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Item 7. 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 consolidated financial statements and notes thereto which are included elsewhere in this Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-K 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, dietary supplements and body care products 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 September 30, 2023, we operated 165 stores in 21 states, including Colorado, Arizona, Arkansas, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, 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. The sizes of our stores range from approximately 7,000 to 16,000 selling square feet. For the year ended September 30, 2023, our new stores averaged approximately 9,000 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, 2023, we increased our store count at a compound annual growth rate of 2.2%. In fiscal year 2023, we opened three new stores, relocated/remodeled three existing stores and closed two stores. We plan to open four to six new stores and relocate/remodel four to six stores in fiscal year 2024. As of the date of this report, we have signed leases or acquired property for an additional two new stores and five relocations/remodels that we plan to open in fiscal years 2024 and beyond. Between October 1, 2023 and the date of this Form 10-K, we opened two new stores and did not relocate/remodel any stores.

Performance Highlights

Key highlights of our recent performance 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 in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.

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Industry Trends and Economics

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

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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, a convenient, clean and shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries, dietary supplements and body care products.

We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including construction permitting and the availability of construction materials and equipment. 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 industries and regional and general economic conditions, including inflationary or recessionary trends. We believe there are opportunities for increased leverage of costs and increased economies 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 this 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, returns, and allowances. In comparing net sales between periods, we monitor the following:

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-K 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 sales increase. 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.

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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 technology. Depreciation expenses on lease 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, primarily related to store relocations, as well as store closing costs. Store expenses also include long-lived asset impairment charges. 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 expenses

Pre-opening expenses for new stores and relocations/remodels 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 and depreciation expense. Other pre-opening 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 costs are expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.

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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 740 “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 bases. 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.

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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:

Year ended September 30,

Statements of Income Data:*

Cost of goods sold and occupancy costs 71.3 72.0 72.3

Administrative expenses 3.2 2.9 2.7

Pre-opening expenses 0.2 0.1 0.1

Interest expense, net (0.3 ) (0.2 ) (0.2 )

Income before income taxes 2.5 2.5 2.5

Provision for income taxes (0.4 ) (0.6 ) (0.5 )

*Figures may not sum due to rounding.

Other Operating Data (Unaudited):

Store unit count increase period over period 0.6 % 1.2 1.9

Change in daily average comparable store sales 3.6 % 2.6 0.7

Number of new stores opened during the period 3 3 3

Number of stores relocated/remodeled during the period 3 2 5

Number of stores closed during the period 2 1 —

(1) Gross square footage and selling square footage at the end of the period include the square footage for all stores that were open as of the end of the fiscal year presented.

Year ended September 30, 2023 compared to Year ended September 30, 2022

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

Year ended September 30, Change in

Statements of Income Data:

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Net sales

Net sales increased $50.9 million, or 4.7%, to $1,140.6 million for the year ended September 30, 2023 compared to $1,089.6 million for the year ended September 30, 2022, due to a $39.3 million increase in comparable store sales and a $14.8 million increase in new store sales, partially offset by a $3.2 million decrease in net sales related to store closures. Daily average comparable store sales increased 3.6% for the year ended September 30, 2023 compared to an increase of 2.6% for the year ended September 30, 2022. The daily average comparable store sales increase in fiscal year 2023 resulted from a 1.8% increase in average transaction size and a 1.7% increase in daily average transaction count. Comparable store average transaction size was $45.92 for the year ended September 30, 2023. The increase in net sales during the year ended September 30, 2023 was primarily driven by retail price increases, transaction count, new store sales, and marketing initiatives, including market-specific campaigns and {N}power rewards program offers that drove customer engagement, partially offset by a moderation of the pandemic trends experienced in the first half of fiscal year 2022.

Gross profit

Gross profit increased $22.1 million, or 7.2%, to $326.9 million for the year ended September 30, 2023 compared to $304.9 million for the year ended September 30, 2022. Gross profit reflects earnings after product and store occupancy costs. Gross margin increased to 28.7% for the year ended September 30, 2023 from 28.0% for the year ended September 30, 2022. The increase in gross margin during the year ended September 30, 2023 was driven by higher product margin attributed to effective pricing and promotions, partially offset by higher shrink expense.

Store expenses

Store expenses increased $15.2 million, or 6.3%, to $257.3 million for the year ended September 30, 2023 compared to $242.1 million for the year ended September 30, 2022. Store expenses as a percentage of net sales were 22.6% and 22.2% for the years ended September 30, 2023 and 2022, respectively. The increase in store expenses as a percentage of net sales was primarily driven by higher labor expenses as a result of increased wage rates. Store expenses included long-lived asset impairment charges of $1.3 million and $2.9 million for fiscal years 2023 and 2022, respectively.

Administrative expenses

Administrative expenses increased $4.4 million, or 14.0%, to $36.0 million for the year ended September 30, 2023 compared to $31.6 million for the year ended September 30, 2022. The increase in administrative expenses was primarily driven by higher compensation expenses, technology amortization, software expenses and legal expenses. Administrative expenses as a percentage of net sales were 3.2% and 2.9% for the years ended September 30, 2023 and 2022, respectively.

Pre-opening expenses

Pre-opening expenses were $2.0 million for the year ended September 30, 2023 compared to $1.1 million for the year ended September 30, 2022.

Interest expense, net

Interest expense, net of capitalized interest, was $3.3 million for the year ended September 30, 2023 compared to $2.4 million for the year ended September 30, 2022.

Income taxes

Income tax expense decreased $1.3 million to $5.1 million for the year ended September 30, 2023 compared to $6.4 million for the year ended September 30, 2022. The Company’s effective income tax rate was 18.1% and 23.1% for the years ended September 30, 2023 and 2022, respectively. The decrease in the effective income tax rate was primarily attributable to increased food donation deductions recorded during fiscal year 2023.

Net income

Net income was $23.2 million, or $1.02 diluted earnings per share, for the year ended September 30, 2023 compared to $21.4 million, or $0.94 diluted earnings per share, for the year ended September 30, 2022.

