. Basis of Presentation and Summary of Significant Accounting Policies

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by Article

of Regulation S-

Accordingly, they do

not

include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form

-Q should be read in conjunction with Item

– “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form

-K. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are

not

necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending

September 30.

The accompanying unaudited consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company (

VC2

). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has

one

reporting segment: natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the

three

months ended

December 31, 2018

and

2017,

as follows:

	Three months ended December 31,
	201 8			201 7
Grocery		68	%		67
Dietary supplements		21			22
Other		11			11
		100	%		100

Use of

Estimates

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 (including the fair value of assets acquired and liabilities assumed in a business combination), the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to: allowances for self-insurance reserves; valuation of inventories; useful lives of property and equipment for depreciation and amortization; impairment of finite-lived intangible assets, long-lived assets, and goodwill; lease assumptions; and litigation based on currently available information. Changes in facts and circumstances

may

result in revised estimates and actual results could differ from those estimates.

U.S. Tax Reform

December 22, 2017,

the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform Act). The Tax Reform Act significantly revised the ongoing federal income tax by, among other things, lowering U.S. corporate income tax rates effective

January 1, 2018.

The Company has a U.S. federal income tax rate of approximately

21.0%

for the fiscal year ending

September 30, 2019.

The Tax Reform Act resulted in a blended U.S. federal income tax rate of approximately

24.3%

for the fiscal year ended

September 30, 2018.

Remeasurement of the Company’s deferred tax balance under the Tax Reform Act resulted in a non-cash tax benefit of approximately

$4.3

million for the

three

months ended

December 31, 2017

and the fiscal year ended

September 30, 2018.

Recently Adopted Accounting Pronouncements

May 2014,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

2014

09,

“Revenue from Contracts with Customers,” Topic

606,

“Revenue from Contracts with Customers” (ASU

2014

). ASU

2014

provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP. ASU

2014

09’s

core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. The Company adopted this ASU and related amendments on

October 1, 2018,

using the modified retrospective approach. Additionally, upon adoption of this ASU, the Company elected the following practical expedients:

ASU

2016

09,

pursuant to which the incremental costs of obtaining a contract are recognized as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is

one

year or less.

ASU

2016

12,

pursuant to which sales taxes and other similar taxes collected from customers are presented net of sales.

ASU

2016

20,

pursuant to which the transaction price allocated to performance obligations is

not

disclosed when the related contract has a duration of

one

year or less.

Updated accounting policies and other disclosures are discussed below in

Recent Accounting Pronouncements

in this Note

The adoption of ASU

2014

did

not

have a material impact on the Company’s consolidated financial statements for the

three

months ended

December 31, 2018.

Recent Accounting Pronouncements

January 2017,

the FASB issued ASU

2017

04,

“Simplifying the Test for Goodwill Impairment,” Topic

350,

“Intangibles – Goodwill and Other” (ASU

2017

). The amendments in ASU

2017

simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the

first

step in the current

two

-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should

not

exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. Early adoption is permitted for annual and interim goodwill impairment testing dates after

January 1, 2017,

and the ASU is effective for the Company’s

first

quarter of the fiscal year ending

September 30, 2020.

The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

February 2016,

the FASB issued ASU

2016

02,

“Leases,” Topic

842,

“Leases” (ASU

2016

). ASU

No.

2016

requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than

months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. ASU

2016

also requires certain quantitative and qualitative disclosures. The provisions of ASU

2016

are effective for the Company’s

first

quarter of the fiscal year ending

September 30, 2020,

with early adoption permitted. The Company will apply the transition provisions of ASU

2016

at its adoption date, rather than the earliest comparative period presented in the financial statements, as permitted by ASU

2018

11,

“Leases,” Topic

842,

“Targeted Improvements,” released in

July 2018.

The adoption of ASU

2016

will result in a material increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets. The Company is also performing a comprehensive review of its current processes to determine and implement changes required to support the adoption of this standard. As part of this review process, the Company is implementing new software solutions to support the lease reporting upon adoption. The Company is currently evaluating the other effects the adoption of ASU

2016

will have on its consolidated financial statements.

January 2018,

the FASB issued ASU

2018

01,

“Leases,” Topic

842,

“Land Easement Practical Expedient for Transition to Topic

842”

(ASU

2018

). ASU

2018

permits an entity to elect a transition practical expedient to

not

assess, under Accounting Standards Codification (ASC)

842,

land easements that exist or expired before the standard’s effective date that were

not

previously accounted for as leases under ASC

840.

The Company plans to elect this practical expedient in implementing ASU

2016

02.

June 2018,

the FASB issued ASU

2018

07,

“Compensation-Stock Compensation,” Topic

718,

“Improvements to Nonemployee Share-Based Payment Accounting” (ASU

2018

) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU

2018

expands the scope of Topic

718

to more closely align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain exceptions. The provisions of ASU

2018

are effective for the Company’s

first

quarter of the fiscal year ending

September 30, 2020,

with early adoption permitted. This ASU is

not

expected to have a material impact on the Company’s consolidated financial statements.

SEC Disclosure Update

August 2018,

the SEC adopted final rules under SEC Release

No.

10532,

Disclosure Update and Simplification

, amending and expanding certain disclosure requirements. The rules require, among other things, that registrants include in their interim financial statements a reconciliation of changes in stockholders’ equity in the notes or as a separate statement that reconciles the beginning balance to the ending balance of each caption in stockholders’ equity for each period for which an income statement is required to be filed. The Company applied the new SEC disclosure requirements to the Consolidated Statements of Stockholders’ Equity for the

three

months ended

December 31, 2018

on a retrospective basis.