Natural Grocers by Vitamin Cottage, Inc. Annual Report 2013

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FY2013 Annual Report · Natural Grocers by Vitamin Cottage, Inc.

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b y v i ta m i n c o t ta g e

2013 Annual Report

by vitamin cottage

Natural Grocers is a rapidly expanding specialty retailer
of natural and organic groceries and dietary supplements.

Welcome to Natural Grocers

Your Real Natural Food StoreSM

Natural Grocers. Your Real Natural Food Store.

We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education, and community outreach. We strive to generate long-term relationships with our customers based on transparency and trust. natural body carecommunity roomcenter store groceryexclusively organic produceshopper-friendly storesdemo kitchen vitamins & supplementsby vitamin cottage

2013 Annual Report

Dear Fellow Stakeholders:

We delivered strong financial results this fiscal year. Our five founding principles continue to
drive our robust sales and we remain focused on our disciplined approach to cost controls. We
added 13 new stores to our chain and executed at a high level across all areas. Highlights of
fiscal year 2013 include:

•
•
•
•

Net sales increased 28% to $430.7 million;
Strong net income and EBITDA growth;
11.1% daily average comparable store sales growth; and
22% unit growth.

We are proud to continue to support the needs of the core health food and dietary supplement
consumers whose foremost concern is to provide improved nutrition for themselves and their
families. We believe our ongoing commitment to providing a broad selection of healthy,
natural, and minimally processed foods and dietary supplements is in line with growing
consumer preference for clean and safe ingredients and full transparency in the ingredient
supply chain.

As part of our commitment to helping people learn about good nutrition, all of our stores
support a full-time Nutritional Health CoachSM position. The role of the Nutritional Health Coach
is to train, educate and support our employees, customers, and communities on health and
nutrition issues using science-based learning resources. To further strengthen our 55-year
commitment to nutrition education and community outreach, we continue to build full demo
kitchens and community rooms in many of our new and remodeled stores.

One question we hear often is whether we intend to uphold the standards, principles and
practices on which our success has been built. The answer, of course, is yes. We remain
focused on our five founding principles, which are to provide nutrition education, high quality
standards, Everyday Affordable Prices SM, support for our communities and great jobs for our
associates.

We believe we are well positioned to fund our accelerated growth and support it with rigorous
execution, capital discipline, and a robust operational infrastructure.

We remain confident in our strategy and our ability to grow our store base as we carry forward
the positive momentum we have generated in fiscal year 2013.

Kemper Isely, Co-President
President

Zephyr Isely, Co-

Financial Highlights Fiscal 2009 - Fiscal 2013

Net sales (in thousands)

Daily average comparable store sales growth

$430,655

$336,385

$264,544

$206,080

$226,910

11.3%

11.1%

7.3%

6.4%

2.9%

3.1%

4.9%

2.1%

2.0%

0.2%

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Comp

Mature comp

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

EBITDA (in thousands) and EBITDA margin

Operating income (in thousands) and Operating
margin

$33,082 (1)

$32,593
--------

$12,442

$14,540

$15,137

$23,341 (1)

$21,949
--------

6.0%

6.4%

5.7%

6.9% (1)

7.7% (1)

$8,296

$9,027

4.0%

$7,411

2.8%

$19,088

$11,994

3.6%

4.4%

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Diluted earnings per share (pro forma)

Operating cash flow and Capital expenditures (in
millions)

$34.7

$0.48 (2)

$0.47
--------

$0.36 (2)

$0.32
--------

$0.20

$0.23

$0.19

$25.2

$24.7

$25.7

$20.4

$16.7

$11.6

$8.9

$11.4

$7.6

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

FY 2009

FY 2010

FY 2011

FY 2012

FY 2013

Operating cash flow

Capital expenditures (3)

(1) Adjusted EBITDA excludes $0.5 million and $1.4 million for fiscal year 2013 and 2012, respectively, of share-based and IPO incentive
compensation expenses.
Additionally, the stores with leases that are classified as capital and financing lease obligations, rather than being reflected as
operating leases, increased EBITDA as a percentage of sales by approximately 60 basis points for fiscal year 2013.
See reconciliation table in Item 7, page 42 of Form 10-K.

(2) Adjusted pro forma EPS illustrates net income as if we owned 100% of BVC for all periods illustrated, and further excludes $0.3 million and
$0.9 million for fiscal year 2013 and 2012, respectively, of tax effected share-based and IPO incentive compensation expenses.
See reconciliation table in Item 7, page 41 of Form 10-K.

(3) Capital expenditures are net of proceeds from sale of property and equipment.

Page intentionally left blank.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2013
COMMISSION FILE NUMBER: 001-35608

Natural Grocers by Vitamin Cottage, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

45-5034161
(I.R.S. Employer
Identification Number)

12612 West Alameda Parkway
Lakewood, Colorado 80228
(Address of principal executive offices)
(303) 986-4600
(Registrants telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:1) No ⌧
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No ⌧
Indicate by checkmark 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 (cid:1)

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive

Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ⌧ No (cid:1)

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be

contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. (cid:1)

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting

company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer (cid:1)
Non —accelerated filer (cid:1)
(Do not check if a smaller reporting company)

Accelerated filer ⌧
Smaller Reporting Company (cid:1)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No ⌧

Based on the closing sales price on March 28, 2013, the aggregate market value of the voting and non-voting common stock held by non-

affiliates of the registrant was $213,543,381.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 9, 2013 was 22,442,389.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant’s

definitive Proxy Statement for the 2014 Annual Meeting of the Stockholders, which will be filed with the Securities and Exchange Commission not
later than 120 days after September 30, 2013.

Natural Grocers by Vitamin Cottage, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2013

Table of Contents

PART I

Business .......................................................................................................................................................
Item 1.
Item 1A. Risk Factors ..................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................
Properties ......................................................................................................................................................
Item 2.
Legal Proceedings.........................................................................................................................................
Item 3.
Mine Safety Disclosures ...............................................................................................................................
Item 4.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities ...................................................................................................................................................
Selected Financial Data ................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................
Financial Statements and Supplementary Data .............................................................................................
Item 8.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................
Item 9A. Controls and Procedures ...............................................................................................................................
Item 9B. Other Information .........................................................................................................................................

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

Directors, Executive Officers and Corporate Governance ............................................................................
Executive Compensation ..............................................................................................................................

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters .......................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ..............................................
Principal Accounting Fees and Services .......................................................................................................

PART III

Item 15.

Exhibits and Financial Statement Schedules ................................................................................................

PART IV

SIGNATURES...................................................................................................................................................................

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Except where the context otherwise requires or where otherwise indicated, 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.

FORWARD-LOOKING STATEMENTS

This report on Form 10-K 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 report on
Form 10-K, including in the sections entitled “Business,” “Risk Factors,” and “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 and other financial and operating information are forward looking
statements. We have used the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“plan,” “potential,” “predict,” “project,” “future” and similar terms and phrases to identify forward-looking statements in this report
on Form 10-K.

