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.
 
5
Item 1.
5
 
5
 
6
 
7
 
9
 
11
Item 2.
26
Item 3.
35
Item 4.
36
 
 
 
 
37
Item 1.
37
Item 1A.
37
Item 2.
38
Item 3.
39
Item 4.
39
Item 5.
39
Item 6.
39
 
 
41
 
 
 
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
)
 
$
—

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

Diluted net income (loss) per common share
$
(0.14
)
 
$
(0.07
)
 
$
(0.15
)
 
$
0.07


24

(a) For the three and nine months ended September 28, 2019 and for the three months ended September 29, 2018, due to a loss for the period, no incremental shares are included because the effect would be anti-dilutive.
Securities for the three months ended September 28, 2019 and September 29, 2018 in the amount of 507,116 shares and 43,482 shares, respectively, have been excluded from the above calculation as they were anti-dilutive. Securities for the nine months ended September 28, 2019 and September 29, 2018 in the amount of 574,197 shares and 664,916 shares, respectively, have been excluded from the above calculation as they were anti-dilutive.
The Company has the intent and ability to settle the principal portion of its Convertible Notes in cash, and as such, has applied the treasury stock method, which has resulted in the underlying convertible shares, and related warrants, being anti-dilutive for the three and nine months ended September 28, 2019 and September 29, 2018 as the Company’s average stock price from the date of issuance of the Convertible Notes through September 28, 2019 was less than the conversion price as well as less than the strike price of the warrant transaction. Refer to Note 6., “Credit Arrangements” for additional information on the Convertible Notes.
12. Share Repurchase Programs
Beginning in August 2014, the Company’s board of directors approved share repurchase programs that enable the Company to purchase up to an aggregate of $403.8 million of its shares of common stock and / or its Convertible Notes, from time to time. As of September 28, 2019, 8,064,325 shares of common stock pursuant to these programs, and 83,311 Convertible Notes, have been repurchased for a total of $333.8 million. There is $70.0 million remaining in this program. On October 31, 2018, the Company's board of directors approved a two year extension of the remaining repurchase program. This repurchase program will expire on November 22, 2020.
The repurchase programs do not obligate the Company to acquire any specific number of securities and may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing securities, the availability of alternative investment opportunities, liquidity, restrictions under the Company's credit agreement, applicable law and other factors deemed appropriate.
No shares of the Company were repurchased under these programs during the three and nine month periods ended September 28, 2019 and September 29, 2018. During the nine month period ended 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. Refer to Note 6., “Credit Arrangements” for additional information.
13. Legal Proceedings
In addition to the lawsuits noted below, the Company is party to various lawsuits arising from time to time in the normal course of business, some of which are covered by insurance. Although the impact of the final resolution of these matters on the Company's financial condition, results of operations or cash flows is not known, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
On September 30, 2019, a purported stockholder of the Company commenced a federal securities action in the United States District Court for the District of New Jersey against the Company and its directors, captioned Shiva Stein v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 18543 (D.N.J.).  On October 1, 2019, a second purported Company stockholder commenced a putative securities class action in the United States District Court for the District of Delaware against the same defendants, captioned Jordan Rosenblatt v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 1848 (D. Del.). On October 25, 2019, a third purported stockholder of the Company commenced a federal securities action in the United States District Court for the District of New Jersey against the same defendants, captioned Kathleen S. Bell v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 19334 (D.N.J.). All three lawsuits were brought under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, and challenge as allegedly materially false and misleading the disclosures the Company made in its September 30, 2019 preliminary proxy statement filed with the SEC in connection with the Merger.  The complaints seek injunctive relief against the closing of the Merger pending additional disclosures, attorneys’ fees, and other relief.  Other, similar lawsuits may follow.  The defendants believe that the lawsuits are without merit.
14. Fair Value of Financial Instruments
The fair value hierarchy requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
•
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.

25

•
Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
•
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
The Company’s financial instruments include cash, accounts receivable, accounts payable, contract liabilities and its Revolving Credit Facility. The Company believes that the recorded values of these financial instruments approximate their fair values due to their nature and respective durations.
The Company's financial instruments also include its Convertible Notes (in thousands):
 
September 28, 2019
 
December 29, 2018
  Fair Value
$
60,179

 
$
50,914

  Carrying Value (1)
57,422

 
55,570

 
 
 
 

