UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

OR

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

COMMISSION FILE NUMBER: 001-35608 

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

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

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

(303) 986-4600

(Registrant’s telephone number, including area code)

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

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.001 par value	NGVC	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non –accelerated filer ☐	Smaller reporting company ☒
	Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 4, 2020 was 22,510,846.

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2020

Table of Contents

		Page Number
	PART I. Financial Information
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of March 31, 2020 (unaudited) and September 30, 2019	3
	Consolidated Statements of Income for the three and six months ended March 31, 2020 and 2019 (unaudited)	4
	Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2020 and 2019 (unaudited)	6
	Notes to Unaudited Interim Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
	PART II. Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 5.	Other Information	32
Item 6.	Exhibits	33
SIGNATURES		34

1

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, “fiscal year 2020” refers to the year from October 1, 2019 to September 30, 2020).

Forward-Looking Statements

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

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. In addition, our actual results could differ materially from the forward-looking statements in this Form 10-Q due to risks and challenges related to the COVID-19 pandemic, including: the length of time that the pandemic continues; the inability of customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-priced or other perceived value offerings; the temporary inability of our employees to work due to illness; temporary store closures due to infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local, state or federal governmental authorities; the extent and duration of the economic recession resulting from the COVID-19 pandemic, including its impact on consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; increased operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state governments.

In addition to the foregoing, we believe the factors that could cause our actual results to differ materially from the forward-looking statements in this Form 10-Q include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (the Form 10-K) and Part II, Item 1A - “Risk Factors” in this Form 10-Q. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

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

2

PART I. Financial Information

Item 1. Financial Statements

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	March 31, 2020			September 30, 2019
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	29,374			6,214
Accounts receivable, net		5,594			5,059
Merchandise inventory		88,411			96,179
Prepaid expenses and other current assets		3,253			7,728
Total current assets		126,632			115,180
Property and equipment, net		154,739			201,635
Operating lease assets		349,437			—
Finance lease assets		35,429			—
Deposits and other assets		657			1,638
Goodwill and other intangible assets, net		9,661			8,644
Deferred financing costs, net		37			17
Total assets	$	676,592			327,114
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	70,767			63,162
Accrued expenses		22,663			19,061
Capital and financing lease obligations, current portion		—			1,045
Operating lease obligations, current portion		31,765			—
Finance lease obligations, current portion		2,550			—
Total current liabilities		127,745			83,268
Long-term liabilities:
Capital and financing lease obligations, net of current portion		—			51,475
Operating lease obligations, net of current portion		336,003			—
Finance lease obligations, net of current portion		34,248			—
Revolving credit facility		—			5,692
Deferred income tax liabilities, net		11,161			10,420
Deferred rent		—			11,393
Leasehold incentives		—			7,960
Total long-term liabilities		381,412			86,940
Total liabilities		509,157			170,208
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at March 31, 2020 and September 30, 2019 and 22,503,810 and 22,463,057 outstanding at March 31, 2020 and September 30, 2019, respectively		23			23
Additional paid-in capital		56,439			56,319
Retained earnings		111,022			100,923
Common stock in treasury at cost, 6,469 and 47,222 shares, at March 31, 2020 and September 30, 2019, respectively		(49	)		(359	)
Total stockholders’ equity		167,435			156,906
Total liabilities and stockholders’ equity	$	676,592			327,114

See accompanying notes to unaudited interim consolidated financial statements.

3

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three months ended March 31,						Six months ended March 31,
	2020			2019			2020			2019
Net sales	$	277,524			230,447			507,554			451,962
Cost of goods sold and occupancy costs		199,701			168,233			369,207			330,602
Gross profit		77,823			62,214			138,347			121,360
Store expenses		56,878			50,175			108,305			99,298
Administrative expenses		7,038			5,761			12,857			11,076
Pre-opening and relocation expenses		650			157			1,080			829
Operating income		13,257			6,121			16,105			10,157
Interest expense, net		(516	)		(1,280	)		(1,052	)		(2,535	)
Income before income taxes		12,741			4,841			15,053			7,622
Provision for income taxes		(3,023	)		(981	)		(3,467	)		(1,565	)
Net income	$	9,718			3,860			11,586			6,057
Net income per common share:
Basic	$	0.43			0.17			0.52			0.27
Diluted	$	0.43			0.17			0.51			0.27
Weighted average number of shares of common stock outstanding:
Basic		22,493,341			22,413,055			22,482,285			22,399,665
Diluted		22,543,429			22,561,825			22,542,319			22,579,733

See accompanying notes to unaudited interim consolidated financial statements.

4

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six months ended March 31,
	2020			2019
Operating activities:
Net income	$	11,586			6,057
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,595			14,576
Gain on disposal of property and equipment		—			(165	)
Share-based compensation		552			663
Deferred income tax expense (benefit)		475			(546	)
Non-cash interest expense		6			6
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net		(535	)		254
Merchandise inventory		7,768			(1,107	)
Prepaid expenses and other assets		(483	)		97
Income tax receivable		4,960			(65	)
Operating lease asset		14,973			—
(Decrease) increase in:
Operating lease liability		(15,285	)		—
Accounts payable		10,146			4,469
Accrued expenses		3,602			(517	)
Deferred compensation		—			(688	)
Deferred rent and leasehold incentives		—			(441	)
Net cash provided by operating activities		53,360			22,593
Investing activities:
Acquisition of property and equipment		(18,759	)		(17,644	)
Acquisition of other intangibles		(1,399	)		(251	)
Proceeds from sale of property and equipment		—			792
Proceeds from property insurance settlements		27			22
Net cash used in investing activities		(20,131	)		(17,081	)
Financing activities:
Borrowings under credit facility		226,000			185,200
Repayments under credit facility		(231,692	)		(188,200	)
Capital and financing lease obligation payments		—			(362	)
Finance lease obligation payments		(1,082	)		—
Dividend to shareholders		(3,148	)		—
Loan fees paid		(25	)		—
Payments on withholding tax for restricted stock unit vesting		(122	)		(265	)
Net cash used in financing activities		(10,069	)		(3,627	)
Net increase in cash and cash equivalents		23,160			1,885
Cash and cash equivalents, beginning of period		6,214			9,398
Cash and cash equivalents, end of period	$	29,374			11,283
Supplemental disclosures of cash flow information:
Cash paid for interest	$	328			439
Cash paid for interest on finance or capital and financing lease obligations, net of capitalized interest of $68 and $59, respectively		781			2,087
Income taxes paid		10			2,962
Deferred compensation paid		—			700
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	3,748			1,228
Property acquired through capital and financing lease obligations		—			4,842
Property acquired through operating lease obligations		8,170			—
Property acquired through finance lease obligations		5,232			—

See accompanying notes to unaudited interim consolidated financial statements.