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

Any forward-looking statement made by us in this report on Form 10-K 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 any applicable securities laws. You are advised, however, to consult any
further disclosures we may make in our future reports to the Securities and Exchange Commission, on our website or otherwise.

Item 1. Business.

General

PART I

Natural Grocers is an expanding specialty retailer of natural and organic groceries and dietary supplements. We focus on

providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We
strive to generate long-term relationships with our customers based on transparency and trust by:

• selling only natural and organic groceries and dietary supplements that meet our strict quality guidelines—we do not

approve for sale grocery products that are known to contain artificial colors, flavors, preservatives, sweeteners, or partially
hydrogenated or hydrogenated oils;

• utilizing an efficient and flexible small-store format to offer affordable prices and a shopper-friendly retail environment;

and

• enhancing our customers’ shopping experience by providing free science-based nutrition education to help our customers

make well-informed health and nutrition choices.

Our History and Founding Principles

Our founders, Margaret and Philip Isely, were early proponents of the connection between health and the use of natural and

organic products and dietary supplements. In the mid-1950’s, Margaret transformed her health and the health of her family by
applying concepts and principles she learned from books on nutrition. This inspired the Iselys to provide the same type of nutrition
education to their community. The Iselys initially started by lending books on nutrition and providing samples of whole grain bread
door-to-door in Golden, Colorado and ultimately concluded they could develop a viable business that would also improve their
customers’ well-being. Over time, they fostered relationships through nutrition education and began taking orders for dietary
supplements, whole grain bread and unprocessed foods. As their customers gained more knowledge about nutrition, they were
empowered to make changes to their diets in order to support their health.

Using this model as the foundation for their business, the Iselys opened their first store in 1958, which they later moved to a

modest cottage.

We are committed to maintaining the following founding principles, which have helped foster our growth:

• Nutrition Education. We provide nutrition education in the communities we serve. Empowering our customers and our

associates to take charge of their lives and their health is the foundation upon which our business is built.

• Quality. Every product on our shelves must go through a rigorous screening and approval process. Providing the highest
quality groceries and supplements, Natural Grocers branded products and only United States Department of Agriculture
(USDA), certified organic, fresh produce at the best prices in the industry is part of our mission.

• Every Day Affordable Price. We work hard to secure the best possible prices on all of our customers’ favorite natural and
organic foods and supplements. We believe everyone should be able to afford to take care of their health and buy quality
natural and organic products.

• Community. From free nutrition education lectures, to bag-free checkouts, to sourcing local products, to our donation

program, we work hard to serve the communities that help shape our world.

• Associates. Our associates make our company great. We work hard to ensure that our associates are able to live a healthy,

balanced lifestyle. We support them with free nutrition education programs, good pay and excellent benefits.

In 1998, the second generation of the family, including Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely

purchased our predecessor and the Vitamin Cottage® trademark and assumed control of the business. Since then, we have grown our
store count from 11 stores in Colorado to 72 stores in 13 states as of September 30, 2013. We have also implemented numerous
organizational and operational improvements that have enhanced our ability to scale our operations. We believe that by staying true to
our founding principles, we have been able to continue to attract new customers, extend our geographic reach and further solidify our
competitive position.

Our Markets

We operate within the natural products retail industry, which is a subset of the large and stable U.S. grocery industry. This

industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs,
independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers and multi-
level marketers. The Nutrition Business Journal (NBJ) estimates the 2012 to 2020 compound annual growth rate of dietary supplement
category sales at 6.5%, natural and organic food sales at 9.5% and natural personal care sales at 7.9%. Overall, NBJ anticipates the
compound annual growth rate of the nutrition industry at 7.5% from 2012 to 2020.

We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous

factors, including an increase in:

• consumer focus on high-quality nutritional products;

• awareness of the importance of good nutrition to long-term wellness;

• an aging U.S. population seeking to support healthy aging;

• consumer concerns over the purity and safety of food as a result of the presence of pesticide residues, growth hormones,

artificial ingredients and genetically engineered ingredients in foods;

• consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies;

• well-established natural and organic brands, which generate additional industry awareness and credibility with consumers;

and

• consumers with unique dietary requirements.

Our Competitive Strengths

We believe we are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry

dynamics as a result of the following competitive strengths:

Strict focus on high-quality natural and organic grocery products and dietary supplements. We offer high-quality products
and brands, including an extensive selection of widely-recognized natural and organic food, dietary supplements, body care products,
pet care products and books. We offer our customers an average of approximately 20,000 SKUs of natural and organic products per
store, including an average of approximately 6,750 SKUs of dietary supplements. We believe this product offering enables our
customers to utilize our stores for all of their grocery and dietary supplement purchases. In our grocery departments, we only sell
USDA certified organic produce and do not approve for sale products that are known to contain artificial colors, flavors, preservatives,
sweeteners, or partially hydrogenated or hydrogenated oils. Consistent with this strategy, our merchandise selection does not include
conventional products or merchandise that does not meet our strict quality guidelines. Our store managers enhance our robust product
offering by customizing their stores’ selections to address the preferences of local customers. All products undergo a stringent review
process to ensure the products we sell meet our strict quality guidelines, which helps us generate long-term relationships with our
customers based on transparency and trust.

Engaging customer service experience based on education and empowerment. We strive to consistently offer exceptional

customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience and generates
repeat visits from our loyal customer base. Our customer service model is focused on providing free nutrition education to our
customers. This focus provides an engaging retail experience while also empowering our customers to make informed decisions about
their health. We offer our science-based nutrition education through our trained associates, Health Hotline® newsletter and sales flyer,
one-on-one nutrition health coaching and nutrition classes. Our commitment to nutrition education and customer empowerment is
emphasized throughout our entire organization, from executive management to store associates. Every store also maintains a
Nutritional Health Coach position. The Nutritional Health Coach is responsible for training our store associates and educating our
customers in accordance with applicable local, state and federal regulations. Each Nutritional Health Coach must have earned a degree
or certificate in nutrition, human sciences or a related field from an accredited school, complete continuing education in nutrition, and
be thoroughly committed to fulfilling our mission. Substantially all of our Nutritional Health Coaches are full-time employees. We
believe our Nutritional Health Coach position generally is unique within our industry and represents a key element of our customer
service model.

