10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

OR

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

COMMISSION FILE NUMBER: 001-35608

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

Delaware	45-5034161
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

12612 West Alameda Parkway	80228
Lakewood, Colorado (Address of principal executive offices)	(Zip code)

(303) 986-4600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	NGVC	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 ☒ 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 ☒ 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.

Large accelerated filer ☐	Accelerated filer ☒
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 ☒

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 3, 2021 was 22,606,670.

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2021

Table of Contents

		Page Number
	PART I. Financial Information
Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of March 31, 2021 and September 30, 2020 (unaudited)	4
	Consolidated Statements of Income for the three and six months ended March 31, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended March 31, 2021 and 2020 (unaudited)	6
	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2021 and 2020 (unaudited)	7
	Notes to Unaudited Interim Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
	PART II. Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 6.	Exhibits	31
SIGNATURES		32

2

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, “fiscal year 2021” refers to the year from October 1, 2020 to September 30, 2021).

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this Form 10-Q) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout this Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources, future growth, pending legal proceedings and other financial and operating information, are forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-Q.

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 (the Form 10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

In addition, our actual results could differ materially from the forward-looking statements in this Form 10-Q due to risks and challenges related to the COVID-19 pandemic and the resulting government mandates, including: the length of time the COVID-19 pandemic continues; the inability of customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-priced or other perceived value offerings; the temporary inability of our employees to work due to illness; temporary store closures due to infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local, state or federal governmental authorities; the extent and duration of adverse economic conditions resulting from the COVID-19 pandemic and government mandates, including its impact on consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; increased operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state governments. We believe these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. You are advised, however, to consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). Our reports and other filings with the SEC are available at the SEC’s website at www.sec.gov. Our reports and other filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.

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PART I. Financial Information

Item 1.  Financial Statements

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	March 31, 2021		September 30, 2020
Assets
Current assets:
Cash and cash equivalents	$	20,977		28,534
Accounts receivable, net		8,996		8,519
Merchandise inventory		98,456		100,175
Prepaid expenses and other current assets		4,073		6,185
Total current assets		132,502		143,413
Property and equipment, net		146,364		147,929
Other assets:
Operating lease assets, net		330,514		339,239
Finance lease assets, net		38,344		40,096
Deposits and other assets		611		647
Goodwill and other intangible assets, net		10,988		10,468
Total other assets		380,457		390,450
Total assets	$	659,323		681,792
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	64,026		69,163
Accrued expenses		21,492		24,995
Term loan facility, current portion		1,750		—
Operating lease obligations, current portion		32,705		32,156
Finance lease obligations, current portion		2,996		2,836
Total current liabilities		122,969		129,150
Long-term liabilities:
Term loan facility, net of current portion		32,813		—
Operating lease obligations, net of current portion		316,609		325,641
Finance lease obligations, net of current portion		37,987		39,506
Deferred income tax liabilities, net		15,518		14,429
Total long-term liabilities		402,927		379,576
Total liabilities		525,896		508,726
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,595,467 and 22,546,765 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively		23		23
Additional paid-in capital		57,065		56,752
Retained earnings		76,339		116,291
Total stockholders’ equity		133,427		173,066
Total liabilities and stockholders’ equity	$	659,323		681,792

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three months ended March 31,						Six months ended March 31,
	2021			2020			2021			2020
Net sales	$	259,198			277,524			524,243			507,554
Cost of goods sold and occupancy costs		187,371			199,701			379,391			369,207
Gross profit		71,827			77,823			144,852			138,347
Store expenses		58,422			56,878			118,752			108,305
Administrative expenses		6,358			7,038			13,662			12,857
Pre-opening and relocation expenses		341			650			530			1,080
Operating income		6,706			13,257			11,908			16,105
Interest expense, net		(603	)		(516	)		(1,113	)		(1,052	)
Income before income taxes		6,103			12,741			10,795			15,053
Provision for income taxes		(1,399	)		(3,023	)		(2,459	)		(3,467	)
Net income	$	4,704			9,718			8,336			11,586
Net income per common share:
Basic	$	0.21			0.43			0.37			0.52
Diluted	$	0.21			0.43			0.37			0.51
Weighted average number of shares of common stock outstanding:
Basic		22,581,916			22,493,341			22,570,305			22,482,285
Diluted		22,737,646			22,543,429			22,715,098			22,542,319

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six months ended March 31,
	2021			2020
Operating activities:
Net income	$	8,336			11,586
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,057			15,595
Impairment and store closing costs		105			—
Share-based compensation		487			552
Deferred income tax expense		1,089			475
Non-cash interest expense		11			6
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net		(477	)		(535	)
Merchandise inventory		1,719			7,768
Prepaid expenses and other assets		(922	)		(483	)
Income tax receivable		3,004			4,960
Operating lease asset		15,402			14,973
(Decrease) increase in:
Operating lease liability		(15,861	)		(15,285	)
Accounts payable		(7,142	)		10,146
Accrued expenses		(3,503	)		3,602
Net cash provided by operating activities		17,305			53,360
Investing activities:
Acquisition of property and equipment		(8,673	)		(18,759	)
Acquisition of other intangibles		(926	)		(1,399	)
Proceeds from sale of property and equipment		—			—
Proceeds from property insurance settlements		58			27
Net cash used in investing activities		(9,541	)		(20,131	)
Financing activities:
Borrowings under revolving facility		—			226,000
Repayments under revolving facility		—			(231,692	)
Borrowings under term loan facility		35,000			—
Repayments under term loan facility		(438	)		—
Finance lease obligation payments		(1,369	)		(1,082	)
Dividend to shareholders		(48,288	)		(3,148	)
Loan fees paid		(52	)		(25	)
Payments on withholding tax for restricted stock unit vesting		(174	)		(122	)
Net cash used in financing activities		(15,321	)		(10,069	)
Net (decrease) increase in cash and cash equivalents		(7,557	)		23,160
Cash and cash equivalents, beginning of period		28,534			6,214
Cash and cash equivalents, end of period	$	20,977			29,374
Supplemental disclosures of cash flow information:
Cash paid for interest	$	165			328
Cash paid for interest on finance lease obligations, net of capitalized interest of $83 and $68, respectively		910			781
Income taxes paid		4,777			10
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	4,435			3,748
Acquisition of other intangibles not yet paid		233			179
Property acquired through operating lease obligations		7,287			8,170
Property acquired through finance lease obligations		106			5,232

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended March 31, 2021 and March 31, 2020

(Unaudited)

(Dollars in thousands, except per share data)

	Common stock –$0.001 par
	value
	Shares outstanding		Amount		Additional paid-in capital		Retained earnings			Treasury stock		Total stockholders’ equity
Balances September 30, 2020		22,546,765	$	23	$	56,752	$	116,291		$	—	$	173,066
Net income		—		—		—		3,632			—		3,632
Cash dividends		—		—		—		(46,706	)		—		(46,706	)
Share-based compensation		16,884		—		166		—			—		166
Balances December 31, 2020		22,563,649		23		56,918		73,217			—		130,158
Net income		—		—		—		4,704			—		4,704
Cash dividends		—		—		—		(1,582	)		—		(1,582	)
Share-based compensation		31,818		—		147		—			—		147
Balances March 31, 2021		22,595,467	$	23	$	57,065	$	76,339		$	—	$	133,427

	Common stock –$0.001 par
	value
	Shares outstanding		Amount		Additional paid-in capital			Retained earnings			Treasury stock			Total stockholders’ equity
Balances September 30, 2019		22,463,057	$	23	$	56,319		$	100,923		$	(359	)	$	156,906
Net income		—		—		—			1,868			—			1,868
Cash dividends		—		—		—			(1,573	)		—			(1,573	)
Share-based compensation		12,661		—		135			—			96			231
Topic 842 transition impact		—		—		—			1,660			—			1,660
Balances December 31, 2019		22,475,718		23		56,454			102,878			(263	)		159,092
Net income		—		—		—			9,718			—			9,718
Cash dividends		—		—		—			(1,574	)		—			(1,574	)
Share-based compensation		28,092		—		(15	)		—			214			199
Balances March 31, 2020		22,503,810	$	23	$	56,439		$	111,022		$	(49	)	$	167,435

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Unaudited Interim Consolidated Financial Statements

March 31, 2021 and 2020

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of March 31, 2021, the Company operated 161 stores in 20 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 159 stores in 20 states as of September 30, 2020.

2. 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 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-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. Certain prior year amounts have been combined for consistency with current year presentation. 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.

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; accounting for income taxes; 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.

Recently Adopted Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition, measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.

The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

The adoption of ASC 842 resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million and $377.8 million, respectively, as of October 1, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as deferred rent and leasehold incentives. 

8

 

Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the year ended September 30, 2020. This adjustment was primarily driven by the derecognition of $41.9 million of lease obligations and $40.2 million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback guidance. These leases were reclassified as operating or finance leases as of October 1, 2019, the transition date.  

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Non-employee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 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 2018-07 were effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 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. ASU 2019-10 delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to below). Because the Company is a smaller reporting company, the provisions of ASU 2017-04 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted, and the Company early adopted for the year ended September 30, 2020. ASU 2017-04 did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces 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 when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes” (ASU 2019-12). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The provisions of ASU 2019-12 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2022 with early adoption permitted. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR, but recent amendments provide for a LIBOR successor rate once LIBOR is discontinued. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

3. Revenue Recognition

The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In these transactions, the Company acts as a principal and recognizes revenue (net sales) from the sale of goods when control of the promised goods is transferred to the customer. Control refers to the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, the transferred goods.

The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and payment from the customer is also due at that time. Transaction prices are considered fixed. Discounts provided to customers at the point of sale are recognized as a reduction in revenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.

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Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company. The balance of contract liabilities related to unredeemed gift cards was $1.5 million and $1.3 million as of March 31, 2021 and September 30, 2020, respectively. Revenue for the three months ended March 31, 2021 and 2020 includes $0.1 million and $0 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2020 and 2019, respectively. Revenue for the six months ended March 31, 2021 and 2020 includes approximately $0.4 million and $0.8 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2020 and 2019, respectively.

The following table disaggregates our revenue by product category for the three and six months ended March 31, 2021 and 2020, dollars in thousands and as a percentage of net sales:

	Three months ended March 31,							Six months ended March 31,
	2021				2020			2021			2020
Grocery	$	180,457	70	%		186,171	67		366,072	70		344,106	68
Dietary supplements		53,901	21			63,969	23		107,125	20		111,870	22
Other		24,840	9			27,384	10		51,046	10		51,578	10
	$	259,198	100	%		277,524	100		524,243	100		507,554	100

4. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the Company’s earnings.

Presented below are basic and diluted EPS for the three and six months ended March 31, 2021 and 2020, dollars in thousands, except per share data:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Net income	$	4,704		9,718		8,336		11,586
Weighted average number of shares of common stock outstanding		22,581,916		22,493,341		22,570,305		22,482,285
Effect of dilutive securities		155,730		50,088		144,793		60,034
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,737,646		22,543,429		22,715,098		22,542,319
Basic earnings per share	$	0.21		0.43		0.37		0.52
Diluted earnings per share	$	0.21		0.43		0.37		0.51

There were 4,296 and 2,973 non-vested RSUs for the three and six months ended March 31, 2021, respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 142,020 and 181,720 non-vested RSUs for the three and six months ended March 31, 2020, respectively, excluded from the calculation of diluted EPS as they are antidilutive.

The Company paid a cash dividend of $0.07 per share of common stock in each of the first two quarters of fiscal years 2021 and 2020. The Company paid a special cash dividend of $2.00 per share of common stock in the first quarter of fiscal year 2021.

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5. Debt

Credit Facility

The Company is party to a credit facility consisting of a $50.0 million revolving loan facility (the Revolving Facility) and a fully drawn $35.0 million term loan facility (the Term Loan Facility, and together with the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. As of March 31, 2021, the financing commitment under the Revolving Facility was $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity date. The Company borrowed $35.0 million under the Term Loan Facility in December 2020 to partially fund its previously announced special cash dividend of $2.00 per common share. The Credit Facility matures on November 13, 2024. Base rate loans under the Credit Facility bear interest at a fluctuating base rate, as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio. The Company will repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent, provided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.

On November 13, 2019, the Company amended the Credit Facility to extend the maturity date to November 13, 2024 and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On November 18, 2020, the Company amended the Credit Facility to provide for the Term Loan Facility and permit the payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.

The Company had no amounts outstanding under the Revolving Facility as of March 31, 2021 and September 30, 2020. As of each of March 31, 2021 and September 30, 2020, the Company had undrawn, issued and outstanding letters of credit of $1.3 million, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had $48.7 million available for borrowing under the Revolving Facility as of March 31, 2021 and September 30, 2020. The Company had $34.6 million outstanding under its fully drawn Term Loan Facility as of March 31, 2021.

As of March 31, 2021 and September 30, 2020, the Company was in compliance with the financial covenants under the Credit Facility.

Lease Obligations

As of March 31, 2021 and September 30, 2020, the Company had 19 leases that were classified as finance leases. No rent expense is recorded for these finance leases; rather, rental payments under such leases are recognized as a reduction of the lease obligation and as interest expense. The interest rate on finance lease obligations is determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $0.7 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively, and approximately $1.2 million and $1.1 million for the six months ended March 31, 2021 and 2020, respectively. Interest expense for the three and six months ended March 31, 2021 and 2020 relates primarily to interest on finance lease obligations. The Company capitalized interest of less than $0.1 million for each of the three and six months ended March 31, 2021 and 2020.

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6. Stockholders’ Equity

Share Repurchases

In May 2016, the Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program, which will terminate on May 31, 2022. Repurchases under the Company’s share repurchase program may be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.

Prior to October 1, 2020, the Company reissued 199,543 treasury shares at a cost of $1.7 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three and six months ended March 31, 2021, the Company reissued no treasury shares. During the three and six months ended March 31, 2020, the Company reissued 28,092 treasury shares at a cost of approximately $0.2 million and 40,753 treasury shares at a cost of approximately $0.3 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At March 31, 2021 and September 30, 2020, the Company held no treasury shares.

7. Lease Obligations

The Company leases most of its stores, a bulk food repackaging facility and distribution center and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with scheduled increases in minimum rent payments.

Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets.

Most leases include one or more options to renew, with renewal terms normally expressed in periods of five year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.

As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. We use other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.

Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (“short-term leases”) are not presented on the balance sheet. The Company’s short-term leases relate primarily to embedded leases. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  

The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

The Company has four operating leases and one finance lease with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include various options to renew. These leases account for $8.2 million of right-of-use assets and $8.4 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended March 31, 2021 and 2020, and $0.7 million for each of the six months ended March 31, 2021 and 2020.

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The components of total lease cost for the three and six months ended March 31, 2021 and 2020 were as follows, dollars in thousands:

		Three months ended March 31,						Six months ended March 31,
Lease cost	Classification	2021			2020			2021			2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,603			10,586			21,239			21,252
	Store expenses		79			79			159			159
	Administrative expenses		76			77			152			159
	Pre-opening and relocation expenses		128			122			154			122
Finance lease cost:
Depreciation of right-of-use assets	Store expenses(1)		926			726			1,831			1,487
Interest on lease liabilities	Interest expense, net (1)		506			385			993			803
Short-term lease cost	Store expenses		621			443			1,158			528
Variable lease cost	Cost of goods sold and occupancy costs(2)		891			1,367			2,707			2,605
Sublease income	Store expenses		(70	)		(92	)		(163	)		(185	)
Total lease cost		$	13,760			13,693			28,230			26,930

¹ Immaterial balances related to stores not yet open are included in pre-opening and relocation expenses.

² Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the three and six months ended March 31, 2021 and 2020 were as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,052		11,003		22,189		22,004
Operating cash flows from finance leases		493		431		993		849
Financing cash flows from finance leases		694		564		1,369		1,082
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		4,518		1,792		7,287		7,230
Finance leases		—		3,910		106		5,232

Additional information related to the Company’s leases as of March 31, 2021 and 2020 were as follows:

	March 31, 2021			March 31, 2020
Weighted-average remaining lease term (in years):
Operating leases		11.4			12.0
Finance leases		12.0			12.0
Weighted-average discount rate:
Operating leases		3.6	%		3.6
Finance leases		5.1	%		4.9

In the six months ended March 31, 2021, the Company paid $0.3 million in lease termination costs to terminate the lease associated with one store that closed in the first quarter of fiscal year 2019. In association with the lease termination, the Company wrote off $0.6 million in operating right-of-use assets and $0.8 million in operating lease liabilities and recorded a $0.2 million gain in store expenses.

In addition, during the six months ended March 31, 2020, the Company purchased one store building that had previously been leased. This resulted in: (i) a $2.5 million reduction in operating lease liability and (ii) the reclassification of $2.4 million of corresponding operating right-of-use asset to property and equipment.