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Year ended September 30, 2022 compared to Year ended September 30, 2021

A comparative discussion of our results of operations and other operating data for the years ended September 30, 2022 and September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Year ended September 30, 2022 compared to Year ended September 30, 2021.”

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 costs, share-based compensation and non-recurring items.

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

Year ended September 30,

Impairment of long-lived assets and store closing costs 1,464 2,920

Year ended September 30, 2023 compared to Year ended September 30, 2022

EBITDA increased 4.3% to $60.6 million for the year ended September 30, 2023 compared to $58.1 million for the year ended September 30, 2022. EBITDA as a percentage of net sales was 5.3% for each of the years ended September 30, 2023 and 2022.

Adjusted EBITDA increased 2.0% to $63.4 million for the year ended September 30, 2023 compared to $62.2 million for the year ended September 30, 2022. Adjusted EBITDA as a percentage of net sales was 5.6% and 5.7% for the years ended September 30, 2023 and 2022, respectively.

Year ended September 30, 2022 compared to Year ended September 30, 2021

A comparative discussion of EBITDA and Adjusted EBITDA for the years ended September 30, 2022 and September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2022 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP financial measures – EBITDA and Adjusted EBITDA.”

Management believes some investors’ understanding of our performance is enhanced by including EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe EBITDA and Adjusted EBITDA provide additional information about: (i) our operating performance, because they assist us in comparing the operating performance of our stores on a consistent basis, as they remove 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 that 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 investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

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Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measures of EBITDA and Adjusted EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted 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 analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures 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 our Revolving Facility. Our Credit Facility consists of the $75.0 million Revolving Facility, which we increased on November 16, 2023 from $50.0 million to $75.0 million, 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, cash dividends, share repurchases and corporate taxes. As of September 30, 2023, we had $18.3 million in cash and cash equivalents and $48.5 million available for borrowing under our Revolving Facility.

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 – most recently in May 2022 – and the program will terminate on May 31, 2024. During the year ended September 30, 2023, we repurchased 17,998 shares at a cost of $0.2 million. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.1 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, if any, will be dictated by our capital needs and stock market conditions.

We paid quarterly cash dividends of $0.10 per share of common stock in each quarter of fiscal year 2023. On November 16, 2023, our Board approved the payment of a special cash dividend of $1.00 per share and a quarterly cash dividend of $0.10 per share, which will be paid on December 13, 2023 to stockholders of record as of the close of business on November 27, 2023. The special cash dividend will be funded through available cash and borrowings under our Revolving Facility.

We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the Revolving Facility from time to time. 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, repayment of debt, stock repurchases and dividends for the next 12 months and the foreseeable future. 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.

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

Year ended September 30,

Net cash provided by operating activities $ 64,606 39,693

Net cash used in investing activities (37,950 ) (31,143 )

Net cash used in financing activities (20,353 ) (20,189 )

Net increase (decrease) in cash and cash equivalents 6,303 (11,639 )

Cash and cash equivalents, beginning of year 12,039 23,678

Cash and cash equivalents, end of year $ 18,342 12,039

Year ended September 30, 2023 compared to Year ended September 30, 2022

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, impairment of long-lived assets, share-based compensation, and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $24.9 million, or 62.8%, to $64.6 million for the year ended September 30, 2023 compared to $39.7 million for the year ended September 30, 2022. The increase in cash provided by operating activities was due to an increase in cash provided by working capital, partially offset by a decrease in cash provided by net income as adjusted for non-cash items.

Investing Activities

Net cash used in investing activities increased $6.8 million, or 21.9%, to $38.0 million for the year ended September 30, 2023 compared to $31.1 million for the year ended September 30, 2022. This increase was primarily the result of an increase in property and equipment acquisitions of $8.5 million, partially offset by a decrease in other intangibles acquisitions of $1.9 million during the fiscal year ended September 30, 2023 compared to the fiscal year ended September 30, 2022, attributed to the timing of new store openings, relocations/remodels, and software projects under development.

We plan to spend approximately $30.0 million to $39.0 million on capital expenditures during fiscal year 2024 primarily in connection with expected new store openings and store relocations/remodels.

Acquisition of property and equipment not yet paid decreased $0.9 million to $6.0 million in fiscal year 2023 compared to $7.0 million in fiscal year 2022 due to the timing of payments related to 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. Net cash used in financing activities was $20.4 million for the year ended September 30, 2023 compared to $20.2 million for the year ended September 30, 2022.

Year ended September 30, 2022 compared to Year ended September 30, 2021

A comparative discussion of operating, investing and financing activities for the years ended September 30, 2022 and September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2021 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

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Credit Facility

The revolving commitment amount under the Revolving Facility is $75.0 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. 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 without premium or penalty. On November 16, 2023, we amended the Credit Facility to (i) increase our aggregate revolving commitments from $50.0 million to $75.0 million; (ii) extend the maturity date of the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. The aggregate revolving commitment amount will be automatically and permanently reduced by $2,500,000 annually until the Revolving Facility matures on November 16, 2028, unless we have previously exercised our option to reduce the aggregate revolving commitments to a lower amount.

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) Term SOFR plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Term SOFR loans under the Credit Facility bear interest based on Term SOFR 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 is required to 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, commencing on March 31, 2021 and ending on September 30, 2024. 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 $15.0 million during any fiscal year.

We had no amounts outstanding under the Revolving Facility as of September 30, 2023 and 2022. As of September 30, 2023 and September 30, 2022, we had undrawn, issued and outstanding letters of credit of $1.5 million and $1.1 million, respectively, which were reserved against the amount available for borrowing under the Revolving Facility. We had $48.5 million and $48.9 million available for borrowing under the Revolving Facility as of September 30, 2023 and September 30, 2022, respectively. We had $7.7 million of outstanding borrowings under the fully drawn Term Loan Facility as of September 30, 2023.

As of September 30, 2023 and September 30, 2022, the Company was in compliance with all 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 13, Stockholders’ Equity, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Recent Accounting Pronouncements

For a description of new applicable accounting pronouncements, including those recently adopted, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

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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, revenue, 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.