(1) Represents the net carrying amount of the liability component of the Convertible Notes.
The fair value of the Convertible Notes was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, including the trading price of the Company’s Convertible Notes, when available, the Company’s stock price and interest rates based on similar debt issued by parties with credit ratings similar to the Company (Level 1 or 2).
Intangible assets, fixed assets and right-of-use assets are measured at fair value on a non-recurring basis, that is, the assets are subject to fair value adjustments in certain circumstances such as when there is evidence of impairment. These measures of fair value, and related inputs, are considered Level 3 measures under the fair value hierarchy.
The Company recognized store impairment charges of $2.4 million during Fiscal 2019 on fixed assets and right-of-use assets related to six of its underperforming retail locations, which are still in use in the Company's operations. Impairment charges on the fixed assets of these retail locations represented the full net book value of the fixed assets of these retail locations. Impairment charges on the right-of-use assets of these retail locations were based on a market analysis of the fair value of the applicable real estate operating leases.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto included as part of this quarterly report on Form 10-Q.
Company Overview
We are an omni-channel specialty retailer of vitamins, minerals, herbs, specialty supplements, sports nutrition and other health and wellness products. We market approximately 700 nationally recognized brands as well as our own brands, which include The Vitamin Shoppe®, BodyTech®, BodyTech Elite®, True Athlete®, plnt®, ProBioCare®, Next Step® and VThrive®. We believe we offer one of the largest varieties of products among vitamin, mineral and supplement (“VMS”) retailers and continue to refine our assortment with approximately 6,000 stock keeping units (“SKUs”) offered in our typical store and approximately 7,000 additional SKUs available through e-commerce. We believe our product offering and emphasis on product knowledge and customer service helps us meet the needs of our target customer and serves as a foundation for enhancing strong customer loyalty.
We continue to focus on improving the customer experience through the roll-out of initiatives including increasing customer engagement and personalization, redesigning the omni-channel experience (including in stores as well as through the internet and mobile devices), growing our private brands and improving the effectiveness of pricing and promotions. As part of this strategy, we have developed several initiatives, including an emphasis on the development and deployment of our customer facing digital platforms to enhance the customer's omni-channel experience. In addition, enhancements to our loyalty program were rolled out in the second fiscal quarter of Fiscal 2019.

26

On August 7, 2019, the Company entered into the Merger Agreement with Franchise Group, Inc. and 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.
If the Merger is completed, the (i) stockholders of the Company will be entitled to receive $6.50 in cash, 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.
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.
Trends and Other Factors Affecting Our Business
Our performance is affected by industry trends including, among others, demographic, health and lifestyle preferences, as well as other factors, such as industry media coverage and governmental actions. For example, our industry is subject to potential regulatory activity and other legal matters that could affect the credibility of a given product or category of products. Consumer trends, the overall impact on consumer spending, which may be affected heavily by current economic conditions, and limited product innovation and introductions in the VMS industry can dramatically affect purchasing patterns. Even though our business model allows us to respond to changing industry trends by introducing new products and adjusting our product mix and sales incentives, such actions may not offset adverse trends.
Additionally, our performance is affected by competitive trends such as the entry and expansion of competitors, changes in pricing and promotional strategies or expansion of product assortment by various competitors. Over recent years, there has been a shift of market share from specialty retailers to other channels such as mass market retailers, supermarket chains, club chains, drug store chains and e-commerce companies. This broader competitive channel availability of VMS products represents a challenge for the Company to keep pace with industry growth rates. We also have observed more competition in our assortment, and more competitive pricing and promotional strategies by competitors and increased levels of marketing spending.
As of September 28, 2019 we operate 764 stores located in 45 states, the District of Columbia and Puerto Rico. We continue to evaluate our store network strategy.
As we anticipate an acceleration in the shift in our sales towards digital commerce, we are evaluating (1) our store network in order to identify opportunities to reduce fixed costs by closing underperforming stores, (2) our supply chain infrastructure and processes in order to increase the speed of delivery of products for direct to consumer sales, as well as increase the efficiency of our distribution centers, and (3) our merchandising processes in order to, among other things, increase the penetration of our private label brands. The completion of these evaluations may result in actions including (1) the closing of a significant number of stores at or before lease expiration, (2) an increase in capital expenditures, (3) a reduction in the amount of inventory on hand, and / or (4) future charges to our results of operations for store impairments.
Critical Accounting Policies
Our significant accounting policies are described in Note 2. of the Notes to Consolidated Financial Statements included in our financial statements in the Fiscal 2018 Form 10-K. A discussion of our critical accounting policies and estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Fiscal 2018 Form 10-K. Management has discussed the development and selection of these policies with the Audit Committee of our Board of Directors, and the Audit Committee of our Board of Directors has reviewed the disclosures relating to them. Management believes there have been no material changes to the critical accounting policies or estimates reported in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Fiscal 2018 Form 10-K.
General Definitions for Operating Results
Net Sales consist of sales, net of sales returns, deferred sales, customer incentives and a provision for estimated future returns. Total comparable net sales include retail sales fulfilled in stores and direct to consumer sales. Sales generated by retail

27

stores after 410 days of operation are included in comparable net sales.
Cost of goods sold includes the cost of inventory sold, costs of warehousing, distribution and store occupancy costs. Warehousing and distribution costs, which are capitalized into inventory and then expensed as merchandise is sold, include freight to transfer merchandise and costs associated with our buying department and distribution facilities. Store occupancy costs include rent, common area maintenance, real estate taxes and utilities.
Gross profit is net sales minus cost of goods sold.
Selling, general and administrative expenses consist of operating payroll and related benefits, advertising and promotion expense, depreciation and amortization expenses not capitalized in cost of goods sold, and other selling, general and administrative expenses.
Income (loss) from operations consists of gross profit minus selling, general and administrative expenses.
Interest expense, net includes interest on our Convertible Notes and Revolving Credit Facility, letters of credit fees, interest on our capital leases, as well as amortization of financing costs, reduced by interest income earned from highly liquid investments (investments purchased with an original maturity of ninety days or less).
Key Performance Indicators and Statistics
We use a number of key indicators of financial condition and operating results to evaluate the performance of our business, including the following (in thousands):
 