5

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended March 31, 2020 and March 31, 2019

(Unaudited)

(Dollars in thousands, except per share data)

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

	Common stock –$0.001 par
	value
	Shares outstanding		Amount		Additional paid-in capital			Retained earnings		Treasury stock			Total stockholders’ equity
Balances September 30, 2018		22,373,382	$	23	$	56,236		$	91,507	$	(1,040	)	$	146,726
Net income		—		—		—			2,197		—			2,197
Share-based compensation		18,928		—		101			—		144			245
Balances December 31, 2018		22,392,310		23		56,337			93,704		(896	)		149,168
Net income		—		—		—			3,860		—			3,860
Share-based compensation		39,243		—		(145	)		—		298			153
Balances March 31, 2019		22,431,553	$	23	$	56,192		$	97,564	$	(598	)	$	153,181

See accompanying notes to unaudited interim consolidated financial statements.

6

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Unaudited Interim Consolidated Financial Statements

March 31, 2020 and 2019

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of March 31, 2020, the Company operated 157 stores in 20 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 153 stores in 19 states as of September 30, 2019.

2. Basis of Presentation and Summary of Significant Accounting Policies

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-K. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending September 30.

The accompanying unaudited consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company (VC2). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has one reporting segment: natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the three and six months ended March 31, 2020 and 2019, as follows:

	Three months ended March 31,					Six months ended March 31,
	2020			2019		2020		2019
Grocery		67	%		68		68		68
Dietary supplements		23			22		22		21
Other		10			10		10		11
		100	%		100		100		100

Use of Estimates

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

7

Recently Adopted Accounting Pronouncements 

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

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

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

Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the three and six months ended March 31, 2020. These adjustments were primarily driven by the derecognition of $41.9 million of lease obligations and $40.2 million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback guidance. These leases were reclassified as operating or finance leases as of October 1, 2019, the transition date. See Note 7 for additional information related to the Company’s lease accounting policy.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Nonemployee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain exceptions. The provisions of ASU 2018-07 are effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. This ASU did not have an impact on the Company’s consolidated financial statements for the three or six months ended March 31, 2020.

Recent Accounting Pronouncements 

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

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. ASU 2019-10 delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to above). Because the Company is a smaller reporting company, the provisions of ASU 2017-04 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

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

8

3. Revenue Recognition

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

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

Proceeds from the sale of gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company. The Company also recognizes revenue for a portion of gift card values that is not expected to be redeemed (breakage). The estimated breakage takes into consideration several factors, including the laws and regulations applicable to each jurisdiction. The Company determines the amount of breakage income to be recognized on gift cards using historical experience to estimate amounts that will ultimately not be redeemed. The Company recognizes such breakage income in proportion to redemption rates of the overall population of gift cards.

The balance of contract liabilities related to unredeemed gift cards was $1.2 million and $1.0 million as of March 31, 2020 and September 30, 2019, respectively. Revenue for the three months ended March 31, 2020 and 2019 includes $0 million and $0.2 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2019 and 2018, respectively. Revenue for the six months ended March 31, 2020 and 2019 includes approximately $0.8 million and $0.5 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2019 and 2018, respectively.

The following table disaggregates our revenue by product category for the three months and six months ended March 31, 2020 and 2019, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2020		2019		2020		2019
Grocery	$	186,171		157,802		344,106		309,103
Dietary supplements		63,969		49,700		111,870		95,484
Other		27,384		22,945		51,578		47,375
	$	277,524		230,447		507,554		451,962

4. Earnings Per Share

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

Presented below are basic and diluted EPS for the three and six months ended March 31, 2020 and 2019, dollars in thousands, except per share data:

	Three months ended March 31,				Six months ended March 31,
	2020		2019		2020		2019
Net income	$	9,718		3,860		11,586		6,057
Weighted average number of shares of common stock outstanding		22,493,341		22,413,055		22,482,285		22,399,665
Effect of dilutive securities		50,088		148,770		60,034		180,068
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,543,429		22,561,825		22,542,319		22,579,733
Basic earnings per share	$	0.43		0.17		0.52		0.27
Diluted earnings per share	$	0.43		0.17		0.51		0.27

9

There were 142,020 and 181,720 non-vested RSUs for the three and six months ended March 31, 2020, respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 72,599 and 27,574 non-vested RSUs for the three and six months ended March 31, 2019, respectively, excluded from the calculation of diluted EPS as they are antidilutive. 

The Company paid a dividend of $0.07 per share of common stock in each of the first two quarters of fiscal year 2020. The Company did not declare any dividends during the three or six months ended March 31, 2019.

5. Debt

Credit Facility 

On January 28, 2016, the Company entered into a credit 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 amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on November 13, 2024. For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a 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 $10.0 million during any fiscal year.

The Company had $0 and $5.7 million outstanding under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively.  As of each of March 31, 2020 and September 30, 2019, the Company had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. The Company had $49.0 million and $43.3 million available for borrowing under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively.

As of March 31, 2020 and September 30, 2019, the Company was in compliance with the financial covenants under the Credit Facility.

Lease Obligations 

As of September 30, 2019, 23 leases were classified as capital and financing lease obligations (see Note 7). As a result of the Company’s adoption, effective October 1, 2019, of the new lease standard set out in ASC 842: (i) the Company’s previous capital financing lease obligations were derecognized and reclassified as operating or finance leases and (ii) the Company’s previous capital lease obligations were classified as finance leases. As of March 31, 2020, the Company had 17 leases that were classified as finance leases. No rent expense is recorded for these finance leases (previously classified as capital and financing lease obligations); 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, and legacy capital and financing lease obligations, is determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $0.5 million and $1.3 million for the three months ended March 31, 2020 and 2019, respectively, and approximately $1.1 million and $2.6 million for the six months ended March 31, 2020 and 2019, respectively. Interest expense for the three and six months ended March 31, 2020 and 2019 relates primarily to interest on capital and financing lease obligations.  The Company capitalized interest of less than $0.1 million for each of the three months ended March 31, 2020 and 2019 and approximately $0.1 million for each of the six months ended March 31, 2020 and 2019. 

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6. Stockholders’ Equity

Share Repurchases

In May 2016, the Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. In May 2018, the Board authorized a two-year extension of the share repurchase program. On May 4, 2020, the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022 (see Note 14). Repurchases under the Company’s share repurchase program are 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.

Prior to October 1, 2018, the Company repurchased 199,543 shares under the share repurchase program. The Company did not repurchase any shares between October 1, 2018 and March 31, 2020. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.

