Company Quick10K Filing
Vitamin Shoppe
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 24 $91
10-Q 2019-11-06 Quarter: 2019-09-28
10-Q 2019-08-08 Quarter: 2019-06-29
10-Q 2019-05-08 Quarter: 2019-03-30
10-K 2019-02-26 Annual: 2018-12-29
10-Q 2018-11-07 Quarter: 2018-09-29
10-Q 2018-08-08 Quarter: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-K 2018-02-27 Annual: 2017-12-30
10-Q 2017-11-08 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-07-01
10-Q 2017-05-10 Quarter: 2017-04-01
10-K 2017-03-01 Annual: 2016-12-31
10-Q 2016-11-02 Quarter: 2016-09-24
10-Q 2016-08-03 Quarter: 2016-06-25
10-Q 2016-05-04 Quarter: 2016-03-26
10-K 2016-02-23 Annual: 2015-12-26
10-Q 2015-11-04 Quarter: 2015-09-26
10-Q 2015-08-05 Quarter: 2015-06-27
10-Q 2015-05-06 Quarter: 2015-03-28
10-K 2015-02-24 Annual: 2014-12-27
10-Q 2014-11-04 Quarter: 2014-09-27
10-Q 2014-08-05 Quarter: 2014-06-28
10-Q 2014-05-07 Quarter: 2014-03-29
10-K 2014-02-25 Annual: 2013-12-28
10-Q 2013-11-05 Quarter: 2013-09-28
10-Q 2013-08-06 Quarter: 2013-06-29
10-Q 2013-05-07 Quarter: 2013-03-30
10-K 2013-02-26 Annual: 2012-12-29
10-Q 2012-11-06 Quarter: 2012-09-29
10-Q 2012-08-07 Quarter: 2012-06-30
10-Q 2012-05-08 Quarter: 2012-03-31
10-K 2012-02-28 Annual: 2011-12-31
10-Q 2011-10-28 Quarter: 2011-09-24
10-Q 2011-08-01 Quarter: 2011-06-25
10-Q 2011-05-04 Quarter: 2011-03-26
10-K 2011-03-09 Annual: 2010-12-25
10-Q 2010-11-02 Quarter: 2010-09-25
10-Q 2010-08-05 Quarter: 2010-06-26
10-Q 2010-04-30 Quarter: 2010-03-27
10-K 2010-03-17 Annual: 2009-12-26
8-K 2019-12-16 M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Exhibits
8-K 2019-12-11 Shareholder Vote
8-K 2019-11-11 Enter Agreement, Exhibits
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-09-23 Other Events
8-K 2019-09-09 Other Events, Exhibits
8-K 2019-08-08 Earnings, Exhibits
8-K 2019-08-07 Enter Agreement, Other Events, Exhibits
8-K 2019-06-06 Shareholder Vote
8-K 2019-05-22 Officers, Regulation FD, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-05-02 Officers, Exhibits
8-K 2019-03-25 Officers, Regulation FD, Exhibits
8-K 2019-02-26 Earnings, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-10-18 Regulation FD, Other Events, Exhibits
8-K 2018-08-24 Officers
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-07-30 Officers, Regulation FD, Exhibits
8-K 2018-07-23 Officers, Regulation FD, Exhibits
8-K 2018-06-28 Shareholder Vote, Exhibits
8-K 2018-06-25 Officers, Exhibits
8-K 2018-06-07 Officers
8-K 2018-06-04 Other Events
8-K 2018-05-18 Officers
8-K 2018-05-15 Other Events
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-04-24 Officers
8-K 2018-04-20 Enter Agreement, Regulation FD, Exhibits
8-K 2018-03-29 Other Events
8-K 2018-02-27 Officers, Exhibits
8-K 2018-02-27 Earnings, Regulation FD, Exhibits
VSI 2019-09-28
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 vsi-09282019x10qxex311.htm
EX-31.2 vsi-09282019x10qxex312.htm
EX-32.1 vsi-09282019x10qxex321.htm
EX-32.2 vsi-09282019x10qxex322.htm

Vitamin Shoppe Earnings 2019-09-28

VSI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
WMK 1,111 1,602 560 3,527 926 62 173 1,059 26% 6.1 4%
SFS 400 2,499 2,205 4,770 728 -112 50 996 15% 19.7 -4%
NGVC 255 320 165 894 237 10 48 243 27% 5.1 3%
GNC 207 1,688 1,651 2,227 754 51 91 966 34% 10.6 3%
VSI 91 816 630 1,079 353 -5 34 77 33% 2.3 -1%
CBD 87 52,849 0 0 0 0 87 0%
IFMK 19 110 111 115 19 -13 -8 18 16% -2.4 -12%
IMKTA
VLGEA 489 173 1,225 454 25 66 -56 37% -0.8 5%
DTEA 172 114 0 106 -9 -9 -0 0.0 -5%

10-Q 1 vsi-09282019x10q.htm 10-Q Document


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________________________________________________________________________________
FORM 10-Q
_________________________________________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from                      to                     .
Commission file number: 001-34507
_________________________________________________________________________________________
VITAMIN SHOPPE, INC.
(Exact name of registrant as specified in its charter)
________________________________________________________________________________________
Delaware
 
11-3664322
(State or Other Jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
300 Harmon Meadow Blvd.
Secaucus, New Jersey 07094
(Addresses of Principal Executive Offices, including Zip Code)
(201) 868-5959
(Registrant’s Telephone Number, Including Area Code)
_________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
VSI
The New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):




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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 October 26, 2019 Vitamin Shoppe, Inc. had 24,100,415 shares of common stock outstanding.
 



Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, those that contain words such as “believes”, “expects”, “potential”, “continues”, “may”, “will”, “should”, “seeks”, “predicts”, “intends”, “plans”, “estimates”, “anticipates”, “target”, “could” or the negative version of these words or other comparable words.
These statements are subject to various risks and uncertainties, many of which are outside our control, including, among others, our ability to consummate the proposed merger with Franchise Group, Inc. and the risks associated therewith, our ability to obtain the stockholder approval necessary to consummate the proposed merger, the satisfaction or waiver of other conditions in the merger agreement, the outcome of the current and any future legal proceedings that have or may be instituted against us and others related to the merger agreement in connection with the pending merger transaction, the risk that the pending merger transaction may not be completed in the time frame expected by the parties or at all, strength of the economy, changes in the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, implementation of our strategy, trade restrictions, availability of suitable store locations at appropriate terms, the availability of raw materials, compliance with regulations, certifications and best practices with respect to the development, manufacture, sales and marketing of the Company's products, management changes, maintaining appropriate levels of inventory, changes in tax policy, e-commerce relationships, disruptions of manufacturing, warehouse or distribution facilities or information systems, political environment and other specific factors discussed herein and in other Securities and Exchange Commission (the “SEC”) filings by us (including our reports on Forms 10-K and 10-Q filed with the SEC).
We believe that all forward-looking statements are based on reasonable assumptions when made; however, we caution that it is impossible to predict actual results or outcomes or the effects of risks, uncertainties or other factors on anticipated results or outcomes with certainty and that, accordingly, one should not place undue reliance on these statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update these statements in light of subsequent events or developments. Actual results may differ materially from anticipated results or outcomes discussed in any forward-looking statement.