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Future lease payments under non-cancellable leases as of March 31, 2021 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2021	$	22,299			2,437			24,736
2022		44,589			4,893			49,482
2023		43,789			4,937			48,726
2024		41,964			5,002			46,966
2025		40,261			5,012			45,273
Thereafter		236,959			32,453			269,412
Total future undiscounted lease payments		429,861			54,734			484,595
Less imputed interest		(80,547	)		(13,751	)		(94,298	)
Total reported lease liability		349,314			40,983			390,297
Less current portion		(32,705	)		(2,996	)		(35,701	)
Noncurrent lease liability	$	316,609			37,987			354,596

The table above excludes $30.8 million of legally binding minimum lease payments for leases that had been executed as of March 31, 2021 but whose terms had not yet commenced.

8. Property and Equipment

The Company had the following property and equipment balances as of March 31, 2021 and September 30, 2020, dollars in thousands:

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Construction in process		n/a		$	3,942			6,717
Land		n/a			2,445			1,390
Buildings	16	-	40		31,433			26,732
Land improvements	1	–	24		1,738			1,575
Leasehold and building improvements	1	–	25		156,269			153,438
Fixtures and equipment	5	–	7		142,897			139,965
Computer hardware and software	3	–	5		24,196			23,628
					362,920			353,445
Less accumulated depreciation and amortization					(216,556	)		(205,516	)
Property and equipment, net				$	146,364			147,929

Depreciation and amortization expense for the three and six months ended March 31, 2021 and 2020 is summarized as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	213		194		428		383
Depreciation and amortization expense included in store expenses		6,913		7,393		14,041		14,633
Depreciation and amortization expense included in administrative expenses		294		301		588		579
Total depreciation and amortization expense	$	7,420		7,888		15,057		15,595

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9. Goodwill and Other Intangible Assets

The Company had the following goodwill and other intangible asset balances as of March 31, 2021 and September 30, 2020, dollars in thousands:

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,693			3,634
Less accumulated amortization					(2,764	)		(2,378	)
Amortizable intangible assets, net					929			1,256
Other intangibles in process					4,472			3,625
Trademark	Indefinite				389			389
Total other intangibles, net					5,790			5,270
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	10,988			10,468

10. Accrued Expenses

The composition of accrued expenses as of March 31, 2021 and September 30, 2020 is summarized as follows, dollars in thousands:

	As of
	March 31,		September 30,
	2021		2020
Payroll and employee-related expenses	$	10,736		13,569
Accrued property, sales and use tax payable		6,793		7,912
Accrued marketing expenses		608		407
Deferred revenue related to gift card sales		2,012		1,819
Income tax payable (1)		17		210
Other (1)		1,326		1,078
Total accrued expenses	$	21,492		24,995

(1) Certain prior year amounts have been reclassified for consistency with current year presentation.

11. Income Taxes

Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

12. Related Party Transactions

The Company has ongoing relationships with related entities as noted below:

Chalet Properties, LLC: The Company has four operating leases and one finance lease with Chalet. Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.2 million for each of the three months ended March 31, 2021 and 2020. Rent paid to Chalet was approximately $0.5 million for each of the six months ended March 31, 2021 and 2020.

Isely Family Land Trust LLC: The Company has one operating lease with the the Land Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.1 million for each of the three months ended March 31, 2021 and 2020. Rent paid to the Land Trust was approximately $0.2 million for each of the six months ended March 31, 2021 and 2020.

FTVC LLC: The Company has one operating lease for a store location with FTVC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC was less than $0.1 million for each of the three months ended March 31, 2021 and 2020. Rent paid to FTVC was less than $0.1 million for each of the six months ended March 31, 2021 and 2020.

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13. Commitments and Contingencies

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment-related claims, customer injury claims and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results of operations.

14. Subsequent Event

On May 5, 2021, the Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2021 to stockholders of record as of the close of business on June 1, 2021.

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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 (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2021, we operated 161 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2020, we increased our store count at a compound annual growth rate of 9.1%. In fiscal year 2020, we opened six new stores. We plan to open three to four new stores in fiscal year 2021, two of which opened during the six months ended March 31, 2021. As of the date of this report, we have signed leases for an additional five new stores that we plan to open in fiscal years 2021 and beyond. We plan to relocate/remodel four to five stores in fiscal year 2021, one of which opened in the six months ended March 31, 2021. Between April 1, 2021 and the date of this Form 10-Q, we did not open any new stores and we relocated one store.

Performance Highlights

Key highlights of our performance for the three and six months ended March 31, 2021 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, daily average comparable store sales, are defined under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.

● Net sales. Net sales were $259.2 million for the three months ended March 31, 2021, a decrease of $18.3 million, or 6.6%, compared to net sales of $277.5 million for the three months ended March 31, 2020. Net sales were $524.2 million for the six months ended March 31, 2021, an increase of $16.7 million, or 3.3%, compared to net sales of $507.6 million for the six months ended March 31, 2020.

● Daily average comparable store sales. Daily average comparable store sales for the three months ended March 31, 2021 decreased 7.0% compared to the three months ended March 31, 2020. Daily average comparable store sales for the six months ended March 31, 2021 increased 2.0% compared to the six months ended March 31, 2020.

● Net income. Net income was $4.7 million for the three months ended March 31, 2021, a decrease of $5.0 million, or 51.6%, compared to net income of $9.7 million for the three months ended March 31, 2020. Net income was $8.3 million for the six months ended March 31, 2021, a decrease of $3.3 million, or 28.1%, compared to net income of $11.6 million for the six months ended March 31, 2020.

● EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $14.1 million for the three months ended March 31, 2021, a decrease of $7.0 million, or 33.2%, compared to $21.1 million for the three months ended March 31, 2020. EBITDA was $27.0 million for the six months ended March 31, 2021, a decrease of $4.7 million, or 14.9%, compared to $31.7 million for the six months ended March 31, 2020. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

● Adjusted EBITDA. Adjusted EBITDA was $14.1 million for the three months ended March 31, 2021, a decrease of $7.0 million, or 33.2%, compared to $21.1 million for the three months ended March 31, 2020. Adjusted EBITDA was $27.4 million for the six months ended March 31, 2021, a decrease of $4.3 million, or 13.7%, compared to $31.7 million for the six months ended March 31, 2020. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.

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● Liquidity. As of March 31, 2021, cash and cash equivalents was $21.0 million, and there was $48.7 million available for borrowing under our Revolving Facility, net of undrawn, issued and outstanding letters of credit of $1.3 million.

● New store growth. We opened one new store during the three months ended March 31, 2021. We opened two new stores during the six months ended March 31, 2021. We operated a total of 161 stores as of March 31, 2021. We plan to open a total of three to four new stores in fiscal year 2021, which would result in an annual new store growth rate of 1.9% to 2.5% for fiscal year 2021.

● Store Relocations/Remodels. We relocated/remodeled one store during the three and six months ended March 31, 2021.

Industry Trends and Economics

We have identified the following trends and factors that have impacted and may continue to impact our results of operations and financial condition:

● COVID-19 pandemic. On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. In response to the COVID-19 pandemic, federal, state and local authorities have implemented a number of public health mandates intended to prevent the spread of the virus, including social distancing, quarantine, wearing face coverings, and “stay-at-home” measures. While significant efforts to distribute COVID-19 vaccines to the public have commenced across the United States and many states have reopened their economies by easing restrictions, certain of these public health mandates have had an adverse impact on the U.S. economy. The long-term economic impact of the COVID-19 pandemic is unknown at this time.

● Impact of the COVID-19 pandemic on our operations. We believe we have acted proactively in response to the COVID-19 pandemic and the resulting government mandates. To date, all of our stores have been deemed “essential businesses” by relevant government authorities and have continued operating since the start of the COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health measures have been implemented by states across our footprint and customers have adjusted to these new circumstances by consuming more food at home as restaurants have not fully reopened to pre-pandemic levels. The COVID-19 pandemic and government mandates have also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party.

● Future impact of the COVID-19 pandemic. We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in particular, when the pandemic subsides and government mandates are lifted. We expect the impact of the COVID-19 pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, including economic stabilization efforts, and the long-term effect the pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and government mandates make it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.- Risk Factors” in our Form 10-K. Additional information regarding the impact of the COVID-19 pandemic and government mandates on our business and results of operations is provided below in this MD&A.

● Impact of broader economic trends and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, periods of recession and growth, the price of commodities, the political environment and consumer confidence.

● Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We expect the rate of new store unit growth in the foreseeable future to be comparable to recent years, depending on economic and business conditions and other factors, including the impact of the COVID-19 pandemic and related government mandates.

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● Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.

● Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.

Outlook

We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a convenient shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.

We expect the rate of new store unit growth in the foreseeable future to be comparable to recent years, depending on economic and business conditions and other factors, including the impact of the COVID-19 pandemic and related government mandates. Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. In the future, we believe there are opportunities for increased leverage of costs and increased economics of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our ability to leverage costs may be limited.

Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K.

Key Financial Metrics in Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:

Net sales

Our net sales are comprised of gross sales net of discounts, in-house coupons and returns and allowances. In comparing net sales between periods, we monitor the following:

● Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).

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● Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, return transactions and exchange transactions.

● Average transaction size. Average transaction size, or basket size, is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction.

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and increase sales. Rent payments for leases classified as finance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.

Gross profit and gross margin

Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.

Store expenses

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, generally related to store relocations, as well as store closure and lease termination costs. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.

Administrative expenses

Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.

Pre-opening and relocation expenses

Pre-opening and relocation expenses may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening interest expense. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening and relocation costs are expensed as incurred.

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Interest expense, net

Interest expense consists of the interest associated with finance lease obligations net of capitalized interest, and our Credit Facility.

Income tax expense

Income taxes are accounted for in accordance with the provisions of Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of restricted stock units.

Results of Operations

The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:

	Three months ended March 31,						Six months ended March 31,
	2021			2020			2021			2020
Statements of Income Data:*
Net sales		100.0	%		100.0			100.0			100.0
Cost of goods sold and occupancy costs		72.3			72.0			72.4			72.7
Gross profit		27.7			28.0			27.6			27.3
Store expenses		22.5			20.5			22.7			21.3
Administrative expenses		2.5			2.5			2.6			2.5
Pre-opening and relocation expenses		0.1			0.2			0.1			0.2
Operating income		2.6			4.8			2.3			3.2
Interest expense, net		(0.2	)		(0.2	)		(0.2	)		(0.2	)
Income before income taxes		2.4			4.6			2.1			3.0
Provision for income taxes		(0.5	)		(1.1	)		(0.5	)		(0.7	)
Net income		1.8	%		3.5			1.6			2.3
__________________________
*Figures may not sum due to rounding.
Number of stores at end of period		161			157			161			157
Number of new stores opened during the period		1			2			2			4
Number of stores relocated/remodeled during the period		1			0			1			0
Number of stores closed during the period		0			0			0			0
Twelve-month store unit growth rate		2.5	%		3.3			2.5			3.3
Change in daily average comparable store sales		(7.0	) %		17.0			2.0			9.7

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Three months ended March 31, 2021 compared to the three months ended March 31, 2020

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

	Three months ended March 31,						Change In
	2021			2020			Dollars			Percent
Statements of Income Data:
Net sales	$	259,198			277,524			(18,326	)		(6.6	)%
Cost of goods sold and occupancy costs		187,371			199,701			(12,330	)		(6.2	)
Gross profit		71,827			77,823			(5,996	)		(7.7	)
Store expenses		58,422			56,878			1,544			2.7
Administrative expenses		6,358			7,038			(680	)		(9.7	)
Pre-opening and relocation expenses		341			650			(309	)		(47.5	)
Operating income		6,706			13,257			(6,551	)		(49.4	)
Interest expense, net		(603	)		(516	)		(87	)		16.9
Income before income taxes		6,103			12,741			(6,638	)		(52.1	)
Provision for income taxes		(1,399	)		(3,023	)		1,624			(53.7	)
Net income	$	4,704			9,718			(5,014	)		(51.6	)

Net sales

Net sales decreased $18.3 million, or 6.6%, to $259.2 million for the three months ended March 31, 2021 compared to $277.5 million for the three months ended March 31, 2020, primarily due to a $22.1 million decrease in comparable store sales and a $3.8 million increase in new store sales. Daily average comparable store sales decreased 7.0% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The daily average comparable store sales decrease resulted from an 8.0% increase in daily average transaction size, offset by a 13.9% decrease in daily average transaction count. In the three months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $44.81 for the three months ended March 31, 2021. The decrease in net sales during the three months ended March 31, 2021 was primarily driven by the unprecedented level of net sales we experienced during the three months ended March 31, 2020, as our customers stockpiled groceries during the initial phase of the COVID-19 pandemic. While our net sales during the three months ended March 31, 2021 benefited from customers’ response to the COVID-19 pandemic and related government mandates, this trend moderated from the unprecedented levels experienced during the prior year period. Also contributing to the decrease in net sales during the three months ended March 31, 2021 was the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states.

Gross profit

Gross profit decreased $6.0 million, or 7.7%, to $71.8 million for the three months ended March 31, 2021 compared to $77.8 million for the three months ended March 31, 2020, primarily driven by the decreased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin decreased to 27.7% for the three months ended March 31, 2021 compared to 28.0% for the three months ended March 31, 2020. The decrease in gross margin during the three months ended March 31, 2021 was primarily driven by an increase in store occupancy expenses, as a percentage of net sales, partially offset by a modest improvement in product margin.

Store expenses

Store expenses increased $1.5 million, or 2.7%, to $58.4 million for the three months ended March 31, 2021 compared to $56.9 million for the three months ended March 31, 2020. Store expenses as a percentage of net sales were 22.5% and 20.5% for the three months ended March 31, 2021 and 2020, respectively. The increase in store expenses as a percentage of net sales is attributed to the deleverage associated with the decrease in sales volume and increased labor related expenses.

Administrative expenses

Administrative expenses decreased $0.7 million, or 9.7%, to $6.4 million for the three months ended March 31, 2021 compared to $7.0 million for the three months ended March 31, 2020. Administrative expenses as a percentage of net sales were 2.5% for each of the three months ended March 31, 2021 and 2020.

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Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased $0.3 million, or 47.5%, to $0.3 million for the three months ended March 31, 2021 compared to $0.7 million for the three months ended March 31, 2020, due to the impact of the number and timing of new store openings and relocations. We opened one new store during the three months ended March 31, 2021 compared to opening two new stores during the three months ended March 31, 2020. We did not relocate any stores during each of the three months ended March 31, 2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for the three months ended March 31, 2021 and 2020, respectively.

Interest expense, net

Interest expense, net of capitalized interest, was $0.6 million in the three months ended March 31, 2021 compared to $0.5 million in the three months ended March 31, 2020.

Income taxes

Income tax expense decreased $1.6 million for the three months ended March 31, 2021 to $1.4 million compared to $3.0 million for the three months ended March 31, 2020. The Company’s effective income tax rate was approximately 22.9% and 23.7% for the three months ended March 31, 2021 and 2020, respectively.

Net income

Net income was $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021 compared to $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 primarily driven by the decrease in sales volumes and increase in store expenses.

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Six months ended March 31, 2021 compared to the six months ended March 31, 2020

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

	Six months ended March 31,						Change In
	2021			2020			Dollars			Percent
Statements of Income Data:
Net sales	$	524,243			507,554			16,689			3.3	%
Cost of goods sold and occupancy costs		379,391			369,207			10,184			2.8
Gross profit		144,852			138,347			6,505			4.7
Store expenses		118,752			108,305			10,447			9.6
Administrative expenses		13,662			12,857			805			6.3
Pre-opening and relocation expenses		530			1,080			(550	)		(50.9	)
Operating income		11,908			16,105			(4,197	)		(26.1	)
Interest expense, net		(1,113	)		(1,052	)		(61	)		5.8
Income before income taxes		10,795			15,053			(4,258	)		(28.3	)
Provision for income taxes		(2,459	)		(3,467	)		1,008			(29.1	)
Net income	$	8,336			11,586			(3,250	)		(28.1	)

Net sales

Net sales increased $16.7 million, or 3.3%, to $524.2 million for the six months ended March 31, 2021 compared to $507.6 million for the six months ended March 31, 2020, primarily due to a $7.1 million increase in comparable store sales and a $9.6 million increase in new store sales. Daily average comparable store sales increased 2.0% for the six months ended March 31, 2021 compared to the six months ended March 31, 2020. The daily average comparable store sales increase resulted from a 14.1% increase in daily average transaction size, partially offset by a 10.6% decrease in daily average transaction count. In the six months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $44.98 for the six months ended March 31, 2021. The increase in net sales during the six months ended March 31, 2021 was primarily driven by our customers’ response to the COVID-19 pandemic and related government mandates, partially offset by the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states. Also contributing to the increase in net sales during the six months ended March 31, 2021 were marketing initiatives, promotional campaigns and increased membership in and usage of the {N}power customer loyalty program.

Gross profit

Gross profit increased $6.5 million, or 4.7%, to $144.9 million for the six months ended March 31, 2021 compared to $138.3 million for the six months ended March 31, 2020, primarily driven by the increased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 27.6% for the six months ended March 31, 2021 compared to 27.3% for the six months ended March 31, 2020. The increase in gross margin during the six months ended March 31, 2021 was primarily driven by an improved product margin and a decrease in store occupancy and shrink expenses, as a percentage of net sales.