Prior to October 1, 2019, the Company reissued 152,321 treasury shares at a cost of $1.3 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants.  During the three and six months ended March 31, 2020, the Company reissued 28,092 treasury shares at a cost of approximately $0.2 million and 40,753 treasury shares at a cost of approximately $0.3 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants.  During the three and six months ended March 31, 2019, the Company reissued 39,243 treasury shares at a cost of approximately $0.3 million and 58,171 treasury shares at a cost of approximately $0.4 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants.  At March 31, 2020 and September 30, 2019, the Company held in treasury 6,469 shares and 47,222 shares, respectively, totaling less than $0.1 million and $0.4 million, respectively.

7. Lease Obligations

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

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

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

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

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

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

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

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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 five 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, each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through February 2027 and include various options to renew. These leases account for $7.3 million of right-of-use assets and $7.6 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million and $0.7 million for the three months and six months ended March 31, 2020, respectively.

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

Lease cost	Classification	Three months ended March 31, 2020			Six months ended March 31, 2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,586			21,252
	Store expenses		79			159
	Administrative expenses		77			159
	Pre-opening and relocation expenses		122			122
Finance lease cost:
Depreciation of right-of-use assets	Store expenses(1)		726			1,487
Interest on lease liabilities	Interest expense, net (1)		385			803
Short-term lease cost	Store expenses		443			528
Variable lease cost	Cost of goods sold and occupancy costs(2)		1,367			2,605
Sublease income	Store expenses		(92	)		(185	)
Total lease cost		$	13,693			26,930

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

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

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

	Three months ended March 31, 2020			Six months ended March 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,003			22,004
Operating cash flows from finance leases		431			849
Financing cash flows from finance leases		564			1,082
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		1,792			7,230
Finance leases		3,910			5,232
Weighted-average remaining lease term (in years):
Operating leases		12.0
Finance leases		12.0
Weighted-average discount rate:
Operating leases		3.6	%
Finance leases		4.9	%

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

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Future lease payments under non-cancellable leases as of March 31, 2020 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2020	$	22,276			2,132			24,408
2021		44,151			4,367			48,518
2022		43,444			4,389			47,833
2023		42,561			4,433			46,994
2024		40,458			4,499			44,957
Thereafter		265,950			30,579			296,529
Total future undiscounted lease payments		458,840			50,399			509,239
Less tenant improvement allowance receivable from landlord		(401	)		(218	)		(619	)
Less imputed interest		(90,671	)		(13,383	)		(104,054	)
Total reported lease liability		367,768			36,798			404,566
Less current portion		(31,765	)		(2,550	)		(34,315	)
Noncurrent lease liability	$	336,003			34,248			370,251

The table above excludes $10.7 million of legally binding minimum lease payments for leases that had been executed as of March 31, 2020 but whose terms had not yet commenced.

Prior to the Company’s adoption of ASC 842, the Company’s leases were designated as either capital, financing or operating. Consistent with the guidance provided in ASC 842, previously designated capital lease obligations are now classified as finance leases, while previously designated capital lease finance obligations have been derecognized and reclassified as operating or finance leases. The designation of operating leases remains substantially unchanged under ASC 842. The future minimum lease payments by fiscal year, as determined prior to the adoption of ASC 842 under the Company’s previously designated capital, capital financing and operating leases (as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019) are presented below.

Minimum rental commitments and sublease rental income under the terms of the Company’s operating leases as of September 30, 2019 were as follows, dollars in thousands:

Fiscal Year	Third parties		Related parties		Sublease rental income			Total operating leases
2020	$	41,646		1,081		(422	)		42,305
2021		41,484		1,058		(418	)		42,124
2022		41,081		1,056		(424	)		41,713
2023		40,175		1,056		(413	)		40,818
2024		38,012		1,056		(257	)		38,811
Thereafter		262,086		2,062		(772	)		263,376
Total payments	$	464,484		7,369		(2,706	)		469,147

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Future payments under the terms of the leases for opened stores included in capital lease finance obligations and capital lease obligations as of September 30, 2019 were as follows, dollars in thousands:

Fiscal Year	Interest expense on capital lease finance obligations		Principal payments on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2020	$	3,871		569		605		333		5,378
2021		3,816		656		570		368		5,410
2022		3,751		747		532		407		5,437
2023		3,675		880		488		460		5,503
2024		3,578		1,095		439		515		5,627
Thereafter		15,088		8,244		2,142		3,889		29,363
Non-cash derecognition of capital lease finance obligations at end of lease term		—		27,367		—		—		27,367
Total future payments	$	33,779		39,558		4,776		5,972		84,085

Future payments under the terms of the leases for the store locations at which construction was in progress as of September 30, 2019, based on the two stores’ planned opening date in fiscal year 2020, were as follows, dollars in thousands:

Fiscal Year	Interest expense on capital lease finance obligations for assets under construction		Principal payments on capital lease finance obligations for assets under construction		Interest expense on capital lease obligations for assets under construction		Principal payments on capital lease obligations for assets under construction
2020	$	118		18		237		123
2021		161		26		236		132
2022		160		28		228		139
2023		158		30		221		147
2024		155		33		213		155
Thereafter		1,368		756		1,827		3,944
Non-cash derecognition of capital lease finance obligations at end of lease term		—		1,459		—		—
Total future payments	$	2,120		2,350		2,962		4,640

8. Property and Equipment 

The Company had the following property and equipment balances as of March 31, 2020 and September 30, 2019, dollars in thousands:

				As of
	Useful lives (in years)			March 31, 2020			September 30, 2019
Construction in process		n/a		$	6,158			15,145
Capitalized real estate leases for build-to-suit stores, including unamortized land of $0 and $617, respectively		40			—			42,320
Capitalized real estate leases		15			—			7,241
Land		n/a			1,390			1,230
Buildings		40			26,735			23,571
Land improvements	5	–	24		1,572			1,498
Leasehold and building improvements	1	–	25		152,977			144,318
Fixtures and equipment	5	–	7		136,897			131,491
Computer hardware and software	3	–	5		22,981			21,672
					348,710			388,486
Less accumulated depreciation and amortization					(193,971	)		(186,851	)
Property and equipment, net				$	154,739			201,635

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Prior to the Company’s adoption of ASC 842 effective October 1, 2019, capitalized real estate leases included the Company’s buildings under both capital lease and capital lease finance obligations. Effective upon the Company’s adoption of ASC 842, right-of-use assets for both operating and finance leases are presented as discrete line items outside of property and equipment (see Note 7).