We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Refer to our consolidated financial statements and related notes for a summary of our significant accounting policies. We believe the following accounting policies are the most critical in the preparation of our consolidated financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Income Taxes

We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. We consider the need to establish valuation allowances to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained by the relevant taxing authority. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.

To the extent we prevail in matters for which reserves have been established or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require the use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

Goodwill and Intangible Assets

We assess our goodwill and intangible assets primarily consisting of trademarks, favorable operating leases and covenants-not-to-compete at least annually. The Company’s annual impairment testing of goodwill is performed as of July 1. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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. There are significant judgments and estimates within the processes; it is therefore possible that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.As of September 30, 2023, the Company has recorded no impairment charges related to goodwill.

Impairment of Long-Lived Assets and Store Closing Costs

We assess our long-lived assets, principally property and equipment and lease assets, for possible impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These events or changes primarily include a significant change in current period performance combined with a history of losses and a projection of continuing losses, or a decision to close or relocate a store. The Company assesses the recoverability of the assets at an individual store level, which we consider to be the lowest level in the organization for which independent identifiable cash flows are available. If the carrying value of such assets over their respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated based on either: (i) discounted future cash flows using a market participant’s discount rate; or (ii) an appropriate third-party market appraisal or other valuation technique.

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Our judgment regarding events or changes in circumstances that indicate the assets carrying value may not be recoverable is based on several factors such as historical and forecasted operating results, significant industry trends and other economic factors. Further, determining whether an impairment exists requires that we use estimates and assumptions in calculating the future undiscounted cash flows expected to be generated by the assets. These estimates and assumptions look several years into the future and include assumptions on future store revenue growth, potential impact of operational changes, competitive factors, inflation and the economy. Application of alternative assumptions could produce materially different results.

If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related liabilities arise, such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and restructuring charge recorded.

Leases

We lease retail stores, a bulk food repackaging facility and distribution center, land and administrative offices under long-term operating leases or finance leases. Accounting for leased properties requires compliance with technical accounting rules and significant judgment by management. Application of these accounting rules and assumptions made by management will determine whether the lease is accounted for as an operating or finance lease.

The Company recognizes a lease asset and corresponding lease liability for all leases with terms greater than 12 months, with the recognition, measurement, and presentation of lease expenses dependent on whether the lease is classified as an operating or finance lease. Lease liabilities represent the present value of lease payments not yet paid. Lease assets represent the Company’s right to use an underlying asset and are based upon the lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of 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.

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.

Significant accounting judgment and assumptions are required in determining the accounting for leases, including:

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to interest rate changes of our long-term debt. We do not use financial instruments for trading or other speculative purposes.

Interest Rate Risk

Our principal exposure to market risk relates to changes in interest rates with respect to our Credit Facility. As of September 30, 2023, no amounts were outstanding under our Revolving Facility and $7.7 million was outstanding under our Term Loan Facility. Our Credit Facility carries floating interest rates that are tied to the Eurodollar rate, and therefore, our statements of income and our cash flows are exposed to changes in interest rates. Based upon a sensitivity analysis at September 30, 2023, a hypothetical 100 basis point change in interest rates would change our annual interest expense by $0.2 million for the year ended September 30, 2023.

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Item 8. Financial Statements and Supplementary Data.

Natural Grocers by Vitamin Cottage, Inc.

Index to Consolidated Financial Statements

Page Number

Reports of Independent Registered Public Accounting Firm 55

Consolidated Balance Sheets as of September 30, 2023 and 2022 58

Notes to Consolidated Financial Statements 62

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Natural Grocers by Vitamin Cottage, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries (the Company) as of September 30, 2023 and 2022, the related consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended September 30, 2023, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2023, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 7, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Impairment of Long-Lived Assets

As discussed in Notes 2 and 7 to the consolidated financial statements, the Company reviews its long-lived assets for possible impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets at an asset group level by determining whether the carrying value of such assets can be recovered through projected undiscounted future cash flows over the assets’ respective remaining lives. As of September 30, 2023, the Company’s long-lived assets included property and equipment, operating lease assets, and finance lease assets of $169.1 million, $287.9 million, and $45.1 million, respectively.

We identified the assessment of the recoverability of long-lived assets associated with certain asset groups, including property and equipment, operating lease assets, and finance lease assets, as a critical audit matter. A high degree of auditor judgment was applied in evaluating certain inputs to the assessment. These inputs included forecasted sales and forecasted operating expenses as a percentage of forecasted sales attributable to individual asset groups, for which there was limited observable market information.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to assess the recoverability of long-lived assets, including controls related to development of the inputs of forecasted sales and forecasted operating expenses as a percentage of forecasted sales. We performed sensitivity analyses to assess the impact of changes in forecasted sales and forecasted operating expenses as a percentage of forecasted sales on the recoverability analysis. We evaluated management’s ability to effectively forecast sales and operating expenses as a percentage of sales for certain asset groups by comparing actual results to management’s historical forecasts. We evaluated the reasonableness of forecasted sales and forecasted operating expenses as a percentage of forecasted sales for certain asset groups by comparing these inputs to available industry reports, historical financial data, and budgets.

/s/ KPMG LLP

We have served as the Company’s auditor since 2010.