3


TABLE OF CONTENTS
 
 
 
Page
No.
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
EX 31.1
 
 
EX 31.2
 
 
EX 32.1
 
 
EX 32.2
 
 
EX-101
INSTANCE DOCUMENT
 
EX-101
SCHEMA DOCUMENT
 
EX-101
CALCULATION LINKBASE DOCUMENT
 
EX-101
DEFINITION LINKBASE DOCUMENT
 
EX-101
LABELS LINKBASE DOCUMENT
 
EX-101
PRESENTATION LINKBASE DOCUMENT
 

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VITAMIN SHOPPE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
September 28, 2019
 
December 29, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,995

 
$
2,668

Inventories
181,815

 
189,273

Prepaid expenses and other current assets
23,601

 
27,921

Total current assets
221,411

 
219,862

Right-of-use assets
424,868

 

Property and equipment, net of accumulated depreciation and amortization of $338,044 and $312,977 in 2019 and 2018, respectively
112,755

 
123,002

Intangibles, net
2,283

 
11,088

Deferred taxes
35,695

 
31,659

Other long-term assets
3,250

 
2,468

Total assets
$
800,262

 
$
388,079

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Revolving credit facility
$

 
$

Accounts payable
38,203

 
39,789

Accrued expenses and other current liabilities
56,337

 
65,508

Short-term lease liabilities
96,756

 
500

Total current liabilities
191,296

 
105,797

Long-term lease liabilities
368,828

 
934

Convertible notes, net
57,422

 
55,570

Deferred rent

 
37,034

Other long-term liabilities
308

 
403

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 250,000,000 shares authorized and no shares issued and outstanding at September 28, 2019 and December 29, 2018

 

Common stock, $0.01 par value; 400,000,000 shares authorized, 24,366,706 shares issued and 24,060,705 shares outstanding at September 28, 2019, and 24,234,651 shares issued and 23,974,031 shares outstanding at December 29, 2018
244

 
242

Additional paid-in capital
86,990

 
85,853

Treasury stock, at cost; 306,001 shares at September 28, 2019 and 260,620 shares at December 29, 2018
(7,625
)
 
(7,314
)
Retained earnings
102,799

 
109,560

Total stockholders’ equity
182,408

 
188,341

Total liabilities and stockholders’ equity
$
800,262

 
$
388,079

See accompanying notes to consolidated financial statements.

5




VITAMIN SHOPPE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
$
253,133

 
$
276,636

 
$
807,341

 
$
865,703

Cost of goods sold
172,565

 
189,945

 
541,687

 
591,665

Gross profit
80,568

 
86,691

 
265,654

 
274,038

Selling, general and administrative expenses
82,493

 
82,747

 
254,071

 
260,263

Impairment charges on fixed, intangible and right-of-use assets
521

 
718

 
11,404

 
1,551

Income (loss) from operations
(2,446
)
 
3,226

 
179

 
12,224

Gain on extinguishment of debt

 

 

 
16,229

Interest expense, net
1,080

 
1,289

 
3,221

 
5,429

Income (loss) before provision (benefit) for income taxes
(3,526
)
 
1,937

 
(3,042
)
 
23,024

Provision (benefit) for income taxes
(117
)
 
57

 
440

 
6,204

Net income (loss) from continuing operations
(3,409
)
 
1,880

 
(3,482
)
 
16,820

Net loss from discontinued operations, net of tax

 
(3,626
)
 

 
(15,245
)
Net income (loss)
$
(3,409
)
 
$
(1,746
)
 
$
(3,482
)
 
$
1,575

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
23,716,403

 
23,545,842

 
23,646,617

 
23,477,982

Diluted
23,716,403

 
23,545,842

 
23,646,617

 
23,743,856

 
 
 
 
 
 
 
 
Net income (loss) from continuing operations per common share
 
 
 
 
 
 

Basic
$
(0.14
)
 
$
0.08

 
$
(0.15
)
 
$
0.72

Diluted
$
(0.14
)
 
$
0.08

 
$
(0.15
)
 
$
0.71

 
 
 
 
 
 
 
 
Net loss from discontinued operations per common share
 
 
 
 
 
 
 
Basic
$

 
$
(0.15
)
 
$

 
$
(0.65
)
Diluted
$

 
$
(0.15
)
 
$

 
$
(0.64
)
 
 
 
 
 
 
 
 
Net income (loss) per common share
 
 
 
 
 
 
 
Basic
$
(0.14
)
 
$
(0.07
)
 
$
(0.15
)
 
$
0.07

Diluted
$
(0.14
)
 
$
(0.07
)
 
$
(0.15
)
 
$
0.07

See accompanying notes to consolidated financial statements.



6


VITAMIN SHOPPE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
 Figures may not sum due to rounding

 
Common Stock
 
Treasury Stock
 
Additional
Paid-In Capital
 
Retained Earnings
 
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
 
 
Total
Balance at December 29, 2018
24,234,651

 
$
242

 
(260,620
)
 
$
(7,314
)
 
$
85,853

 
$
109,560

 
$
188,341

Adoption of ASU 2016-02

 

 

 

 

 
(3,279
)
 
(3,279
)
Net income

 

 

 

 

 
3,497

 
3,497

Equity compensation

 

 

 

 
632

 

 
632

Issuance of shares
197,205

 
2

 

 

 
(2
)
 

 

Purchases of treasury stock

 

 
(41,347
)
 
(287
)
 

 

 
(287
)
Cancellation of restricted shares
(63,274
)
 
(1
)
 

 

 
1

 

 

Issuance of shares under employee stock purchase plan
20,844

 

 

 

 
84

 

 
84

Balance at March 30, 2019
24,389,426

 
244

 
(301,967
)
 
(7,602
)
 
86,568

 
109,778

 
188,988

Net loss

 

 

 

 

 
(3,570
)
 
(3,570
)
Equity compensation

 

 

 

 
314

 

 
314

Issuance of shares
60,140

 
1

 

 

 
(1
)
 

 

Purchases of treasury stock

 

 
(1,105
)
 
(5
)
 

 

 
(5
)
Cancellation of restricted shares
(148,073
)
 
(1
)
 

 

 
1

 

 

Issuance of shares under employee stock purchase plan
34,207

 

 

 

 
150

 