Depreciation and amortization expense for the three and six months ended March 31, 2020 and 2019 is summarized as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2020		2019		2020		2019
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	194		185		383		367
Depreciation and amortization expense included in store expenses		7,393		6,848		14,633		13,690
Depreciation and amortization expense included in administrative expenses		301		257		579		519
Total depreciation and amortization expense	$	7,888		7,290		15,595		14,576

9. Goodwill and Other Intangible Assets

The Company had the following goodwill and other intangible asset balances as of March 31, 2020 and September 30, 2019, dollars in thousands:

	Useful lives			As of
	(in years)			March 31, 2020			September 30, 2019
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,496			2,677
Amortizable intangible assets					3,496			2,677
Less accumulated amortization					(1,974	)		(1,592	)
Amortizable intangible assets, net					1,522			1,085
Other intangibles in process					2,552			1,972
Trademark	Indefinite				389			389
Total other intangibles, net					4,463			3,446
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	9,661			8,644

10. Accrued Expenses

The composition of accrued expenses as of March 31, 2020 and September 30, 2019 is summarized as follows, dollars in thousands:

	As of
	March 31,		September 30,
	2020		2019
Payroll and employee-related expenses	$	11,193		8,447
Accrued property, sales and use tax payable		7,738		7,761
Accrued marketing expenses		994		477
Deferred revenue related to gift card sales		1,599		1,410
Other		1,139		966
Total accrued expenses	$	22,663		19,061

11. Income Taxes

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

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On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act, among other things, includes provisions addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property (“QIP”).

As a result of the technical amendments made by the CARES Act to QIP, the Company is currently analyzing the acceleration of depreciation expenses. These accelerated tax depreciation expenses of approximately $4.0 million represent temporary book-to-tax timing differences for income tax purposes (and will therefore have no effective tax rate impact) and are recorded as components within the Company’s deferred income tax liabilities and income tax receivable on the Company’s consolidated balance sheets. The Company is still estimating the potential benefits of addressing the carryback of net operating losses related to the accelerated depreciation expenses. However, the Company does not anticipate that this will have a material impact on the Company’s consolidated financial statements.

12. Related Party Transactions

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

Chalet Properties, LLC:  The Company has five operating leases with Chalet Properties, LLC (Chalet).  Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively. Rent paid to Chalet was approximately $0.5 million and $0.6 million for the six months ended March 31, 2020 and 2019, respectively. 

Isely Family Land Trust LLC:  The Company has one operating lease with the Isely Family Land Trust LLC (the Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.1 million for each of the three months ended March 31, 2020 and 2019. Rent paid to the Land Trust was approximately $0.2 million for each of the six months ended March 31, 2020 and 2019.

FTVC LLC:  The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended March 31, 2020 and 2019. Rent paid to FTVC LLC was less than $0.1 million for each of the six months ended March 31, 2020 and 2019.

13. Commitments and Contingencies

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

14. Subsequent Event

On May 4, 2020, the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022.

On May 6, 2020, the Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2020 to stockholders of record as of the close of business on June 1, 2020.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2020, we operated 157 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

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

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2019, we increased our store count at a compound annual growth rate of 12%. In fiscal year 2019, we opened six new stores. We plan to open six to seven new stores in fiscal year 2020, four of which opened during the six months ended March 31, 2020. No new stores were opened between March 31, 2020 and the date of this Form 10-Q. As of the date of this report, we have signed leases for an additional three new stores that we plan to open in fiscal years 2020 and beyond. We have also purchased the property for one additional new store. We plan to relocate one store in fiscal year 2020. We have not relocated any stores so far in fiscal year 2020.

Performance Highlights

Key highlights of our performance for the three and six months ended March 31, 2020 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.

● Net sales.  Net sales were $277.5 million for the three months ended March 31, 2020, an increase of $47.1 million, or 20.4%, compared to net sales of $230.4 million for the three months ended March 31, 2019.  Net sales were $507.6 million for the six months ended March 31, 2020, an increase of $55.6 million, or 12.3%, compared to net sales of $452.0 million for the six months ended March 31, 2019.

● Comparable store sales and daily average comparable store sales. Comparable store sales and daily average comparable store sales for the three months ended March 31, 2020 increased 18.4% and 17.0%, respectively, compared to the three months ended March 31, 2019. Comparable store sales and daily average comparable store sales for the six months ended March 31, 2020 increased 10.3% and 9.7%, respectively, compared to the six months ended March 31, 2019.

● Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales for the three months ended March 31, 2020 increased 16.7% and 15.4%, respectively, compared to the three months ended March 31, 2019. Mature store sales and daily average mature store sales for the six months ended March 31, 2020 increased 8.8% and 8.2%, respectively, compared to the six months ended March 31, 2019.

● Net income. Net income was $9.7 million for the three months ended March 31, 2020, an increase of $5.9 million, or 151.8%, compared to net income of $3.9 million for the three months ended March 31, 2019. Net income was $11.6 million for the six months ended March 31, 2020, an increase of $5.5 million, or 91.3%, compared to net income of $6.1 million for the six months ended March 31, 2019.

● EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $21.1 million for the three months ended March 31, 2020, an increase of $7.7 million, or 57.7%, compared to $13.4 million for the three months ended March 31, 2019.  EBITDA was $31.7 million for the six months ended March 31, 2020, an increase of $7.0 million, or 28.2%, compared to $24.7 million for the six months ended March 31, 2019. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

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● Liquidity. As of March 31, 2020, cash and cash equivalents was $29.4 million, and there was $49.0 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million.

● New store growth. We opened two new stores during the three months ended March 31, 2020. We opened four new stores during the six months ended March 31, 2020.  We operated a total of 157 stores as of March 31, 2020.  We plan to open a total of six to seven new stores in fiscal year 2020, which would result in an annual new store growth rate of 3.9% to 4.6% for fiscal year 2020. 

● Store Relocations and Remodels. We did not relocate or remodel any stores during the six months ended March 31, 2020.

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:

● Impact of broader economic trends. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, the price of commodities (including oil prices), the political environment and consumer confidence. See “COVID-19 Pandemic” below for a discussion of the impact of the COVID-19 pandemic on the U.S. economy and our business.

●	Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. As we open new stores, our results of operations have been and may continue to be materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management and general economic conditions. Once a new store is open, it typically grows at a faster rate than mature stores for several years. Mature stores are defined as stores that have been open for any part of five fiscal years or longer.
	As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue into the foreseeable future. Our financial results for the three and six months ended March 31, 2020 reflect the effects of these factors, and we anticipate future periods will be similarly impacted.
	Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.

● Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway; mass or discount retailers such as Wal-Mart and Target; natural and gourmet markets such as Whole Foods and The Fresh Market; foreign-based discount retailers such as Aldi and Lidl; specialty food retailers such as Sprouts and Trader Joe’s; warehouse clubs such as Sam’s Club and Costco; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers such as Amazon; meal delivery services; independent health food stores; drug stores; farmers’ markets; food co-ops; and multi-level marketers. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.