Store expenses

Store expenses increased $10.4 million, or 9.6%, to $118.8 million for the six months ended March 31, 2021 compared to $108.3 million for the six months ended March 31, 2020. In the six months ended March 31, 2021, we recorded $0.4 million in lease exit costs, primarily related to a lease termination fee, associated with one store that closed in the first quarter of fiscal year 2019. Store expenses as a percentage of net sales were 22.7% and 21.3% for the six months ended March 31, 2021 and 2020, respectively. The increase in store expenses as a percentage of net sales is primarily attributed to increased labor related expenses.

Administrative expenses

Administrative expenses increased $0.8 million, or 6.3%, to $13.7 million for the six months ended March 31, 2021 compared to $12.9 million for the six months ended March 31, 2020. Administrative expenses as a percentage of net sales were 2.6% and 2.5% for the six months ended March 31, 2021 and 2020, respectively.

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Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased $0.6 million, or 50.9%, to $0.5 million for the six months ended March 31, 2021 compared to $1.1 million for the six months ended March 31, 2020, due to the impact of the number and timing of new store openings and relocations. We opened two new stores during the six months ended March 31, 2021 compared to opening four new stores during the six months ended March 31, 2020. We did not relocate any stores during each of the six months ended March 31, 2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for the six months ended March 31, 2021 and 2020, respectively.

Interest expense

Interest expense, net of capitalized interest, remained flat at $1.1 million for each of the six months ended March 31, 2021 and March 31, 2020.

Income taxes

Income tax expense decreased $1.0 million for the six months ended March 31, 2021 to $2.5 million compared to $3.5 million for the six months ended March 31, 2020. The Company’s effective income tax rate was approximately 22.8% and 23.0% for the six months ended March 31, 2021 and 2020, respectively.

Net income

Net income was $8.3 million, or $0.37 diluted earnings per share, for the six months ended March 31, 2021 compared to $11.6 million, or $0.51 diluted earnings per share, for the six months ended March 31, 2020.

Non-GAAP financial measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as 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 such as impairment charges, store closing and lease exit costs and non-recurring items. The adjustment to EBITDA for the six months ended March 31, 2021 related to lease exit costs associated with one store that closed in the first quarter of fiscal year 2019.

The following table reconciles net income to EBITDA and Adjusted EBITDA, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Net income	$	4,704		9,718		8,336		11,586
Interest expense, net		603		516		1,113		1,052
Provision for income taxes		1,399		3,023		2,459		3,467
Depreciation and amortization		7,420		7,888		15,057		15,595
EBITDA		14,126		21,145		26,965		31,700
Lease exit costs		—		—		405		—
Adjusted EBITDA	$	14,126		21,145		27,370		31,700

EBITDA decreased 33.2% to $14.1 million in the three months ended March 31, 2021 compared to $21.1 million for the three months ended March 31, 2020. EBITDA decreased 14.9% to $27.0 million in the six months ended March 31, 2021 compared to $31.7 million for the six months ended March 31, 2020. EBITDA as a percentage of net sales was 5.4% and 7.6% in the three months ended March 31, 2021 and 2020, respectively. EBITDA as a percentage of net sales was 5.1% and 6.2% in the six months ended March 31, 2021 and 2020, respectively.

Adjusted EBITDA decreased 33.2% to $14.1 million in the three months ended March 31, 2021 compared to $21.1 million for the three months ended March 31, 2020. Adjusted EBITDA decreased 13.7% to $27.4 million in the six months ended March 31, 2021 compared to $31.7 million for the six months ended March 31, 2020. Adjusted EBITDA as a percentage of net sales was 5.4% and 7.6% in the three months ended March 31, 2021 and 2020, respectively. Adjusted EBITDA as a percentage of net sales was 5.2% and 6.2% in the six months ended March 31, 2021 and 2020, respectively.

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EBITDA and Adjusted EBITDA as supplemental measures

Management believes some investors’ understanding of our performance is enhanced by including EBITDA and Adjusted EBITDA, non-GAAP financial measures. We believe EBITDA and Adjusted EBITDA provide additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.

Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes some investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing analysts’ and investors’ understanding of our business and our results of operations, as well as assisting analysts and investors in evaluating how well we are executing our strategic initiatives.

Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA and Adjusted EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA and Adjusted EBITDA have limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results as reported under GAAP. Some of the limitations are:

● EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

● EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

● EBITDA and Adjusted EBITDA do not reflect any impact for single lease expense for leases classified as finance leases;

● EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

● EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; and

● although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility. Our Credit Facility consists of the $50.0 million Revolving Facility and the fully drawn $35.0 million Term Loan Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service, corporate taxes and cash dividends. As of March 31, 2021, we had $21.0 million in cash and cash equivalents, as well as $48.7 million available for borrowing under our Revolving Facility. On November 18, 2020, we entered into the $35.0 million Term Loan Facility maturing November 13, 2024.

In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. Our Board subsequently extended the share repurchase program, which will terminate on May 31, 2022. We did not repurchase any shares during the six months ended March 31, 2021. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash balances or borrowings under our Revolving Facility. The timing and the number of shares repurchased will be dictated by our capital needs and stock market conditions.

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We paid a special cash dividend of $2.00 per share and a quarterly cash dividend of $0.07 per share of common stock in the three months ended December 31, 2020. We paid a quarterly cash dividend of $0.07 per share of common stock in the three months ended March 31, 2021. On May 5, 2021, our Board approved the payment of a quarterly cash dividend of $0.07 per share of common stock to be paid on June 16, 2021 to stockholders of record as of the close of business on June 1, 2021.

We plan to continue to open new stores, which may require us to borrow additional amounts under the Revolving Facility. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Revolving Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs for at least the next twelve months. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:

	Six months ended March 31,
	2021			2020
Net cash provided by operating activities	$	17,305			53,360
Net cash used in investing activities		(9,541	)		(20,131	)
Net cash used in financing activities		(15,321	)		(10,069	)
Net (decrease) increase in cash and cash equivalents		(7,557	)		23,160
Cash and cash equivalents, beginning of period		28,534			6,214
Cash and cash equivalents, end of period	$	20,977			29,374

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities decreased $36.1 million, or 67.6%, to $17.3 million for the six months ended March 31, 2021 compared to $53.4 million for the six months ended March 31, 2020. The decrease in cash provided by operating activities was primarily due to a decrease in net income adjusted for non-cash items as well as cash used for working capital requirements, as compared to cash provided from working capital in the prior year.

Investing Activities

Net cash used in investing activities decreased $10.6 million, or 52.6%, to $9.5 million for the six months ended March 31, 2021 compared to $20.1 million for the six months ended March 31, 2020. This decrease was primarily due to a $10.0 million decrease in property and equipment acquisitions during the six months ended March 31, 2021 compared to the six months ended March 31, 2020 due to the impact of the number and timing of new store openings and relocations/remodels.

Financing Activities

Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and dividends paid to stockholders. Cash used in financing activities was $15.3 million for the six months ended March 31, 2021 compared to $10.1 million for the six months ended March 31, 2020. During the six months ended March 31, 2021, the Company borrowed $35.0 million under the Term Loan Facility which was used to partially fund the $48.3 million of dividends paid to stockholders.

Credit Facility

The financing commitment under the Revolving Facility is $50.0 million, including a $5.0 million sub-limit for standby letters of credit. We borrowed $35.0 million under the Term Loan Facility in December 2020 to partially fund the previously announced special cash dividend of $2.00 per common share. The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and Vitamin Cottage Two Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity date. On November 13, 2019, the Company amended the Credit Facility to extend the maturity date to November 13, 2024 and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On November 18, 2020, the Company amended the Credit Facility to provide for the Term Loan Facility and permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.

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Base rate borrowings under the Credit Facility bear interest at a fluctuating base rate as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor rate (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio. The Company will repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.

We had no amounts outstanding under the Revolving Facility as of March 31, 2021 and September 30, 2020, respectively. As of March 31, 2021 and September 30, 2020, we had undrawn, issued and outstanding letters of credit of $1.3 million, which were reserved against the amount available for borrowing under the Revolving Facility. We had $48.7 million available for borrowing under the Revolving Facility as of March 31, 2021 and September 30, 2020. We had $34.6 million of outstanding borrowings under the fully drawn Term Loan Facility as of March 31, 2021.

As of each of March 31, 2021 and September 30, 2020, the Company was in compliance with the financial covenants under the Credit Facility.

Share Repurchases

Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

As of March 31, 2021, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Revolving Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of March 31, 2021, the Company had signed seven leases whose terms have not yet commenced; such leases are for five new stores, one store relocation and one store remodel in fiscal year 2021 and beyond. The contractual obligation related to these leases is $30.8 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements included in this Form 10-Q.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances.

Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

To a limited extent, we are exposed to interest rate changes with respect to our Credit Facility. We do not use financial instruments for trading or other speculative purposes. There have been no material changes regarding our market risk position from the information provided under Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.          

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officers and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. Other Information

Item 1.  Legal Proceedings

We periodically are involved in various legal proceedings, including discrimination and other employment-related claims, customer personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.

Item 1A.  Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Form 10-K.

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Item 6.  Exhibits

EXHIBIT INDEX

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
10.1#	Customer Distribution Agreement by and among United Natural Foods, Inc., Tony’s Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food Markets, Inc. dated as of June 21, 2016
31.1	Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3	Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†	Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2021 and September 30, 2020 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended March 31, 2021 and 2020 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, 2021 and 2020 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2021 and 2020 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

# Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. This exhibit was subject to a confidential treatment request previously granted by the Securities and Exchange Commission (SEC), which is effective through May 31, 2021. The Company is filing this exhibit to transition to the new confidential treatment rules promulgated by the SEC in Item 601(b) of Regulation S-K.

† The certifications attached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on May 6, 2021.

Natural Grocers by Vitamin Cottage, Inc.
By:	/s/ KEMPER ISELY
	Kemper Isely, Co-President
	(Principal Executive Officer)
By:	/s/ TODD DISSINGER
	Todd Dissinger, Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EX-10.1

Exhibit 10.1

Portions of this document have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. Redacted portions are indicated with the notation “[***]”.

CUSTOMER DISTRIBUTION AGREEMENT

This CUSTOMER DISTRIBUTION AGREEMENT (the “Agreement”) is dated as of June 21, 2016 (the “Effective Date”) by and among United Natural Foods, Inc., a Delaware corporation (“UNFI”), Tony’s Fine Foods, a California corporation (“Tony’s”) and Albert’s Organics, a New Jersey corporation (“Albert’s”) (UNFI, Tony’s and Albert’s being collectively referred to as “Supplier”), and Vitamin Cottage Natural Food Markets, Inc., a Colorado corporation (“Customer”).

WITNESSETH:

WHEREAS, Customer desires to engage Supplier as a distributor of certain products offered for sale by Supplier and ordered by Customer (the “Products”); and

WHEREAS, Suppliers desire to accept such engagement under the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the above premises and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.    DISTRIBUTION. Supplier will distribute the Products to Customer, under the terms and conditions set forth herein.

2.    TERM AND TERMINATION.

A.    The initial term of this Agreement (the “Initial Term”) will commence on the Effective Date and will continue until May 31, 2021, subject to earlier termination as set forth in Section 2.B. Thereafter, the Agreement will renew automatically for successive one (1)-year periods (each a “Renewal Term”, and collectively with the Initial Term, the “Term”) unless either party provides the other party with written notice of its intention not to renew this Agreement at least ninety (90) days prior to the expiration of the Initial Term hereof or the applicable Renewal Term, as the case may be.

B.    This Agreement may be terminated:

i.    By Supplier or Customer, immediately upon written notice of termination, in the event of a material breach of this Agreement by the other party, if such breach continues uncured for a period of thirty (30) days after written notice of such breach;

ii.    Automatically and without notice: (i) upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings; (ii) upon either party’s making of an assignment for the benefit of creditors; or (iii) upon either party’s dissolution or ceasing to do business; or

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iii.    By an executed written agreement between Supplier and Customer.

C.    Notwithstanding anything to the contrary in this Agreement or in any ancillary documents, Supplier retains full rights to suspend shipments and exercise a right of setoff against any payments owed to Customer in the event Customer is delinquent in its payment obligations to Supplier.

3.    PRICING. Pricing, including all allowances and credits, is set forth on Exhibit A attached hereto and incorporated herein.

4.    SALES SUPPORT.

A.    [***]. In addition, Tony’s and Albert’s will [***].

B.    [***]. For purposes of this Agreement, the term “Vendor” means the party from whom Supplier purchases Products.

C.     UNFI, Tony’s and Albert’s will each supply [***].

D.    [***] will work with Customer to [***].

E.    [***], will process all pricing files, handle pricing functions and administer any agreed-upon [***].

F.    In the event Customer determines that any of the Supplier personnel identified in Sections 4.A through E is failing to perform his or her duties in a competent and timely manner, Customer may request that Supplier replace the relevant individual by providing written notice to Supplier. Such notice shall describe in reasonable detail Customer’s reasons for replacing the individual in question. Supplier will not unreasonably withhold any Customer request to replace any such individual. If Supplier consents to Customer’s request to replace the individual, Supplier will as promptly as reasonably practicable: (i) remove the individual identified in Customer’s notice from servicing Customer and (ii) provide a suitable replacement to perform the role in question.

5.    PROMOTIONS.

A.    Supplier will assist Customer with administering a monthly promotion program for Customer’s account. These promotions may include selected national and chain-specific promotions.

B.    Supplier requires [***] of lead time from Customer on final information and estimated quantities for monthly promotions in order to insure maximum service level performance.

C.    Supplier will present EDAP promotion pricing when available from any Vendor, subject to the conditions negotiated between Customer and the Vendor.

D.    In the event Supplier advances any promotional monies to the Customer on behalf of any Vendor, [***].

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6.    ADVERTISING.

A.    Supplier will provide such assistance as Customer may from time to time reasonably request in connection with administering Vendor-sponsored quarterly marketing programs, which may include print advertising, demos and event marketing.

B.    In the event Supplier advances any advertising support monies to Customer on behalf of the Vendor, [***].

C.    In the event Supplier acts on Customer’s behalf in processing advertisements, Supplier will [***].

D.    In the event that Supplier acts on Customer’s behalf in processing coupons, coupons will be billed back to the Vendor at [***].

E.    Any permitted deductions by either party must be supported by appropriate documentation, including but not necessarily limited to ad copy, demo reports and proof of performance.

7.    NEW ITEM INTRODUCTORY FEES.

A.    Supplier will provide such assistance as Customer may from time to time reasonably request in connection with administering fees to the Vendor on behalf of Customer for new item introductions (“New Item Introductory Fees”).

B.    Customer will as promptly as reasonably possible provide to Supplier appropriate documentation from the Vendor or its authorized representative to support New Item Introductory Fees.

C.    [***].

D.    [***].

8.    CUSTOMER CORE SETS. Supplier agrees to stock such new products as requested by Customer that will become part of the Product(s) that will be carried at all or substantially all of Customer’s stores (the “Customer Core Sets”). All Vendors proposed by Customer to provide Customer Core Sets must meet Supplier’s reasonable requirements, which will be promptly provided to Customer upon request. Product requests that are not part of the Customer Core Sets will be reviewed on a case by case basis. [***] Supplier Distribution Center (each, a “DC”). If such Product does not meet this minimum, [***]. Supplier will use reasonable commercial efforts to carry all Customer Core Sets in all the DCs.

9.    PRIVATE LABEL PRODUCTS.

[***] (each, a “Private Label Product”). The cost charged by Supplier to Customer for each Private Label Product shall equal [***]. Minimum sales for Private Label Products shall be [***], with the exception of [***], which shall be [***]. If any Private Label Product does not meet this sales minimum, Supplier will have the right to discontinue such Product by providing written notice to Customer. Supplier and Customer agree to review pricing in [***] from the Effective Date; provided, however, that any change to the Private Label Product pricing will be subject to the parties’ mutual agreement.

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A.    Private Label Product SKUs must be shipped to Customer within sixty (60) days of being received by Supplier; otherwise, the charges set forth below shall apply:

i. Dry freight: [***].

ii. Frozen freight: [***].

B.    In the event that any Private Label Product is discontinued or terminated, goes out of date or otherwise becomes unsaleable through no fault of Supplier, Customer shall arrange for the delivery/removal from all DCs and shall take full responsibility for any such inventory within [***] of being notified by Supplier. Customer agrees to buy back any such inventory from Supplier.

C.    Supplier shall notify Customer in writing if any Private Label Product SKU is: (i) approaching [***] from its expiration date, in the case of [***] and (ii) [***] from its expiration date, in the case of [***]. Within [***] of receiving such notice with respect to any Private Label Product, Customer shall direct Supplier to either: (i) deliver all such Products that to Customer’s stores; (ii) donate such Product and charge Customer at the applicable Cost of Product; or (iii) destroy such product and charge Customer for the actual disposal fees incurred, if any.