Scalable operations and replicable, cost-effective store model. We believe our scalable operating structure, attractive new
store model, flexible real estate strategy and disciplined approach to new store development allow us to maximize store performance
and continue to grow our store base. Our store model is successful in highly competitive markets and has supported significant growth
outside of our original Colorado geography. We believe our supply chain and infrastructure are scalable and will accommodate
significant growth based on the ability of our primary distribution relationships to effectively service our planned store locations. Our
investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale,
warehousing, distribution, accounting, reporting and financial systems support this growth. To further support the scalability of our
operations, we intend to invest in a human resources information and learning management system, or HRIS in fiscal year 2014. In
addition, we have established effective site selection guidelines, as well as scalable procedures, to enable us to open a new store within
approximately nine months from the time of site selection. Our limited offering of prepared foods also reduces real estate costs, labor
costs and perishable inventory shrink and allows us to quickly leverage our new store opening costs.

Experienced and committed team with proven track record. Our executive management team has an average of 35 years of
experience in the natural grocery industry, while our entire management team has an average of over 28 years of relevant experience.
Since the second generation of the Isely family assumed control of the business in 1998, we have grown our store count from 11 to
72 stores as of September 30, 2013 while remaining dedicated to our founding principles. Over their tenure, members of our executive
management team have been instrumental in establishing a successful, scalable operating model, generating consistently strong
financial results and developing an effective site selection and store opening process. The depth of our management experience
extends beyond our home office. As of September 30, 2013, 43% of our store managers at comparable stores (stores open for 13
months or longer) have tenures of over four years with us, and our store and department managers at these stores have average tenures
of over three years with us. In addition, we have a track record of promoting store management personnel from within. We believe our
management’s experience at all levels will allow us to continue to grow our store base while improving operations and driving
efficiencies.

Our Growth Strategies

We are pursuing several strategies to continue our profitable growth, including:

Expand our store base. We intend to continue expanding our store base through new store openings in existing markets, as
well as penetrating new markets, by leveraging our core competencies of site selection and efficient store openings. Based upon our
operating experience and research conducted for us by customer analytics firm The Buxton Company, we believe the entire U.S.
market can support at least 1,100 Natural Grocers stores, including approximately 200 additional Natural Grocers stores in the 14
states in which we currently operate or have signed leases. In the fiscal years 2013 and 2012, we opened 13 and ten new stores,
respectively, and we plan to open 15 new stores in fiscal year 2014, three of which we have opened during the first quarter of fiscal
year 2014 prior to filing this report on Form 10-K. We intend to target new store openings at or above our current levels over the near
term.

Current store locations and signed leases.

32*

*Includes signed leases for stores to be opened in fiscal year 2014: three leases in Oregon, one lease in Colorado, one lease

in Idaho, one lease in Kansas, one lease in New Mexico, one lease in Utah and one lease in Washington.

Increase sales from existing customers. We have achieved positive comparable store sales growth for over 45 consecutive
quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging
customer experience through science-based nutrition education and a differentiated merchandising strategy of delivering affordable,
high-quality natural and organic grocery products and dietary supplements. We also plan to continue to utilize targeted marketing
efforts for our existing customers, which we anticipate will drive customer transactions and convert additional occasional, single-
category customers into core, multi-category customers.

Grow our customer base. We plan to continue building our brand awareness, which we anticipate will grow our customer

base. We believe offering nutrition education has historically been one of our most effective marketing efforts to reach new customers
and increase the demand for natural and organic groceries and dietary supplements in our markets. We intend to enhance potential
customers’ nutrition knowledge through targeted marketing efforts, including the distribution of our Health Hotline newsletter and
sales flyer, the internet and social media, as well as an expansion of our educational outreach efforts in schools, businesses and
communities, offering lectures, classes, printed and online educational resources and publications, health fairs and community
wellness events. In addition to offering nutrition education, we intend to attract new customers with our every day affordable prices
and to build community awareness through our support of local vendors and charities.

Improve operating margins. We expect to continue to improve our operating margins as we benefit from investments we

have made or are making in fixed overhead and information technology, including the implementation of our enterprise resource
planning (ERP) system in fiscal year 2010 and planned implementation of the HRIS in fiscal year 2014. We anticipate these
investments will support our long-term growth strategy with only a modest amount of additional capital. We expect to achieve greater
economies of scale through sourcing and distribution as we add more stores, and we intend to optimize performance, maintain
appropriate store labor levels and effectively manage product selection and pricing to achieve additional margin expansion.

Our Stores

Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a small-store format
that aims to provide a convenient, easily shopped and relaxed environment for our customers. Our store design emphasizes a clutter-

free, organized feel, a quiet ambience accented with warm lighting and the absence of aromas from meat and seafood counters present
in many of our competitors’ stores. We believe our core customers consider us a destination stop for their natural and organic products
and that we are their primary choice for natural and organic groceries and dietary supplements.

Our Store Format. Our stores range from 5,000 to 16,000 selling square feet, and average approximately 10,000 selling

square feet. In fiscal year 2013, our 13 new stores averaged approximately 11,500 selling square feet. Approximately one quarter of
our stores’ selling square footage is dedicated to dietary supplements. Some of our stores also include a dedicated community room
available for public gathering, demonstration kitchen for cooking education and lecture space. Our comparable stores sell an average
of approximately 20,000 SKUs of natural and organic products per store, including an average of approximately 6,750 SKUs of
dietary supplements. We begin to include stores in our comparable store base on the first day of the thirteenth full month following the
store’s opening.

The following diagram depicts a typical new store layout:

Site Selection. Our real estate strategy is adaptable to a variety of market conditions. When selecting locations for new stores,

we use analytical models, based on research provided by The Buxton Company and our extensive experience to identify promising
store locations. We typically locate new stores in prime locations which offer easy customer access and high visibility. Many of our
stores are near other supermarkets or gourmet food retailers, and we complement their conventional product offerings with high-
quality, affordable natural and organic groceries and dietary supplements in an efficient and convenient retail setting. Our site
selection model incorporates factors such as target demographics, community characteristics, nearby retail activity and other measures
in determining viable new store locations and is based on first-hand observation of the community’s characteristics surrounding each
site. We have a team of associates dedicated to opening new stores efficiently and quickly, typically within nine months from the time
of site selection.

Store Level Economics. Historically our new stores opened since January 1, 2005 have required an upfront capital
investment of approximately $2.1 million. We anticipate that our fiscal year 2014 new stores will require an upfront capital
investment of approximately $2.5 million consisting of capital expenditures of approximately $1.9 million, net of tenant allowances,
initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of less than $0.3 million. We project that
these stores will have higher first year sales and are targeting approximately four years to recoup our initial net cash investments and
approximately 35% cash-on-cash returns by the end of the fifth year following the opening.

Individual new store investment levels and the performance of new store locations may differ widely from originally targeted
levels and from store-to-store due to a variety of factors, and these differences may be material. In particular, investments in individual
stores, store-level sales, profit margins, payback periods and cash-on-cash return levels are impacted by a range of risks and
uncertainties beyond our control, including those described under the caption “Risk Factors.”