Denver, Colorado

December 7, 2023

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

Natural Grocers by Vitamin Cottage, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Natural Grocers by Vitamin Cottage, Inc. and subsidiaries' (the Company) internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2023 and 2022, the related consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended September 30, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated December 7, 2023 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Denver, Colorado

December 7, 2023

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

September 30,

Assets

Current assets:

Prepaid expenses and other current assets 4,151 4,369

Other assets:

Deposits and other assets 395 452

Goodwill and other intangible assets, net 14,129 14,131

Liabilities and Stockholders’ Equity

Current liabilities:

Term loan facility, current portion 1,750 1,750

Operating lease obligations, current portion 34,850 34,735

Finance lease obligations, current portion 3,690 3,223

Long-term liabilities:

Term loan facility, net of current portion 5,938 13,938

Operating lease obligations, net of current portion 276,808 295,064

Finance lease obligations, net of current portion 47,142 44,664

Commitments (Notes 11 and 18)

Stockholders’ equity:

Common stock in treasury at cost, 6,497 shares at September 30, 2023 (66 ) —

See accompanying notes to consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Dollars in thousands, except per share data)

Year ended September 30,

Net income per share of common stock:

Weighted average number of shares of common stock outstanding:

See accompanying notes to consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Dollars in thousands)

Year ended September 30,

Operating activities:

Impairment of long-lived assets and store closing costs 1,268 2,920 1,155

Loss on disposal of property and equipment 379 78 209

Deferred income tax (benefit) expense (1,475 ) 609 864

Non-cash interest expense 19 22 24

Changes in operating assets and liabilities:

Decrease (increase) in:

Prepaid expenses and other assets (128 ) (1,025 ) (141 )

(Decrease) increase in:

Investing activities:

Proceeds from sale of property and equipment 107 21 89

Proceeds from property insurance settlements 36 280 443

Financing activities:

Borrowings under term loan facility — — 35,000

Repurchase of common stock (181 ) — —

Loan fees paid — — (52 )

Net increase (decrease) in cash and cash equivalents 6,303 (11,639 ) (4,856 )

Supplemental disclosures of cash flow information:

Supplemental disclosures of non-cash investing and financing activities:

Acquisition of property and equipment not yet paid $ 6,016 6,965 4,770

Acquisition of other intangibles not yet paid 3 12 319

Property acquired through operating lease obligations 15,274 24,429 9,216

Property acquired through finance lease obligations 5,724 9,625 3,025

See accompanying notes to consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended September 30, 2023, 2022 and 2021

(Dollars in thousands, except per share data)

Common stock –$0.001 par Additional Total

value paid-in Retained Treasury stockholders’

Shares outstanding Amount capital earnings stock equity

Share-based compensation — — 537 — — 537

Issuance of common stock 73,652 — — — — —

Share-based compensation — — 783 — — 783

Issuance of common stock 69,771 — — — — —

Issuance of common stock 66,725 — — — — —

Repurchase of common stock (17,998 ) — — — (181 ) (181 )

See accompanying notes to consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE,INC.

Notes to Consolidated Financial Statements

September 30, 2023 and 2022

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, dietary supplements and body care products. The Company operated 165 retail stores as of September 30, 2023, including 44 stores in Colorado, 23 in Texas, 14 in Oregon, 12 in Arizona, eight each in Utah and Kansas, seven in Missouri, six each in Iowa, New Mexico and Oklahoma, five each in Idaho and Washington, four in Montana, three each in Arkansas, Nebraska, Nevada and North Dakota, two in Wyoming, and one each in Louisiana, Minnesota, and South Dakota. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 164 stores as of September 30, 2022.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying 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.

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, 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 valuation of inventories, useful lives of long-lived assets for depreciation and amortization, impairment of finite-lived intangible assets, long-lived assets, and goodwill, lease assumptions, allowances for self-insurance reserves, deferred tax assets and liabilities, 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.

Segment Information

The Company has one reporting segment: natural and organic retail stores.

Other Comprehensive Income

The Company has no other comprehensive income.

Cash and Cash Equivalents

Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds, and credit and debit card transactions that typically settle within three business days. The Company considers all highly liquid investments with a remaining maturity of 90 days or less when acquired to be cash equivalents.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, magazine advertising and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Accounts receivable also includes receivables from Landlords for tenant improvement allowances. Vendor receivable balances are generally presented on a gross basis separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience and application of the specific identification method. Allowance for doubtful accounts totaled $0.2 million and $0.1 million as of September 30, 2023 and 2022, respectively.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in cash and cash equivalents. The Company’s cash and cash equivalent account balances, which are held in major financial institutions, exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $17.2 million as of September 30, 2023.

Vendor Concentration

For each of the years ended September 30, 2023 and 2022, purchases from the Company’s largest vendor and its subsidiaries represented approximately 68% of all product purchases made during such periods. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.

Merchandise Inventory

Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the preparation of inventory for sale, including inventory overhead costs. Merchandise inventory is carried at the lower of cost or net realizable value. Cost is determined using the weighted average cost method.

Long-Lived Assets

Depreciable long-lived assets primarily consist of leasehold and building improvements, which are stated at historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the useful life of the relevant asset. For land improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’ useful lives or the lease terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and primarily relate to store relocations and closures.

The Company capitalizes interest, if applicable, as part of the historical costs of buildings and leasehold and building improvements.

Impairment of Finite-Lived Intangible and Long-Lived Assets

We assess our long-lived assets, principally property and equipment, lease assets, and intangible assets subject to amortization, for possible impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These events or changes primarily include a significant change in current period performance combined with a history of losses and a projection of continuing losses, or a decision to close or relocate a store. If the carrying value of such assets over their respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated based on either: (i) discounted future cash flows using a market participant’s discount rate; or (ii) an appropriate third-party market appraisal or other valuation technique.

The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses. As of September 30, 2023 and 2022, the Company had property and equipment assets of $169.1 million and $157.2 million, respectively, operating lease assets of $287.9 million and $307.1 million, respectively, finance lease assets of $45.1 million and $43.6 million, respectively, and intangible assets subject to amortization of $8.5 million. The Company recorded impairment charges related to long-lived assets of $1.3 million, $2.9 million and $1.1 million in fiscal years 2023, 2022 and 2021, respectively.

Goodwill and Other Intangible Assets

Intangible assets primarily consist of goodwill, internal-use software, and trademarks. Goodwill and the Company’s trademarks have indefinite lives and are not amortized; rather, they are tested for impairment at least annually on July 1. The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Software costs that do not meet capitalization criteria are expensed as incurred. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.