D.    Supplier agrees to provide slots for Customer’s re-packaged bulk at each DC. Re-packaged bulk will be cross-docked to Customer’s distribution centers.

E.    Supplier agrees to take commercially reasonable efforts to prevent any Private Label Product from being sold, distributed, conveyed or donated to any distribution network, store, entity or person not approved in advance by Customer. 

10.     SERVICE LEVEL. Supplier is committed to fill Customer’s orders for Products at a rate of at least [***] (the “Service Level”), except that any Products that Supplier is unable to procure due to over pulls, out of stock issues (including “manufacturer outs” and “vendor outs”) and other factors as to which Supplier has no control shall not count against Supplier for the purpose of establishing the Service Level. Customer understands that its promotional forecasting, if late or incomplete, will have a negative impact on the Service Level and that Supplier shall not be responsible for upholding the Service Level when Customer’s promotional forecasting is late or incomplete.  Should Customer request that Supplier provide verification from Vendors or other manufacturers that a particular Product was unavailable to Supplier, Customer will make such request in writing and Supplier will request such proof from the Vendor or manufacturer. Supplier will provide a weekly fill rate report and an under/over report to Customer. If the fill rate goes below [***] for a [***], Supplier will as promptly as practicable develop and implement an action plan designed to regain the [***] fill rate. If, [***], the fill rate remains below [***]), the parties will immediately schedule a meeting at Customer’s Headquarters, to include the NGVC and UNFI CEOs (or their respective assigned proxies), to review corrective action to ensure prompt resolution to bringing the fill rate back to the [***] level.

11.    CUSTOMER FEES. Customer may not impose any fees (whether by deduction or invoice) without prior written authorization from Supplier. Such fees could relate to, but may not be limited to, deliveries, incorrect UPC codes, file transmission issues and/or pricing discrepancies. These fees will not be accepted and all amounts will be the sole responsibility of the Customer, including repayment of deductions if needed.

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12.    NEW STORES AND RESET. Supplier will work with Customer on a new store opening discount file. Customer must supply signed authorizations and must continuously update this file. No credits will be issued for missing file authorizations. Customer will use its reasonable commercial efforts to provide the authorization file and new store order to Supplier [***] prior to shipment. Customer is responsible for updating the file going forward. Supplier will apply existing authorized deals on file in lieu of the authorization file from Customer until the authorization file is on file with Supplier. Supplier will not solicit deals on a “by store” basis. Supplier will extend “A” store open deals to Customer until such time, if any, that Customer’s New Store Discount Program is implemented.

13.    EDI PROGRAMS. Supplier will offer EDI programs, specifically transaction sets 810, 880, 894, 856, 875, 895, 812 and 850.

14.    ORDERS AND DELIVERY.

A.    Once submitted, orders cannot be canceled without Supplier’s consent, not to be unreasonably withheld. When it is impractical to produce the exact quantity ordered, orders will be considered complete upon shipment of a substantially identical quantity over or under the amount specified in the order. Normal tolerances in specifications will be acceptable.

B.    For direct store deliveries (“DSDs”), UNFI requires a [***] minimum order per store, per delivery. Delivery charges (calculated based on the total amount of the DSD invoice) will be applied at the bottom of the invoice based on the number of miles Customer’s store is located from the applicable DC per the chart below:

Miles from	Delivery
UNFI DC	Charge
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]

C.    For DSD’s, Tony’s requires a [***] minimum order per delivery per store. No DSD delivery charge will apply to any Tony’s order.

D.    For DSD’s, Albert’s requires a minimum [***] per order per store. No DSD delivery charge will apply to any Albert’s order.

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E.    Supplier will use commercially reasonable efforts to consolidate deliveries where capabilities allow.

F.    Supplier shall not be charged or required to pay “lumper fees” or other fees associated with handling Product after delivery at Customer’s dock.

G.    All deliveries shall be “drop and go” unless otherwise mutually agreed by the parties.

H.    Supplier shall, at Supplier’s election, transport Products on Supplier fleet or Customer-approved carriers to individual Customer stores. Supplier shall comply with all applicable laws, including any regional or national limitations or guidelines regarding deliveries.

I.    If a Customer store requests a change in a delivery time, Supplier will use commercially reasonable efforts to meet such request. If changes are required by municipal, residential or property owners on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and/or operating hours, then Customer and Supplier will work together to make the scheduling changes necessary to comply with such restrictions.

J.    Products will be delivered palletized and shrink-wrapped and meet Customer's quality standards and be free from damage, including, but not limited to, temperature damage, and be free from evidence of rodents or insects.

K.    Title and risk of loss for Products purchased pursuant to this Agreement shall pass upon delivery to the Customer’s store when delivered by Supplier fleet or by independent carrier.

15.    FUEL SURCHARGE.

A.    For DSDs and cross-dock deliveries, Supplier will add a fuel surcharge per the chart below. The price per gallon for setting the fuel surcharge will be determined monthly using the prior month’s U.S. Weekly average from the U.S. Department of Energy’s Weekly Retail On-Highway Diesel Price report found at (www.eia.doe.gov). The monthly cost per gallon for any given month will be calculated as follows: the average of the prior month's U.S. weekly average prices (the sum of the four weekly prices, divided by four), rounded to two decimal places using standard rounding. One fuel surcharge per delivery will be applied to each Customer invoice.

B.    The following Fuel Surcharge amounts will be billed directly to Customer’s Corporate Headquarters on a monthly basis:

Cost Per Gallon	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Delivery	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Gallon	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Delivery	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]

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16.    MERCHANDISING AND SERVICE. Supplier will provide merchandising resources to assist with new store set ups and Plan-o-grams (schematics).

17.    PAYMENT TERMS AND CONDITIONS.

A.    East Region Customers will remit payment to the following address(es):

United Natural Foods, Inc.

PO Box 706

Keene, New Hampshire 03431

Attention: Accounts Receivable

Albert’s Organics

144 Commerce Boulevard

Logan Township, NJ 08085

Attention: Accounts Receivable

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B.    West Region Customers will remit payment to the following address(es):

United Natural Foods, Inc.

PO Box 742930

Los Angeles, CA 90074-2930

Attention: Accounts Receivable

Tony’s Fine Foods

3575 Reed Avenue

P.O. Box 1501

West Sacramento, CA 95605

Attention: Accounts Receivable

C.    Notwithstanding the provisions of subsections A and B above, payment may be made by electronic funds transfer. Customer should contact Supplier’s respective Accounts Receivable Departments (see Sections 17A and 17B, above) for additional information.

D.     Payment terms are net [***] from the date of the invoice except for: (i) new stores, in which case payment terms will be net [***] from the date of the invoice on orders placed prior to opening through [***] after opening and (ii) invoices dated within [***] of the end of each of Customer’s fiscal quarter, in which case payment terms will be net [***] from the date of the invoice. For purposes of this Subsection, new store orders include orders dated before the opening date of each new store and invoices dated within [***] after the opening date of each new store.

E.    All deductions require Advice of Correction (“AOC”) documentation from Customer.

F.    Each Supplier invoice will contain an itemized description of the Products ordered, all associated fees and charges and all applicable taxes (exclusive of taxes based on Supplier’s income). In the event system issues prevent non-itemized charges from appearing on invoices, such amounts will be billed directly to Customer’s Corporate Headquarters on a monthly basis. Supplier is responsible for charging the correct taxes with respect to the Products identified on each invoice. Supplier may later make adjustments to the extent any fees, charges or tax amounts are incorrect on any invoice.

G.    Customer will notify Supplier in writing of any dispute with respect to any invoice. Customer will not be required to pay any amounts disputed in an invoice until such dispute is resolved. Customer shall pay any amounts owed within [***] of Supplier’s providing backup information sufficient to resolve the dispute.

H.    Should Customer overpay any invoice, Supplier shall: (i) as promptly as practicable provide written notice thereof to Customer and (ii) as directed by Customer in a written notice to Supplier, either (a) immediately credit such overpayment against future invoices for Products or (b) return the overpayment to Customer within [***] after Customer’s request therefor. In the event no written notice is received by Supplier, any overpayments discovered by Supplier shall be remitted to Customer by check or electronic funds transfer within fifteen (15) business days of Supplier’s discovery of such overpayment.

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18.    SUPPLIER’S REPRESENTATIONS, WARRANTIES AND COVENANTS. Supplier represents, warrants and covenants to Customer as follows:

A.    Supplier (i) has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein and (ii) will use reasonable care in the performance of its obligations under this Agreement.

B.    Supplier has adequate processes and systems in place and has adequately educated its personnel to fully comply with, and will fully comply with, all federal, state and local regulations relating to handling and labeling of organic Products, including, but not limited to, the National Organic Standards as promulgated by the U.S. Department of Agriculture and such other federal, state or local laws as may apply to Supplier as a handler or processor of organic foods. Supplier acknowledges that Customer has placed substantial reliance on Supplier to handle various foods for human consumption so as to not invalidate any “organic” designation of such foods.

C.    Supplier has proper security safeguards in place to ensure the confidentiality of all of Customer’s data as contained in Supplier’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. Supplier has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of Supplier’s computer systems, wherever located, Supplier will be able to recover all necessary data to continue to perform its obligations hereunder.

D.    All the DCs servicing Customer will be maintained and operated in accordance with Supplier’s warehousing and delivery standards and all applicable laws. Such DCs have the operational systems required to support the obligations of Supplier as set forth in this Agreement, and all such DCs have adequate capacity to order, store and deliver Products in accordance with the terms of this Agreement and in the amounts contemplated by Customer. All the DCs shall have sufficient security measures in place prior to receipt of Products for Customer to ensure that such Products are not tampered with or adulterated in any manner, and that all such Products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products.

E.    Supplier has a reliable recall system and policies in place including appropriate tracking, coding and accounting systems for all Products.

F.    All Products are guaranteed to be in saleable condition at the time of pickup/delivery. While specific “expiration dates” will vary from product to product, most [***] will have a minimum of [***] shelf life and most [***] (which include, without limitation, all [***]) will have a minimum of [***] shelf life, with the exception of: (i) [***], which will have a minimum of [***] shelf life and (ii) [***], which will have a minimum of [***] shelf life. Minimum shelf life [***] include the day of delivery. For Tony’s and Albert’s minimum shelf life guarantees, see Exhibit A, Section 7A, below.

G.    Supplier will observe the Continuing Quality Guarantee standards set out in Exhibit B.

H.    Supplier has full power and authority to execute, deliver and perform this Agreement.

I.    This Agreement has been duly and validly authorized, executed and delivered by Supplier and constitutes a valid and binding agreement enforceable against Supplier in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity.

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19.    CUSTOMER’S REPRESENTATIONS AND WARRANTIES. Customer represents, warrants and covenants to Supplier as follows:

A.    Customer has full power and authority to execute, deliver and perform this Agreement.

B.    This Agreement has been duly and validly authorized, executed and delivered by Customer and constitutes a valid and binding agreement enforceable against Customer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity.

20.    COMPLIANCE WITH LAWS.

A.    Each party covenants and agrees during the Term it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. Each party agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties’ obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability.

B.    In connection with any organic Products, Supplier shall take all such actions as are required by any federally recognized certifying organization (or as required by law) in order for such Products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of the necessary precautions to prevent Product compromise. Supplier shall provide its organic certifications to Customer at Customer’s request.

21.    AUDIT RIGHTS.

A.    No more than [***], Customer shall have the right, upon [***] prior written notice and at Customer’s expense, to: (i) verify Supplier’s performance of its obligations hereunder, including, without limitation, [***]; (ii) confirm that Supplier [***]; and (iii) audit [***]. To the extent Supplier is prevented from providing any information requested by Customer due to confidentiality obligations to a third party, Supplier will make commercially reasonable efforts to provide the requested information in redacted or abbreviated form.

B.    Customer may use its own internal auditors [***]. Any such audit or inspection shall be conducted during Supplier’s normal business hours at a time mutually convenient to the parties.

C.    Supplier shall cooperate with each Customer audit or inspection and provide such assistance as is reasonably required in carrying out any such audit or inspection. The parties shall cooperate to minimize any disruption caused by, and the cost incurred by Supplier in connection with, any such audit or inspection.

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D.    Following each audit or inspection, Customer and Supplier will: (i) meet to review the results of the audit or inspection and (ii) use reasonable commercial efforts to mutually agree on the most appropriate way to remediate any deficiencies identified in such audit or inspection.

E.    To the extent that an audit performed by Customer reveals any error or incorrect charging (overcharge or undercharge) in any Supplier invoice that [***].

F.    Customer shall bear the costs of any audit or inspection, unless such audit or inspection reveals a material discrepancy in the information previously supplied by Supplier, in which case the costs of the audit will be borne by Supplier.

G.    Supplier will retain all its books and records (in any form or media) relating to this Agreement for a minimum period of [***] following the expiration or termination of this Agreement.

22.    INSURANCE.

A.    At the time of execution and throughout the Term, Supplier shall, at its own cost and expense, carry and maintain the insurance coverage listed below with insurers having a “Best’s” rating of A VII.

i.    Workers' Compensation Insurance with statutory limits as required in the state(s) of operation; and providing coverage for any employee entering onto Customer’s premises, even if not required by statute.

ii.    Commercial General Liability Insurance covering claims for bodily injury, death, personal injury or property damage occurring or arising out of the performance of this Agreement. The limits of insurance shall not be less than [***] per occurrence with a general aggregate limit of [***].

iii.    Product Liability Insurance with limits of not less than [***] per occurrence.

iv.    Comprehensive Automobile Liability Insurance covering the ownership, operation and maintenance of all owned, non-owned and hired motor vehicles used in connection with the performance of this Agreement, with limits of at least [***] per occurrence.

v.    Umbrella or Excess Liability Insurance with limits not less than [***] per occurrence that provides additional limits for employer’s liability, commercial general liability, automobile liability and products liability insurance.

ii.    Supplier will provide Customer with certificates of insurance evidencing all of the referenced insurance policies, which will provide that: (i) such insurance will not be materially modified or cancelled unless Customer has been given at least thirty (30) days’ advance written notice thereof; and (ii) such certificates will be renewed annually or as policy renewals occur. Limits of liability may be maintained through a combination of primary and excess policies.

23.    CONFIDENTIAL INFORMATION.

A.    As used herein, the term “Confidential Information” means any non-public, confidential or proprietary information relating to either party or its Affiliates (the “Disclosing Party”) that is furnished, disclosed or made accessible by the Disclosing Party to the other party (the “Receiving Party”) hereunder, whether verbally or in writing (including, but not limited to, trade secrets, business plans, marketing plans, financial data, specifications, models, samples, computer programs and documentation). All Confidential Information will remain the property of the Disclosing Party and no license or other rights in or to any Confidential Information are granted by virtue of this Agreement.

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B.    Confidential Information will not include any information that: (i) is in the possession of or known to the Receiving Party as of the Effective Date, as evidenced by documentation; (ii) is or becomes publicly available through no fault of the Receiving Party; (iii) is independently developed by the Receiving Party without the use of any Confidential Information; (iv) is obtained by the Receiving Party from a third party without breach by such third party of any obligation of confidence with respect to the information disclosed; or (v) is required to be disclosed pursuant to the order or requirement of a court, regulatory agency, or other government body of competent jurisdiction. If the Receiving Party is subject to an order or requirement to disclose Confidential Information, it: (i) will notify the Disclosing Party immediately of such order or requirement to disclose (unless prohibited by such court, agency or government body) and use reasonable efforts to resist, or to assist the Disclosing Party in resisting, such disclosure and, if such disclosure must be made, to obtain or assist in obtaining a protective order or comparable assurance that the Confidential Information disclosed will be held in confidence and not be further disclosed absent the Disclosing Party’s prior written consent and (ii) disclose only those portions of the Disclosing Party’s Confidential Information as are necessary to comply with such order or requirement.

C.    The Receiving Party agrees: (i) to use the Confidential Information solely for the purpose of performing its obligations and exercising its rights under this Agreement; (ii) to make only such number of copies of any Confidential Information as may be reasonably necessary for the purpose of performing its obligations and exercising its rights under this Agreement; and (iii) not to disclose any Confidential Information to any third party, except to those of its employees who have a need to know such Confidential Information for purposes of fulfilling the Receiving Party’s obligations hereunder and who are bound in writing to maintain the confidentiality of such Confidential Information. The Receiving Party will be responsible for any breach of this Section 23 by its employees.

D.    Upon the expiration or termination of the Agreement, or at any time upon the Disclosing Party’s request, the Receiving Party will promptly return to the Disclosing Party or, at the Disclosing Party’s direction, destroy all Confidential Information, in whole or in part, in whatever format, including any copies thereof.

E.    The Receiving Party agrees that monetary damages will not be a sufficient remedy for any breach of its obligations under this Section 23 and that, in the event of such a breach, the Disclosing Party will be entitled to equitable relief, including injunction and specific performance. Such equitable relief will be in addition to other remedies at law or in equity that are available to the Disclosing Party.

F.    The provisions of this Section 23 will survive for two (2) years following the expiration of termination of this Agreement.

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24.    MISCELLANEOUS.