 
150

Balance at June 29, 2019
24,335,700

 
243

 
(303,072
)
 
(7,607
)
 
87,034

 
106,208

 
185,878

Net loss

 

 

 

 

 
(3,409
)
 
(3,409
)
Equity compensation

 

 

 

 
(110
)
 

 
(110
)
Issuance of shares
13,890

 

 

 

 

 

 

Purchases of treasury stock

 

 
(2,929
)
 
(18
)
 

 

 
(18
)
Cancellation of restricted shares
(2,793
)
 

 

 

 

 

 

Issuance of shares under employee stock purchase plan
19,909

 

 

 

 
66

 

 
66

Balance at September 28, 2019
24,366,706

 
$
244

 
(306,001
)
 
$
(7,625
)
 
$
86,990

 
$
102,799

 
$
182,408




7


 
Common Stock
 
Treasury Stock
 
Additional
Paid-In Capital
 
Retained Earnings
 
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
 
 
Total
Balance at December 30, 2017
24,220,509

 
$
242

 
(198,561
)
 
$
(7,010
)
 
$
88,823

 
$
113,312

 
$
195,367

Net loss

 

 

 

 

 
(3,859
)
 
(3,859
)
Equity compensation

 

 

 

 
875

 

 
875

Issuance of restricted shares
288,149

 
3

 

 

 
(3
)
 

 

Purchases of treasury stock

 

 
(42,339
)
 
(185
)
 

 

 
(185
)
Cancellation of restricted shares
(5,492
)
 

 

 

 

 

 

Issuance of shares under employee stock purchase plan
29,149

 

 

 

 
107

 

 
107

Repurchases of Convertible Notes

 

 

 

 
(5,849
)
 

 
(5,849
)
Balance at March 31, 2018
24,532,315

 
245

 
(240,900
)
 
(7,195
)
 
83,953

 
109,453

 
186,456

Net income

 

 

 

 

 
7,180

 
7,180

Equity compensation

 

 

 

 
56

 

 
56

Issuance of restricted shares
17,539

 

 

 

 

 

 

Purchases of treasury stock

 

 
(13,100
)
 
(59
)
 

 

 
(59
)
Cancellation of restricted shares
(276,344
)
 
(3
)
 

 

 
3

 

 

Repurchases of Convertible Notes

 

 

 

 
(26
)
 

 
(26
)
Balance at June 30, 2018
24,273,510

 
243

 
(254,000
)
 
(7,254
)
 
83,985

 
116,633

 
193,607

Net loss

 

 

 

 

 
(1,746
)
 
(1,746
)
Equity compensation

 

 

 

 
809

 

 
809

Issuance of restricted shares
40,770

 

 

 

 

 

 

Purchases of treasury stock

 

 
(2,717
)
 
(31
)
 

 

 
(31
)
Cancellation of restricted shares
(90,734
)
 
(1
)
 

 

 
1

 

 

Issuance of shares under employee stock purchase plan
25,052

 

 

 

 
86

 

 
86

Balance at September 29, 2018
24,248,598

 
$
242

 
(256,717
)
 
$
(7,285
)
 
$
84,881

 
$
114,887

 
$
192,725


See accompanying notes to consolidated financial statements.






8


VITAMIN SHOPPE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(3,482
)
 
$
1,575

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of fixed assets, intangible assets and finance leases right-of-use assets
30,708

 
32,002

Impairment charges on intangible assets
9,000

 
8,174

Impairment charges on fixed assets
994

 
9,591

Impairment charges on right-of-use assets
1,410

 

Loss on sale of FDC Vitamins, LLC

 
203

Amortization of deferred financing fees
329

 
485

Gain on extinguishment of debt

 
(16,229
)
Amortization of debt discount on convertible notes
1,612

 
2,570

Deferred income taxes
(2,876
)
 
14,478

Deferred rent

 
(2,835
)
Non-cash portion of lease expense for operating leases
69,692

 

Equity compensation expense
837

 
1,740

Tax benefits on exercises of equity awards
438

 
743

Changes in operating assets and liabilities:
 
 
 
Accounts receivable

 
(1,458
)
Inventories
7,458

 
33,925

Prepaid expenses and other current assets
4,483

 
(1,143
)
Other long-term assets
(1,039
)
 
(35
)
Accounts payable
(1,428
)
 
(3,994
)
Accrued expenses and other current liabilities
(10,032
)
 
(2,147
)
Operating lease liabilities
(73,617
)
 

Other long-term liabilities
(475
)
 
(46
)
Net cash provided by operating activities
34,012

 
77,599

Cash flows from investing activities:
 
 
 
Capital expenditures
(19,447
)
 
(24,655
)
Net proceeds on sale of FDC Vitamins, LLC

 
14,847

Trademarks and other intangible assets
(469
)
 
(250
)
Net cash used in investing activities
(19,916
)
 
(10,058
)
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
10,000

 
125,000

Repayments of borrowings under revolving credit facility
(10,000
)
 
(137,000
)
Purchases of convertible notes

 
(57,158
)
Bank overdraft
(386
)
 
1,881

Issuance of shares under employee stock purchase plan
301

 
194

Purchases of treasury stock
(311
)
 
(275
)
Other financing activities
(373
)
 
(339
)

9


Net cash used in financing activities
(769
)
 
(67,697
)
Effect of exchange rate changes on cash and cash equivalents

 
1

Net increase (decrease) in cash and cash equivalents
13,327

 
(155
)
Cash and cash equivalents beginning of period
2,668

 
1,947

Cash and cash equivalents end of period
$
15,995

 
$
1,792

Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
969

 
$
2,219

Income taxes paid (refunded)
$
350

 
$
(10,729
)
Supplemental disclosures of non-cash investing activities:
 
 
 
Liability for purchases of property and equipment
$
4,930

 
$
1,829

See accompanying notes to consolidated financial statements.