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COVID-19 Pandemic

On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. National, state and local authorities have recommended social distancing and imposed or recommended quarantine, isolation and “stay-at-home” measures on large portions of the population, including mandatory business closures. These measures are expected to have a serious adverse impact on the U.S. economy. Many economists expect the United States to enter a recession as a result of the pandemic. The duration and severity of such recession are unknown at this time. The effectiveness of the U.S government’s economic stabilization efforts in response to the pandemic, including proposed government payments to affected citizens and industries, is uncertain.

To date, all of our stores have been deemed an “essential business” by relevant government authorities and have continued operating since the start of the COVID-19 pandemic. We believe we have acted proactively in response to the COVID-19 pandemic. The steps we have taken to protect the health and wellbeing of our customers and employees (whom we refer to as the “good4u Crew” or “Crew”) as a result of the pandemic include:

● Enforcing social distancing in all parts of our stores, including in checkout lines;

● Sourcing and repackaging bulk hand sanitizer for use by Crew members in our stores;

● Hiring approximately 650 temporary Crew members to handle increased customer traffic and operational demands at our stores and to assist with cleaning and stocking our stores;

● Paying higher wages and bonuses to our Crew members;

● Expanding the healthcare coverage and leave and paid time off options made available to our Crew members;

● Providing daily immune and stress support supplements to our Crew members at no cost;

● Assigning a store Crew member to clean and sanitize shopping carts at the entrance to our stores;

● Producing more than 6,000 face masks and requiring store Crew members to wear them while working;

● Providing disposable gloves to our store Crew members;

● Installing plexiglass shields at substantially all checkout registers;

● Frequently cleaning the most touched surfaces in all stores, including the checkout areas and payment keypads;

● Limiting the number of customers allowed in the company’s stores at one time;

● Requiring customers to bag their own purchases;

● Closing all stores early so they can be restocked and thoroughly cleaned;

● Designating specific shopping hours for higher risk individuals twice a week; and

● Establishing guidelines and practices to protect our corporate office Crew members.

Starting in late February 2020 through March 31, 2020, we experienced unprecedented levels of net sales due to the COVID-19 outbreak as stay-at-home measures were implemented by states across our footprint, customers stocked-up on essential items and dining out options were constrained or eliminated. During the three months ended March 31, 2020, the COVID-19 pandemic also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party.

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Although net sales in April 2020 moderated from the peak levels experienced in March 2020, comparable store sales for April 2020 were significantly higher than in the same period in fiscal year 2019. During April 2020, average transaction count declined compared to April 2019, as stay-at-home directives generally remained in place in our markets, resulting in less frequent customer shopping trips. However, the decline in average transaction count during April 2020 was more than offset by an increase in average transaction size.

Since the COVID-19 outbreak, we have experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain and such disruptions have moderated, although certain products remain in relatively short supply or are unavailable.

While we are closely monitoring the economic impact of the COVID-19 pandemic on our business, the long-term impact of the pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic makes it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.-Risk Factors.”

Additional information regarding the impact of the COVID-19 pandemic on our business and results of operations is provided below in this MD&A.

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, reputation for cleanliness, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a convenient and efficient shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.

We currently expect the rate of new store unit growth in the foreseeable future to depend on economic and business conditions and other factors, including the impact of the COVID-19 pandemic. During the past few years, we have enhanced our infrastructure to enable us to support growth. In addition, in recent years we believe we have enhanced customer loyalty through our {N}power^® customer loyalty program.

Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. In the future, we believe there are opportunities for increased leverage in costs, such as administrative expenses, as well as 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 expenses), our ability to leverage costs may be limited.

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

Key Financial Metrics in Our Business

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

Net sales

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

● Change in comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months.

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● Change in daily average comparable store sales. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).

● Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2020 are stores that opened during or before fiscal year 2015). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.

● Change in daily average mature store sales. Daily average mature store sales are mature store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).

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

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

Cost of goods sold and occupancy costs

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

Gross profit and gross margin

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

Store expenses

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, generally related to store relocations. 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 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 sales typically decrease.

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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 Sarbanes-Oxley, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.

Pre-opening and relocation expenses

Pre-opening and relocation expenses may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as capital or financing leases, no pre-opening rent expense is recognized. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening and relocation costs are expensed as incurred.

Interest expense, net

Interest expense consists of the interest associated with finance lease obligations (previously classified as capital and financing lease obligations) and our Credit Facility, net of capitalized interest and interest income.

Results of Operations

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

	Three months ended March 31,						Six months ended March 31,
	2020			2019			2020			2019
Statements of Income Data:*
Net sales		100.0	%		100.0			100.0			100.0
Cost of goods sold and occupancy costs		72.0			73.0			72.7			73.1
Gross profit		28.0			27.0			27.3			26.9
Store expenses	20.5				21.8			21.3			22.0
Administrative expenses		2.5			2.5			2.5			2.5
Pre-opening and relocation expenses		0.2			0.1			0.2			0.2
Operating income		4.8			2.7			3.2			2.2
Interest expense, net		(0.2	)		(0.6	)		(0.2	)		(0.6	)
Income before income taxes		4.6			2.1			3.0			1.7
Provision for income taxes		(1.1	)		(0.4	)		(0.7	)		(0.3	)
Net income		3.5	%		1.7			2.3			1.3
__________________________
*Figures may not sum due to rounding.
Number of stores at end of period		157			152			157			152
Number of new stores opened during the period		2			1			4			5
Number of stores relocated or remodeled during the period		0			1			0			2
Number of stores closed during the period		0			0			0			1
Twelve-month store unit growth rate		3.3	%		4.8			3.3			4.8
Change in comparable store sales		18.4			2.9			10.3			4.2
Change in daily average comparable store sales		17.0			2.9			9.7			4.2
Change in mature store sales		16.7			1.8			8.8			2.7
Change in daily average mature store sales		15.4			1.8			8.2			2.7

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Three months ended March 31, 2020 compared to the three months ended March 31, 2019

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

	Three months ended March 31,						Change In
	2020			2019			Dollars			Percent
Statements of Income Data:
Net sales	$	277,524			230,447			47,077			20.4	%
Cost of goods sold and occupancy costs		199,701			168,233			31,468			18.7
Gross profit		77,823			62,214			15,609			25.1
Store expenses		56,878			50,175			6,703			13.4
Administrative expenses		7,038			5,761			1,277			22.2
Pre-opening and relocation expenses		650			157			493			314.0
Operating income		13,257			6,121			7,136			116.6
Interest expense, net		(516	)		(1,280	)		764			(59.7	)
Income before income taxes		12,741			4,841			7,900			163.2
Provision for income taxes		(3,023	)		(981	)		(2,042	)		208.2
Net income	$	9,718			3,860			5,858			151.8

Net sales

Net sales increased $47.1 million, or 20.4%, to $277.5 million for the three months ended March 31, 2020 compared to $230.4 million for the three months ended March 31, 2019, primarily due to a $42.3 million increase in comparable store sales and a $4.8 million increase in new store sales. Daily average comparable store sales increased 17.0% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.  The daily average comparable store sales increase resulted from a 13.1% increase in daily average transaction size and a 3.5% increase in average transaction count. Comparable store average transaction size was $41.60 for the three months ended March 31, 2020.  Daily average mature store sales increased 15.4% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in comparable store sales during the three months ended March 31, 2020 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Prior to late February 2020, comparable store sales for the second quarter were generally consistent with the prior fiscal quarter. During March 2020, our comparable store sales increased by approximately 40% compared to March 2019, driven by our customers’ response to the COVID-19 outbreak. Also contributing to the increase in comparable store sales during the three months ended March 31, 2020 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.