A.    Force Majeure. Neither party will be liable for any delay or failure in the performance of this Agreement, or in the delivery or shipment of goods, or for any damages suffered by the other party by reason of such delay or failure, if such delay or failure is, directly or indirectly, caused by, or in any manner arises from a “Force Majeure” event, which for purposes of this Agreement means fires, floods, accidents, civil unrest, acts of God, war, governmental interference or embargoes, strikes, labor difficulties, shortage of labor, fuel, power, materials, or supplies, transportation delays, or any other cause or causes (whether or not similar in nature to any of these hereinbefore specified) beyond Supplier’s reasonable control. In the event of a Force Majeure event, the party so affected shall, as promptly as reasonably practicable, give reasonable written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible. All orders are accepted with the understanding that they are subject to Supplier’s ability to obtain the necessary Products, and all orders as well as shipments applicable thereto are subject to Supplier’s current manufacturing schedules, and government regulations, orders, directives, and restrictions that may be in effect from time to time.

B.    Indemnification; Limitation on Liability.

i.    As a distributor, Supplier employs reasonable efforts to obtain representations and warranties from its vendors that they comply with all local, state, regional, provincial and federal regulations regarding the manufacture, storage, transportation and distribution of food, food products and non-food products, in addition to all applicable labeling regulations. Notwithstanding, Supplier is not the manufacturer of the Products, however, and, except as set forth in this Agreement or the Exhibits hereto, makes no representations and/or warranties with respect to the manufacture of the Products.

ii.     Supplier will indemnify, defend and hold harmless Customer and its parent, subsidiaries affiliates, stockholders, directors, officers, employees, agents, representatives, successors and assigns from and against any and all demands, claims, liabilities, losses, judgments, settlements, penalties, costs, expenses, fees (including reasonable fees of any attorneys), interest, liens, encumbrances, causes of action, damages of any kind and any other obligations (together “Damages”) sought by any third-party, alleging, arising out of or relating to: (i) any actual or alleged violation by Supplier of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation (including any violation of any applicable federal, state or local laws relating to any Product, including any label, packaging or invoice associated with such Product); (ii) any negligence or willful misconduct of Supplier or any of its employees or agents; (iii) the breach of any term of this Agreement; (iv) injury due to the presence or activities of Supplier or any of its employees or contractors at any Customer store or other property; (v) any Product’s infringement or misappropriation of any patent, trademark, trade name, trade dress, copyright, trade secret or proprietary right of any third party; (vi) injury to any person, or any other damage or loss alleged to have resulted from the Product having been adulterated or misbranded within the meaning of any applicable federal, state or local law or regulation; (vii) any defect involving the packaging, labeling, packing, shipping and/or invoicing of Product; or (viii) any Product recall or withdrawal or safety notice initiated as a result of a request by a government agency, local health authority or consumer protection agency or court action because of or resulting from a condition which existed at the time of delivery of the Product to any Customer Store.

iii.     Supplier acknowledges that it generally obtains indemnification agreements from the various manufacturers, suppliers, vendors or distributors of the Products it purchases and sells. Supplier agrees to indemnify, defend and hold harmless Customer and its parent, subsidiaries affiliates, stockholders, directors, officers, employees, agents, representatives, successors and assigns from and against  any and all Damages (including but not limited to, personal injury, illness or death of any person) arising from or pertaining to the handling, shipment, delivery, condition of, consumption or use of any Product (other than Private Label Products), without regard to any negligence by Supplier related to such Product. Supplier’s obligation to indemnify Customer for any Liabilities arising from any Products sold to Customer shall exist regardless of the existence or nonexistence of any such indemnification agreements from any Product manufacturer, supplier, vendor or distributor. Indemnification under this section does not extend to Damages arising out of any Private Label Products, except where the Liability is attributable to the negligence or intentional acts or omissions of Supplier.

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iv.    Supplier shall not be required to defend and indemnify any claim to the extent such claim arises from the negligence or the intentional act or omission of Customer or a customer of Customer.

v.    Customer will notify Supplier within a reasonable time after it becomes aware of any indemnification claim hereunder. Notwithstanding the foregoing, Customer’s failure to provide any such notice to Supplier shall not relieve the Supplier of or from any of its indemnification obligations hereunder, except to the extent that Supplier suffers prejudice as a result of such failure.

vi.    The parties hereto shall cooperate in the prosecution or defense of any third party claim and shall furnish such records, information and testimony and attend to such proceedings as may be reasonably requested in connection therewith. Supplier shall make no settlement of any claim which would give rise to liability on the part of Customer without Customer’s prior written consent, and Customer shall not be liable for the amount of any settlement effected without its prior written consent.

vii.     EXCEPT AS SET FORTH IN THIS AGREEMENT AND THE EXHIBITS HERETO, SUPPLIER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER’S EXCLUSIVE REMEDIES ARE SET FORTH IN THIS AGREEMENT. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT, PUNITIVE OR SPECIAL DAMAGES, INCLUDING COMMERCIAL LOSS AND LOST PROFITS, HOWEVER CAUSED AND REGARDLESS OF LEGAL THEORY OR FORESEEABILITY, DIRECTLY OR INDIRECTLY ARISING UNDER THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN APPRISED OF THE POSSIBILITY OF SUCH DAMAGES.

C.    Dispute Resolution; Governing Law.

i.    The parties agree to handle any and all disputes arising out of this Agreement in accordance with the dispute resolution process set forth in this Section 24.C.

ii.    The parties shall first attempt to resolve any dispute in the normal course of business through their respective employees having direct operational responsibility for the relevant subject area. Any and all disputes between the parties which are not resolved in the normal course of business shall be promptly referred to the Chief Executive Officers of UNFI and Customer or their proxies, who will have sixty (60) days from the date of the referral to investigate, negotiate and resolve the dispute, unless the parties agree in writing to extend such period. If the Chief Executive Officers (or their proxies) are unable to resolve the dispute within such sixty (60) days period (as it may be extended), then the dispute may be resolved pursuant to Subsection (iii) below.

iii.    Governing Law, Venue and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of law principles thereof. The federal and/or state courts of Delaware will have exclusive personal and subject matter jurisdiction over, and the parties each hereby submit to the venue of such courts with respect to, any dispute arising pursuant to this order, and all objections to such jurisdiction and venue are hereby waived. The parties consent to service of process permitted under Delaware law or by certified mail, return receipt requested.

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iv.    Notwithstanding anything herein to the contrary, in the event either party breaches its confidentiality obligations under Section 23, the other party shall immediately be entitled to obtain injunctive or other equitable relief in any court of competent jurisdiction.

D.    Entire Agreement. Other than any credit applications, this Agreement and any attached schedules contain the entire agreement between Supplier and Customer regarding the distribution of Products by Supplier and supersede all prior written or oral agreements regarding distribution of Products. Without limiting the generality of the foregoing, this Agreement supersedes that Distribution Agreement dated as of June 1, 2008 by and between Customer and UNFI, as amended (the “Prior Agreement”). The Prior Agreement shall terminate upon the execution of this Agreement.

E.    Publicity. No press release or general public disclosure regarding this Agreement shall be issued by either party without the other party’s prior written approval of the form, content and timing of such press release or general public disclosure, except as may be required by applicable law or the rules of any securities exchange. Neither party shall use the other party’s names, marks, codes, drawings, specifications in any advertising, promotional efforts or publicity of any kind without the prior written permission of the other party as to the time, manner, format and media.

F.    Modification and Waiver. No modification of any term or provision of this Agreement will be enforceable unless set forth in a writing executed by both parties. No waiver of any term or provision of this Agreement will be enforceable unless set forth in a writing executed by the party sought to be charged. The waiver by either party hereto of any of its rights or breaches by the other party under this Agreement in a particular instance will not be construed as a waiver of the same or different rights or breaches in subsequent instances. Without limiting the generality of the foregoing, the acceptance by Supplier of any partial payment due hereunder will not establish a custom or waive any rights of Supplier to enforce prompt payments hereunder.

G.    Assignment. This Agreement may not be assigned by either party without the other party’s prior written consent (which consent shall not be unreasonably withheld or delayed). Notwithstanding the foregoing, either party may assign its interests hereunder, without obtaining the consent of the other party, to: (i) any entity that controls, is controlled by or is under common control with the assigning party or (ii) any person or entity that acquires all or substantially all the assigning party’s assets or shares of capital stock, provided (a) the assigning party provides written notice of such assignment to the other party within ten (10) days of such assignment; (b) the assignee agrees in writing to be bound by and observe the terms of this Agreement; and (c) the assignee satisfactorily completes Supplier’s credit application, unless such assignee is a pre-existing customer of Supplier.

H.    Notices. Any written notices required in this Agreement may be made by personal delivery, facsimile, electronic mail, overnight or other delivery service, or first class mail. Notices by facsimile or electronic mail will be effective when transmission is complete and confirmed; notices by personal delivery will be effective upon delivery; notices by overnight or other delivery services will be effective when delivery is confirmed; and notices by mail will be effective four business days after mailing. The notice address for each party is set forth below the signatures, and is subject to change upon written notice thereof.

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I.    Severability. In the event any provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect: (i) such provision shall be fully severable; (ii) this Agreement shall be construed and enforced as if such invalid, illegal or unenforceable provision had never comprised a portion of this Agreement; and (iii) the remaining provisions of this Agreement shall not be affected by such invalid, illegal or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of such invalid, illegal or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in substance to such invalid, illegal or unenforceable provision as may by possible and be valid, legal and enforceable.

J.    Counterparts; Execution. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same document. Delivery of an executed signature page of this Agreement by facsimile transmission or electronic photocopy (i.e., a “pdf”) shall be effective as delivery of a manually executed counterpart hereof.

[Signature page follows]

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IN WITNESS WHEREOF, the parties have duly executed this Agreement as evidenced by the signatures of their duly authorized representatives as of the Effective Date.

VITAMIN COTTAGE NATURAL FOOD MARKETS INC.		UNITED NATURAL FOODS, INC.
By:	/s/ Kemper Isely	By:	[***]
Name: Kemper Isely Title:  Co-President Date:  June 21, 2016		Name:  [***] Title:  [***] Date:  June 21, 2016
12612 West Alameda Parkway Lakewood, CO  80228 Email:  Kemper@naturalgrocers.com		313 Iron Horse Way Providence, RI  02908 Fax No: 877-775-6476 Email:  [***]
		TONY’S FINE FOODS
		By:	[***]
		Name:  [***] Title:  [***] Date:  June 21, 2016 3575 Reed Avenue West Sacramento, CA 95606

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ALBERT’S ORGANICS
By:	[***]
Name:  [***] Title:  [***] Date:  June 21, 2016 144 Commerce Boulevard Logan Township, NJ 08085 With a copy to: United Natural Foods, Inc. 313 Iron Horse Way Providence, RI 02908 Attn: Office of General Counsel

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EXHIBIT A

PRICING

1.    DEFINITIONS

A.    Contracted Cost means [***].

B.    Contracted Products means those Products governed by an agreement between the Customer and the vendor of the Products that prescribes the Contracted Cost for such Products.

C.    Cost of Product means [***]. Cost of Product will not be adjusted for, and Customer will not be entitled to, [***]. In addition, Cost of Product will not be reduced by [***]. Vendors will include, without limitation, third-party affiliates and divisions of Supplier. Any invoice that forms the basis for Cost of Product may contain [***].

2.    PRICING

A. Tony’s and Albert’s will distribute all Products ordered by Customer in the categories described below in Section 2B. The “Sell Price” of the Product equals: [***]. Sell Price is exclusive of all city, state, and federal excise taxes, including, without limitation, taxes on manufacture, sales, receipts, gross income, occupation, use and similar taxes. Wherever applicable, any tax or taxes (other than taxes based on Supplier’s income) will be added to the invoice as a separate charge to be paid by the Customer.         

B. Tony’s and Albert’s products (excluding produce) will be priced per Category per the chart below.

		[***]
Categories	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]

Tony’s and Albert’s will review pricing every [***] for potential changes in Net Weekly Average Store Purchases. Customer will receive a [***] notification prior to any change in the applicable Mark-Up Percentage. New pricing will be activated [***] post quarter-end.

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Item price changes (except produce and high commodities products) will be presented with a [***] lead time and will be implemented by the Effective Date. Supplier reserves the right to correct erroneous published descriptions or prices immediately.

C. Based on an annual sales volume (calculated on a calendar year basis) of [***], UNFI will charge [***]. UNFI agrees that Customer will be entitled to such pricing for the period between the Effective Date and December 31, 2016. Should Customer’s annual purchase volume fall below [***], UNFI reserves the right to [***]. Customer will receive [***] prior written notification from UNFI prior to any change in [***]. UNFI will take all technical and other steps reasonably necessary to ensure Customer’s ability to use [***] as expeditiously as possible. Provided UNFI has fulfilled such obligation, [***].

3.    [***]

4.    DISPUTES. If Customer disputes any pricing, Customer will so notify Supplier and the parties will diligently attempt to resolve the pricing issue. If the dispute cannot be resolved within [***], the Products in question may be removed from availability to Customer by Supplier. Once the dispute is resolved, the Products will be reinstated.

5.    REBATES

A.    Growth Incentive Rebate: Supplier will provide Customer with [***] based upon the following criteria:

1) [***].

2) Future years will be based upon the following chart:

[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]

3) [***].

4) [***].

B.    Blue Marble Brands (BMB) Rebate: Blue Marble Brands LLC will provide [***] for the following brands:

[***]

[***].

2

1) [***].

[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]

2) [***].

C.    [***].

6. SUPPLIER CREDIT POLICY

A. Requesting Credit:

1)    At time of delivery, all pallet, box, tote, piece count discrepancies must be noted on the billing manifest. A signed billing manifest acknowledges receipt of items as verified by the driver.

2)    For UNFI, all credits must be requested within [***] after delivery; for Tony’s all credits must be requested within [***] hours after delivery; and for Albert’s all credits must be requested within [***] after delivery for fresh produce and within [***] for non-produce items. For Albert’s, produce claims reported after [***] period will not be accepted.

3)    Bulk items are subject to insect contamination. Please inspect all items promptly. We cannot issue credit for any claims reported more than [***] after delivery.

4)    The following information must be supplied when requesting credit/Product pickup.

a) Store name, account number, invoice number, Supplier item code or UPC, and item description.

b) Quantity – please note which you are requesting, eaches or case credit (partial case credit may be given for damaged items).

c) Reason for credit.

d) Mispicks – please provide information on the item that was ordered and not received (mispicked), and not the item that was actually received. The Supplier “pull sticker” will have the necessary information.

5) As part of our credit process, all claims are subject to research before being approved.

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B. Returning Product:

1)    All returns must be approved by the Supplier’s respective Credits Department prior to being returned and must be in original cartons/packages, free of price tags and in saleable condition, or NO credit will be issued. Authorized returns will be picked up via the UNFI driver on your next delivery. UNFI’s drivers cannot accept returns without pre-authorization. All returns are subject to UNFI’s verification for credit to be considered final.

2)    Supplier does not accept the return of the following:

a) Discontinued items,

b) Products that do not sell,

c) Retailer’s promotional or ad items,

d) Seasonal or Holiday merchandise,

e) Appliances or Media products, or

d) Consumer returns not authorized by the Manufacturer.

C. Miscellaneous Information:

1) Restock fee – Supplier agrees not to charge Customer a restock fee on returns or refused loads for cause, but reserves the right to deny credit/returns on misordered products or products refused at time of delivery without cause.

2) Product Code Dates – Tony’s and Albert’s guarantees that dated perishables will have the minimum expiration dates shown in this Exhibit A, Section 7A. Supplier guarantees [***] on all non-perishable products. The product code date policy applies to all store orders, per-opening store orders, and DC orders.

3) Supplier will accept the “mispick” and “return order” documents from Customer in place of the standard UNFI credit request forms.

4) Customer agrees to specify damages, mispicks, and BNR on the AOC documents submitted to Supplier.

7. TONY’S AND ALBERT’S PRODUCTS

A. Upon delivery, Tony’s and Albert’s guarantees the minimum shelf life for each Product category listed below (however, there are item exceptions within each category depending on the item and manufacturer).

1) [***]

2) [***]

3) [***]

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4) [***]

5) [***]

6) [***]

7) [***]

B. [***] are non-refundable except when damaged or unsalable due to manufacture’s defect unless agreed upon by Vendor and Customer.

8. ACQUISITIONS. When taking over an account, Supplier will not assume responsibility for: (i) perishable items, (ii) Products with less than [***] shelf life or (iii) Products that are not offered in Supplier’s catalogue. Responsibility for these Products is to be assumed by the Customer or the Vendor.

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EXHIBIT B

Continuing Quality Guarantee

Supplier is committed to the distribution of safe, wholesome, high quality Products. Supplier is a licensed and insured distributor of food and non-food products and is not the manufacturer of most of the products (“Products”) it sells to its customers (“Customers”). Supplier recognizes that its Customers desire to provide consumers with Products that consistently meet and exceed the highest safety, regulatory and quality standards. Supplier is likewise committed to providing Products that meet and exceed these high standards.  As such, Supplier endeavors to ensure that each of its vendors (“Vendors”) share and embrace this same commitment to safety and quality. This Continuing Quality Guarantee has been developed based on the notion that the relationship between Supplier and Customer is one of distributor and customer.