10


VITAMIN SHOPPE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Vitamin Shoppe, Inc. (“VSI”), is incorporated in the State of Delaware, and through its wholly-owned subsidiary, Vitamin Shoppe Industries Inc. (“Subsidiary” or “Industries” together with VSI, the “Company”), is an omni-channel specialty retailer of nutritional products. Sales of both national brands and our own brands of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products (“VMS products”) are made through VSI-operated retail stores, the internet and mobile devices to customers located primarily in the United States.
The consolidated financial statements as of September 28, 2019 and September 29, 2018 are unaudited. The consolidated balance sheet as of December 29, 2018 was derived from our audited financial statements. The Company currently operates through one business segment, retail, which includes Vitamin Shoppe and Super Supplements retail store formats and our e-commerce formats. In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. The interim financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with GAAP. The interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended December 29, 2018, as filed with the Securities and Exchange Commission on February 26, 2019 (the “Fiscal 2018 Form 10-K”). The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
The Company's fiscal year ends on the last Saturday in December. As used herein, the term “Fiscal Year” or “Fiscal” refers to a 52-week period, ending on the last Saturday in December. The results for the three and nine months ended September 28, 2019 and September 29, 2018 are each based on 13-week and 39-week periods, respectively.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the reporting period. Actual results could differ from those estimates.
The Company has reclassified its finance lease liabilities in its consolidated balance sheet as of December 29, 2018 to conform to current year presentation.
Except as noted below, the Company has considered all new accounting pronouncements and has concluded that there are no new pronouncements, issued but not yet effective, that may have a material impact on its results of operations, financial condition, or cash flows, based on current information.
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. ASU 2016-13 was issued by the FASB to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to be applied to credit loss estimates. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2019 and will be adopted using a modified-retrospective approach. The Company is evaluating ASU 2016-13 and currently expects this guidance will not have a material impact on its results of operations, financial condition, or cash flows, based on current information.
2. Agreement and Plan of Merger
On August 7, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Franchise Group, Inc. (formerly known as Liberty Tax, Inc.) (“Franchise Group”) and Valor Acquisition, LLC, a wholly owned subsidiary of Franchise Group (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Franchise Group (the “Merger”).
If the Merger is completed, the (i) stockholders of the Company will be entitled to receive $6.50 in cash (the “Per Share Price”), less any applicable withholding taxes, for each share of common stock of the Company owned by them, (ii) common stock of the Company will no longer be publicly traded and will be delisted from the New York Stock Exchange and (iii) common stock of the Company will be deregistered under the Securities Exchange Act of 1934, as amended, and the Company will no longer file periodic or current reports with the United States Securities and Exchange Commission.

11


The Company expects that the Merger will close during the fourth quarter of 2019, subject to the approval of the Company’s stockholders and other customary closing conditions.
3. Discontinued Operations
On May 7, 2018, the Company sold certain assets, including the Betancourt Nutrition® brand, and liabilities of FDC Vitamins, LLC d/b/a Nutri-Force Nutrition (“Nutri-Force”) to Arizona Nutritional Supplements, LLC (“ANS”). The parties also executed supply agreements in which the Company has agreed to purchase a total of $53.0 million annually of its private label products and Betancourt Nutrition® brand products from ANS through October 2023.
The results of operations of Nutri-Force for the three and nine months ended September 29, 2018 are classified as discontinued operations in the consolidated statements of operations.

Reconciliation of the Major Line Items Constituting Loss of Discontinued Operations to the After-Tax Loss of Discontinued Operations That Are Presented in the Statements of Operations
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
Major classes of line items constituting net loss on discontinued operations:
 
 
 
Net sales (1)
$
761

 
$
11,187

Cost of goods sold
2,417

 
9,756

Fixed assets impairment charges

 
7,236

Gross loss
(1,656
)
 
(5,805
)
Selling, general and administrative expenses
629

 
2,581

Intangible assets and fixed assets impairment charges

 
8,978

Discontinued operations loss
40

 
203

Loss before provision (benefit) for income taxes
(2,325
)
 
(17,567
)
Provision (benefit) for income taxes
1,301

 
(2,322
)
Net loss
$
(3,626
)
 
$
(15,245
)
 
 
 
 
(1)
Revenue related to a transition services agreement during the three and nine months ended September 29, 2018 was $0.8 million and $2.4 million, respectively.
Cash Flow Disclosures for Discontinued Operations
(in thousands)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
Cash flows provided by (used in) operating activities
$
936

 
$
(14,180
)
Cash flows provided by (used in) investing activities
$
(882
)
 
$
14,752

 
 
 
 
Depreciation and amortization
$

 
$
769

Capital expenditures
$

 
$
94

 
 
 
 

12


4. Goodwill and Intangible Assets
The following table discloses the carrying value of all intangible assets (in thousands):
 
September 28, 2019
 
December 29, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Accumulated Impairment Charges
 
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Accumulated Impairment Charges
 
Net
Intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
210,633

 
$

 
$
210,633

 
$

 
$
210,633

 
$

 
$
210,633

 
$

Tradenames – Indefinite-lived (1)
68,405

 

 
68,405

 

 
68,405

 

 
59,405

 
9,000

Tradenames – Definite-lived
6,233

 
3,950

 

 
2,283

 
5,764

 
3,676

 

 
2,088

 
$
285,271

 
$
3,950

 
$
279,038

 
$
2,283

 
$
284,802

 
$
3,676

 
$
270,038

 
$
11,088


(1)
During the second quarter of Fiscal 2019, the Company experienced a sustained reduction to its market capitalization. In addition, the Company revised its forecast for Fiscal 2019 and updated its long-range plan. Based on these factors, the Company concluded that an impairment trigger occurred and therefore an interim impairment test of the Vitamin Shoppe tradename was performed. The results of the interim impairment test indicated that the carrying value of the Vitamin Shoppe tradename exceeded its fair value. The Company recorded an impairment charge on the Vitamin Shoppe tradename of $9.0 million during the second quarter of Fiscal 2019, which represented the full remaining carrying value of this indefinite-lived tradename.
    For indefinite-lived tradenames, the Company utilizes the royalty relief method in its quantitative evaluations. Under the royalty relief method, a royalty rate is determined based on comparable licensing arrangements which is applied to the revenue projections for the applicable indefinite-lived tradename and the fair value is calculated using a discounted cash flow analysis. Cash flows are discounted using an internally derived weighted average cost of capital which reflects the costs of borrowing as well as the associated risk.
These measures of fair value for indefinite-lived tradenames, and related inputs, are considered Level 3 measures under the fair value hierarchy.
The useful lives of the Company’s definite-lived intangible assets are 10 years. The expected amortization expense on definite-lived intangible assets on the Company’s consolidated balance sheet at September 28, 2019, is as follows (in thousands):
 
 
 
Remainder of Fiscal 2019
$
91

Fiscal 2020
381

Fiscal 2021
381

Fiscal 2022
378

Fiscal 2023
335

Thereafter
717

 
$
2,283



13


5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (in thousands):
 
September 28, 2019
 
December 29, 2018
Accrued salaries and related expenses
$
11,889

 
$
24,048

Sales tax payable and related expenses
7,491

 
7,092

Deferred sales
4,024

 
5,455

Other accrued expenses
32,933

 
28,913

 
$
56,337

 
$
65,508

 