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The Company’s annual impairment testing of goodwill is performed as of July 1. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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. As of September 30, 2023, the Company has recorded no impairment charges related to goodwill.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life of the credit facility using the straight-line method.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center, and administrative offices under long-term operating or finance leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease. The Company recognizes a lease asset and corresponding lease liability for all leases with terms greater than 12 months, with the recognition, measurement, and presentation of lease expenses dependent on whether the lease is classified as an operating or finance lease.

Operating Leases

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. The rent payment pursuant to the lease agreement is recorded as a reduction of the operating lease liability and lease asset and as single lease expense over the remaining term of the applicable lease.

Finance Leases

Finance lease liabilities represent the present value of lease payments not yet paid. Finance lease assets represent the Company’s right to use an underlying asset and are based upon the lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of finance lease assets. The Company does not record single lease expense for the rental payments under finance leases, but rather payments under the finance lease obligations are recognized as a reduction of the finance lease obligation and as interest expense over the remaining term of the lease. The lease asset is depreciated on a straight-line basis over the remaining term of the applicable lease.

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from historical trends.

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts and returns. Sales taxes are not included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. The Company records a contract liability within accrued expenses when it sells the Company’s gift cards and records a sale when a customer redeems the gift card.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances, as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and payments. Vendor consideration associated with product discounts is recorded as a reduction in the cost of the product. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not include any rent amounts for the store leases classified as finance leases.

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Store Expenses

Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities, depreciation, gain or loss on disposal of assets, long-lived asset impairment charges, store closing costs and other related expenses associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.

Administrative Expenses

Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.

Pre-Opening Expenses

Costs associated with the opening of new stores or relocating/remodeling existing stores are expensed as incurred.

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2023, 2022 and 2021 were $6.9 million, $6.2 million and $6.3 million, respectively, net of vendor reimbursements of $7.1 million, $6.3 million and $5.4 million for the years ended September 30, 2023, 2022 and 2021, respectively.

Share-Based Compensation

The Company adopted the 2012 Omnibus Incentive Plan in connection with its initial public offering on July 25, 2012. Restricted stock units are granted at the market price of the Company’s common stock on the date of grant and expensed over the applicable vesting period.

The excess tax benefits for recognized compensation costs are reported as a credit to income tax expense and as operating cash outflows when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the Company operates.

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the Company believes are more likely than not to be recovered.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities.

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax purposes.

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Recently Adopted Accounting Pronouncements

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), which was subsequently amended by a standard update in December 2022. 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 the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. As amended, the guidance only applies to modifications made prior to December 31, 2024. On December 15, 2022, the Company amended the Credit Facility (as defined in Note 10 below) to, among other things, replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on the Secured Overnight Financing Rate (SOFR). The Company elected to apply ASU 2020-04’s amendments for contract modifications during the first quarter of the fiscal year ending September 30, 2023. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements for the year ended September 30, 2023.

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 simplified the accounting for income taxes by removing certain exceptions to the general principles and also simplified 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 were effective for the Company’s first quarter of the fiscal year ended September 30, 2022. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the year ended September 30, 2022.

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. The Company is evaluating the impact that the adoption of these provisions will have on its consolidated financial statements but does not anticipate that these provisions will have material impacts on its consolidated financial statements.

No other new accounting pronouncements issued or effective during fiscal year 2023 had, or are expected to have, a material impact on the Company’s 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.

Proceeds from the sale of the Company’s 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.

As of September 30, 2023 and 2022, the balance of contract liabilities related to unredeemed gift cards was $1.5 million and $1.3 million, respectively. Revenue for the fiscal year ended September 30, 2023 includes $0.6 million that was included in the contract liability balance of unredeemed gift cards at September 30, 2022.

Rewards program points are accrued as deferred revenue at the retail value per point, net of estimated breakage based on historical redemption rates experienced within the rewards program. Rewards points are forfeited at the end of each calendar year.

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The following table disaggregates the Company’s revenue by product category for the fiscal years ended September 30, 2023, 2022 and 2021, dollars in thousands and as a percentage of net sales:

Year ended September 30,

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 is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units were to vest, resulting in the issuance of common stock that would then share in the earnings of the Company.

The following table presents the Company’s basic and diluted EPS for the years ended September 30, 2023, 2022 and 2021, dollars in thousands, except per share data:

Year ended September 30,

There were 62,752, 43,542 and 166,362 non-vested restricted stock units for the years ended September 30, 2023, 2022 and 2021, respectively, excluded from the calculation as they are antidilutive.

As of September 30, 2023, the Company had 50,000,000 shares of common stock authorized, of which 22,745,412 shares were issued and 22,738,915 shares were outstanding, as well as 6,497 shares of treasury common stock that was not outstanding, and 10,000,000 shares of preferred common stock authorized, of which none was issued and outstanding.

5. Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and market participant’s assumptions (unobservable inputs). Non-financial assets, such as goodwill and long-lived assets, are accounted for at fair value on a non-recurring basis. These items are tested for impairment on the occurrence of a triggering event or, in the case of goodwill and intangibles with indefinite lives, at least on an annual basis.

During fiscal year 2023, long-lived assets, including lease assets, with an aggregate carrying value of $5.9 million were written down to their fair value of $4.6 million, resulting in asset impairment charges of $1.3 million. During fiscal year 2022, long-lived assets with an aggregate carrying value of $7.4 million were written down to their fair value of $4.5 million, resulting in asset impairment charges of $2.9 million. During fiscal year 2021, long-lived assets with an aggregate carrying value of $3.3 million were written down to their fair value of $2.1 million, resulting in asset impairment charges of $1.1 million. The carrying amounts of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate fair value because of the short maturity of those assets and liabilities.

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6. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2023 and 2022, dollars in thousands:

Useful lives As of September 30,

Less accumulated depreciation and amortization (259,628 ) (243,558 )

Total costs capitalized for qualifying construction projects of leasehold and building improvements included $0.5 million for each of the years ended September 30, 2023 and 2021 and $0.4 million for the year ended September 30, 2022, related to internal staff compensation. Depreciation expense related to capitalized internal staff compensation was $0.7 million for the year ended September 30, 2023 and $0.6 million for each of the years ended September 30, 2022 and 2021. Capitalized interest costs were $0.3 million for each of the years ended September 30, 2023 and 2022 and $0.2 million for the year ended September 30, 2021.