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

Decrease in total comparable net sales (1)
(7.7
)%
 
(1.9
)%
 
(6.1
)%
 
(2.2
)%
Gross profit as a percent of net sales
31.8
 %
 
31.3
 %
 
32.9
 %
 
31.7
 %
Income (loss) from operations
$
(2,446
)
 
$
3,226

 
$
179

 
$
12,224

Adjusted EBITDA (2)
$
13,217

 
$
14,371

 
$
48,968

 
$
52,898

(1)
Total comparable net sales are comprised of comparable fulfilled in retail store sales and direct to consumer sales.
(2)
Adjusted EBITDA is defined as EBITDA (net income (loss) before interest expense, net, provision (benefit) for income taxes, depreciation and amortization), as further adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company's actual operating performance including certain items which are generally non-recurring. We have excluded the impact of such items from internal performance assessments. We believe that excluding such items helps investors compare our operating performance with our results in prior periods. We believe it is appropriate to exclude these items as they are not related to ongoing operating performance and, therefore, limit comparability between periods and between us and similar companies.
We believe Adjusted EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Investors in the Company regularly request Adjusted EBITDA as a supplemental analytical measure to, and in conjunction with, Company financial data prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We understand that investors use Adjusted EBITDA, among other things, to assess our period-to-period operating performance and to gain insight into the manner in which management analyzed operating performance.
In addition, we believe that Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA and Adjusted EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which items may vary for different companies for reasons unrelated to overall operating performance. We use these non-GAAP financial measures for planning and forecasting and measuring results against the forecast and in certain cases we may use similar measures for bonus targets for certain of our employees. Using several measures to evaluate the business allows us and investors to assess our relative performance against our competitors.

28

Although we believe that Adjusted EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies, even in the same industry, may define Adjusted EBITDA differently than we do. As a result, it may be difficult to use Adjusted EBITDA or similarly named non-GAAP measures that other companies may use to compare the performance of those companies to our performance. The Company does not, and investors should not, place undue reliance on EBITDA or Adjusted EBITDA as measures of operating performance.
A reconciliation of net income (loss) from continuing operations to EBITDA and Adjusted EBITDA is as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income (loss) from continuing operations
$
(3,409
)
 
$
1,880

 
$
(3,482
)
 
$
16,820

Additions:
 
 
 
 
 
 
 
Provision (benefit) for income taxes
(117
)
 
57

 
440

 
6,204

Interest expense, net
1,080

 
1,289

 
3,221

 
5,429

Depreciation and amortization
10,944

 
10,504

 
30,708

 
31,233

EBITDA
8,498

 
13,730

 
30,887

 
59,686

Adjustments:
 
 
 
 
 
 
 
Tradename impairment charge (a)
—

 
—

 
9,000

 
—

Acquisition costs (b)
3,341

 
—

 
3,341

 
—

Store closure costs (c)
620

 
—

 
2,433

 
—

Management realignment costs (d)
225

 
363

 
1,681

 
2,211

Right-of-use asset impairment charges (e)
317

 
—

 
1,410

 
—

Legal settlement (f)
125

 
—

 
125

 
—

Inventory obsolescence charge (g)
91

 
—

 
91

 
—

Gain on extinguishment of debt (h)
—

 
—

 
—

 
(16,229
)
Inventory charge (i)
—

 
—

 
—

 
3,600

Distribution center closing costs (j)
—

 
246

 
—

 
2,936

Shareholder settlement (k)
—

 
32

 
—

 
694

Adjusted EBITDA
$
13,217

 
$
14,371

 
$
48,968

 
$
52,898

(a)
Impairment charge on the Vitamin Shoppe tradename.
(b)
Costs related to the pending acquisition of Vitamin Shoppe.
(c)
Store closure costs primarily include lease termination fees.
(d)
Costs related to management turnover, including severance charges, recruitment costs and other professional fees.
(e)
Charges incurred to reflect the fair market value of the right-of-use assets associated with certain retail locations.
(f)
Costs incurred related to the settlement of a legal matter.
(g)
Write-off of inventory acquired in an asset purchase transaction.
(h)
Gain recognized on the repurchases of a portion of Convertible Notes.
(i)
Inventory charge resulting from an evaluation to optimize the Company's product assortment.
(j)
Costs related to the closing of the North Bergen, New Jersey distribution center.
(k)
Professional fees incurred related to shareholder settlement.