6. Credit Arrangements

Convertible Senior Notes due 2020

On December 9, 2015, the Company issued $143.8 million of its 2.25% Convertible Senior Notes due 2020 (the “Convertible Notes”). The Convertible Notes are senior unsecured obligations of VSI. Interest on the Convertible Notes is payable on June 1 and December 1 of each year until their maturity date of December 1, 2020. The Company may not redeem the Convertible Notes prior to the maturity date.
Prior to July 1, 2020, the remaining Convertible Notes will be convertible only under certain circumstances. The Convertible Notes are convertible at an initial conversion rate of 25.1625 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to a conversion price of approximately $39.74. The conversion rate is subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following certain corporate events that occur prior to the maturity date, the Company is required to increase, in certain circumstances, the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event including customary conversion rate adjustments in connection with a “make-whole fundamental change” as defined. Upon conversion, the Company may satisfy its conversion obligation by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at its election.
The Company allocated the principal amount of the Convertible Notes between its liability and equity components (see table below). The carrying amount of the liability component was determined by measuring the fair value of a similar debt instrument of similar credit quality and maturity that did not have the conversion feature. The carrying amount of the equity component, representing the embedded conversion option, was determined by deducting the fair value of the liability component from the principal amount of the Convertible Notes as a whole. The equity component was recorded to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the Convertible Notes over the carrying amount of the liability component was recorded as a debt discount, and is being amortized to interest expense using an effective interest rate of 3.8% over the term of the Convertible Notes. The Company allocated the total amount of transaction costs incurred to the liability and equity components using the same proportions as the proceeds from the Convertible Notes. Transaction costs attributable to the liability component were recorded as a direct deduction from the liability component of the Convertible Notes, and are being amortized to interest expense using the effective interest method through the maturity date. Transaction costs attributable to the equity component were netted with the equity component of the Convertible Notes in additional paid-in capital.
During the nine month period ending September 29, 2018, the Company repurchased $75.3 million in aggregate principal amount of its Convertible Notes for an aggregate purchase price of $57.2 million, which includes accrued interest of $0.3 million. The gain on extinguishment of the repurchased Convertible Notes was $16.2 million.


14


The Convertible Notes consist of the following components (in thousands):
 
September 28, 2019
 
December 29, 2018
Liability component:
 
 
 
  Principal
$
60,439

 
$
60,439

  Conversion feature
(17,115
)
 
(17,115
)
  Liability portion of debt issuance costs
(2,675
)
 
(2,675
)
  Amortization
16,773

 
14,921

  Net carrying amount
$
57,422

 
$
55,570

 
 
 
 
Equity component:
 
 
 
  Conversion feature
$
18,862

 
$
18,862

  Equity portion of debt issuance costs
(793
)
 
(793
)
  Deferred taxes
941

 
941

  Net carrying amount
$
19,010

 
$
19,010

 
 
 
 
In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions for which it paid an aggregate $26.4 million. In addition, the Company sold warrants for which it received aggregate proceeds of $13.0 million. The convertible note hedge transactions are expected generally to reduce potential dilution of the Company’s common stock upon any conversion of notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted notes. However, the warrant transaction could separately have a dilutive effect to the extent that the market value per share of the Company’s common stock exceeds the applicable strike price of the warrant transactions, which is approximately $52.99 at inception. As these transactions meet certain accounting criteria, the convertible note hedge and warrant transactions are recorded in stockholders’ equity, are not accounted for as derivatives and are not remeasured each reporting period.
The net proceeds from the Convertible Notes and related transactions of $125.7 million, net of commissions and offering costs of $4.6 million, were used to repurchase shares of the Company’s common stock under the Company’s share repurchase programs. Refer to Note 12., “Share Repurchase Programs” for additional information.
In connection with the repurchases of Convertible Notes, the convertible note hedge transactions and the warrant transaction noted above were reduced in ratable proportion to the face amount of Convertible Notes that were repurchased. The net proceeds received by the Company from these transactions were de minimis.
Revolving Credit Facility
As of September 28, 2019 and December 29, 2018, the Company had no borrowings outstanding on its Revolving Credit Facility (the “Revolving Credit Facility”).
The Revolving Credit Facility has a maturity date of May 9, 2022, provided that the maturity date would be any day on or after September 2, 2020 only if the Company did not on any such day have enough liquidity to retire its Convertible Notes then outstanding, if any.
Subject to the terms of the Revolving Credit Facility, the Company may borrow up to $90.0 million, with a Company option to increase the facility up to a total of $150.0 million. The availability under the Revolving Credit Facility is subject to a borrowing base calculated on the value of certain inventory as well as certain accounts receivable of the Company. The obligations thereunder are secured by a security interest in substantially all of the assets of the Company. Under the Revolving Credit Facility, VSI has guaranteed the Company’s obligations, and Industries and its wholly-owned subsidiaries have each guaranteed the obligations of the other respective entities. The Revolving Credit Facility provides for affirmative and negative covenants affecting the Company. The Revolving Credit Facility restricts, among other things, the Company’s ability to incur indebtedness, create or permit liens on the Company’s assets, declare or pay dividends and make certain other restricted payments, consolidate, merge or recapitalize, sell assets, make certain investments, loans or other advances, enter into transactions with affiliates, change our line of business, and restricts the types of hedging activities the Company can enter into. The largest amount borrowed during the nine months ended September 28, 2019 and September 29, 2018 was $10.0 million

15


and $44.0 million, respectively. The unused available line of credit under the Revolving Credit Facility at September 28, 2019 was $85.5 million.
Borrowings under the Revolving Credit Facility accrue interest, at the Company’s option, at the rate per annum based on an “alternative base rate” plus 0.00%, 0.125% or 0.25% or the adjusted Eurodollar rate plus 1.00%, 1.125% or 1.25%, in each case with the highest spread applicable in the event that the average excess collateral availability under the Revolving Credit Facility is less than 33% of the borrowing base availability under the Revolving Credit Facility, the second highest spread applicable in the event that the average excess collateral availability under the Revolving Credit Facility is less than 66% and greater than or equal to 33% of the borrowing base availability under the Revolving Credit Facility and the lowest spread applicable in the event that the average excess collateral availability under the Revolving Credit Facility is greater than or equal to 66% of the borrowing base availability under the Revolving Credit Facility. The weighted average interest rate for the Revolving Credit Facility during the nine months ended September 28, 2019 and September 29, 2018 was 3.86% and 2.92%, respectively. The commitment fee on the undrawn portion of the $90.0 million Revolving Credit Facility is 0.25% per annum.
Interest expense, net for the three and nine months ended September 28, 2019 and September 29, 2018 consists of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Amortization of debt discount on Convertible Notes
$
544