Our Focus on Nutrition Education

Nutrition education is one of our founding principles and is a primary focus for all associates. We believe our emphasis on

science-based nutrition education differentiates us from our competitors and creates a unique shopping experience for our customers.

Our Nutritional Health Coaches are a core element of our nutrition education program. Most of our stores are staffed with a

full-time Nutritional Health Coach to educate customers and train associates on nutrition. Nutritional Health Coaches must have
earned a degree or certificate in nutrition, human sciences or a related field from an accredited school, complete continuing education
in nutrition, and be thoroughly committed to fulfilling our mission. Our Nutritional Health Coaches provide free one-on-one nutrition
health coaching to educate and empower customers to make informed nutrition choices. Each Nutritional Health Coach is also
responsible for various educational outreach activities, such as nutrition classes, lectures, seminars, health fairs and store tours. Our
training and education programs are supplemented by outside experts, online materials and printed handouts. For our associates, our
Nutritional Health Coaches are an onsite resource for nutrition training and education. Each Nutritional Health Coach trains our
associates on using a compliant educational approach to customer service without attempting to diagnose or treat.

Additionally, we use our Health Hotline to educate our customers. The Health Hotline is a newsletter and sales flyer which is

published eight times per year and includes in-depth articles on health and nutrition, along with a selection of sale items.

Our Products

Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:

• we do not approve for sale food known to contain artificial colors, flavors, preservatives, sweeteners, or partially

hydrogenated or hydrogenated oils, regardless of the proportion of its natural or organic ingredients;

• we only sell USDA certified organic produce;

• we only sell meats naturally raised without antibiotics, hormone treatments and that were not fed animal by-products; and

• we do not sell wine, beer, liquor or tobacco.

Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness

within the current product set. We actively research new products in the marketplace via our product vendors, private label
manufacturers, scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all
departments by providing an extensive assortment of natural and organic products. We do not need to sell conventional products to fill
our selection, increase our margins or draw in more customers.

What We Sell. We operate both a full-service natural and organic grocery store and a dietary supplement store within a single

retail location. The following is a breakdown of our sales mix for the year ended September 30, 2013:

The products in our stores include:

• Grocery. We offer a broad selection of natural and organic grocery products with an emphasis on minimally processed and

single ingredient products that are not known to contain artificial colors, flavors, preservatives, sweeteners, partially

hydrogenated oils or hydrogenated oils. Additionally, we carry a wide variety of products associated with special diets such
as gluten free, vegetarian and non-dairy. Our grocery products include:

• Produce. We sell only USDA certified organic produce and source from local, organic producers whenever

possible. Our selection varies based on seasonal availability, and we offer a variety of organic produce offerings
that are not typically found at conventional food retailers.

• Bulk Food and Private Label Products. We sell a wide selection of private label products, including nuts, water,
pasta, dried fruits, grains, granolas, honey, agave nectar, herbs, spices and teas. We also sell peanut and almond
butters ground in-store under the Natural Grocers brand.

• Dry, Frozen and Canned Groceries. We offer a wide variety of natural and organic dry, frozen and canned

groceries, including cereals, soups, baby foods, frozen entrees and snack items. We offer a broad selection of
natural chocolate bars, and energy, protein and food bars.

• Meats and Seafood. We only offer naturally-raised or organic meat products. The meat products we offer are not

treated with antibiotics, hormones or fed animal by-products. Additionally, we only buy from companies we
believe employ humane animal-raising practices. Our seafood items are generally frozen at the time of processing
and sold from our freezer section, thereby ensuring freshness and reducing food spoilage and safety issues.

• Dairy Products and Dairy Substitutes. We offer a broad selection of natural and organic dairy products, such as

milk, eggs, cheeses, yogurts and beverages as well as non-dairy substitutes made from almonds, coconuts, rice and
soy.

• Prepared Foods. Our stores have a convenient selection of refrigerated prepared food items, including salads,

sandwiches, fresh salsa, fresh humus and wraps. The size of this offering varies by location.

• Bread and Baked Goods. We receive regular deliveries of a wide selection of bakery products for our fresh bakery

section, which includes an extensive selection of gluten-free items.

• Beverages. We offer a wide variety of beverages containing natural and organic ingredients. We also offer low-
cost, self-serve filtered drinking water that is dispensed into one-gallon or larger containers provided by our
customers.

• Dietary Supplements. Our dietary supplement department primarily sells name-brand supplements, as well as an extensive
line of private label dietary supplements. The department is carefully organized to help both associates and customers find
products efficiently. We generally offer several different formulations and potencies for each type of product in order to
meet our customers’ varying needs.

• Other.

• Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products

containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end
formulations.

• Pet Care. We offer a full line of natural pet care and food products which comply with our human food

guidelines.

• Household and General Merchandise. We offer sustainable household products, including cleaning supplies,

paper products, dish and laundry soap and other common household products, including diapers.

• Books and Handouts. We stock approximately 400 titles in our book department. Titles cover various approaches

to diet, lifestyle and health. Additionally, we offer approximately 300 handouts on various health topics and
dietary supplements to our customers free of charge.

Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe
to be in compliance with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and
product profile as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA)

good manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect
our suppliers to comply with industry best practices for food safety.

Many of our suppliers are inspected and certified under the USDA National Organic Program, voluntary industry
associations, and other third party auditing programs with regard to additional ingredients, manufacturing and handling standards.
Each Natural Grocers store is certified as an organic handler and processor by an accredited USDA certifier in the calendar year after
it opens. We operate all of our stores in compliance with National Organic Program standards, which require segregation of organic
and conventional products, restricted use of certain substances for cleaning and pest control and rigorous recordkeeping, among other
requirements.

Our Pricing Strategy

We have an every day affordable pricing strategy with an EDAP - Every Day Affordable Price SM on many products, while
also providing special sale pricing on hundreds of additional items. We believe our every day affordable pricing strategy allows our
customers to shop our stores on a regular basis for their groceries and dietary supplements.

Our pricing strategies include the following:

• every day affordable pricing throughout our stores;

• heavily advertised Health Hotline deals supported by manufacturer participation;

• in-store specials generally lasting for one month and not advertised outside the store;

• managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and

• specials on seasonally harvested produce.

As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as
administrative expenses, as well as increased economies of scale in sourcing products. We continually strive to keep our product,
operating and general and administrative costs low in order to continue to offer attractive pricing for our customers.

Our Store Operations

Store Hours. Our stores are open seven days a week, generally from 8:56 a.m. to 8:04 p.m. Monday through Saturday, and

Sunday from 9:56 a.m. to 6:06 p.m.

Store Management and Staffing. Our stores are managed by a manager and assistant manager, with department managers in

each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments. Each store manager is
responsible for managing his or her monthly store profit and loss, including labor, merchandising and inventory costs. We also employ
regional managers to oversee all store operations for regions consisting of approximately 15 stores.