29

The following table shows the changes in our network of stores during the three and nine months ended September 28, 2019 and September 29, 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Store Data:
 
 
 
 
 
 
 
Stores open at beginning of period
765

 
782

 
774

 
785

Stores opened
1

 
1

 
1

 
2

Stores closed
(2
)
 
(3
)
 
(11
)
 
(7
)
Stores open at end of period
764

 
780

 
764

 
780

Total retail square footage at end of period (in thousands)
2,673

 
2,718

 
2,673

 
2,718

Average store square footage at end of period
3,499

 
3,485

 
3,499

 
3,485


Three Months Ended September 28, 2019 Compared to Three Months Ended September 29, 2018
The information presented below is for the three months ended September 28, 2019 and September 29, 2018 and was derived from our consolidated financial statements, which, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position and operating results for such periods and as of such dates.
The following tables summarize our results of operations for the three months ended September 28, 2019 and September 29, 2018 (in thousands):
 
Three Months Ended
 
 
 
 
 
September 28, 2019
 
September 29, 2018
 
$
Change
 
%
Change
Net sales
$
253,133

 
$
276,636

 
$
(23,503
)
 
(8.5
)%
Cost of goods sold
172,565

 
189,945

 
(17,380
)
 
(9.2
)%
Cost of goods sold as % of net sales
68.2
 %
 
68.7
%
 
 
 
 
Gross profit
80,568

 
86,691

 
(6,123
)
 
(7.1
)%
Gross profit as % of net sales
31.8
 %
 
31.3
%
 
 
 
 
Selling, general and administrative expenses
82,493

 
82,747

 
(254
)
 
(0.3
)%
SG&A expenses as % of net sales
32.6
 %
 
29.9
%
 
 
 
 
Impairment charges on fixed and right-of-use assets
521

 
718

 
(197
)
 
(27.4
)%
Impairment charges as % of net sales
0.2
 %
 
0.3
%
 
 
 
 
Income (loss) from operations
(2,446
)
 
3,226

 
(5,672
)
 
(175.8
)%
Income (loss) from operations as % of net sales
(1.0
)%
 
1.2
%
 
 
 
 
Interest expense, net
1,080

 
1,289

 
(209
)
 
(16.2
)%
Income (loss) before provision (benefit) for income taxes
(3,526
)
 
1,937

 
(5,463
)
 
(282.0
)%
Provision (benefit) for income taxes
(117
)
 
57

 
(174
)
 
(305.3
)%
Net income (loss) from continuing operations
(3,409
)
 
1,880

 
(5,289
)
 
(281.3
)%
Net loss from discontinued operations
—

 
(3,626
)
 
3,626

 
(100.0
)%
Net income (loss)
$
(3,409
)
 
$
(1,746
)
 
$
(1,663
)
 
95.2
 %
Net Sales
Net sales decreased 8.5% as a result of a decrease in our total comparable net sales of $20.9 million, or 7.7% and a decrease in our total non-comparable net sales of $2.6 million.

30

Cost of Goods Sold
Cost of goods sold includes product, warehouse, distribution and occupancy costs. As a percentage of net sales, cost of goods sold decreased by 0.5%. This includes product margin improvement of 0.7% and supply chain leverage of 0.5%. This was partially offset by occupancy deleverage of 0.7%.
Selling, General and Administrative Expenses
 
Three Months Ended
 
 
 
 
 
September 28, 2019
 
September 29, 2018
 
$
Change
 
%
Change
SG&A Expenses (in thousands):
 
 
 
 
 
 
 
Store Payroll and Benefits (a)
$
33,894

 
$
34,693

 
$
(799
)
 
(2.3
)%
Store Payroll & benefits as % of net sales
13.4
%
 
12.5
%
 
 
 
 
Advertising and Promotion (b)
6,418

 
5,934

 
484

 
8.2
 %
Advertising & promotion as % of net sales
2.5
%
 
2.1
%
 
 
 
 
Other SG&A (c)
42,181

 
42,120

 
61

 
0.1
 %
Other SG&A as % of net sales
16.7
%
 
15.2
%
 
 
 
 
Total SG&A Expenses
$
82,493

 
$
82,747

 
$
(254
)
 
(0.3
)%
 

(a)
Store payroll and benefits decreased primarily due to store closures and more efficient distribution of labor.
(b)
Advertising and promotion expenses increased primarily due to higher digital advertising expenditures partially offset by lower advertising expenditures at retail locations.
(c)
Other selling, general and administrative expenses included lower overhead expenses totaling $4.1 million which primarily includes a decrease in incentive compensation and is partially offset by an increase in depreciation and amortization of $0.7 million. The three months ended September 28, 2019 includes costs related to the pending acquisition of Vitamin Shoppe of $3.3 million, store closure costs of $0.6 million and management realignment costs of $0.2 million. The three months ended September 29, 2018 includes management realignment costs of $0.4 million and costs related to the closing of the North Bergen, New Jersey distribution center of $0.2 million.

Impairment Charges on Fixed and Right-of-Use Assets
The three months ended September 28, 2019 includes impairment charges on right-of-use assets of $0.3 million. In addition, impairment charges on fixed assets decreased by $0.5 million.
Interest Expense, Net
Interest expense, net decreased $0.2 million due to lower borrowings on the Revolving Credit Facility and the repurchases of a portion of the Company's Convertible Notes during Fiscal 2018.