Core Values:

Supplier has established a set of six Core Values that inspire our approach to business. Supplier expects its suppliers to comply with a Code of Conduct that demonstrates support of these same core values:

● Integrity and respect in all of our actions

● Trust and accountability in all relationships

● Open and honest communication with employees

● Profitable growth of the organization

● A safe and healthy work environment

● Social and environmental responsibility for the health of the planet

Representations and Warranties:

As a distributor, Supplier employs reasonable efforts to obtain representations and warranties from its vendors that they comply with all local, state, regional, provincial and federal regulations regarding the manufacture, storage, transportation and distribution of food, food products and non-food products, in addition to all applicable labeling regulations. As a general practice, Supplier endeavors to purchase Products from Vendors that warrant that:

1) All Products are manufactured, packaged, labeled, packed, shipped and invoiced in compliance with the applicable requirements of federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and all other countries in which the Product is manufactured and that all required labeling is affixed to Products and passed on to Supplier or its customers;

2) All Products are a) not adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended, and regulations adopted thereunder (the “FD&C Act”); b) not articles that are prohibited, under the FD&C Act or any successor thereto, from being introduced into interstate commerce; c) not prohibited under any public health, safety or environmental laws, or any other laws regulations or ordinances of any state or other government authority which are applicable to such shipment or delivery; d) merchantable and fit for their intended purpose, and will pass without objection in trade; and (e) compliant with all applicable provisions of the Meat Inspection Act (“MIA”), Poultry Product Inspection (“PPIA”) and/or Egg Product Inspection Act (“EPIA”), including all applicable rules and regulations adopted thereunder.

3) If applicable, all advertising and promotional materials developed or provided by Vendor for any Product will comply with all applicable requirements of federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and all other countries in which the Vendor does business, including, without limitation and if applicable, those promulgated by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Federal Trade Commission and the Environmental Protection Agency;

4) Vendor a) verifies its product supply chains to evaluate and address risks of human trafficking and slavery (and will disclose to Supplier whether a third party conducted the evaluation for Vendor); b) audits its own vendors to evaluate compliance with Vendor’s company standards (and will specify to Supplier whether the audits are independent and unannounced); c) requires its direct vendors to certify that the products they provide to Vendor comply with the laws of the country in which the supplier does business; d) maintains internal accountability standards for employees and contractors concerning human trafficking and slavery; e) ensures that Vendor employees and management responsible for supply chain management are trained to identify human trafficking and slavery and how to mitigate risks within supply chains;

5) Vendor and all employees and agents involved in the manufacturing, processing or delivery of the Products will strictly adhere to all applicable federal, state and local laws, regulations and prohibitions of the United States, its territories and all countries in which the Product is produced with respect to the operation of their production facilities and their other business and labor practices, including but not limited to the California Transparency in Supply Chains Act of 2010, and comply with existing local and federal laws regarding slavery and human trafficking in the country or countries in which UNFI’s business with Supplier is being conducted;

6) All intellectual property or proprietary rights used by Vendor in connection with the Products are owned by Vendor or Vendors has been properly authorized to use such rights in connection with the Products and to sell the Products that incorporate such proprietary rights to Supplier for use or further resale.

Notwithstanding that Supplier endeavors to obtain the above warranties from its vendors, Supplier is not the manufacturer of the Products it distributes and does not make any representations and/or warranties with respect to the manufacture of such Products. EXCEPT AS SET FORTH IN THE AGREEMENT AND THE EXHIBITS THERETO, SUPPLIER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR THE PRODUCTS IT DISTRIBUTES.

Food Safety:

Supplier considers Food Safety to be of the utmost importance. As such, Supplier has a reputable auditing firm perform annual Third Party Good Manufacturing Practices (GMP) Audits at its distribution centers, and all of its distribution centers are certified by accredited Food Safety certifiers. In conjunction with food safety, all Supplier divisions utilize accredited pest control services that are aware of Supplier’s organic status, to monitor and report on regularly scheduled facility visits and any pest issues that are detected.

GFSI Standards Certification and HACCP Program:

Supplier’s Distribution Centers have HACCP plans and Supplier operates and maintains its facilities in accordance therewith. Supplier has HACCP trained personnel employed at each of its facilities, who are responsible for ensuring the implementation of Supplier’s HACCP program.

Supplier has obtained certification to one of the GFSI-recognized programs (“Safe Quality Foods” or “SQF”) at nearly all of its facilities company-wide. Complete SQF Certification is anticipated during 2016.

Certified Organic Distributor:

In 2002, Supplier became the first coast-to-coast natural products company certified in organic distribution. This certification by Quality Assurance International, a USDA accredited organic certification organization, means that Supplier meets the stringent standards of the USDA National Organic Program and that Supplier has all the required systems in place to verify and maintain the organic integrity of product through the entire supply chain.

Food Safety Evaluations and Site Visits by Customers:

Supplier shall make the facilities and warehouses that it owns and operates available to Customer for complete GMP and food safety evaluations during regular business hours and upon reasonable request.

Bioterrorism Act of 2002:

Supplier complies with the Bioterrorism Act of 2002 and requires its suppliers and anyone making deliveries to or visiting its distribution centers to comply with its strict requirements as well.

Recall Process:

Supplier understands that Customer expects to be provided with products that consistently meet the highest health, safety and quality standards. Supplier, as a distributor in the middle between its Vendors and its Customers, shall notify Customer of a FDA classified recall as soon as practicable but in no event longer than [***] from notification by its Vendor and in the case of a recall that poses a serious health risk, Supplier shall provide such notice within [***] from receipt of complete and necessary information from the supplier. Supplier shall not be subject to any recall fees associated with any recalls or market withdrawals, including fees, assessments, costs, and/or expenses incurred and/or imposed by Customer associated with or resulting from a recall or market withdrawal (“Recall Fees”). To the extent, however, that Supplier is able to recover any Recall Fees from the Vendor or manufacturer, Supplier will pass the recovered Recall Fees on to Customer.

This Continuing Quality Guarantee is the sole guarantee provided by Supplier and supersedes any oral or prior document relating to the subject matter hereof.

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Kemper Isely, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2021

/s/ Kemper Isely

Kemper Isely

Co-President and a Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Zephyr Isely, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2021

/s/ Zephyr Isely

Zephyr Isely

Co-President and a Principal Executive Officer

EX-31.3

Exhibit 31.3

CERTIFICATION

I, Todd Dissinger, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2021

/s/ Todd Dissinger

Todd Dissinger

Chief Financial Officer and Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc. (the “Company”) for the fiscal quarter ended March 31, 2021, Kemper Isely, Co-President and a Principal Executive Officer of the Company, Zephyr Isely, Co-President and a Principal Executive Officer of the Company, and Todd Dissinger, Chief Financial Officer and Principal Financial Officer of the Company, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

● The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

● The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 6, 2021

/s/ Kemper Isely

Kemper Isely

Co-President and a Principal Executive Officer

/s/ Zephyr Isely

Zephyr Isely

Co-President and a Principal Executive Officer

/s/ Todd Dissinger

Todd Dissinger

Chief Financial Officer and Principal Financial Officer

XML

Document And Entity Information - shares	6 Months Ended
	Mar. 31, 2021	May 03, 2021
Document Information [Line Items]
Entity Central Index Key	0001547459
Entity Registrant Name	Natural Grocers by Vitamin Cottage, Inc.
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2021
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Mar. 31, 2021
Document Transition Report	false
Entity File Number	001-35608
Entity Incorporation, State or Country Code	DE
Entity Tax Identification Number	45-5034161
Entity Address, Address Line One	12612 West Alameda Parkway
Entity Address, Postal Zip Code	80228
Entity Address, City or Town	Lakewood
Entity Address, State or Province	CO
City Area Code	303
Local Phone Number	986-4600
Title of 12(b) Security	Common Stock, $0.001 par value
Trading Symbol	NGVC
Security Exchange Name	NYSE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Entity Common Stock, Shares Outstanding		22,606,670

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands		Mar. 31, 2021	Sep. 30, 2020
Current assets:
Cash and cash equivalents		$ 20,977	$ 28,534
Accounts receivable, net		8,996	8,519
Merchandise inventory		98,456	100,175
Prepaid expenses and other current assets		4,073	6,185
Total current assets		132,502	143,413
Property and equipment, net		146,364	147,929
Other assets:
Operating lease assets, net		330,514	339,239
Finance lease assets, net		38,344	40,096
Deposits and other assets	[1]	611	647
Goodwill and other intangible assets, net		10,988	10,468
Total other assets		380,457	390,450
Total assets		659,323	681,792
Current liabilities:
Accounts payable		64,026	69,163
Accrued expenses		21,492	24,995
Term loan facility, current portion		1,750	0
Operating lease obligations, current portion		32,705	32,156
Finance lease obligations, current portion		2,996	2,836
Total current liabilities		122,969	129,150
Long-term liabilities:
Term loan facility, net of current portion		32,813	0
Operating lease obligations, net of current portion		316,609	325,641
Finance lease obligations, net of current portion		37,987	39,506
Deferred income tax liabilities, net		15,518	14,429
Total long-term liabilities		402,927	379,576
Total liabilities		525,896	508,726
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,595,467 and 22,546,765 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively		23	23
Additional paid-in capital		57,065	56,752
Retained earnings		76,339	116,291
Total stockholders’ equity		133,427	173,066
Total liabilities and stockholders’ equity		$ 659,323	$ 681,792

[1] Certain prior year results have been combined for combined for consistency with current year presentation.

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Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - $ / shares	Mar. 31, 2021	Sep. 30, 2020
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	22,595,467	22,546,765
Common stock, shares outstanding (in shares)	22,595,467	22,546,765

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Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Net sales	$ 259,198	$ 277,524	$ 524,243	$ 507,554
Cost of goods sold and occupancy costs	187,371	199,701	379,391	369,207
Gross profit	71,827	77,823	144,852	138,347
Store expenses	58,422	56,878	118,752	108,305
Administrative expenses	6,358	7,038	13,662	12,857
Pre-opening and relocation expenses	341	650	530	1,080
Operating income	6,706	13,257	11,908	16,105
Interest expense, net	(603)	(516)	(1,113)	(1,052)
Income before income taxes	6,103	12,741	10,795	15,053
Provision for income taxes	(1,399)	(3,023)	(2,459)	(3,467)
Net income	$ 4,704	$ 9,718	$ 8,336	$ 11,586
Net income per common share:
Basic (in dollars per share)	$ 0.21	$ 0.43	$ 0.37	$ 0.52
Diluted (in dollars per share)	$ 0.21	$ 0.43	$ 0.37	$ 0.51
Weighted average number of shares of common stock outstanding:
Basic (in shares)	22,581,916	22,493,341	22,570,305	22,482,285
Diluted (in shares)	22,737,646	22,543,429	22,715,098	22,542,319

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Operating activities:
Net income	$ 8,336	$ 11,586
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	15,057	15,595
Impairment and store closing costs	105	0
Share-based compensation	487	552
Deferred income tax expense	1,089	475
Non-cash interest expense	11	6
Changes in operating assets and liabilities
Accounts receivable, net	(477)	(535)
Merchandise inventory	1,719	7,768
Prepaid expenses and other assets	(922)	(483)
Income tax receivable	3,004	4,960
Operating lease asset	15,402	14,973
Operating lease liability	(15,861)	(15,285)
Accounts payable	(7,142)	10,146
Accrued expenses	(3,503)	3,602
Net cash provided by operating activities	17,305	53,360
Investing activities:
Acquisition of property and equipment	(8,673)	(18,759)
Acquisition of other intangibles	(926)	(1,399)
Proceeds from sale of property and equipment	0	0
Proceeds from property insurance settlements	58	27
Net cash used in investing activities	(9,541)	(20,131)
Financing activities:
Borrowings under revolving facility	0	226,000
Repayments under revolving facility	0	(231,692)
Borrowings under term loan facility	35,000	0
Repayments under term loan facility	(438)	0
Finance lease obligation payments	(1,369)	(1,082)
Dividend to shareholders	(48,288)	(3,148)
Loan fees paid	(52)	(25)
Payments on withholding tax for restricted stock unit vesting	(174)	(122)
Net cash used in financing activities	(15,321)	(10,069)
Net (decrease) increase in cash and cash equivalents	(7,557)	23,160
Cash and cash equivalents, beginning of period	28,534	6,214
Cash and cash equivalents, end of period	20,977	29,374
Supplemental disclosures of cash flow information:
Cash paid for interest	165	328
Cash paid for interest on finance lease obligations, net of capitalized interest of $83 and $68, respectively	910	781
Income taxes paid	4,777	10
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	4,435	3,748
Acquisition of other intangibles not yet paid	233	179
Property acquired through operating lease obligations	7,287	8,170
Property acquired through finance lease obligations	$ 106	$ 5,232

XML

Consolidated Statements of Cash Flows (Unaudited) (Parentheticals) - USD ($) $ in Thousands	6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020
Capitalized interest	$ 83	$ 68

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Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock Outstanding [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Treasury Stock [Member]	Total
Balance (in shares) at Sep. 30, 2019	22,463,057
Balance at Sep. 30, 2019	$ 23	$ 56,319	$ 100,923	$ (359)	$ 156,906
Net income	0	0	1,868	0	1,868
Cash dividends	$ 0	0	(1,573)	0	(1,573)
Share-based compensation (in shares)	12,661
Share-based compensation	$ 0	135	0	96	231
Topic 842 transition impact	$ 0	0	1,660	0	1,660
Balance (in shares) at Dec. 31, 2019	22,475,718
Balance at Dec. 31, 2019	$ 23	56,454	102,878	(263)	159,092
Balance (in shares) at Sep. 30, 2019	22,463,057
Balance at Sep. 30, 2019	$ 23	56,319	100,923	(359)	156,906
Net income					11,586
Balance (in shares) at Mar. 31, 2020	22,503,810
Balance at Mar. 31, 2020	$ 23	56,439	111,022	(49)	167,435
Balance (in shares) at Dec. 31, 2019	22,475,718
Balance at Dec. 31, 2019	$ 23	56,454	102,878	(263)	159,092
Net income	0	0	9,718	0	9,718
Cash dividends	$ 0	0	(1,574)	0	(1,574)
Share-based compensation (in shares)	28,092
Share-based compensation	$ 0	(15)	0	214	199
Balance (in shares) at Mar. 31, 2020	22,503,810
Balance at Mar. 31, 2020	$ 23	56,439	111,022	(49)	167,435
Balance (in shares) at Sep. 30, 2020	22,546,765
Balance at Sep. 30, 2020	$ 23	56,752	116,291	0	173,066
Net income	0	0	3,632	0	3,632
Cash dividends	$ 0	0	(46,706)	0	(46,706)
Share-based compensation (in shares)	16,884
Share-based compensation	$ 0	166	0	0	166
Balance (in shares) at Dec. 31, 2020	22,563,649
Balance at Dec. 31, 2020	$ 23	56,918	73,217	0	130,158
Balance (in shares) at Sep. 30, 2020	22,546,765
Balance at Sep. 30, 2020	$ 23	56,752	116,291	0	173,066
Net income					8,336
Balance (in shares) at Mar. 31, 2021	22,595,467
Balance at Mar. 31, 2021	$ 23	57,065	76,339	0	133,427
Balance (in shares) at Dec. 31, 2020	22,563,649
Balance at Dec. 31, 2020	$ 23	56,918	73,217	0	130,158
Net income	0	0	4,704	0	4,704
Cash dividends	$ 0	0	(1,582)	0	(1,582)
Share-based compensation (in shares)	31,818
Share-based compensation	$ 0	147	0	0	147
Balance (in shares) at Mar. 31, 2021	22,595,467
Balance at Mar. 31, 2021	$ 23	$ 57,065	$ 76,339	$ 0	$ 133,427

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Note 1 - Organization

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Nature of Operations [Text Block]

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of March 31, 2021, the Company operated 161 stores in 20 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 159 stores in 20 states as of September 30, 2020.

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Basis of Presentation and Significant Accounting Policies [Text Block]

2. 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 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-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. Certain prior year amounts have been combined for consistency with current year presentation. 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.

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; accounting for income taxes; 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.

Recently Adopted Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition, measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.

The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

The adoption of ASC 842 resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million and $377.8 million, respectively, as of October 1, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as deferred rent and leasehold incentives. 

Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the year ended September 30, 2020. This adjustment was primarily driven by the derecognition of $41.9 million of lease obligations and $40.2 million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback guidance. These leases were reclassified as operating or finance leases as of October 1, 2019, the transition date.  