Each store is staffed with several non-management associates. To ensure a high level of service, associates receive ongoing
nutrition training. Associates are carefully trained and evaluated based on a requirement that they present nutrition information in an
appropriate and legally compliant educational context while interacting with customers. Additionally, store associates are cross-trained
in various functions, including cashier duties, stocking and receiving product.

All associates are eligible to participate in our incentive compensation plan after 90 days of employment for management

level associates and after one year of employment for non-management level associates. The criteria for incentive compensation
include meeting sales projections, sales to labor hour goals and cost of goods sold metrics, which help align all store associates with
both corporate and store-level financial goals. We have an established set of standard operating procedures, which includes hiring and
human resource policies, training practices and operational instruction manuals. This allows each store to operate with strict
accountability and still maintain independence to respond to its unique circumstances.

Every store also maintains a Nutritional Health Coach position. The Nutritional Health Coach is responsible for training our
store associates and educating our customers in accordance with applicable local, state and federal regulations. Substantially all of our
Nutritional Health Coaches are full-time employees.

Bulk Food Repackaging Facility and Distribution Center. Our 107,000 square foot bulk food repackaging facility and
distribution center is in Golden, Colorado. The facility handles several different operational functions, including distribution of a

limited number of grocery and dietary supplement lines. The facility also houses our private label bulk foods repackaging lines. The
distribution center maintains a small fleet of commercial delivery trucks for use within Colorado.

Inventory. We use a robust merchandise management and perpetual inventory system that values goods at moving average

cost. We manage shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.

Sourcing and Vendors. We source from over 900 suppliers, which include over 2,500 brands. These suppliers range from

small mom-and-pop businesses to multi-national conglomerates. As of September 30, 2013, we purchased 83% of the goods we sell
from our top 20 suppliers.

We contract with third-party manufacturers to produce groceries and dietary supplements under our private labels, which

include the Natural Grocers and Vitamin Cottage brands. We have longstanding relationships with our suppliers, and we require
disclosure from them regarding quality, freshness, potency and safety data information. Our bulk food private label products are
packaged by us in pre-packed sealed bags to help prevent contamination while in transit and in our stores. Unlike most of our
competitors, most of our private label nuts, trail mix and flours are refrigerated in our warehouse and stores to maintain freshness.

For the year ended September 30, 2013, approximately 47% of our total purchases were from United Natural Foods Inc., or

UNFI. In addition, approximately 8% of our purchases were from Albert’s Organics, a subsidiary of UNFI that distributes fresh
produce and meat. We maintain good relations with UNFI and believe we have adequate alternative supply methods, including self-
distribution.

Our Associates

Commitment to our associates is one of our five founding principles. Associates are eligible for health, long-term disability,

vision and dental insurance coverage, as well as Company paid short-term disability and life insurance benefits, after they meet
eligibility requirements. Additionally, our associates are offered a 401(k) retirement savings plan with contribution matching
opportunities. We believe we pay above average retail wages, and all associates earn an additional $0.75 per hour, up to $30 a week,
in “Vitamin Bucks” which can be used to purchase products in our stores. It is important to us that our associates live a healthy,
balanced lifestyle, and we believe the Vitamin Bucks incentive provides an additional resource for our associates to purchase natural
and organic products. This further offers our associates the opportunity to become more familiar with our products, which we believe
improves the customer service our associates are able to provide. We believe these and other factors result in higher retention rates and
encourage our associates to appreciate our culture, which helps them better promote our brand.

As of September 30, 2013, we employed 1,648 full-time and 355 part-time (less than 30 hours per week) associates,

including 170 associates at our home office. None of our associates is subject to a collective bargaining agreement. We believe we
have good relations with our associates.

Our Customers

The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and

nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary
supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core
customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements. Our
customers tend to be interested in health and nutrition, and expect our store associates to be highly knowledgeable about these topics
and related products.

An analysis of our Health Hotline subscriber database indicates that our customers come from broad geographic segments,

including urban, suburban and rural areas, which reflects the varied characteristics and portability of our store locations.

Our Communities

One of our founding principles is to be an active member and steward of the communities we serve. As a commitment to this

principle, we:

• provide extensive free educational services to customers in the form of lectures, classes, printed resources, online resources,

publications and one-on-one nutrition coaching;

• participate in health fairs, school outreach, community wellness events and other activities to engage with and educate the

community;

• disseminate new research on nutrition information;

• participate in the legislative and regulatory process at local, state and national levels so that our customers have access to

quality food and dietary supplements and the educational resources to guide their own wellness;

• continually strive to source products and services from local producers and vendors;

• carefully collect all of our excess or distressed food and merchandise and donate it to local non-profit organizations;

• provide cash to local food banks, making donation determinations based on the number of customers who shop our stores

with their own bags;

• do not provide paper or plastic bags at our registers and encourage use of reusable totes;

• reduce our energy costs and carbon footprint using efficient heating, ventilation and air conditioning, lighting, and

refrigerating systems;

• implement strategies to eliminate excess packaging, energy and transportation costs;

• recycle and reuse paper, plastic, glass and electronic products whenever possible; and

• use healthy and environmentally responsible building materials and finishes in our new stores and remodels.

Marketing and Advertising

A significant portion of our marketing efforts is focused on educating our customers on the benefits of natural and organic

grocery products and dietary supplements. Our customer outreach programs provide practical general nutrition knowledge to a variety
of groups and individuals, schools, businesses, families and seniors. These educational efforts fulfill one of our founding principles
and also offer us the opportunity to build relationships with our customers.

Health Hotline. At the heart of our marketing efforts is our Health Hotline, a 20-page newsletter and sales flyer which is

published eight times a year and mailed to over 300,000 subscribers by U.S. Mail. Additionally, approximately 80,000 copies of each
release are distributed at the in-store level. Over 3.0 million abridged versions of the Health Hotline are inserted into the weekly
newspaper of many of our communities 35 times per year, and an email version is distributed approximately once a week to over
63,000 subscribers. The Health Hotline contains a mix of in-depth health and nutrition articles, information on our community-based
initiatives and current in-store event listings, along with a selection of popular sale items. The articles are relevant, science-based and
written to reflect the most recent research findings. Generally, we negotiate with our suppliers for significantly lower costs on Health
Hotline sale items, which in turn allows us to offer low sale prices to our customers. Focused staff training at all locations precedes the
release of each Health Hotline to ensure that store staff are familiar with content in each issue. We believe both store visits and sales
increase when the Health Hotline is published.

Web Sites and Social Media. We maintain www.naturalgrocers.com as our official company website to host store

information, sales flyers, educational materials, product information, policies and contact forms, advocacy and news items and e-
commerce activities. We believe the continued growth of site visitors, page views and other metrics of our website activity indicates
that our content is timely and informative to the communities we serve. Our website is interlinked with other online and social media
outlets, including Facebook, Foursquare, Google Places, YELP, Twitter, Pinterest and others.