Provision (benefit) for Income Taxes
The effective provision (benefit) tax rate for continuing operations for the three months ended September 28, 2019 was 3.3% compared to 2.9% for the three months ended September 29, 2018. The change in the effective tax rate is primarily due to the permanent tax difference related to acquisition costs incurred for the three months ended September 28, 2019 and the one-time tax benefit of $1.3 million resulting from the adoption of the Tax Cut and Jobs Act of 2017 for the three months ended September 29, 2018.

Nine Months Ended September 28, 2019 Compared to Nine Months Ended September 29, 2018
The information presented below is for the nine months ended September 28, 2019 and September 29, 2018 and was derived from our consolidated financial statements, which, in the opinion of management, include all adjustments necessary for a fair presentation of our financial position and operating results for such periods and as of such dates.

31

The following tables summarize our results of operations for the nine months ended September 28, 2019 and September 29, 2018 (in thousands):
 
Nine Months Ended
 
 
 
 
 
September 28, 2019
 
September 29, 2018
 
$
Change
 
%
Change
Net sales
$
807,341

 
$
865,703

 
$
(58,362
)
 
(6.7
)%
Cost of goods sold
541,687

 
591,665

 
(49,978
)
 
(8.4
)%
Cost of goods sold as % of net sales
67.1
%
 
68.3
%
 
 
 
 
Gross profit
265,654

 
274,038

 
(8,384
)
 
(3.1
)%
Gross profit as % of net sales
32.9
%
 
31.7
%
 
 
 
 
Selling, general and administrative expenses
254,071

 
260,263

 
(6,192
)
 
(2.4
)%
SG&A expenses as % of net sales
31.5
%
 
30.1
%
 
 
 
 
Impairment charges on fixed, intangible and right-of-use assets
11,404

 
1,551

 
9,853

 
635.3
 %
Impairment charges as % of net sales
1.4
%
 
0.2
%
 
 
 
 
Income from operations
179

 
12,224

 
(12,045
)
 
(98.5
)%
Income from operations as % of net sales
—
%
 
1.4
%
 
 
 
 
Gain on extinguishment of debt
—

 
16,229

 
(16,229
)
 
(100.0
)%
Interest expense, net
3,221

 
5,429

 
(2,208
)
 
(40.7
)%
Income (loss) before provision for income taxes
(3,042
)
 
23,024

 
(26,066
)
 
(113.2
)%
Provision for income taxes
440

 
6,204

 
(5,764
)
 
(92.9
)%
Net income (loss) from continuing operations
(3,482
)
 
16,820

 
(20,302
)
 
(120.7
)%
Net loss from discontinued operations
—

 
(15,245
)
 
15,245

 
(100.0
)%
Net income (loss)
$
(3,482
)
 
$
1,575

 
$
(5,057
)
 
(321.1
)%
Net Sales
Net sales decreased 6.7% as a result of a decrease in our total comparable net sales of $52.1 million, or 6.1% and a decrease in our total non-comparable net sales of $6.3 million.
Cost of Goods Sold
Cost of goods sold includes product, warehouse, distribution and occupancy costs. As a percentage of net sales, cost of goods sold decreased by 1.2%. This includes product margin improvement of 1.1%, a prior year charge for the elimination of unproductive inventory of 0.4%, supply chain leverage of 0.3% and prior year costs related to the closing of the North Bergen, New Jersey distribution center of 0.2%. This was partially offset by occupancy deleverage of 0.7%.
Selling, General and Administrative Expenses
 
Nine Months Ended
 
 
 
 
 
September 28, 2019
 
September 29, 2018
 
$
Change
 
%
Change
SG&A Expenses (in thousands):
 
 
 
 
 
 
 
Store Payroll and Benefits (a)
$
102,456

 
$
106,685

 
$
(4,229
)
 
(4.0
)%
Store Payroll & benefits as % of net sales
12.7
%
 
12.3
%
 
 
 
 
Advertising and Promotion (b)
21,622

 
19,307

 
2,315

 
12.0
 %
Advertising & promotion as % of net sales
2.7
%
 
2.2
%
 
 
 
 
Other SG&A (c)
129,993

 
134,271

 
(4,278
)
 
(3.2
)%
Other SG&A as % of net sales
16.1
%
 
15.5
%
 
 
 
 
Total SG&A Expenses
$
254,071

 
$
260,263

 
$
(6,192
)
 
(2.4
)%
 

32


(a)
Store payroll and benefits decreased primarily due to a decrease in health insurance costs, store closures and lower store commissions.
(b)
Advertising and promotion expenses increased primarily due to higher digital advertising expenditures partially offset by lower advertising expenditures at retail locations.
(c)
Other selling, general and administrative expenses included lower overhead expenses totaling $8.1 million which includes decreases in incentive compensation and health insurance costs and is partially offset by an increase in depreciation and amortization of $0.7 million. The nine months ended September 28, 2019 includes costs related to the pending acquisition of Vitamin Shoppe of $3.3 million, store closure costs of $2.3 million and management realignment costs of $1.7 million. The nine months ended September 29, 2018 includes management realignment costs of $2.2 million, costs related to the closing of the North Bergen, New Jersey distribution center of $1.1 million and professional fees related to shareholder settlement of $0.7 million.