Gross profit

Gross profit increased $15.6 million, or 25.1%, to $77.8 million for the three months ended March 31, 2020 compared to $62.2 million for the three months ended March 31, 2019, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increase in gross profit reflected an increase in the number of stores. Gross margin increased to 28.0% for the three months ended March 31, 2020 compared to 27.0% for the three months ended March 31, 2019. The increase in gross margin during the three months ended March 31, 2020 was primarily driven by a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.

We had 21 store leases that were classified as capital and financing lease obligations for the three months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.

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Store expenses

Store expenses increased $6.7 million, or 13.4%, to $56.9 million for the three months ended March 31, 2020 compared to $50.2 million for the three months ended March 31, 2019. The increase in store expenses during the three months ended March 31, 2020 was primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to the COVID-19 pandemic. Store expenses as a percentage of sales were 20.5% and 21.8% for the three months ended March 31, 2020 and 2019, respectively. The decrease in store expenses as a percentage of sales was primarily attributable to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.

Administrative expenses

Administrative expenses increased $1.3 million, or 22.2%, to $7.0 million for the three months ended March 31, 2020 compared to $5.8 million for the three months ended March 31, 2019. The increase in administrative expenses during the three months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communications expenses. Administrative expenses as a percentage of sales were 2.5% for each of the three months ended March 31, 2020 and 2019. 

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $0.5 million, or 314.0%, to $0.7 million for the three months ended March 31, 2020 compared to $0.2 million for the three months ended March 31, 2019, due to the impact of the number and timing of new store openings and relocations.  We opened two new stores during the three months ended March 31, 2020 compared to opening one new store and relocating one store during the three months ended March 31, 2019.  Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.1% for the three months ended March 31, 2020 and 2019, respectively. 

Interest expense, net

Interest expense, net of capitalized interest, decreased $0.8 million, or 59.7%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.  The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the three months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility.  The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.

Income taxes

Income tax expense increased $2.0 million for the three months ended March 31, 2020 to $3.0 million compared to $1.0 million for the three months ended March 31, 2019. The Company’s effective income tax rate was approximately 23.7% and 20.3% for the three months ended March 31, 2020 and 2019, respectively.

Net income

Net income was $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 compared to $3.9 million, or $0.17 diluted earnings per share, for the three months ended March 31, 2019. The increase in net income during the three months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.

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Six months ended March 31, 2020 compared to the six months ended March 31, 2019

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

	Six months ended March 31,						Change In
	2020			2019			Dollars			Percent
Statements of Income Data:
Net sales	$	507,554			451,962			55,592			12.3	%
Cost of goods sold and occupancy costs		369,207			330,602			38,605			11.7
Gross profit		138,347			121,360			16,987			14.0
Store expenses		108,305			99,298			9,007			9.1
Administrative expenses		12,857			11,076			1,781			16.1
Pre-opening and relocation expenses		1,080			829			251			30.3
Operating income		16,105			10,157			5,948			58.6
Interest expense, net		(1,052	)		(2,535	)		1,483			(58.5	)
Income before income taxes		15,053			7,622			7,431			97.5
Provision for income taxes		(3,467	)		(1,565	)		(1,902	)		121.5
Net income	$	11,586			6,057			5,529			91.3

Net sales

Net sales increased $55.6 million, or 12.3%, to $507.6 million for the six months ended March 31, 2020 compared to $452.0 million for the six months ended March 31, 2019, primarily due to a $46.4 million increase in comparable store sales and a $9.4 million increase in new store sales, partially offset by a $0.2 million decrease in sales from one store that closed during the first quarter of fiscal 2019.  Daily average comparable store sales increased 9.7% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019.  The daily average comparable store sales increase resulted from a 8.1% increase in average transaction size and a 1.5% increase in daily average transaction count.  Comparable store average transaction size was $39.50 for the six months ended March 31, 2020.  Daily average mature store sales increased 8.2% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019.  The increase in comparable store sales during the six months ended March 31, 2020 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Also contributing to the increase in comparable store sales during the six months ended March 31, 2020 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.

Gross profit

Gross profit increased $17.0 million, or 14.0%, to $138.3 million for the six months ended March 31, 2020 compared to $121.4 million for the six months ended March 31, 2019, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increased in gross profit reflected an increase in the number of stores. Gross margin increased to 27.3% for the six months ended March 31, 2020 from 26.9% for the six months ended March 31, 2019. The increase in gross margin during the six months ended March 31, 2020 was primarily driven by a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.

We had 21 store leases that were classified as capital and financing lease obligations for the six months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.

Store expenses

Store expenses increased $9.0 million, or 9.1%, to $108.3 million for the six months ended March 31, 2020 compared to $99.3 million for the six months ended March 31, 2019. The increase in store expenses during the six months ended March 31, 2020 was primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to the COVID-19 pandemic. Store expenses as a percentage of sales were 21.3% and 22.0% for the six months ended March 31, 2020 and 2019, respectively. The decrease in store expenses as a percentage of sales was primarily attributable to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.

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Administrative expenses

Administrative expenses increased $1.8 million, or 16.1%, to $12.9 million for the six months ended March 31, 2020 compared to $11.1 million for the six months ended March 31, 2019.  The increase in administrative expenses during the six months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communication expenses. Administrative expenses as a percentage of sales were 2.5% for each of the six months ended March 31, 2020 and 2019.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $0.3 million, or 30.3%, to $1.1 million for the six months ended March 31, 2020 compared to $0.8 million for the six months ended March 31, 2019, due to the impact of the number and timing of new store openings and relocations.  We opened four new stores during the six months ended March 31, 2020 compared to opening five new stores and relocating two stores during the six months ended March 31, 2019.  Pre-opening and relocation expenses as a percentage of sales were 0.2% for each of the six months ended March 31, 2020 and 2019. 

Interest expense

Interest expense, net of capitalized interest, decreased $1.5 million, or 58.5%, for the six months ended March 31, 2020 compared to the six months ended March 31, 2019.  The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the six months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility.  The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.