 
$
594

 
$
1,612

 
$
2,570

Interest on Convertible Notes
340

 
390

 
1,020

 
1,738

Amortization of deferred financing fees
110

 
120

 
329

 
485

Interest / fees on the Revolving Credit Facility and other interest
86

 
185

 
260

 
636

Interest expense, net
$
1,080

 
$
1,289

 
$
3,221

 
$
5,429

7. Leases
The Company’s lease contracts consist of real estate leases and non-real estate leases primarily related to equipment. The Company leases the property for all of its stores as well as its distribution centers and corporate offices. In addition, the Company leases the facilities for its discontinued manufacturing operations. As of September 28, 2019, all of the Company’s real estate leases are classified as operating leases. Generally, the initial term of leases for stores is ten years. These leases generally contain renewal options for periods ranging from one to ten years, a few of which are considered “reasonably certain” in the measurement of lease liabilities and the corresponding right-of-use assets due to significant capital expenditures related to those store locations. The Company is also required under these leases to pay costs such as real estate taxes and common area maintenance. Contingent rentals are paid based on a percentage of gross sales as defined by lease agreements. These costs and contingent rentals are not considered as lease payments in the measurement of lease liabilities and the corresponding right-of-use assets as they represent non-lease components or variable lease payments other than those that depend on an index or rate. The Company sub-leases a portion of its stores, as well as certain manufacturing facilities related to its discontinued operations.
Non-real estate leases consist primarily of leases for equipment used in our distribution centers, corporate offices and for store connectivity. These leases, based on the underlying lease agreements, are classified as operating or finance leases.
Adoption and Transition
The Company has elected to adopt Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) in accordance with Accounting Standards Update No. 2018-11 (“ASU 2018-11”), Leases (Topic 842) Targeted Improvements. Under the transition method included in ASU 2018-11, the Company initially applies ASU 2016-02 at the adoption date of December 30, 2018 (first day of Fiscal 2019) and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company’s reporting for the comparative periods presented in its financial statements will continue to be in accordance with previous GAAP (Topic 840, Leases). Under this transition method, the Company must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840.

16


On December 30, 2018, the Company recognized a cumulative-effect charge of $3.3 million net of tax to the opening balance of retained earnings which represents impairment charges to the right-of-use assets associated with stores whose fixed assets have been previously impaired, and whose lease liabilities were determined to be above fair market value.
Transition of Operating Leases
For existing operating leases under Topic 840, the transition to operating leases under Topic 842 was as follows:
Lease liability and right-of use asset are recognized at the later of the lease commencement date and the date of adoption of December 30, 2018.
The lease liability is measured as the present value of the remaining lease payments using the discount rate based on the Company's incremental borrowing rates as no interest rates are explicitly stated in the lease agreements.
The right-of-use asset is measured based on the value of the lease liability, adjusted for the following:
Additions to the amount of the lease liability include:
Prepaid rent
Unamortized initial direct costs
Favorable assets resulting from business combinations
Reductions to the amount of the lease liability include:
Accrued / deferred rent
Lease incentives
Impairment charges
Cease use liabilities, such as lease termination costs
Unfavorable liabilities resulting from business combinations
Write-off of any unamortized initial direct costs that are no longer initial direct costs under Topic 842 as an adjustment to equity. For leases which commenced prior to adoption, this write-off is not applicable as the Company has elected the package of practical expedients, as noted below.

Transition of Finance Leases
For existing capital leases under Topic 840, the transition to finance leases under Topic 842 was as follows:
Lease liability and right-of-use asset are recognized based on the carrying value of the existing asset and liability at the later of the lease commencement date and the date of adoption of December 30, 2018.
Include any unamortized initial direct costs that meet the Topic 842 initial direct costs definition; write-off any unamortized initial direct costs that are no longer initial direct costs under Topic 842 as an adjustment to equity. For existing leases, this write-off is not applicable as the Company has elected the package of practical expedients, as noted below.
Practical Expedients
The Company has elected to use the following practical expedients for the adoption of ASU 2016-02:
For leases that commenced before the effective date, (1) the Company need not reassess whether any expired or existing contracts are or contain leases, (2) the Company need not reassess the lease classification for any expired or existing leases and (3) the Company need not reassess initial direct costs for any existing leases.
To use hindsight in determining lease term and in assessing impairment of the Company’s right-of-use assets.
To not allocate the consideration in the contract between separate non-lease components and lease components.
Significant Assumptions and Judgments
Discount rate
The discount rate is the rate implicit in the lease unless that rate cannot be readily determined. In that case, the Company is required to use its incremental borrowing rate. The discount rate for a lease is determined based on the information available at the later of the adoption of ASU 2016-02 or at lease commencement. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company engaged outside valuation consultants for the determination of the incremental borrowing rates for its operating leases.


17


 
 
Three Months
Ended
 
Nine Months Ended
 
 
September 28, 2019
 
September 28, 2019
 
 
(in thousands)
 
(in thousands)
Lease cost
 
 
 
 
Finance lease cost:
 
 
 
 
      Amortization of right-of-use assets
 
$
110

 
$
349

      Interest on lease liabilities
 
13

 
45

Operating lease cost
 
29,252

 
88,315

Variable lease cost
 
2,884

 
8,390

Sublease income
 
(337
)
 
(879
)
Total lease cost
 
$
31,922

 
$
96,220

 
 
 
 
 
Other Information
 
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
      Operating cash flows from finance leases
 
$
13

 
$
45

      Operating cash flows from operating leases
 
$
30,628

 
$
91,978

      Financing cash flows from finance leases
 
$
126

 
$
373

Right-of-use assets obtained in exchange for new finance lease liabilities
 
$

 
$

Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
12,416

 
$
40,435

 
 
 
 
 
 
 
 
 
As of
 
 
 
 
September 28, 2019
Weighted-average remaining lease term, in years – finance leases
 


 
2.0

Weighted-average remaining lease term, in years – operating leases
 


 
5.1

Weighted-average discount rate – finance leases
 


 
4.7
%
Weighted-average discount rate – operating leases
 


 
5.4
%

As of September 28, 2019, the Company's right-of-use assets consist of the following (in thousands):

Right-of-use assets - operating leases
$
423,987

Right-of-use assets - finance leases
881

Total right-of-use assets
$
424,868



18


As of September 28, 2019, the reconciliation of undiscounted cash flows to lease liabilities, by lease type, is as follows (in thousands):

 
 
Operating
Leases
 
Finance
Leases
Undiscounted cash flows:
 
 
 
 
Year 1
 
$
118,458

 
$
558

Year 2
 
107,318

 
502

Year 3
 
92,140

 
56

Year 4
 
74,340

 

Year 5
 
53,768

 

Beyond Year 5
 
97,060

 

 
 
$
543,084

 
$
1,116

 
 
 
 
 
Present values
 
$
464,523

 
$
1,061

 
 
 
 
 
Short-term lease liabilities
 
$
96,238

 
$
518

Long-term lease liabilities
 
368,285

 
543

Total lease liabilities
 
$
464,523

 
$
1,061

 
 
 
 