Impairment Charges on Fixed, Intangible and Right-of-Use Assets
The nine months ended September 28, 2019 includes an impairment charge on the Vitamin Shoppe tradename of $9.0 million and impairment charges on right-of-use assets of $1.4 million. In addition, impairment charges on fixed assets decreased by $0.6 million.
Gain on Extinguishment of Debt
During the nine months ended September 29, 2018, the Company recognized $16.2 million of gains on the repurchases of a portion of its Convertible Notes.
Interest Expense, Net
Interest expense, net decreased $2.2 million due to the repurchases of a portion of the Company's Convertible Notes during Fiscal 2018 and lower borrowings on the Revolving Credit Facility.

Provision for Income Taxes
The effective provision tax rate for continuing operations for the nine months ended September 28, 2019 was (14.5)% compared to 26.9% for the nine months ended September 29, 2018. The change in the effective tax rate is primarily due to the permanent tax difference related to acquisition costs incurred for the nine months ended September 28, 2019 and the one-time tax benefit of $1.3 million resulting from the adoption of the Tax Cut and Jobs Act of 2017 for the nine months ended September 29, 2018 as well as the permanent tax differences related to the excess tax deficiencies from stock-based compensation in both periods.


Key Indicators of Liquidity and Capital Resources
The following table provides key indicators of our liquidity and capital resources (in thousands):
 
As of
 
September 28, 2019
 
December 29, 2018
Balance Sheet Data:
 
 
 
Cash and cash equivalents
$
15,995

 
$
2,668

Working capital (a)
30,115

 
114,065

Total assets
800,262

 
388,079

Total debt (b)
58,483

 
57,005

(a) Working capital is total current assets minus total current liabilities. Beginning in Fiscal 2019, current liabilities includes short-term lease liabilities of the Company's operating leases.
(b) Total debt includes the outstanding balance on the Company's Revolving Credit Facility, the net balance of its Convertible Notes and its finance lease obligations.

33

 
Nine Months Ended
 
September 28, 2019
 
September 29, 2018
Other Information:
 
 
 
Depreciation and amortization of fixed assets, intangible assets and finance leases right-of-use assets
$
30,708

 
$
32,002

Cash Flows Provided By (Used In):
 
 
 
Operating activities
$
34,012

 
$
77,599

Investing activities
(19,916
)
 
(10,058
)
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
)
Liquidity and Capital Resources
Historically, our primary uses of cash have been to fund working capital, operating expenses and capital expenditures related primarily to the build-out of new stores, the transformation of existing stores and information technology investments as well as to repurchase shares of our common stock and our Convertible Notes. We have financed our requirements predominately through internally generated cash flow, supplemented with short-term financing. We believe that the cash generated by operations and cash and cash equivalents, together with the borrowing availability under our Revolving Credit Facility, will be sufficient to meet our working capital needs for the next twelve months, costs and investments related to our current initiatives, systems development, store build-outs and improvements and interest payments, as well as the repurchase of shares of our common stock and our Convertible Notes from time to time in negotiated or open market transactions subject to market conditions.
During Fiscal 2019, we plan to spend approximately $30.0 million in capital expenditures, including costs for information technology, investments in new and existing stores and costs supporting growth initiatives. Of the total capital expenditures projected for Fiscal 2019, we have invested $19.4 million during the nine months ended September 28, 2019. During Fiscal 2019, we have opened one store and closed eleven stores as of September 28, 2019. During the remainder of Fiscal 2019 we plan to open one new store. As we continue to evaluate the Company's store network, we are taking actions to close approximately 60 to 80 stores by the end of Fiscal 2021, of which we expect to close 32 stores by the end of Fiscal 2019, to address the shift in sales to digital and improve our overall operational results.
The Company is subject to concentrations of credit risk associated with cash and cash equivalents, and at times holds cash balances in excess of Federal Deposit Insurance Corporation limits. Currently, the Company’s cash management practice is to hold cash balances in quality institutions and invest in highly liquid and secure investments.
We were in compliance with all financial covenants relating to our Revolving Credit Facility and Convertible Notes as of September 28, 2019. We expect to be in compliance with these same covenants during the remainder of Fiscal 2019 as well.
Cash Provided by Operating Activities
Net cash provided by operating activities was $34.0 million for the nine months ended September 28, 2019 as compared to $77.6 million for the nine months ended September 29, 2018. The $43.6 million decrease in cash flows from operating activities is primarily due to changes in cash flows related to inventory and accrued expenses.
Cash Used in Investing Activities
Net cash used in investing activities was $19.9 million during the nine months ended September 28, 2019 as compared to $10.1 million during the nine months ended September 29, 2018. The $9.9 million increase in cash flows used in investing activities is primarily due to the net proceeds on the sale of FDC Vitamins, LLC of $14.8 million during the nine months ended September 29, 2018, partially offset by a decrease in capital expenditures of $5.2 million.
Cash Used in Financing Activities
Net cash used in financing activities was $0.8 million for the nine months ended September 28, 2019, as compared to $67.7 million for the nine months ended September 29, 2018. The $66.9 million decrease in cash used in financing activities is primarily due to the Company's repurchases of Convertible Notes for $57.2 million and net repayments on the Revolving Credit Facility of $12.0 million during the nine months ended September 29, 2018.