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Non-employee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 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 2018-07 were effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 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. ASU 2019-10 delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to below). Because the Company is a smaller reporting company, the provisions of ASU 2017-04 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted, and the Company early adopted for the year ended September 30, 2020. ASU 2017-04 did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces 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 when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes” (ASU 2019-12). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The provisions of ASU 2019-12 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2022 with early adoption permitted. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR, but recent amendments provide for a LIBOR successor rate once LIBOR is discontinued. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

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Note 3 - Revenue Recognition

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Revenue from Contract with Customer [Text Block]

3. Revenue Recognition

The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In these transactions, the Company acts as a principal and recognizes revenue (net sales) from the sale of goods when control of the promised goods is transferred to the customer. Control refers to the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, the transferred goods.

The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and payment from the customer is also due at that time. Transaction prices are considered fixed. Discounts provided to customers at the point of sale are recognized as a reduction in revenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.

Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company. The balance of contract liabilities related to unredeemed gift cards was $1.5 million and $1.3 million as of March 31, 2021 and September 30, 2020, respectively. Revenue for the three months ended March 31, 2021 and 2020 includes $0.1 million and $0 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2020 and 2019, respectively. Revenue for the six months ended March 31, 2021 and 2020 includes approximately $0.4 million and $0.8 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2020 and 2019, respectively.

The following table disaggregates our revenue by product category for the three and six months ended March 31, 2021 and 2020, dollars in thousands and as a percentage of net sales:

	Three months ended March 31,							Six months ended March 31,
	2021				2020			2021			2020
Grocery	$	180,457	70	%		186,171	67		366,072	70		344,106	68
Dietary supplements		53,901	21			63,969	23		107,125	20		111,870	22
Other		24,840	9			27,384	10		51,046	10		51,578	10
	$	259,198	100	%		277,524	100		524,243	100		507,554	100

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Note 4 - Earnings Per Share

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Earnings Per Share [Text Block]

4. Earnings Per Share

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the Company’s earnings.

Presented below are basic and diluted EPS for the three and six months ended March 31, 2021 and 2020, dollars in thousands, except per share data:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Net income	$	4,704		9,718		8,336		11,586
Weighted average number of shares of common stock outstanding		22,581,916		22,493,341		22,570,305		22,482,285
Effect of dilutive securities		155,730		50,088		144,793		60,034
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,737,646		22,543,429		22,715,098		22,542,319
Basic earnings per share	$	0.21		0.43		0.37		0.52
Diluted earnings per share	$	0.21		0.43		0.37		0.51

There were 4,296 and 2,973 non-vested RSUs for the three and six months ended March 31, 2021, respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 142,020 and 181,720 non-vested RSUs for the three and six months ended March 31, 2020, respectively, excluded from the calculation of diluted EPS as they are antidilutive.

The Company paid a cash dividend of $0.07 per share of common stock in each of the first two quarters of fiscal years 2021 and 2020. The Company paid a special cash dividend of $2.00 per share of common stock in the first quarter of fiscal year 2021.

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Note 5 - Debt

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Debt and Capital Leases Disclosures [Text Block]

5. Debt

Credit Facility

The Company is party to a credit facility consisting of a $50.0 million revolving loan facility (the Revolving Facility) and a fully drawn $35.0 million term loan facility (the Term Loan Facility, and together with the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. As of March 31, 2021, the financing commitment under the Revolving Facility was $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity date. The Company borrowed $35.0 million under the Term Loan Facility in December 2020 to partially fund its previously announced special cash dividend of $2.00 per common share. The Credit Facility matures on November 13, 2024. Base rate loans under the Credit Facility bear interest at a fluctuating base rate, as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio. The Company will repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent, provided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.

On November 13, 2019, the Company amended the Credit Facility to extend the maturity date to November 13, 2024 and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On November 18, 2020, the Company amended the Credit Facility to provide for the Term Loan Facility and permit the payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.

The Company had no amounts outstanding under the Revolving Facility as of March 31, 2021 and September 30, 2020. As of each of March 31, 2021 and September 30, 2020, the Company had undrawn, issued and outstanding letters of credit of $1.3 million, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had $48.7 million available for borrowing under the Revolving Facility as of March 31, 2021 and September 30, 2020. The Company had $34.6 million outstanding under its fully drawn Term Loan Facility as of March 31, 2021.

As of March 31, 2021 and September 30, 2020, the Company was in compliance with the financial covenants under the Credit Facility.

Lease Obligations

As of March 31, 2021 and September 30, 2020, the Company had 19 leases that were classified as finance leases. No rent expense is recorded for these finance leases; rather, rental payments under such leases are recognized as a reduction of the lease obligation and as interest expense. The interest rate on finance lease obligations is determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $0.7 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively, and approximately $1.2 million and $1.1 million for the six months ended March 31, 2021 and 2020, respectively. Interest expense for the three and six months ended March 31, 2021 and 2020 relates primarily to interest on finance lease obligations. The Company capitalized interest of less than $0.1 million for each of the three and six months ended March 31, 2021 and 2020.

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Note 6 - Stockholders' Equity

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Stockholders' Equity Note Disclosure [Text Block]

6. Stockholders’ Equity

Share Repurchases

In May 2016, the Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program, which will terminate on May 31, 2022. Repurchases under the Company’s share repurchase program may be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.

Prior to October 1, 2020, the Company reissued 199,543 treasury shares at a cost of $1.7 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three and six months ended March 31, 2021, the Company reissued no treasury shares. During the three and six months ended March 31, 2020, the Company reissued 28,092 treasury shares at a cost of approximately $0.2 million and 40,753 treasury shares at a cost of approximately $0.3 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At March 31, 2021 and September 30, 2020, the Company held no treasury shares.

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Note 7 - Lease Obligations

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Lessee, Operating and Finance Leases [Text Block]

7. Lease Obligations

The Company leases most of its stores, a bulk food repackaging facility and distribution center and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with scheduled increases in minimum rent payments.

Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets.

Most leases include one or more options to renew, with renewal terms normally expressed in periods of five year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.

As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. We use other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.

Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (“short-term leases”) are not presented on the balance sheet. The Company’s short-term leases relate primarily to embedded leases. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.  

The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

The Company has four operating leases and one finance lease with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include various options to renew. These leases account for $8.2 million of right-of-use assets and $8.4 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended March 31, 2021 and 2020, and $0.7 million for each of the six months ended March 31, 2021 and 2020.

The components of total lease cost for the three and six months ended March 31, 2021 and 2020 were as follows, dollars in thousands:

		Three months ended March 31,						Six months ended March 31,
Lease cost	Classification	2021			2020			2021			2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,603			10,586			21,239			21,252
	Store expenses		79			79			159			159
	Administrative expenses		76			77			152			159
	Pre-opening and relocation expenses		128			122			154			122
Finance lease cost:
Depreciation of right-of-use assets	Store expenses(1)		926			726			1,831			1,487
Interest on lease liabilities	Interest expense, net (1)		506			385			993			803
Short-term lease cost	Store expenses		621			443			1,158			528
Variable lease cost	Cost of goods sold and occupancy costs(2)		891			1,367			2,707			2,605
Sublease income	Store expenses		(70	)		(92	)		(163	)		(185	)
Total lease cost		$	13,760			13,693			28,230			26,930

¹ Immaterial balances related to stores not yet open are included in pre-opening and relocation expenses.

² Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the three and six months ended March 31, 2021 and 2020 were as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,052		11,003		22,189		22,004
Operating cash flows from finance leases		493		431		993		849
Financing cash flows from finance leases		694		564		1,369		1,082
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		4,518		1,792		7,287		7,230
Finance leases		—		3,910		106		5,232

Additional information related to the Company’s leases as of March 31, 2021 and 2020 were as follows:

	March 31, 2021			March 31, 2020
Weighted-average remaining lease term (in years):
Operating leases		11.4			12.0
Finance leases		12.0			12.0
Weighted-average discount rate:
Operating leases		3.6	%		3.6
Finance leases		5.1	%		4.9

In the six months ended March 31, 2021, the Company paid $0.3 million in lease termination costs to terminate the lease associated with one store that closed in the first quarter of fiscal year 2019. In association with the lease termination, the Company wrote off $0.6 million in operating right-of-use assets and $0.8 million in operating lease liabilities and recorded a $0.2 million gain in store expenses.

In addition, during the six months ended March 31, 2020, the Company purchased one store building that had previously been leased. This resulted in: (i) a $2.5 million reduction in operating lease liability and (ii) the reclassification of $2.4 million of corresponding operating right-of-use asset to property and equipment.

Future lease payments under non-cancellable leases as of March 31, 2021 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2021	$	22,299			2,437			24,736
2022		44,589			4,893			49,482
2023		43,789			4,937			48,726
2024		41,964			5,002			46,966
2025		40,261			5,012			45,273
Thereafter		236,959			32,453			269,412
Total future undiscounted lease payments		429,861			54,734			484,595
Less imputed interest		(80,547	)		(13,751	)		(94,298	)
Total reported lease liability		349,314			40,983			390,297
Less current portion		(32,705	)		(2,996	)		(35,701	)
Noncurrent lease liability	$	316,609			37,987			354,596

The table above excludes $30.8 million of legally binding minimum lease payments for leases that had been executed as of March 31, 2021 but whose terms had not yet commenced.

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Note 8 - Property and Equipment

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

8. Property and Equipment

The Company had the following property and equipment balances as of March 31, 2021 and September 30, 2020, dollars in thousands:

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Construction in process		n/a		$	3,942			6,717
Land		n/a			2,445			1,390
Buildings	16	-	40		31,433			26,732
Land improvements	1	–	24		1,738			1,575
Leasehold and building improvements	1	–	25		156,269			153,438
Fixtures and equipment	5	–	7		142,897			139,965
Computer hardware and software	3	–	5		24,196			23,628
					362,920			353,445
Less accumulated depreciation and amortization					(216,556	)		(205,516	)
Property and equipment, net				$	146,364			147,929

Depreciation and amortization expense for the three and six months ended March 31, 2021 and 2020 is summarized as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	213		194		428		383
Depreciation and amortization expense included in store expenses		6,913		7,393		14,041		14,633
Depreciation and amortization expense included in administrative expenses		294		301		588		579
Total depreciation and amortization expense	$	7,420		7,888		15,057		15,595

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Note 9 - Goodwill and Other Intangible Assets

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

9. Goodwill and Other Intangible Assets

The Company had the following goodwill and other intangible asset balances as of March 31, 2021 and September 30, 2020, dollars in thousands:

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,693			3,634
Less accumulated amortization					(2,764	)		(2,378	)
Amortizable intangible assets, net					929			1,256
Other intangibles in process					4,472			3,625
Trademark	Indefinite				389			389
Total other intangibles, net					5,790			5,270
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	10,988			10,468

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Note 10 - Accrued Expenses

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

10. Accrued Expenses

The composition of accrued expenses as of March 31, 2021 and September 30, 2020 is summarized as follows, dollars in thousands:

	As of
	March 31,		September 30,
	2021		2020
Payroll and employee-related expenses	$	10,736		13,569
Accrued property, sales and use tax payable		6,793		7,912
Accrued marketing expenses		608		407
Deferred revenue related to gift card sales		2,012		1,819
Income tax payable (1)		17		210
Other (1)		1,326		1,078
Total accrued expenses	$	21,492		24,995

(1) Certain prior year amounts have been reclassified for consistency with current year presentation.

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Note 11 - Income Taxes

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Income Tax Disclosure [Text Block]

11. Income Taxes

Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

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Note 12 - Related Party Transactions

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

12. Related Party Transactions

The Company has ongoing relationships with related entities as noted below:

Chalet Properties, LLC: The Company has four operating leases and one finance lease with Chalet. Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.2 million for each of the three months ended March 31, 2021 and 2020. Rent paid to Chalet was approximately $0.5 million for each of the six months ended March 31, 2021 and 2020.

Isely Family Land Trust LLC: The Company has one operating lease with the the Land Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.1 million for each of the three months ended March 31, 2021 and 2020. Rent paid to the Land Trust was approximately $0.2 million for each of the six months ended March 31, 2021 and 2020.

FTVC LLC: The Company has one operating lease for a store location with FTVC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC was less than $0.1 million for each of the three months ended March 31, 2021 and 2020. Rent paid to FTVC was less than $0.1 million for each of the six months ended March 31, 2021 and 2020.

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Note 13 - Commitments and Contingencies

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

13. Commitments and Contingencies

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment-related claims, customer injury claims and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results of operations.

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Note 14 - Subsequent Event

6 Months Ended

Mar. 31, 2021

Notes to Financial Statements

Subsequent Events [Text Block]

14. Subsequent Event

On May 5, 2021, the Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2021 to stockholders of record as of the close of business on June 1, 2021.

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Significant Accounting Policies (Policies)

6 Months Ended

Mar. 31, 2021

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

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 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-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. Certain prior year amounts have been combined for consistency with current year presentation. 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.

Use of Estimates, Policy [Policy Text Block]

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; accounting for income taxes; 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.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition, measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.

The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

The adoption of ASC 842 resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million and $377.8 million, respectively, as of October 1, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as deferred rent and leasehold incentives. 

Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the year ended September 30, 2020. This adjustment was primarily driven by the derecognition of $41.9 million of lease obligations and $40.2 million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback guidance. These leases were reclassified as operating or finance leases as of October 1, 2019, the transition date.  

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Non-employee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 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 2018-07 were effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 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. ASU 2019-10 delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to below). Because the Company is a smaller reporting company, the provisions of ASU 2017-04 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted, and the Company early adopted for the year ended September 30, 2020. ASU 2017-04 did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2021.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces 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 when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes” (ASU 2019-12). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The provisions of ASU 2019-12 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2022 with early adoption permitted. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR, but recent amendments provide for a LIBOR successor rate once LIBOR is discontinued. The Company does not anticipate that the adoption of these provisions will have a material impact on its consolidated financial statements.

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Note 3 - Revenue Recognition (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Disaggregation of Revenue [Table Text Block]

	Three months ended March 31,							Six months ended March 31,
	2021				2020			2021			2020
Grocery	$	180,457	70	%		186,171	67		366,072	70		344,106	68
Dietary supplements		53,901	21			63,969	23		107,125	20		111,870	22
Other		24,840	9			27,384	10		51,046	10		51,578	10
	$	259,198	100	%		277,524	100		524,243	100		507,554	100

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Note 4 - Earnings Per Share (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Net income	$	4,704		9,718		8,336		11,586
Weighted average number of shares of common stock outstanding		22,581,916		22,493,341		22,570,305		22,482,285
Effect of dilutive securities		155,730		50,088		144,793		60,034
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,737,646		22,543,429		22,715,098		22,542,319
Basic earnings per share	$	0.21		0.43		0.37		0.52
Diluted earnings per share	$	0.21		0.43		0.37		0.51

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Note 7 - Lease Obligations (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Lease, Cost [Table Text Block]

		Three months ended March 31,						Six months ended March 31,
Lease cost	Classification	2021			2020			2021			2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,603			10,586			21,239			21,252
	Store expenses		79			79			159			159
	Administrative expenses		76			77			152			159
	Pre-opening and relocation expenses		128			122			154			122
Finance lease cost:
Depreciation of right-of-use assets	Store expenses(1)		926			726			1,831			1,487
Interest on lease liabilities	Interest expense, net (1)		506			385			993			803
Short-term lease cost	Store expenses		621			443			1,158			528
Variable lease cost	Cost of goods sold and occupancy costs(2)		891			1,367			2,707			2,605
Sublease income	Store expenses		(70	)		(92	)		(163	)		(185	)
Total lease cost		$	13,760			13,693			28,230			26,930

Additional Information Related to Leases [Table Text Block]

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,052		11,003		22,189		22,004
Operating cash flows from finance leases		493		431		993		849
Financing cash flows from finance leases		694		564		1,369		1,082
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		4,518		1,792		7,287		7,230
Finance leases		—		3,910		106		5,232

	March 31, 2021			March 31, 2020
Weighted-average remaining lease term (in years):
Operating leases		11.4			12.0
Finance leases		12.0			12.0
Weighted-average discount rate:
Operating leases		3.6	%		3.6
Finance leases		5.1	%		4.9

Operating and Finance Lease, Liability, Maturity [Table Text Block]

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2021	$	22,299			2,437			24,736
2022		44,589			4,893			49,482
2023		43,789			4,937			48,726
2024		41,964			5,002			46,966
2025		40,261			5,012			45,273
Thereafter		236,959			32,453			269,412
Total future undiscounted lease payments		429,861			54,734			484,595
Less imputed interest		(80,547	)		(13,751	)		(94,298	)
Total reported lease liability		349,314			40,983			390,297
Less current portion		(32,705	)		(2,996	)		(35,701	)
Noncurrent lease liability	$	316,609			37,987			354,596

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Note 8 - Property and Equipment (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Property, Plant and Equipment [Table Text Block]

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Construction in process		n/a		$	3,942			6,717
Land		n/a			2,445			1,390
Buildings	16	-	40		31,433			26,732
Land improvements	1	–	24		1,738			1,575
Leasehold and building improvements	1	–	25		156,269			153,438
Fixtures and equipment	5	–	7		142,897			139,965
Computer hardware and software	3	–	5		24,196			23,628
					362,920			353,445
Less accumulated depreciation and amortization					(216,556	)		(205,516	)
Property and equipment, net				$	146,364			147,929