 
Difference between undiscounted cash flows and discounted cash flows
 
$
78,561

 
$
55

Prior to the adoption of ASU 2016-02, as of December 29, 2018, the Company’s real estate lease commitments were as follows (in thousands):
Fiscal year
Total
Operating
Leases (1)
2019
$
121,227

2020
108,993

2021
95,529

2022
80,274

2023
61,847

Thereafter
115,852

 
$
583,722

 
(1)
Store operating leases included in the above table do not include contingent rent based upon sales volume. Operating leases do not include common area maintenance costs or real estate taxes that are paid to the landlord during the year, which combined represented approximately 18.5% of our minimum lease obligations for Fiscal 2018.
8. Revenue Recognition
The Company recognizes revenue from retail customers when merchandise is sold “at point of sale” in retail stores or upon delivery to a customer. Substantially all revenue from customers represents goods transferred at a point in time.
Upon adoption, at the beginning of Fiscal 2018, the Company applied the modified retrospective method for the transition to FASB Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The modified retrospective method requires application of the new revenue standard beginning with the financial statements for the year in which the new revenue standard is first implemented. Under the modified retrospective method, an entity records a cumulative-effect adjustment on the opening balance sheet to retained earnings. The opening adjustment to retained earnings is determined on the basis of the impact of the new revenue standard's application on contracts that were not completed as of the date of initial application. The Company did not record an opening adjustment to retained earnings as the impact of the application of the new revenue standard was de minimis.

19


Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into two categories, sales fulfilled in stores and direct to consumer sales. The Company determines that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
The following table contains net sales by fulfillment category (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales:
 
 
 
 
 
 
 
 
Sales fulfilled in stores
$
216,636

 
$
240,642

 
$
693,215

 
$
752,933

 
Direct to consumer sales
36,497

 
35,994

 
114,126

 
112,770

Net sales
$
253,133

 
$
276,636

 
$
807,341

 
$
865,703

 
 
 
 
 
 
 
 
 
The following table represents net sales by major product category (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Product Category
 
 
 
 
 
 
 
 
Vitamins, Minerals, Herbs and Homeopathy
$
73,836

 
$
80,825

 
$
236,384

 
$
253,626

 
Sports Nutrition
71,608

 
82,143

 
230,827

 
261,151

 
Specialty Supplements
69,087

 
72,019

 
215,151

 
223,427

 
Other
37,991

 
41,078

 
123,198

 
125,700

 
 
252,522

 
276,065

 
805,560

 
863,904

 
Delivery Revenue
611

 
571

 
1,781

 
1,799

 
  Total net sales
$
253,133

 
$
276,636

 
$
807,341

 
$
865,703

 
 
 
 
 
 
 
 
 
Delivery revenue represents shipping fees billed to customers which are included in net sales in the consolidated statements of operations.
Contract Balances
Receivables primarily consist of amounts due from debit and credit card processors, wholesale customers and amounts due from third-party e-commerce marketplaces. These receivables balances are included in prepaid expenses and other current assets in the consolidated balance sheets.
For the periods presented, the Company does not have contract assets. A contract asset would exist when an entity has a contract with a customer for which revenue has been recognized but payment is contingent on a future event other than the passage of time (e.g., unbilled receivables).
Contract liabilities primarily include deferred sales related to the loyalty program, a liability for future gift card redemptions and a liability for sales in transit. These liabilities are included in accrued expenses and other current liabilities in the consolidated balance sheets.

20


The opening and closing balances of the Company’s receivables and contract liabilities are as follows (in thousands):
 
Receivables
 
Contract
Liabilities
 
 
 
 
Balances as of December 29, 2018
$
8,211

 
$
7,287

Increase / (Decrease)
771

 
(1,034
)
Balances as of March 30, 2019
8,982

 
6,253

Increase / (Decrease)
772

 
(1,113
)
Balances as of June 29, 2019
9,754

 
5,140

Increase / (Decrease)
(1,145
)
 
179

Balances as of September 28, 2019
$
8,609

 
$
5,319

 
 
 
 
Balances as of December 30, 2017
$
10,937

 
$
7,511

Increase
1,055

 
899

Balances as of March 31, 2018
11,992

 
8,410

Increase / (Decrease)
(560
)
 
1,013

Balances as of June 30, 2018
11,432

 
9,423

Decrease
(515
)
 
(2,498
)
Balances as of September 29, 2018
$
10,917

 
$
6,925

The amounts of revenue recognized during the three month periods ended March 30, 2019 and March 31, 2018 that were included in the opening contract liability balances as of December 29, 2018 and December 30, 2017 were $6.0 million and $6.5 million, respectively. The amounts of revenue recognized during the three month periods ended June 29, 2019 and June 30, 2018 that were included in the opening contract liability balances as of March 30, 2019 and March 31, 2018 were $5.2 million and $6.4 million, respectively. The amounts of revenue recognized during the three month periods ended September 28, 2019 and September 29, 2018 that were included in the opening contract liability balances as of June 29, 2019 and June 30, 2018 were $3.5 million and $8.4 million, respectively. This revenue consists primarily of loyalty point redemptions, the delivery of sales in transit and gift card redemptions.
Performance Obligations
For retail sales, the performance obligation is the transfer of retail merchandise to the customer at the retail store or at the time of delivery to the customer. Variable consideration for retail sales is primarily related to our loyalty program. Under the loyalty program, sales are deferred at the time points are earned based on the value of points that are projected to be redeemed, which are based on historical redemption data and current trends. The Company records a liability in the period points are earned with a corresponding reduction of sales. Through the first fiscal quarter of Fiscal 2019, loyalty points were earned each calendar quarter and must have been redeemed within the subsequent calendar quarter or they expired. Enhancements to the loyalty program were rolled out in the second fiscal quarter of Fiscal 2019 and include providing Healthy Awards® members with flexibility when redeeming loyalty points. Under the enhanced loyalty program, Healthy Awards® members have the option to redeem loyalty points as they are earned or accumulate loyalty points over an extended period of time.
The Company considers shipping and handling costs as fulfillment costs, and does not consider such activities as a separate performance obligation. When applicable, the Company is responsible for shipment and delivery of the merchandise, even when using a third-party shipping company.