34

Revolving Credit Facility
The terms of our Revolving Credit Facility extend through May 9, 2022, and allow the Company to borrow up to $90.0 million, subject to the terms of the facility, with a Company option to increase the facility up to a total of $150.0 million. For information regarding the terms of our Revolving Credit Facility, refer to Note 6., “Credit Arrangements” in the Notes to Consolidated Financial Statements (unaudited). As of September 28, 2019, the Company had no borrowings outstanding on its Revolving Credit Facility. The largest amount borrowed during the nine months ended September 28, 2019 and September 29, 2018 was $10.0 million and $44.0 million, respectively. The unused available line of credit under the Revolving Credit Facility at September 28, 2019 was $85.5 million.
Convertible Notes
On December 9, 2015, the Company issued $143.8 million of its 2.25% Convertible Notes. The Convertible Notes are senior unsecured obligations of the Company. Interest is payable on the Convertible Notes on June 1 and December 1 of each year until their maturity date of December 1, 2020. During Fiscal 2018, the Company repurchased $83.3 million in aggregate principal amount of its Convertible Notes. For additional information regarding our Convertible Notes, refer to Note 6. “Credit Arrangements”, in the Notes to Consolidated Financial Statements (unaudited).
Contractual Obligations and Commercial Commitments
As of September 28, 2019, there have been no material changes with respect to our contractual obligations since December 29, 2018. For additional information, see Contractual Obligations and Commercial Commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in the Fiscal 2018 Form 10-K.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Effects of Inflation
We do not believe that our sales or operating results have been materially affected by inflation during the periods presented in our financial statements. During the nine months ended September 28, 2019, cost inflation was less than 1%. During Fiscal 2019, we anticipate market driven cost inflation to be in the range of 1% to 3% excluding any potential tariffs. Additionally, we may experience increased cost pressure from our suppliers which could have an adverse effect on our gross profit results in the future.
Recent Accounting Pronouncements
Except as discussed in Note 1., “Basis of Presentation” in the Notes to the Consolidated Financial Statements (unaudited), 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosure about Market Risk” in Item 7A of Part II of our Fiscal 2018 Form 10-K. As of September 28, 2019, our exposure to market risk has not changed materially since December 29, 2018.

35

Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, who are our principal executive officer and principal financial officer, respectively, of the design and operation of our disclosure controls and procedures as such term is defined in Rules l3a-15(e) and l5d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of September 28, 2019, pursuant to Exchange Act Rules 13a-l5 and 15d-15. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 28, 2019.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 28, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
    
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

36

PART II. OTHER INFORMATION
 
Item 1.    Legal Proceedings
In addition to the lawsuits noted below, the Company is party to various lawsuits arising from time to time in the normal course of business, some of which are covered by insurance. Although the impact of the final resolution of these matters on the Company's financial condition, results of operations or cash flows is not known, management does not believe that the resolution of these lawsuits will have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
On September 30, 2019, a purported stockholder of the Company commenced a federal securities action in the United States District Court for the District of New Jersey against the Company and its directors, captioned Shiva Stein v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 18543 (D.N.J.).  On October 1, 2019, a second purported Company stockholder commenced a putative securities class action in the United States District Court for the District of Delaware against the same defendants, captioned Jordan Rosenblatt v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 1848 (D. Del.). On October 25, 2019, a third purported stockholder of the Company commenced a federal securities action in the United States District Court for the District of New Jersey against the same defendants, captioned Kathleen S. Bell v. Vitamin Shoppe, Inc., et al., No. 19 Civ. 19334 (D.N.J.). All three lawsuits were brought under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, and challenge as allegedly materially false and misleading the disclosures the Company made in its September 30, 2019 preliminary proxy statement filed with the SEC in connection with the Merger.  The complaints seek injunctive relief against the closing of the Merger pending additional disclosures, attorneys’ fees, and other relief.  Other, similar lawsuits may follow.  The defendants believe that the lawsuits are without merit.
Item 1A. Risk Factors
For a more detailed explanation of the factors affecting our business, please refer to the Risk Factors section in the Fiscal 2018 Form 10-K. Except for the additional risk factors listed below, there has not been a material change to the risk factors set forth in the Fiscal 2018 Form 10-K.
Risks related to the Merger
The announcement and pendency of the Merger may have an adverse effect on our business, financial condition, operating results and cash flows.
Uncertainty about the effect of the proposed Merger on our employees, customers, business partners and other third parties may disrupt our sales and marketing or other key business activities and may have a material adverse effect on our business, financial condition, operating results and cash flows. Current and prospective employees may experience uncertainty about their roles following the Merger. We may not be able to attract and retain key talent, including senior leaders, to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could have a material adverse effect on our business, financial condition and operating results. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could materially adversely affect our business, financial condition, operating results and cash flows. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and restricts us, without the consent of Franchise Group, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies, to respond effectively to competitive pressures and industry developments, and to attain our financial and other goals and may otherwise harm our business, financial condition, operating results and cash flows.
The consummation of the Merger is subject to a number of conditions and if these conditions are not satisfied the Merger may not be consummated.
Pursuant to the Merger Agreement, consummation of the Merger is subject to a number of conditions that must be satisfied prior to the consummation of the Merger and that may not occur, even if we obtain stockholder approval. The closing conditions under the Merger Agreement include, among others, the adoption of the Merger Agreement by holders of a majority of our outstanding common stock.