Depreciation and amortization expense for the years ended September 30, 2023, 2022 and 2021 is summarized as follows, dollars in thousands:

Year ended September 30,

1Pre-opening depreciation and amortization expenses for fiscal year 2021 have been reclassified from store expenses to be consistent with the presentation for fiscal years 2023 and 2022.

7. Impairment of Long-Lived Assets

Long-lived assets, such as property and equipment, lease assets, and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses the recoverability of the assets at an individual store level, which we consider to be the lowest level in the organization for which independent identifiable cash flows are available. If the carrying value of such assets over their respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is recognized. The amount of impairment is measured based on projected discounted future cash flows using a market participant’s discount rate. The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends, and other economic and regulatory factors in performing these analyses.

As of September 30, 2023 and 2022, the Company had property and equipment assets of $169.1 million and $157.2 million, respectively, and lease assets of $333.1 million and $350.7 million, respectively. In fiscal years 2023, 2022 and 2021, the Company concluded, as a result of its review of potential long-lived asset impairments, that certain long-lived assets were impaired. The Company recorded impairments of $1.3 million, $2.9 million and $1.1 million for the years ended September 30, 2023, 2022 and 2021, respectively. Such charges are reflected within store expenses on the consolidated statements of income.

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8. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2023 and 2022, are summarized as follows, dollars in thousands:

Useful lives As of September 30,

Amortizable intangible assets:

Less accumulated amortization (5,326 ) (3,827 )

Amortizable intangible assets, net 7,881 8,138

Other intangibles in process 643 369

Deferred financing costs, net 3 - 5 18 37

Total goodwill and other intangibles, net $ 14,129 14,131

Amortization expense was $1.5 million, $0.7 million and $0.8 million for the years ended September 30, 2023, 2022 and 2021, respectively.

Future aggregate amortization expense associated with intangibles assets for the fiscal years subsequent to 2023 is estimated to be approximately as follows, dollars in thousands:

Fiscal year Amortization expense

Total amortization expense $ 8,542

Capitalized costs for internal-use software development were $1.1 million, $3.1 million and $2.0 million for the years ended September 30, 2023, 2022 and 2021, respectively, primarily due to capitalization of expenses related to external consultants.

9. Accrued Expenses

The composition of accrued expenses as of September 30, 2023 and 2022 is summarized as follows, dollars in thousands:

As of September 30,

Payroll and employee-related expenses $ 17,719 14,527

Accrued property, sales and use tax payable 9,844 8,450

Accrued marketing expenses 466 153

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10. Debt

Credit Facility

The Company is party to a Credit Facility, entered into on January 28, 2016 and subsequently amended, consisting of a $75.0 million revolving loan facility (the Revolving Facility), which was increased on November 16, 2023 from $50.0 million to $75.0 million, and a $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. The revolving commitment amount under the Revolving Facility is $75.0 million, subject to reduction as described below, 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 without premium or penalty. The Term Loan Facility matures on November 13, 2024 and the Revolving Facility matures on November 16, 2028. 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) Term SOFR plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Term SOFR borrowings under the Credit Facility bear interest based on Term SOFR for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is based upon the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal 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 administrative agent’s 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 $15.0 million during any fiscal year.

On November 16, 2023, the Company amended the Credit Facility to (i) increase its aggregate revolving commitments from $50.0 million to $75.0 million; (ii) extend the maturity date of the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. The aggregate revolving commitment amount will be automatically and permanently reduced by $2,500,000 annually until the Revolving Facility matures in November 2028, unless the Company has previously exercised its option to reduce the aggregate revolving commitments to a lower amount.

The Company had no amounts outstanding under the Revolving Facility as of September 30, 2023 and 2022. The Company had undrawn, issued and outstanding letters of credit of $1.5 million and $1.1 million as of September 30, 2023 and 2022, respectively, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had $48.5 million and $48.9 million available for borrowing under the Revolving Facility as of September 30, 2023 and 2022, respectively. The Company had $7.7 million outstanding under its fully drawn Term Loan Facility as of September 30, 2023.

As of September 30, 2023 and 2022, the Company was in compliance with all covenants under the Credit Facility.

Lease Obligations

The Company had 24 and 21 leases that were classified as finance leases as of September 30, 2023 and 2022, respectively. 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 commencement of the lease.

Interest

The Company incurred gross interest expense of $3.6 million, $2.7 million and $2.5 million for the years ended September 30, 2023, 2022 and 2021, respectively. Interest expense relates primarily to interest on finance lease obligations and the Credit Facility. The Company capitalized interest of $0.3 million for each of the years ended September 30, 2023 and 2022 and $0.2 million for the year ended September 30, 2021.

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11. Lease Commitments

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

Most leases include one or more options to renew, with renewal terms normally expressed in periods of five-to-ten 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. The Company uses 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 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 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 14). The leases began at various times with the earliest commencing in November 1999, continue for various terms through May 2042 and include various options to renew. The terms and rental rates of these leases have been approved by our audit committee in accordance with our related party transaction policy. As of September 30, 2023, these leases accounted for $8.4 million of operating lease assets and $8.5 million of operating lease liabilities, of which $0.9 million was current, and are included in the disclosures below. Lease expense is recognized on a straight-line basis and was $1.2 million for the year ended September 30, 2023 and $1.3 million for each of the years ended September 30, 2022 and 2021.

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The components of total lease cost for the years ended September 30, 2023, 2022 and 2021 were as follows, dollars in thousands:

Year ended September 30,

Operating lease cost:

Finance lease cost:

Depreciation of lease assets Store expenses 3,746 3,832 3,618

Interest on lease liabilities Interest expense, net 1,837 1,896 1,931

Variable lease cost Cost of goods sold and occupancy costs (2) 6,429 5,851 5,611

Sublease income Store expenses (323 ) (302 ) (313 )

1Pre-opening expenses for fiscal year 2021 have been reclassified from store expenses and interest expense, net to be consistent with the presentation for fiscal years 2023 and 2022.