Income taxes

Income tax expense increased $1.9 million for the six months ended March 31, 2020 to $3.5 million compared to $1.6 million for the six months ended March 31, 2019.  The Company’s effective income tax rate was approximately 23.0% and 20.5% for the six months ended March 31, 2020 and 2019, respectively.

Net income

Net income was $11.6 million, or $0.51 diluted earnings per share, for the six months ended March 31, 2020 compared to $6.1 million, or $0.27 diluted earnings per share, for the six months ended March 31, 2019.  The increase in net income during the six months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.

Non-GAAP financial measures 

EBITDA

EBITDA is not a measure of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. The following table reconciles net income to EBITDA for the periods presented, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2020		2019		2020		2019
Net income	$	9,718		3,860		11,586		6,057
Interest expense, net		516		1,280		1,052		2,535
Provision for income taxes		3,023		981		3,467		1,565
Depreciation and amortization		7,888		7,290		15,595		14,576
EBITDA	$	21,145		13,411		31,700		24,733

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EBITDA increased 57.7% to $21.1 million in the three months ended March 31, 2020 compared to $13.4 million for the three months ended March 31, 2019. EBITDA increased 28.2% to $31.7 million in the six months ended March 31, 2020 compared to $24.7 million for the six months ended March 31, 2019.  The increase in EBITDA was primarily driven by the significant growth in net income resulting from the increase in net sales starting in late February 2020 as a result of the COVID-19 outbreak. EBITDA as a percentage of sales was 7.6% and 5.8% in the three months ended March 31, 2020 and 2019, respectively.  EBITDA as a percentage of sales was 6.2% and 5.5% in the six months ended March 31, 2020 and 2019, respectively. The number of stores with finance leases (previously classified as capital and financing lease obligations) decreased from 21 as of March 31, 2019 to 17 as of March 31, 2020 as a result of our adoption of ASC 842 effective October 1, 2019. Finance leases have a positive impact on EBITDA because, as discussed above, they result in lower cost of goods sold and occupancy costs. Conversely, the greater number of stores with operating leases during the six months ended March 31, 2020, led to higher cost of goods sold and occupancy costs, which negatively impacted both EBITDA and EBITDA as a percentage of sales.

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

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

Our competitors may define EBITDA differently, and as a result, our measure of EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that does 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 has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results as reported under GAAP. Some of the limitations are:

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

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

● EBITDA does not reflect any impact for straight-line rent expense for leases classified as capital and financing lease obligations;

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

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

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

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

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service and corporate taxes.  As of March 31, 2020, we had $29.4 million in cash and cash equivalents, as well as $49.0 million available for borrowing under our Credit Facility.  We are not currently receiving, and do not currently intend to apply for, direct financial assistance under any federal or state programs implemented as a result of the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

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In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expend up to $10.0 million to repurchase shares of the Company’s common stock.  In May 2018, our Board authorized a two-year extension of the share repurchase program. On May 4, 2020, our Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022.  We did not repurchase any shares during the three or six months ended March 31, 2020. Between April 1, 2020 and May 4, 2020 (the latest practicable date for making the determination), we did not repurchase any additional shares of our 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 $8.3 million. We expect funding of share repurchases will come from operating cash flow, excess cash and/or borrowings under the Credit Facility. The timing and the number of shares repurchased will be dictated by our capital needs and stock market conditions.

We paid a dividend of $0.07 per share of common stock in each of the first two quarters of fiscal year 2020. On May 6, 2020, our Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2020 to stockholders of record as of the close of business on June 1, 2020.

The opening of new stores may require us to borrow additional amounts under the Credit Facility. Subject to economic and business conditions, we plan to spend approximately $8 million to $13 million on capital expenditures during the remainder of fiscal year 2020 in connection with two to three new store openings and one store relocation. We are closely monitoring the impact of the COVID-19 pandemic on our liquidity and cash generated from operations. Currently, we believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Credit Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs for at least the next twelve months. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

Typically, our new stores require an upfront capital investment of approximately $2.1 million per store consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.2 million.

Set out below is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:

	Six months ended March 31,
	2020			2019
Net cash provided by operating activities	$	53,360			22,593
Net cash used in investing activities		(20,131	)		(17,081	)
Net cash used in financing activities		(10,069	)		(3,627	)
Net increase in cash and cash equivalents		23,160			1,885
Cash and cash equivalents, beginning of period		6,214			9,398
Cash and cash equivalents, end of period	$	29,374			11,283

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $30.8 million, or 136.2%, to $53.4 million for the six months ended March 31, 2020 compared to $22.6 million for the six months ended March 31, 2019.  The increase in cash provided by operating activities was primarily due to an increase in cash provided by working capital, as well as an increase in net income adjusted for non-cash items.  Our working capital requirements for inventory will likely increase as we continue to open new stores.

Investing Activities

Net cash used in investing activities increased $3.1 million, or 17.9%, to $20.1 million for the six months ended March 31, 2020 compared to $17.1 million for the six months ended March 31, 2019.  This increase was primarily due to a $1.1 million increase in software investments for internal use and a $1.1 million increase in property and equipment acquisitions during the six months ended March 31, 2020 compared to the six months ended March 31, 2019.

Financing Activities

Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility.  Cash used in financing activities was $10.1 million for the six months ended March 31, 2020 compared to $3.6 million of cash used in financing activities for the six months ended March 31, 2019. During the six months ended March 31, 2020, the Company used cash generated from operations to repay the outstanding balance owing under the Credit Facility. Notwithstanding our repayment of the outstanding balance owing under the Credit Facility as of March 31, 2020, the Credit Facility remains in full force and effect.

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Credit Facility

The maximum amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The operating company is the borrower under the Credit Facility and its obligations thereunder 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 Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on November 13, 2024.

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a 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, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.

We had $0 and $5.7 million outstanding under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively.  As of each of March 31, 2020 and September 30, 2019, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility.  We had $49.0 million and $43.3 million available for borrowing under the Credit Facility as of March 31, 2020 and September 30, 2019, respectively.

As of March 31, 2020 and September 30, 2019, the Company was in compliance with the debt covenants under the Credit Facility.

Share Repurchases

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

Off-Balance Sheet Arrangements 

As of March 31, 2020, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of March 31, 2020, the Company had signed two leases whose terms have not yet commenced; such leases are for one new store and one relocated store in fiscal year 2020 and beyond. The contractual obligation related to these leases is $10.7 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

Recent Accounting Pronouncements

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

Critical Accounting Policies

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.

Changes in Internal Control over Financial Reporting

During the six months ended March 31, 2020, we implemented controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard on our financial statements to facilitate the adoption of that standard effective October 1, 2019.

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

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PART II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

The risk factors below update those disclosed in Part I, “Item 1A-Risk Factors,” of our Form 10-K.