Television Commercials. We occasionally run television commercials in our markets. The commercials are produced locally

and primarily feature members of the Isely family.

Billboards. Increasingly, we have used billboards in our marketing efforts. These billboards typically are near, or on the same

site as, our stores.

Competition

The food and dietary supplement retail business is a large, highly-fragmented and competitive industry. Our competition

varies by market and includes conventional supermarkets such as Kroger and Safeway, mass or discount retailers such as Walmart and

Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Sprouts and Trader
Joe’s, warehouse clubs such as Sam’s Club and Costco, independent health food stores, dietary supplement retailers, drug stores,
farmers markets, mail order and online retailers and multi-level marketers. Each of these outlets competes with us on the basis of
price, selection, quality, customer service, shopping experience or any combination of these factors. We believe our commitment to
carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements differentiates
us in the industry.

Seasonality

Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal

changes in consumer purchasing.

Insurance and Risk Management

We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability,

director and officers’ liability, employment practices liability, associate healthcare benefits and other casualty and property risks.
Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit
level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect
ultimate settlements of claims. We evaluate our insurance requirements on an ongoing basis to ensure we maintain adequate levels of
coverage.

Trademarks and Other Intellectual Property

We believe that our intellectual property is important to the success of our business. We have received the registration of

trademarks not only for Vitamin Cottage and Health Hotline but also for our logo, Natural Grocers by Vitamin Cottage ® and Vitamin
Cottage Natural Grocers® for appropriate categories of trade. We do not own or license for use any patents, franchises or concessions
on which our business depends. Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and
their registrations are property maintained.

Information Technology Systems

We have made significant investments in overhead and information technology infrastructure, including purchasing,

receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems. We use an ERP system
with integrated merchandise management, reporting and accounting system at all of our stores, as well as at our bulk food repackaging
facility and distribution center and for corporate functions including accounting, reporting and purchasing. Our ERP system
application support and hardware are outsourced, which allows us to focus on our core business. We intend to implement an
enterprise wide HRIS in fiscal year 2014 which will allow us to more effectively onboard and train our employees at all locations.

Regulatory Compliance

The safety, formulation, manufacturing, processing, packaging, importation, labeling, promotion, advertising and distribution

of products we sell in our stores, including private label products, are subject to regulation by several federal agencies, including the
FDA, the Federal Trade Commission, or the FTC, the USDA, the Consumer Product Safety Commission and the Environmental
Protection Agency and various agencies of the states and localities. Pursuant to the Food, Drug, and Cosmetic Act, or the FDCA, the
FDA regulates the safety, formulation, manufacturing, processing, packaging, labeling, importation and distribution of food and
dietary supplements (including vitamins, minerals, amino acids and herbs). In addition, the FTC has jurisdiction to regulate the
promotion and advertising of these products.

Dietary Supplements. The FDCA has been amended several times with respect to dietary supplements, in particular by the

Dietary Supplement Health and Education Act of 1994, or DSHEA. DSHEA established a framework governing the composition,
safety, labeling, manufacturing and marketing of dietary supplements, defined “dietary supplement” and “new dietary ingredient” and
established new statutory criteria for evaluating the safety of substances meeting the respective definitions. In the process, DSHEA
removed dietary supplements and new dietary ingredients from pre-market approval requirements that apply to food additives and
pharmaceuticals and established a combination of “notification” and “post marketing controls” for regulating product safety.
Notwithstanding, non-dietary ingredients in a dietary supplement remain subject to the FDA’s food additive authorities. The FDA
does not require notification to market a dietary supplement if it contains only dietary ingredients that were present in the U.S. food
supply prior to DSHEA’s enactment on October 15, 1994. However, for a dietary ingredient not present in the food supply prior to this
date, the manufacturer must provide the FDA with information supporting the conclusion that the ingredient will reasonably be
expected to be safe at least 75 days before introducing a new dietary ingredient into interstate commerce. As required by the FSMA,

the FDA issued draft guidance in July 2011, which attempted to clarify when an ingredient would be considered a “new dietary
ingredient,” the evidence needed to document the safety of a new dietary ingredient and appropriate methods for establishing the
identity of a new dietary ingredient. The draft guidance has not been finalized. If finalized, the draft guidance may cause dietary
supplement products available in the market before DSHEA to be classified to include a “new dietary ingredient” if the dietary
supplement product was produced using manufacturing processes different from those used in 1994.

DSHEA also empowered the FDA to establish good manufacturing practice regulations governing key aspects of the
production of dietary supplements. DSHEA expressly permits dietary supplements to bear statements describing how a product affects
the structure, function and general well-being of the body. Although manufacturers must be able to substantiate any such statement, no
pre-market approval authorization is required for such statements and manufacturers need only notify FDA that they are employing a
given claim. No statement may expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or
prevent a disease. DSHEA does, however, authorize supplement sellers to provide “third-party literature,” (e.g., a reprint of a peer-
reviewed scientific publication linking a particular dietary ingredient with health benefits) in connection with the sale of a dietary
supplement to consumers. This provision is an exception to the FDA’s broad powers over the promotion of regulated products.
Accordingly, the authorization is limited and applies only if the publication is printed in its entirety, is not false or misleading, presents
a balanced view of the available scientific information and does not “promote” a particular manufacturer or brand of dietary
supplement and is displayed in an area physically separate from the dietary supplements.

Food. The FDA has comprehensive authority to regulate the safety of food and food ingredients other than dietary
supplements. Food additives and food contact substances are subject to pre-market approvals or notification requirements. The FDA’s
overall food safety authority was dramatically enhanced in 2011 with the passage of the Food Safety Modernization Act, or FSMA.
The FSMA required the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food
producers. Regulations and rules issued under FSMA are in varying degrees of finalization. Regardless, the FDA’s authority under
FSMA applies to all domestic food facilities and, by way of imported food supplier verification requirements, to all foreign facilities
that supply us with food products. In addition, the FSMA required the FDA to establish science-based minimum standards for the safe
production and harvesting of produce, to identify “high risk” foods and “high risk” facilities and instructed the FDA to set goals for
the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from which food
is imported into the United States. With respect to both foods and dietary supplements, the FSMA meaningfully augmented the FDA’s
ability to access producers’ records and suppliers’ records. This increased access could cause the FDA to identify areas of concern it
had not previously considered to be problematic for our suppliers and contract manufacturers. The FSMA also gives the FDA
authority to require food producers, distributors and sellers to recall adulterated or misbranded food if the FDA determines that there is
a reasonable probability that the food will cause serious adverse health consequences to persons or animals. Additionally, the FSMA
increases the FDA’s authority for administrative detentions of adulterated and misbranded foods. The FSMA also could cause
enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens upon our suppliers and contract
manufacturers.