2Immaterial 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 years ended September 30, 2023, 2022 and 2021 was as follows, dollars in thousands:

Year ended September 30,

Cash paid for amounts included in the measurement of lease liabilities:

Lease assets obtained in exchange for new lease liabilities:

Additional information related to the Company’s leases as of September 30, 2023 and 2022 was as follows:

September 30,

Weighted-average remaining lease term (in years):

Weighted-average discount rate:

Operating leases 3.8 % 3.7

Finance leases 4.9 % 4.8

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During the year ended September 30, 2023, the Company paid $0.2 million in lease termination costs to early terminate the lease associated with a store that closed in fiscal year 2022. As a result of this lease termination, the Company wrote off $0.1 million in operating lease assets and $0.2 million in operating lease liabilities and recorded a $0.1 loss in store expenses. In addition, during the year ended September 30, 2022, the Company purchased one store’s building and land that had previously been leased. This resulted in a $1.5 million reduction in finance lease liability and the reclassification of $1.4 million of corresponding finance lease assets to property and equipment.

Future lease payments under non-cancellable leases as of September 30, 2023 were as follows, dollars in thousands:

Fiscal year Operating leases Finance leases Total

The table above excludes $2.4 million of legally binding minimum lease payments for leases that had been executed as of September 30, 2023 but whose terms had not yet commenced.

Future minimum rental commitments and sublease rental income under the terms of the Company’s operating and finance leases were as follows as of September 30, 2023, dollars in thousands:

Fiscal year Third parties Related parties Sublease rental income Total leases

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2023, 2022 and 2021 totaled $58.4 million, $56.0 million and $55.3 million, respectively, which is included in cost of goods sold and occupancy costs and administrative expenses in the consolidated statements of income. In addition, $0.3 million, $0.3 million and $0.2 million is included in pre-opening expense associated with rent expense for stores prior to their opening date for the years ended September 30, 2023, 2022 and 2021, respectively.

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12. Share-Based Compensation

The Company adopted the 2012 Omnibus Incentive Plan (as amended, the Plan) on July 17, 2012. Restricted stock unit awards granted pursuant to the Plan, if they vest, will be settled in new shares of the Company’s common stock or shares of common stock held in treasury. At the adoption of the Plan, there were 1,090,151 shares of common stock available for issuance or delivery under the Plan. In March 2019, the Company’s stockholders approved a proposal to amend the Plan to: (i) increase the number of shares of common stock reserved for issuance thereunder by 600,000 shares and (ii) extend its term by five years. As of September 30, 2023, 253,544 shares of common stock remain available for grants under the Plan. The Plan provides for awards of options, stock appreciation rights, stock grants, restricted stock units, other share-based awards and cash-based incentive awards to officers, members of the Board, certain employees who are not named executive officers and consultants. As of September 30, 2023, restricted stock units had been granted under the Plan, at no out-of-pocket cost to officers, Board members and key employees. These restricted stock units generally vest, subject to requisite service requirements, annually in installments over a five-year period or in full following a three-year period. The award recipients are not entitled to cash dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture during the vesting period. Restricted stock units are granted at the market price of the Company’s stock on the date of grant and are expensed on a straight-line basis over the vesting period.

The shares of non-vested restricted stock units as of September 30, 2023 were as follows:

Shares Weighted average grant date fair value

During the year ended September 30, 2023, the Company awarded fully vested stock grants totaling 2,000 shares of the Company’s common stock to 20 employees who were not named executive officers.

Share-based compensation expense for restricted stock unit awards to certain employees who are not named executive officers was $0.9 million, $0.8 million and $0.5 million for the years ended September 30, 2023, 2022 and 2021, respectively. Share-based compensation expense for restricted stock unit awards to one named executive officer was $0.3 million for the year ended September 30, 2023 and $0.2 million for each of the years ended September 30, 2022 and 2021.

Each independent member of the Board receives an annual grant of restricted stock units equal to $60,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). Such grants are made each year on the date of the Company’s annual meeting of stockholders, or on a pro rata basis in the case of a mid-year appointment. Share-based compensation expense for the Company’s awards to its Board members was $0.2 million for each of the years ended September 30, 2023, 2022 and 2021.

The Company recorded total share-based compensation expense before income taxes of $1.4 million, $1.2 million and $0.9 million for the years ended September 30, 2023, 2022 and 2021, respectively. The share-based compensation expense is included in cost of goods sold and occupancy costs, store expenses or administrative expenses in the consolidated statements of income consistent with the manner in which the applicable officer, Board member or key employee’s compensation expense is presented. The Company realized a tax benefit from share-based compensation of less than $0.1 million for the year ended September 30, 2023 and $0.1 million for each of the years ended September 30, 2022 and 2021.

As of September 30, 2023, there was $2.1 million of unrecognized share-based compensation expense related to non-vested restricted stock units, net of estimated forfeitures, which the Company anticipates will be recognized over a weighted average period of approximately two years.

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13. 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 – most recently in May 2022 – and the program will terminate on May 31, 2024. 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 following table summarizes share repurchase activity for the years ended September 30, 2023, 2022 and 2021, dollars in thousands, except average price per common share acquired:

Year Ended September 30,

Number of common shares acquired 17,998 — —

Average price per common share acquired (including commissions) $ 10.07 — —

Total cost of common shares acquired $ 181 — —

During fiscal year 2023, the Company reissued 11,501 treasury shares at a cost of $0.1 million to satisfy the issuance of common stock pursuant to the vesting of certain restricted stock unit awards and the award of stock grants. During fiscal years 2022 and 2021, the Company did not reissue any treasury shares. At September 30, 2023 and 2022, the Company held 6,497 and no shares in treasury, respectively.

Between October 1, 2023 and December 4, 2023 (the latest practical date for making the determination), the Company has not repurchased any additional shares of the Company’s common stock. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.1 million.