21


9. Stock Based Compensation
Equity Incentive Plans – Through its 2018 Long-term Incentive Plan (the “2018 Plan”), the Company provides stock based compensation to certain directors, officers, consultants and employees of the Company. As of September 28, 2019, there were 2,658,423 shares available to grant under the 2018 Plan which includes 240,900 shares currently held by the Company as treasury stock.
During Fiscal 2018, the Company granted inducement awards to certain executives, which were granted outside of the 2018 Plan, but generally incorporate the terms and conditions of the 2018 Plan. These inducement awards consisted of 104,510 performance share units and 31,250 restricted share units.
The following table summarizes restricted shares for the 2018 Plan as of September 28, 2019 and changes during the nine month period then ended:
 
Number of Unvested
Restricted Shares
 
Weighted
Average Grant
Date Fair Value
Unvested at December 29, 2018
436,397

 
$
11.70

Granted
226,539

 
$
6.47

Vested
(104,222
)
 
$
21.17

Canceled/forfeited
(214,140
)
 
$
6.74

Unvested at September 28, 2019
344,574

 
$
8.49

The total intrinsic value of restricted shares vested during the nine months ended September 28, 2019 and September 29, 2018 was $0.7 million and $0.7 million, respectively.
The following table summarizes stock options for the 2018 Plan as of September 28, 2019 and changes during the nine month period then ended:
 
Number
of Options
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life (years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at December 29, 2018
272,000

 
$
17.13

 

 

Granted

 
$

 

 

Exercised

 
$

 

 

Canceled/forfeited
(36,050
)
 
$
30.17

 

 

Outstanding at September 28, 2019
235,950

 
$
15.13

 
7.03
 
$
261

Vested or expected to vest at September 28, 2019
225,677

 
$
15.54

 
6.98
 

Vested and exercisable at September 28, 2019
133,222

 
$
22.08

 
6.12
 
$
87

No options were exercised during the nine months ended September 28, 2019 and September 29, 2018.
Stock options were not granted during the nine months ended September 28, 2019. The weighted-average grant date fair value of stock options during the nine months ended September 29, 2018 was $1.76. The fair value of each option grant was estimated on the date of grant using the Monte Carlo option-pricing model, because these awards contain a market condition based on the achievement of predetermined targets related to the share price of our common stock, with the following assumptions:

22


 
Nine Months Ended
 
September 29, 2018
Expected dividend yield
0.0
%
Weighted average expected volatility
42.61
%
Weighted average risk-free interest rate
2.54
%
Expected holding period
6.02 years

The following table summarizes performance share units for the 2018 Plan, as well as inducement awards, as of September 28, 2019 and changes during the nine month period then ended:
 
Number of Unvested
Performance Share
Units
 
Weighted
Average Grant
Date Fair Value
Unvested at December 29, 2018
443,869

 
$
10.64

Granted
372,504

 
$
6.82

Vested
(3,028
)
 
$
30.26

Canceled/forfeited
(171,252
)
 
$
10.15

Unvested at September 28, 2019
642,093

 
$
8.46

Performance share units granted during the nine months ended September 28, 2019 will vest on December 25, 2021 if the performance criteria are achieved. These performance share units can vest at a range of 0% to 300% based on the achievement of pre-established performance targets.
The total intrinsic value of performance share units vested during the nine months ended September 28, 2019 was de minimis.
The following table summarizes restricted share units for the 2018 Plan, as well as inducement awards, as of September 28, 2019 and changes during the nine month period then ended:
 
Number of Unvested
Restricted Share
Units
 
Weighted
Average Grant
Date Fair Value
Unvested at December 29, 2018
89,340

 
$
7.84

Granted
159,144

 
$
3.77

Vested
(58,090
)
 
$
7.75

Canceled/forfeited

 
$

Unvested at September 28, 2019
190,394

 
$
4.46

The total intrinsic value of restricted share units vested during the nine months ended September 28, 2019 and September 29, 2018 was $0.4 million and $0.7 million, respectively.
Compensation expense attributable to stock based compensation for the three and nine months ended September 28, 2019 was approximately $(0.1) million and $0.8 million, respectively, and for the three and nine months ended September 29, 2018 was approximately $0.8 million and $1.7 million, respectively. As of September 28, 2019, the remaining unrecognized stock based compensation expense for non-vested stock options, restricted shares, performance share units and restricted share units to be expensed in future periods is $1.8 million, and the related weighted-average period over which it is expected to be recognized is 1.6 years. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures based on its historical forfeiture rate since the inception of granting stock based awards. The estimated value of future forfeitures for stock options, restricted shares, performance share units and restricted share units as of September 28, 2019 is approximately $0.2 million.
Treasury Stock – As part of the Company’s equity incentive plan, the Company makes required tax payments on behalf of employees as their equity awards vest. The Company withholds the number of vested shares having a value on the date of vesting equal to the minimum statutory tax obligation. The shares withheld are recorded as treasury shares. During the

23


nine months ended September 28, 2019, the Company purchased 45,381 shares in settlement of employees’ tax obligations for a total of $0.3 million. The Company accounts for treasury stock using the cost method. 240,900 treasury shares are available to grant under the Company’s equity incentive plan.
10. Advertising Costs
The costs of advertising for online marketing arrangements, direct mail, magazines and radio are expensed as incurred, or the first time the advertising takes place. Advertising expense was $6.4 million and $5.9 million for the three months ended September 28, 2019 and September 29, 2018, respectively, and $21.6 million and $19.3 million for the nine months ended September 28, 2019 and September 29, 2018, respectively.
11. Net Income (Loss) Per Share
The Company’s basic net income (loss) per share excludes the dilutive effect of stock options, unvested restricted shares, unvested performance share units, unvested restricted share units and warrants. It is based upon the weighted average number of common shares outstanding during the period divided into net income (loss).
Diluted net income (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Stock options, unvested restricted shares, unvested performance share units, unvested restricted share units and warrants are included as potential dilutive securities for the periods applicable, using the treasury stock method to the extent dilutive.
The components of the calculation of basic net income (loss) per common share and diluted net income (loss) per common share are as follows (in thousands except share and per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Numerator:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
(3,409
)
 
$
1,880

 
$
(3,482
)
 
$
16,820

Net loss from discontinued operations

 
(3,626
)
 

 
(15,245
)
Net income (loss)
$
(3,409
)
 
$
(1,746
)
 
$
(3,482
)
 
$
1,575

Denominator:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
23,716,403

 
23,545,842

 
23,646,617

 
23,477,982

Effect of dilutive securities (a):
 
 
 
 
 
 
 
Stock options

 

 

 
20,807

Restricted shares

 

 

 
137,697

Performance share units

 

 

 
80,543

Restricted share units

 

 

 
26,827

Diluted weighted average common shares outstanding
23,716,403

 
23,545,842

 
23,646,617

 
23,743,856

 
 
 
 
 
 
 
 
Basic net income (loss) from continuing operations per common share
$
(0.14
)
 
$
0.08

 
$
(0.15
)
 
$
0.72

Diluted net income (loss) from continuing operations per common share
$
(0.14
)
 
$
0.08

 
$
(0.15
)
 
$
0.71

 
 
 
 
 
 
 
 
Basic net loss from discontinued operations per common share
$

 
$
(0.15
)
 
$

 
$
(0.65
)
Diluted net loss from discontinued operations per common share
$

 
$
(0.15