The FDA also exercises broad jurisdiction over the labeling and promotion of food. Labeling is a broad concept that, under
certain circumstances, extends even to product-related claims and representations made on a company’s website or similar printed or
graphic medium. All foods, including dietary supplements, must bear labeling that provides consumers with essential information with
respect to ingredients, product weight, etc. The FDA administers a pre-market authorization program applicable to foods and
supplements alike regarding the use of “nutrient content” claims (e.g., “high in antioxidants,” “low in fat,” etc.), “health” claims
(claims describing the relationship between a food substance and a health or disease condition) and “natural and “all natural” claims.
“Organic” claims, however, are primarily regulated by the USDA. In addition, the FDA has authority over products falsely or
misleadingly labeled “organic.” Products labeled “organic” must be certified by an accredited agent as compliant with USDA-
established standards.

FDA Enforcement. The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety, labeling,

manufacturing and promotion of foods and dietary supplements, including powers to issue a public warning letter to a company,
publicize information about illegal products, institute an administrative detention of food, request or order a recall of illegal products
from the market, and request the Department of Justice to initiate a seizure action, an injunction action or a criminal prosecution in the
United States courts. Pursuant to the FSMA, the FDA also has the power to refuse the import of any food or dietary supplement from a
foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations. Moreover, the FDA has the
authority to administratively suspend the registration of any facility producing food, including supplements, deemed to present a
reasonable probability of causing serious adverse health consequences.

Food and Dietary Supplement Advertising. The FTC exercises jurisdiction over the advertising of foods and dietary

supplements. The FTC has the power to institute monetary sanctions and the imposition of “consent decrees” and penalties that can
severely limit a company’s business practices. In recent years, the FTC has instituted numerous enforcement actions against dietary

supplement companies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading
advertising claims.

Compliance. As is common in our industry, we rely on our suppliers and contract manufacturers to ensure that the products
they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek certifications
of compliance, representations and warranties, indemnification and insurance from our suppliers and contract manufacturers.
However, even with adequate certifications, representations and warranties, insurance and indemnification, any claims of non-
compliance could significantly damage our reputation and consumer confidence in our products. In addition, the failure of such
products to comply with applicable regulatory and legislative requirements could prevent us from marketing the products or require us
to recall or remove such products from our stores. In order to comply with applicable statutes and regulations, our suppliers and
contract manufacturers have from time to time reformulated, eliminated or relabeled certain of their products and we have revised
certain provisions of our sales and marketing program.

Furthermore, to ensure compliant practices, our associates working in our stores are trained regularly on how to provide

customer service using an educational approach that is ethical, honest, accurate and does not cross over into a scope of practice
reserved for licensed healthcare professionals. For instance, we do not allow discussion of any “disease” or “cure.” Instead, we focus
on how the structure and function of the body is affected by lifestyle choices and the different nutritional components of an
individual’s diet, including those contained in dietary supplements. Our customers are encouraged to make informed decisions about
their diet, lifestyle, and possible need for supplementation. We also conduct internal compliance reviews on all free nutrition literature
that we make available to our customers upon request with the goal of ensuring that these materials only reference relevant dietary
supplement ingredients and not any particular brands or products. One role of the Nutritional Health Coach is to oversee our FDA and
FTC compliance measures. We believe that our nutrition education practices are in compliance with federal and state requirements,
but a finding to the contrary could pose significant issues with respect to our business and reputation among our customers or
otherwise have a material adverse effect on our business.

New or revised government laws and regulations affecting our business or our industry, such as those relating to genetically

modified foods, could result in additional compliance costs and civil remedies. The risks associated with these laws and regulations
are further described under the caption “Risk Factors.”

Segment Information

We have one reporting segment, natural and organic retail stores, through which we conduct all of our business. Please see

the Consolidated Financial Statements of the Company for the fiscal year ended September 30, 2013, set forth in Part IV of this report
on Form 10-K, for financial information regarding this segment.

Available Information

Our website is located at www.naturalgrocers.com. We will make our periodic reports and other information filed with or
furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website as soon as reasonably
practicable after those reports and other information are electronically filed with or furnished to the SEC. In addition, our Corporate
Governance Guidelines, the charters for our Audit Committee and Compensation Committee, and our Code of Ethics are publicly
available on our website at www.naturalgrocers.com under the “Investor Relations – Corporate Governance” section, and we will post
any amendments to, or waivers from, a provision of this Code of Ethics on our website, at the address and location specified above.
A printed copy of this information is also available without charge by sending a written request to Corporate Secretary, Natural
Grocers by Vitamin Cottage, Inc., 12612 West Alameda Parkway, Lakewood, CO 80228. You may read and copy any materials we
file with the SEC at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
The SEC also maintains a website that contains our reports and other information at www.sec.gov. Information on our website or any
other website is not incorporated by reference into this report on Form 10-K.

Item 1A. Risk Factors.

Our business, financial condition and results of operations can be impacted by a number of factors which could cause our

actual results to vary materially from recent results or from our anticipated future results. If any of the following risks actually
occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As
a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock.

Risks related to our business

We may not be successful in our efforts to grow.

Our continued growth largely depends on our ability to successfully open and operate new stores on a profitable basis.

During fiscal years 2013 and 2012, we opened 13 and ten new stores, respectively. We plan to open 15 new stores and remodel two
stores in fiscal year 2014. Delays or failures in opening new stores, or achieving lower than expected sales in new stores, could
materially and adversely affect our growth. Our plans for continued expansion could place increased demands on our financial,
managerial, operational and administrative resources. For example, our planned expansion will require us to increase the number of
people we employ and may require us to upgrade our management information system and our distribution infrastructure. We
currently operate a single bulk food repackaging facility and distribution center, which houses our bulk food repackaging operation. In
order to support our recent and expected future growth and to maintain the efficient operation of our business, we may need to add
additional distribution centers in the future. These increased demands and operating complexities could cause us to operate our
business less efficiently, which could materially and adversely affect our operations, financial performance and ability to grow in the
future.

Our ability to successfully open new stores is dependent upon a number of factors, including our ability to select suitable

sites for our new store locations, to negotiate and execute leases, to coordinate the contracting work on our new stores, to identify and
recruit store managers, Nutritional Health Coaches and other staff, to secure and manage the inventory necessary for the launch and
successful operation of our new stores and to effectively promote and market our new stores. If we are ineffective in performing these
activities, then our efforts to open and operate new stores may be unsuccessful or unprofitable, and we may be unable to execute our
growth plans.

Although we target particular levels of cash-on-cash returns and capital investment for each of our new stores, new stores

may not meet these targets. Any store we open may not be profitable or achieve operating results similar to those of our existing
stores. There is also the potential that some of our new stores will be located near areas where we have existing stores, thereby
reducing the sales of such existing stores.

If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner,

our sales may decrease.

