEM
3.       QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




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




ITEM 4.       CONTROLS AND
PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and our Chief
Financial and Accounting Officer, evaluated the effectiveness of our disclosure
controls and procedures as of June 30, 2010. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
means controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our disclosure
controls and procedures as of June 30, 2010, our Chief Executive Officer and
Chief Financial and Accounting Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance
level.




Changes
in Internal Control over Financial Reporting




There was
no change in our internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the
Exchange Act that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




17




PART
II.     OTHER INFORMATION




ITEM
1.       LEGAL PROCEEDINGS





Except as
set forth below, we are not subject to any litigation other than routine
litigation of a nature customary for companies of our size. Except as set forth
below, we have had no significant litigation and have not been the subject of
any product liability litigation.





Securities Class
Action





On May
24, 2010, a putative class action complaint was filed in the United States
District Court for the Southern District of Florida against us and certain
current and former officers and directors by a stockholder on behalf of herself
and other stockholders who purchased our common stock between September 24, 2009
and April 20, 2010, captioned Miyahira v. Vitacost.com, Inc., Ira P. Kerker,
Richard P. Smith, Stewart Gitler, Allen S. Josephs, David N. Ilfeld, Lawrence A
Pabst, Eran Ezra, and Robert G. Trapp, Case 9:10-cv-80644-KLR.  The
complaint asserts claims under Sections 11, 12(a)(2), and 15 of the Securities
Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 promulgated thereunder.  The complaint
alleges that defendants violated the federal securities laws during the period
by, among other things, disseminating false and misleading statements and/or
concealing material facts concerning our current and prospective business and
financial results.  The complaint also alleges that as a result of
these actions our stock price was artificially inflated during the class
period.  The complaint seeks unspecified compensatory damages, costs,
and expenses.  We believe plaintiff's allegations are without merit
and we plan to vigorously defend against them.





Derivative Action and
Shareholder Demand





On July
16, 2010 we received a letter from a shareholder's counsel demanding that our
board of directors take action against certain current and former officers and
directors.  The factual allegations in the letter mirror those in the
class action lawsuit discussed above.  On July 20, 2010, a complaint
was filed by an alleged shareholder in the Circuit Court of the 15th Judicial
Circuit for Palm Beach County, Florida, purportedly on our
behalf.  The suit names our directors and certain officers as
defendants. The factual allegations in this lawsuit mirror those in the class
action lawsuit as well, and the claims are for breach of fiduciary duty, unjust
enrichment, abuse of control, gross mismanagement, insider trading, and waste of
corporate assets.  The complaint seeks disgorgement, restitution,
costs, expenses, and non-monetary equitable relief.  We are currently
evaluating the best course of action to take in response to the demand letter
and the derivative complaint.





ITEM
1A.   RISK FACTORS





In
addition to the risk factors included below, please refer to the Risk Factors
section of our Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2010, for a complete explanation for the risk
factors affecting our business.  Other than the risk factors included
below, there have been no material changes from the risk factors previously
disclosed on our Form 10-K, as filed with the Securities and Exchange Commission
on March 30, 2010.




Complying
with healthcare reform legislation could increase our costs and have a material
adverse effect on our business, financial condition or results of
operations.




-
              The
      Patient Protection and Affordable Care Act was signed into law in March
      2010.   This act may require us to make additional
      contributions to the health care programs currently offered to our
      employees, which may have an adverse impact on our results of operations
      and cash flows.




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




During
the quarter ended June 30, 2010, we made no sales of unregistered
securities.





ITEM
3.       DEFAULTS UPON SENIOR
SECURITIES




None.




ITEM
4.       [REMOVED AND
RESERVED.]




ITEM
5.       OTHER INFORMATION




None.


18





ITEM
6.       EXHIBITS




Exhibits3(i)
              
              Amended
      and Restated Certificate of Incorporation of Vitacost.com, Inc.
      (1)3(i)
              
              Amendment
      to Amended and Restated Certificate of Incorporation of Vitacost.com, Inc.
      (2)3(ii)
              
              Amended
      and Restated Bylaws of Vitacost.com, Inc. (3)3.1
              
              Certificate
      of Designation of Series A Junior Participating Preferred Stock of
      Vitacost.com, Inc. (4)4.1
              
              Rights
      Agreement dated as of March 24, 2010 by and between the Registrant and
      Mellon Investor Services LLC, as Rights
    Agent.  (5)31.1
              
              Certification
      of Chief Executive Officer Pursuant to Rule 13(a)-14(a) of the Securities
      Exchange Act of 1934 as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of Chief Financial Officer Pursuant to Rule 13(a)-14(a) of the Securities
      Exchange Act of 1934 as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
              
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.(1)
              
              Filed
      as Exhibit 3(i)(1) to Registrant’s Registration Statement on Form S-1
      filed with the Securities and Exchange Commission on June 20,
      2007.(2)
              
              Filed
      as Exhibit 3(i)(2) to Amendment No. 5 to Registrant’s Registration
      Statement on Form S-1 filed with the Securities and Exchange Commission on
      August 24, 2009.(3)
              
              Filed
      as Exhibit 3(ii) to Amendment No. 5 to Registrant’s Registration Statement
      on Form S-1 filed with the Securities and Exchange Commission on August
      24, 2009.(4)
              
              Filed
      as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on March 24, 2010.(5)
              
              Filed
      as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the
      Securities and Exchange Commission on March 24,
  2010.





SIGNATURES




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




VITACOST.COM,
      INC.By:  /s/ IRA P.
      KERKERName:  Ira
      P. KerkerTitle:  Chief
      Executive OfficerBy:  /s/ RICHARD P.
      SMITHName:  Richard
      P. SmithTitle:  Chief
      Financial and Accounting OfficerDate:
      August 16, 2010


19





INDEX
TO EXHIBITS





Exhibits3(i)(1)
              
              Amended
      and Restated Certificate of Incorporation of Vitacost.com, Inc.
      (1)3(i)(2)
              
              Amendment
      to Amended and Restated Certificate of Incorporation of Vitacost.com, Inc.
      (2)3(ii)
              
              Amended
      and Restated Bylaws of Vitacost.com, Inc. (3)3.1
              
              Certificate
      of Designation of Series A Junior Participating Preferred Stock of
      Vitacost.com, Inc. (4)4.1
              
              Rights
      Agreement dated as of March 24, 2010 by and between the Registrant and
      Mellon Investor Services LLC, as Rights
    Agent.  (5)31.1
              
              Certification
      of Chief Executive Officer Pursuant to Rule 13-14(a) of the Securities
      Exchange Act of 1934 as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of Chief Financial Officer Pursuant to Rule 13-14(a) of the Securities
      Exchange Act of 1934 as Adopted Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
              
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.(1)
              
              Filed
      as Exhibit 3(i)(1) to Registrant’s Registration Statement on Form S-1
      filed with the Securities and Exchange Commission on June 20,
      2007.(2)
              
              Filed
      as Exhibit 3(i)(2) to Amendments No. 5 to Registrant’s Registration
      Statement on Form S-1 filed with the Securities and Exchange Commission on
      August 24, 2009.(3)
              
              Filed
      as Exhibit 3(ii) to Amendments No. 5 to Registrant’s Registration
      Statement on Form S-1 filed with the Securities and Exchange Commission on
      August 24, 2009.




20