The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition.

The COVID-19 outbreak has had a significant impact on our operations. For so long as it continues, and in the event there is another widespread regional, national or global health epidemic or pandemic, our business could be severely impacted. While we are closely monitoring the economic impact of the COVID-19 pandemic on our business, the long-term financial impact of the COVID-19 pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S. economy.

The impacts of the COVID-19 outbreak could include some or all of the following:

● Customers who are infected by the COVID-19 virus may not be able to visit and shop at our stores. Even if infected customers are physically able to shop, we have urged any individual who displays symptoms of the virus not to shop in our stores until they have recovered fully. An increase in the number of our customers who are infected by COVID-19 could therefore negatively impact our sales.

● The COVID-19 outbreak may cause consumers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. For example, the practice of social distancing may cause fewer customers to frequent our stores at any given time. In addition, the COVID-19 pandemic may lead to a permanent shift towards more online shopping for groceries, which may lead consumers to purchase groceries and nutritional supplements online from competitors that offer more extensive online shopping options than we do.

● Quarantine, isolation or stay-at-home orders issued by local, state or federal authorities may make it more difficult or impossible for customers to shop at our stores. In addition, limitations imposed by national, state or local authorities on the number of customers who may shop at our stores at any given time could impact those stores’ transaction count. Further, national, state or local authorities could take action to ban in-store grocery shopping in favor of home delivery and curbside pick-ups. Depending on the length and severity of the COVID-19 pandemic, such restrictions and limitations could become progressively more severe. Any such governmental actions could negatively impact our sales.

● Our costs may continue to increase as a result of the COVID-19 pandemic. For example, since the outbreak commenced we have hired more temporary Crew members in order to handle increased customer traffic at our stores; to monitor customers entering and exiting our stores to comply with maximum occupancy limitations; and to assist with cleaning and stocking our stores. Depending on the duration of the COVID-19 pandemic, we may be required to incur additional labor and other costs to meet the challenges posed by the pandemic.

● If a store Crew member contracts the COVID-19 virus, or if an infected customer spreads the virus at a store, that store may have to be temporarily closed for cleaning and sanitizing. Such temporary store closures could affect multiple stores at the same time.

● Widespread infections at any store may make it impossible to adequately staff that store, which would lead to the temporary closure of that store. Such temporary store closures could affect multiple stores at the same time.

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● Many economists expect the United States to enter a recession as a result of the COVID-19 pandemic. Since the COVID-19 outbreak, levels of unemployment have increased significantly. If the COVID-19 outbreak causes an economic slowdown or recession, consumer spending could be adversely affected, which in turn could lead to a decrease in spending by consumers, cause our customers to avoid visiting our stores and cause us to experience lower net sales than expected. In addition, customers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, customers may reduce the amount of natural and organic products that they purchase and instead purchase conventional offerings, which generally have lower retail prices, at other stores.

● The products we sell are sourced from a wide variety of domestic and international suppliers. Since the COVID-19 outbreak, we have experienced shortages and delays in the delivery of certain products to our stores. The COVID-19 outbreak could: (i) adversely impact our business by disrupting or delaying the production and delivery of products to our stores; (ii) adversely impact transport availability and cost; (iii) impact the financial stability of our suppliers; and (iv) cause our suppliers to prioritize the supply of scarce products to our competitors.

● We could be subject to legal proceedings brought by customers or Crew members alleging they contracted the COVID-19 virus at one of our locations.

Any of the foregoing impacts of the COVID-19 outbreak could have a material adverse effect on our business, financial position and results of operations. The duration of any such impacts cannot be predicted because of the unprecedented nature of the COVID-19 pandemic.

Our sale of products containing cannabidiol (CBD) could lead to regulatory action by federal, state and/or local authorities or legal proceedings brought by or on behalf of consumers.

The Agricultural Improvement Act of 2018 (the 2018 Farm Bill) legalized the cultivation, processing and sale of “industrial hemp” (i.e., hemp containing no more than 0.3% tetrahydrocannabinol, or THC). Industrial hemp is used to produce CBD, a non-psychoactive compound. Despite the provisions of the 2018 Farm Bill and subsequent U.S. Department of Agriculture rules, uncertainty exists concerning the legal and regulatory status of finished products containing CBD. The Food and Drug Administration (FDA) has yet to establish a regulatory framework for the manufacture and sale of products containing CBD, and has sent warning letters to certain CBD manufacturers that are alleged to have marketed their products in violation of the federal Food, Drug, and Cosmetic Act (the FDCA) and the rules promulgated thereunder. The FDA also announced that it cannot conclude based on current published studies that CBD is generally recognized as safe (GRAS) for use in human and animal food products. Food and beverage products, including nutritional supplements, that contain non-GRAS ingredients are considered to be adulterated under the FDCA. In addition, certain state and local governments have taken action to restrict or prohibit the sale of products containing CBD. Further, class action lawsuits have been filed against certain CBD manufacturers alleging that their products are mislabeled and falsely advertised under state consumer protection laws.

We sell products containing CBD at certain of our stores. While we strive to sell products containing CBD only in states and localities where such sale is permissible, state and local authorities in those areas may adopt new laws and regulations, or adopt interpretations of existing laws and regulations, that restrict or prohibit the sale of products containing CBD. Further, we could be subject to regulatory action brought by federal, state and/or local authorities, or legal proceedings brought by or on behalf of consumers, that allege, among other things, that: (i) our sale of products containing CBD violates applicable federal or state law (including applicable state consumer protection laws); (ii) the products we sell that contain CBD are adulterated or have been misbranded or labeled in violation of applicable rules, regulations or standards of the FDA, the FDCA or any other federal or state law or agency; (iii) the products we sell that contain CBD have been labeled with (a) express or implied health claims that are not supported by appropriate scientific evidence or (b) claims that are difficult or impossible to verify; (iv) the products we sell that contain CBD have been labeled with inappropriate dosing instructions or use recommendations; (v) the products we sell that contain CBD have been improperly tested or evaluated or do not contain the stated concentration of CBD; and (vi) the products we sell that contain CBD contain more than the legally allowable concentration of THC. Any such regulatory action or legal proceeding could have a material adverse effect on our business, financial position and results of operations.

Item 5. Other Information

On May 4, 2020, our Board authorized an extension of the Company’s previously announced share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022. The dollar value of the shares of common stock that may yet be repurchased under the share repurchase program is approximately $8.3 million. Repurchases will 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 promulgated under the Securities Exchange Act of 1934, as amended, 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. 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.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
31.1	Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3	Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†	Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2020 (unaudited) and September 30, 2019, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2020 and 2019 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, 2020 and 2019 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2020 and 2019 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements.

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on May 7, 2020.

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

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