Dividends

The Company paid a quarterly cash dividend of $0.10, $0.10 and $0.07 per share of common stock in each quarter of fiscal years 2023, 2022 and 2021, respectively, and a special cash dividend of $2.00 per share of common stock in the first quarter of fiscal year 2021.

14. Related Party Transactions

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

Chalet Properties, LLC: The Company has four operating leases (see Note 11) 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 $0.9 million for each of the years ended September 30, 2023 and 2022 and $1.0 million for the year ended September 30, 2021.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 11) with 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 $0.3 million for each of the years ended September 30, 2023, 2022 and 2021.

FTVC LLC: The Company has one operating lease (see Note 11) 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 years ended September 30, 2023, 2022 and 2021.

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15. Income Taxes

The following are the components of the provision for income taxes for the years ended September 30, 2023, 2022 and 2021, respectively, dollars in thousands:

Year ended September 30,

Deferred federal income tax (benefit) expense (1,334 ) 559 836

Deferred state income tax (benefit) expense (141 ) 50 28

Total deferred income tax (benefit) expense (1,475 ) 609 864

The differences between the United States federal statutory income tax rate and the Company’s effective tax rate are as follows:

Year ended September 30,

State income taxes, net of federal income tax expense 3.1 3.4 3.6

Enhanced food deduction (3.1 ) (0.5 ) (0.5 )

Deferred tax liability adjustment — 1.0 0.8

Other, net (2.9 ) (1.8 ) (3.9 )

Deferred taxes have been classified on the consolidated balance sheets as follows, dollars in thousands:

As of September 30,

Long-term assets $ — —

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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows, dollars in thousands:

As of September 30,

Deferred tax assets:

Research and experimental expenditures 963 —

Deferred tax liabilities:

The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future deductions based on the nature of the deductible temporary differences and expected future taxable income.

The Company did not utilize federal income tax carryforwards or federal tax credit carryforwards for the years ended September 30, 2023, 2022 and 2021. The Company utilized $0.1 million in tax effected state income tax carryforwards for each of the years ended September 30, 2023, 2022 and 2021.

The Company did not have any uncertain tax positions as of September 30, 2023 and 2022.

The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years 2019 and prior and is no longer subject to state and local income tax examinations for fiscal years 2018 and prior.

16. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Employees may defer up to the annual maximum limit prescribed by the Code. The Company, on a discretionary basis, may match up to 25% of participant contributions up to a maximum annual employer match of $2,500. As of September 30, 2023, the Company had accrued $0.9 million for matching contributions to be paid out after the plan year ending December 31, 2023. Subsequent to plan years ending December 31, 2022 and 2021, the Company funded matching contributions to participants’ accounts of $1.1 and $1.2 million, respectively.

17. Segment Reporting

The Company has one reporting segment: natural and organic retail stores. The Company’s revenue is derived from the sale of natural and organic products at its stores. All existing operations are domestic.

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18. Commitments and Contingencies

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation, subject to a stop loss policy. The self-insurance liability related to claims under the Company’s health benefit plans is determined based on analysis of actual claims. The amounts related to these claims are included as a component of payroll and employee-related expenses in accrued expenses. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. While the Company believes that its assumptions are appropriate, the estimated accrual for these liabilities could be significantly affected if future occurrences and claims materially differ from these assumptions and historical trends.

Legal

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment discrimination 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 financial statements.

19. Subsequent Events

On November 16, 2023, the Board approved a special cash dividend of $1.00 per share and a quarterly cash dividend of $0.10 per share, which will be paid on December 13, 2023 to stockholders of record as of the close of business on November 27, 2023. The special cash dividend will be funded through available cash and borrowings under the Company’s Revolving Facility.

On November 16, 2023, the Company entered into the Seventh Amendment to the Credit Facility to (i) increase its aggregate revolving commitments from $50.0 million to $75.0 million, subject to reductions; (ii) extend the maturity date of the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. See Note 10, Debt for additional information.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of consolidated financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

We have assessed the effectiveness of our internal control over financial reporting as of September 30, 2023 using the criteria described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment of the design and related testing of the internal control over financial reporting, management concluded that, as of September 30, 2023, we maintained effective internal control over financial reporting.

Our independent registered public accounting firm, KPMG LLP, audited the effectiveness of our internal control over financial reporting. KPMG LLP’s attestation report is included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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-K. 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 at a reasonable assurance level as of September 30, 2023.

Item 9B. Other Information.

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item is incorporated herein by reference to the information provided under the headings “Executive Officers and Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive Proxy Statement on Schedule 14A for the 2024 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2023 (the 2024 Proxy Statement). We have adopted a Code of Ethics that establishes the standards of ethical conduct applicable to all of our directors, officers, including our principal executive, financial and accounting officers, employees, consultants and contractors. Our Code of Ethics is publicly available on our website at www.naturalgrocers.com and we will post any amendments to, or waivers from, a provision of this Code of Ethics by posting such information on our website, at the address specified above.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information in the 2024 Proxy Statement under the headings “Executive Compensation” and “Director Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item concerning securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management is incorporated by reference to the information in the 2024 Proxy Statement under the headings “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item concerning transactions with related persons and director independence is incorporated by reference to the information in the 2024 Proxy Statement under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance.”

Item 14. Principal Accounting Fees and Services.

Our independent registered accounting firm is KPMG LLP, Denver, CO, Auditor Firm ID: 185. The information required by this item is incorporated by reference to the information in the 2024 Proxy Statement under the heading “Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

1. Financial Statements: See Part II, Item 8 of this Form 10-K.

3. Exhibits:

EXHIBIT INDEX

Exhibit Number Description Form File No. Exhibit Number Filing Date

Natural Grocers by Vitamin Cottage, Inc. NGVC US Equity

NGVC · 10-K · period ended 2023-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits and Financial Statement Schedules.

Natural Grocers by Vitamin Cottage, Inc. NGVC US Equity☆

NGVC · 10-K · period ended 2023-09-30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 14. Principal Accounting Fees and Services.

Item 15. Exhibits and Financial Statement Schedules.

Natural Grocers by Vitamin Cottage, Inc. NGVC US Equity