37

The obligation to consummate the Merger is also subject to the accuracy of representations and warranties, and the satisfaction of performance of obligations, in each case as set forth in the Merger Agreement, subject to specified materiality exceptions. The obligation of Franchise Group to close is also subject to the absence of any material adverse effect having occurred at the Company. As a result of the above-mentioned conditions and the other conditions described in the Merger Agreement, there can be no assurance that the Merger will be consummated, even if stockholder approval of the Merger is obtained.
Should the Merger fail to close for any reason, our business, financial condition, operating results, or cash flows may be materially adversely affected.
The failure to complete the Merger in a timely manner or at all could negatively impact the market price of our common stock, as well as adversely affect our business, financial condition, operating results and cash flows.
Completion of the Merger is subject to several conditions beyond our control that may prevent, delay or otherwise adversely affect its completion in a material way, including the approval of our stockholders, the expiration or termination of applicable waiting periods under antitrust and competition laws and similar competition approvals or consents that must be obtained from regulatory entities. The Merger cannot be completed until the conditions to closing are satisfied or (if permissible under applicable law) waived. We cannot guarantee that the closing conditions set forth in the Merger Agreement will be satisfied or, even if satisfied, that no event of termination will take place. In the event that the Merger is not completed for any reason, the holders of our common stock will not receive any payment for their common stock in connection with the proposed Merger. Instead, we will remain an independent public company, and the holders of our common stock will continue to own their common stock.
If the Merger is not completed, the price of our shares of common stock may drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under certain circumstances specified in the Merger Agreement, we may be required to pay a termination fee to Franchise Group in the event that the Merger is not consummated. Also, in connection with the Merger, we may incur substantial transaction fees and costs.
Further, a failure to complete the Merger may result in a negative perception of us in the financial markets and investment community and negative responses from customers, business partners and other third parties. Any disruption to our business resulting from the announcement and pendency of the Merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our employees, customers, business partners and other third parties, could continue or accelerate in the event of a failure to complete the Merger. Our business, financial condition, operating results and cash flows may be adversely affected, as compared to the condition prior to the announcement of the Merger, if the Merger is not consummated.
We are the target of securities class action and derivative lawsuits that could result in substantial costs and may delay or prevent the Merger from being completed.
Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into merger agreements, and several such lawsuits have been filed against the Company. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management's time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, or from being completed within the expected timeframe, which may adversely affect our business, financial condition, operating results and cash flows. For additional information, please see “Item 1. Legal Proceedings” above.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes the Company’s purchases of shares of common stock during the quarter ended September 28, 2019:

38

Period
Total Number
of Shares (or
Units)
Purchased
(1)
 
Average Price
Paid per Share
(or Unit)
 
Total Number of Shares (or Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
(2)
 
Maximum  Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet
Be Purchased Under
the Plans or Programs
(in thousands) (2)
June 30, 2019 through July 27, 2019
—

 
$
—

 
—

 
$
70,000

July 28, 2019 through August 24, 2019
2,234

 
$
5.85

 
—

 
$
70,000

August 25, 2019 through September 28, 2019
695

 
$
6.47

 
—

 
$
70,000

Totals
2,929

 
 
 
—

 
 
 
(1)
Shares withheld to cover required tax payments on behalf of employees as their equity awards vest.
(2)
On August 5, 2014, May 6, 2015 and November 23, 2015, the Company’s board of directors approved share repurchase programs that enable the Company to purchase up to an aggregate of $300 million of its shares of common stock from time to time over three year periods ending on August 4, 2017, May 5, 2018 and November 22, 2018, respectively. On May 5, 2017, the Company's board of directors authorized the repurchase of up to an additional $70.0 million of equity and equity-linked securities. On October 31, 2018, the Company's board of directors approved a two year extension of the remaining repurchase program. On May 1, 2019, the Company’s board of directors increased the amount available under this program to $70.0 million. This repurchase program will expire on November 22, 2020.
Item 3.    Defaults Upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.
Item 6.    Exhibits    
Exhibit
No.                        Description
2.1
3.1
3.2
10.1
31.1
31.2

39

32.1
32.2
101.1
The following financial information from the Company’s Quarterly Report on Form 10-Q, for the period ended September 28, 2019, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.


40

SIGNATURE
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 on November 6, 2019.
 
 
 
VITAMIN SHOPPE, INC.
 
 
By:
 
/s/ Charles D. Knight
 
 
Charles D. Knight
 
 
EVP and Chief Financial Officer


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