Depreciation and Amortization Expense [Table Text Block]

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	213		194		428		383
Depreciation and amortization expense included in store expenses		6,913		7,393		14,041		14,633
Depreciation and amortization expense included in administrative expenses		294		301		588		579
Total depreciation and amortization expense	$	7,420		7,888		15,057		15,595

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Note 9 - Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Schedule of Intangible Assets and Goodwill [Table Text Block]

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,693			3,634
Less accumulated amortization					(2,764	)		(2,378	)
Amortizable intangible assets, net					929			1,256
Other intangibles in process					4,472			3,625
Trademark	Indefinite				389			389
Total other intangibles, net					5,790			5,270
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	10,988			10,468

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Note 10 - Accrued Expenses (Tables)

6 Months Ended

Mar. 31, 2021

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	As of
	March 31,		September 30,
	2021		2020
Payroll and employee-related expenses	$	10,736		13,569
Accrued property, sales and use tax payable		6,793		7,912
Accrued marketing expenses		608		407
Deferred revenue related to gift card sales		2,012		1,819
Income tax payable (1)		17		210
Other (1)		1,326		1,078
Total accrued expenses	$	21,492		24,995

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Note 1 - Organization (Details Textual)	Mar. 31, 2021	Sep. 30, 2020
Number of Stores	161	159
Number of States in which Entity Operates	20	20

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (Details Textual) $ in Thousands	6 Months Ended
	Mar. 31, 2021 USD ($)	Sep. 30, 2020 USD ($)	Oct. 01, 2019 USD ($)
Number of Reportable Segments	1
Operating Lease, Right-of-Use Asset	$ 330,514	$ 339,239
Operating Lease, Liability, Total	349,314
Retained Earnings (Accumulated Deficit), Ending Balance	$ 76,339	116,291
Accounting Standards Update 2016-01 [Member]
Operating Lease, Right-of-Use Asset			$ 359,600
Operating Lease, Liability, Total			$ 377,800
Capital Lease Obligations, Total		(41,900)
Capital Leases, Balance Sheet, Assets by Major Class, Net, Total		(40,200)
Accounting Standards Update 2016-01 [Member] | Cumulative Effect, Period of Adoption, Adjustment [Member]
Retained Earnings (Accumulated Deficit), Ending Balance		$ 1,700

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Note 3 - Revenue Recognition (Details Textual) - Gift Cards [Member] - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Sep. 30, 2020
Contract with Customer, Liability, Total	$ 1,500		$ 1,500		$ 1,300
Contract with Customer, Liability, Revenue Recognized	$ 100	$ 0	$ 400	$ 800

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Note 3 - Revenue Recognition - Disaggregation of Revenue (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Net sales	$ 259,198	$ 277,524	$ 524,243	$ 507,554
Net Sales, percent	100.00%	100.00%	100.00%	100.00%
Grocery [Member]
Net sales	$ 180,457	$ 186,171	$ 366,072	$ 344,106
Net Sales, percent	70.00%	67.00%	70.00%	68.00%
Dietary Supplements [Member]
Net sales	$ 53,901	$ 63,969	$ 107,125	$ 111,870
Net Sales, percent	21.00%	23.00%	20.00%	22.00%
Manufactured Product, Other [Member]
Net sales	$ 24,840	$ 27,384	$ 51,046	$ 51,578
Net Sales, percent	9.00%	10.00%	10.00%	10.00%

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Note 4 - Earnings Per Share (Details Textual) - $ / shares	3 Months Ended				6 Months Ended
	Mar. 31, 2021	Dec. 31, 2020	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2021	Mar. 31, 2020
Quarterly Cash dividend [Member]
Common Stock, Dividends, Per Share, Declared (in dollars per share)	$ 0.07	$ 0.07	$ 0.07	$ 0.07
Special Cash Dividend [Member]
Common Stock, Dividends, Per Share, Declared (in dollars per share)		$ 2.00
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount (in shares)	4,296		142,020		2,973	181,720

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Note 4 - Earnings Per Share - Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Net income	$ 4,704	$ 9,718	$ 8,336	$ 11,586
Weighted average number of shares of common stock outstanding (in shares)	22,581,916	22,493,341	22,570,305	22,482,285
Effect of dilutive securities (in shares)	155,730	50,088	144,793	60,034
Weighted average number of shares of common stock outstanding including effect of dilutive securities (in shares)	22,737,646	22,543,429	22,715,098	22,542,319
Basic earnings per share (in dollars per share)	$ 0.21	$ 0.43	$ 0.37	$ 0.52
Diluted earnings per share (in dollars per share)	$ 0.21	$ 0.43	$ 0.37	$ 0.51

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Note 5 - Debt (Details Textual) $ / shares in Units, $ in Thousands			1 Months Ended	3 Months Ended		6 Months Ended
	Nov. 18, 2020 USD ($) $ / shares	Nov. 13, 2019 USD ($)	Dec. 31, 2020 USD ($)	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Sep. 30, 2020 USD ($)
Proceeds from Issuance of Long-term Debt, Total						$ 35,000	$ 0
Common Stock, Dividends, Per Share, Cash Paid (in dollars per share) | $ / shares	$ 2.00
Capital and Financing Lease Obligations Number of Leases				19		19		19
Interest Expense, Debt, Excluding Amortization				$ 700	$ 500	$ 1,200	1,100
Interest Costs Capitalized				100	$ 100	100	$ 100
Letter of Credit [Member]
Letters of Credit Outstanding, Amount				1,300		1,300		$ 1,300
The New Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity				50,000		50,000
Line of Credit Facility, Dividend Restrictions, Maximum Amount		$ 10,000
Line of Credit Facility, Remaining Borrowing Capacity				48,700		48,700		48,700
Long-term Debt, Total				34,600		$ 34,600
The New Credit Facility [Member] | Maximum [Member]
Debt Instrument, Maximum Dividend Payment Permitted	$ 50,000
The New Credit Facility [Member] | Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate						0.50%
The New Credit Facility [Member] | Eurodollar [Member]
Debt Instrument, Basis Spread on Variable Rate						1.00%
The New Credit Facility [Member] | Term Loan [Member]
Debt Instrument, Face Amount				35,000		$ 35,000
Proceeds from Issuance of Long-term Debt, Total			$ 35,000
Debt Instrument, Periodic Payment, Principal						400
The New Credit Facility [Member] | Revolving Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity				50,000		50,000
Long-term Line of Credit, Total				0		0		$ 0
The New Credit Facility [Member] | Standby Letters of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity				$ 5,000		$ 5,000

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Note 6 - Stockholders' Equity (Details Textual) - USD ($) $ in Millions	1 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended
	May 31, 2016	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020	Sep. 30, 2020
Stock Repurchase Program, Period in Force (Year)	2 years
Stock Repurchase Program, Authorized Amount	$ 10.0
Stock Repurchase Program, Remaining Authorized Repurchase Amount		$ 8.3		$ 8.3
Stock Issued During Period, Shares, Treasury Stock Reissued for Equity-based Compensation Obligations (in shares)		0	28,092	0	40,753	199,543
Stock Issued During Period, Value, Treasury Stock Reissued for Equity-based Compensation Obligations			$ 0.2		$ 0.3	$ 1.7
Treasury Stock, Shares, Ending Balance (in shares)		0		0		0

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Note 7 - Lease Obligations (Details Textual) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Sep. 30, 2020 USD ($)
Lessee, Operating Lease, Renewal Term (Year)	5 years		5 years
Operating Lease, Right-of-Use Asset	$ 330,514		$ 330,514		$ 339,239
Operating Lease, Liability, Total	349,314		349,314
Operating Lease, Expense	300	$ 300	700	$ 700
Payments for Lease Termination Fee			300
Operating Lease, Right-of-Use Asset, Write Off			600
Operating Lease, Liability, Write Off			800
Increase (Decrease) in Operating Lease Liability for Purchase				2,500
Decrease in Operating Right-of-use Asset for Assets Transferred in Property and Equipment				$ 2,400
Lessee, Operating Lease, Lease Not yet Commenced, Minimum Lease Payments	$ 30,800		30,800
Store Expenses [Member]
Gain (Loss) on Right of Use Assets and Lease Liabilities, Write-offs			$ 200
Chalet [Member]
Number of Operating Leases	4		4
Finance Lease, Number of Lease	1		1
Isely Family Land Trust LLC [Member]
Number of Operating Leases	1		1
FTVC, LLC [Member]
Number of Operating Leases	1		1
Related Parties [Member]
Operating Lease, Right-of-Use Asset	$ 8,200		$ 8,200
Operating Lease, Liability, Total	$ 8,400		$ 8,400
Minimum [Member]
Lessee, Operating Lease, Term of Contract (Year)	10 years		10 years
Maximum [Member]
Lessee, Operating Lease, Term of Contract (Year)	25 years		25 years

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Note 7 - Lease Obligations - Lease Cost (Details) - USD ($) $ in Thousands		3 Months Ended		6 Months Ended
		Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Total lease cost		$ 13,760	$ 13,693	$ 28,230	$ 26,930
Cost of Sales [Member]
Operating lease cost		10,603	10,586	21,239	21,252
Variable lease cost	[1]	891	1,367	2,707	2,605
Store Expenses [Member]
Operating lease cost		79	79	159	159
Depreciation of right-of-use assets	[2]	926	726	1,831	1,487
Short-term lease cost		621	443	1,158	528
Sublease income		(70)	(92)	(163)	(185)
General and Administrative Expense [Member]
Operating lease cost		76	77	152	159
Pre-opening Costs and Relocation Expenses [Member]
Operating lease cost		128	122	154	122
Interest Expense [Member]
Interest on lease liabilities	[2]	$ 506	$ 385	$ 993	$ 803

[1] Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

[2] Immaterial balances related to stores not yet open are included in pre-opening and relocation expenses.

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Note 7 - Lease Obligations - Additional Information (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Operating cash flows from operating leases	$ 11,052	$ 11,003	$ 22,189	$ 22,004
Operating cash flows from finance leases	493	431	993	849
Financing cash flows from finance leases	694	564	1,369	1,082
Operating leases	4,518	1,792	7,287	7,230
Finance leases	$ 0	$ 3,910	$ 106	$ 5,232
Operating leases (Year)	11 years 4 months 24 days	12 years	11 years 4 months 24 days	12 years
Finance leases (Year)	12 years	12 years	12 years	12 years
Operating leases	3.60%	3.60%	3.60%	3.60%
Finance leases	5.10%	4.90%	5.10%	4.90%

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Note 7 - Lease Obligations - Future Lease Payments (Details) - USD ($) $ in Thousands	Mar. 31, 2021	Sep. 30, 2020
Remainder of 2021, Operating leases	$ 22,299
Remainder of 2021, Finance leases	2,437
Remainder of 2021	24,736
2022, Operating leases	44,589
2022, Finance leases	4,893
2022	49,482
2023, Operating leases	43,789
2023, Finance leases	4,937
2023	48,726
2024, Operating leases	41,964
2024, Finance leases	5,002
2024	46,966
2025, Operating leases	40,261
2025, Finance leases	5,012
2025	45,273
Thereafter, Operating leases	236,959
Thereafter, Finance leases	32,453
Thereafter	269,412
Total future undiscounted lease payments, operating leases	429,861
Total future undiscounted lease payments, finance leases	54,734
Total future undiscounted lease payments	484,595
Less imputed interest, operating leases	(80,547)
Less imputed interest, finance leases	(13,751)
Less imputed interest	(94,298)
Total reported lease liability, operating leases	349,314
Total reported lease liability, finance leases	40,983
Total reported lease liability	390,297
Less current portion, operating leases	(32,705)	$ (32,156)
Less current portion, finance leases	(2,996)	(2,836)
Less current portion	(35,701)
Noncurrent lease liability, operating leases	316,609	325,641
Noncurrent lease liability, finance leases	37,987	$ 39,506
Noncurrent lease liability	$ 354,596

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Note 8 - Property and Equipment - Schedule of Property and Equipment (Details) - USD ($) $ in Thousands	6 Months Ended
	Mar. 31, 2021	Sep. 30, 2020
Property, plant, and equipment, gross	$ 362,920	$ 353,445
Less accumulated depreciation and amortization	(216,556)	(205,516)
Property and equipment, net	146,364	147,929
Construction in Progress [Member]
Property, plant, and equipment, gross	3,942	6,717
Land [Member]
Property, plant, and equipment, gross	2,445	1,390
Building [Member]
Property, plant, and equipment, gross	$ 31,433	26,732
Building [Member] | Minimum [Member]
Useful life (Year)	16 years
Building [Member] | Maximum [Member]
Useful life (Year)	40 years
Land Improvements [Member]
Property, plant, and equipment, gross	$ 1,738	1,575
Land Improvements [Member] | Minimum [Member]
Useful life (Year)	1 year
Land Improvements [Member] | Maximum [Member]
Useful life (Year)	24 years
Leasehold and Building Improvements [Member]
Property, plant, and equipment, gross	$ 156,269	153,438
Leasehold and Building Improvements [Member] | Minimum [Member]
Useful life (Year)	1 year
Leasehold and Building Improvements [Member] | Maximum [Member]
Useful life (Year)	25 years
Furniture and Fixtures [Member]
Property, plant, and equipment, gross	$ 142,897	139,965
Furniture and Fixtures [Member] | Minimum [Member]
Useful life (Year)	5 years
Furniture and Fixtures [Member] | Maximum [Member]
Useful life (Year)	7 years
Computer Hardware and Software [Member]
Property, plant, and equipment, gross	$ 24,196	$ 23,628
Computer Hardware and Software [Member] | Minimum [Member]
Useful life (Year)	3 years
Computer Hardware and Software [Member] | Maximum [Member]
Useful life (Year)	5 years

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Note 8 - Property and Equipment - Depreciation and Amortization Expense (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Mar. 31, 2021	Mar. 31, 2020	Mar. 31, 2021	Mar. 31, 2020
Depreciation and amortization expense	$ 7,420	$ 7,888	$ 15,057	$ 15,595
Cost of Sales [Member]
Depreciation and amortization expense	213	194	428	383
Stores [Member]
Depreciation and amortization expense	6,913	7,393	14,041	14,633
General and Administrative Expense [Member]
Depreciation and amortization expense	$ 294	$ 301	$ 588	$ 579

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Note 9 - Goodwill and Other Intangible Assets - Summary of Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands	6 Months Ended
	Mar. 31, 2021	Sep. 30, 2020
Less accumulated amortization	$ (2,764)	$ (2,378)
Amortizable intangible assets, net	929	1,256
Other intangibles in process	4,472	3,625
Trademark	389	389
Total other intangibles, net	5,790	5,270
Goodwill	5,198	5,198
Total goodwill and other intangibles, net	10,988	10,468
Other Intangible Assets [Member]
Amortizable intangible assets	$ 3,693	$ 3,634
Other Intangible Assets [Member] | Minimum [Member]
Intangible assets useful life (Year)	6 months
Other Intangible Assets [Member] | Maximum [Member]
Intangible assets useful life (Year)	3 years

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Note 10 - Accrued Expenses - Composition of Accrued Expenses (Details) - USD ($) $ in Thousands		Mar. 31, 2021	Sep. 30, 2020
Payroll and employee-related expenses		$ 10,736	$ 13,569
Accrued property, sales and use tax payable		6,793	7,912
Accrued marketing expenses		608	407
Deferred revenue related to gift card sales		2,012	1,819
Income tax payable (1)	[1]	17	210
Other (1)	[1]	1,326	1,078
Total accrued expenses		$ 21,492	$ 24,995

[1] Certain prior year amounts have been reclassified for consistency with current year presentation.

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Note 12 - Related Party Transactions (Details Textual) $ in Millions	3 Months Ended		6 Months Ended
	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)	Mar. 31, 2021 USD ($)	Mar. 31, 2020 USD ($)
Chalet [Member]
Number of Operating Leases	4		4
Finance Lease, Number of Lease	1		1
Related Party Transaction Number of Owners That Are Non-Independent Board Members of the Entity			4
Related Party Transaction, Expenses from Transactions with Related Party	$ 0.2	$ 0.2	$ 0.5	$ 0.5
Isely Family Land Trust LLC [Member]
Number of Operating Leases	1		1
Related Party Transaction, Expenses from Transactions with Related Party	$ 0.1	0.1	$ 0.2	0.2
FTVC, LLC [Member]
Number of Operating Leases	1		1
Related Party Transaction Number of Owners That Are Non-Independent Board Members of the Entity	4
FTVC, LLC [Member] | Maximum [Member]
Related Party Transaction, Expenses from Transactions with Related Party	$ 0.1	$ 0.1	$ 0.1	$ 0.1

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Note 14 - Subsequent Event (Details Textual) - Subsequent Event [Member]	May 05, 2021 $ / shares
Dividends Payable, Amount Per Share (in dollars per share)	$ 0.07
Dividends Payable, Date to be Paid	Jun. 16, 2021
Dividends Payable, Date of Record	Jun. 01, 2021