We believe our success depends, in substantial part, on our ability to:

• anticipate, identify and react to natural and organic grocery and dietary supplement trends and changing consumer

preferences in a timely manner;

• translate market trends into appropriate, saleable product and service offerings in our stores before our competitors; and

• develop and maintain vendor relationships that provide us access to the newest merchandise on reasonable terms.

Consumer preferences often change rapidly and without warning, moving from one trend to another among many product or
retail concepts. Our performance is 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 and the cost of these products. Our store offerings remain composed of
natural and organic products and dietary supplements. A change in consumer preferences away from our offerings would have a
material adverse effect on our business. Additionally, negative publicity over the safety of any such items may adversely affect
demand for our products and could result in lower customer traffic, sales and results of operations.

If we are unable to anticipate and satisfy consumer merchandise preferences in the regions where we operate, our net sales

may decrease, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material
adverse effect on our business, financial condition and results of operations.

Our inability to maintain or improve levels of comparable store sales could cause our stock price to decline.

We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the past. In

addition, our overall comparable store sales may fluctuate in the future. A variety of factors affect comparable store sales, including:

• our ability to execute our business strategy effectively, including successfully opening new stores that achieve sales

consistent with our existing stores;

• consumer preferences;

• competition;

• economic conditions;

• product pricing and availability;

• in-store merchandising-related activities;

• consumer confidence;

• unusually strong initial sales performance by our new stores; and

• our ability to source and distribute products efficiently.

In addition, many specialty retailers have been unable to sustain high levels of comparable store sales during and after

periods of substantial expansion. These factors may cause our comparable store sales results to be materially lower than in recent
periods, which could have a material adverse effect on our business, financial condition and results of operations, and could result in a
decline in the price of our common stock.

Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons.

Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to

fluctuate in the future. A variety of other factors affect our comparable store sales and quarterly financial performance, including:

• changes in our merchandising strategy or product mix;

• performance of our newer and remodeled stores;

• the effectiveness of our inventory management;

• the timing and concentration of new store openings, and the related additional human resource requirements and pre-

opening and other start-up costs;

• the cannibalization of existing store sales by new store openings;

• levels of pre-opening expenses associated with new stores;

• timing and effectiveness of our marketing activities;

• seasonal fluctuations due to weather conditions and extreme weather-related disruptions;

• actions by our existing or new competitors, including pricing changes;

• supply shortages; and

• general U.S. economic conditions and, in particular, the retail sales environment.

Accordingly, our results for any one fiscal year or quarter are not necessarily indicative of the results to be expected for any

other year or quarter, and comparable store sales of any particular future period may decrease. In the event of such a decrease, the
price of our common stock would likely decline. For more information on our results of operations for the fiscal year 2013, see
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition

and could negatively impact our ability to execute our growth strategy.

Adverse and uncertain economic conditions may impact demand for the products we sell in our stores. Consumer spending

and levels of disposable income, including spending for natural and organic grocery and dietary supplement products that we sell, are
affected by, among other things, prevailing economic conditions, levels of employment, salaries and wages, interest rates, the

availability of credit, tax rates, housing market conditions, consumer confidence, political instability and consumer perception of
economic conditions. The outbreak or escalation of war, the occurrence of terrorist acts or other hostilities in or affecting the United
States, or concern regarding epidemics in the United States or in international markets could also lead to a decrease in spending by
consumers. In the event of an economic slowdown, consumer spending could be adversely affected, and we could experience lower
net sales than expected. We could be forced to delay or slow our new store growth plans, which could have a material adverse effect
on our business, financial condition and results of operations. In addition, our ability to manage normal commercial relationships with
our suppliers, manufacturers of our private label products, distributors, customers and creditors may suffer. 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. In addition, consumers may choose to purchase private label products at other stores rather than branded
products because they are generally less expensive. Suppliers may become more conservative in response to these conditions and seek
to reduce their production. Our results of operations depend upon, among other things, our ability to maintain and increase sales
volume with our existing customers, to attract new customers and to provide products that appeal to customers at prices they are
willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.

We may be unable to compete effectively in our highly competitive markets.

The markets for natural and organic groceries and dietary supplements are highly competitive with few barriers to entry. Our

competition varies by market and includes conventional, natural, gourmet and specialty food markets, mass and discount retailers,
warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online
retailers and multi-level marketers. Many of our competitors are larger, more established and have greater financial, marketing and
other resources than us, and may be able to adapt to changes in consumer preferences more quickly, devote greater resources to the
marketing and sale of their products, or generate greater brand recognition. As a result, we may lose market share to our competitors,
which could have a material adverse effect on our business, financial condition and results of operations.

Our inability to maintain or increase our operating margins could adversely affect our results of operations and the price

of our stock.

We intend to continue to increase our operating margins by leveraging efficiencies of scale, improved systems, continued

cost discipline, focus on appropriate store labor levels and disciplined product selection. If we are unable to successfully manage the
potential difficulties associated with store growth, we may not be able to capture the efficiencies of scale that we expect from
expansion. If we are not able to continue to capture efficiencies of scale, improve our systems, continue our cost discipline and
maintain appropriate store labor levels and disciplined product selection, we may not be able to achieve our goals with respect to
operating margins. In addition, if we do not adequately refine and improve our various ordering, tracking and allocation systems, we
may not be able to increase sales and reduce inventory shrink. As a result, our operating margins may stagnate or decline, which could
have a material adverse effect on our business, financial condition and results of operations and adversely affect the price of our stock.

A reduction in traffic to anchor stores in the shopping areas in close proximity to our stores could significantly reduce our

sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition and
results of operations.

Many of our stores are located in close proximity to shopping areas that may also accommodate other well-known anchor
stores. Sales at our stores are derived, in part, from the volume of traffic generated by the other anchor stores in the shopping areas
where our stores are located. Customer traffic may be adversely affected by regional economic downturns, a general downturn in the
local area where our store is located, long-term nearby road construction projects, the closing of nearby anchor stores or other nearby
stores or the decline of the shopping environment in a particular shopping area. Any of these events would reduce our sales and leave
us with excess inventory, which could have a material adverse effect on our business, financial condition and results of operation. In
response to such events, we may be required to increase markdowns or initiate marketing promotions to reduce excess inventory,
which would further decrease our gross profits and net income.

If we or our third-party suppliers fail to comply with regulatory requirements, or are unable to provide products that meet

our specifications, our business and our reputation could suffer.

If we or our third-party suppliers, including suppliers of our private label products, fail to comply with applicable regulatory
requirements or to meet our specifications for quality, we could be required to take costly corrective action and our reputation could
suffer. We do not own or operate any manufacturing facilities, except for our bulk food repackaging facility and distribution center
discussed below, and therefore depend upon independent third-party vendors to produce our private label branded products, such as
vitamins, minerals, dietary supplements, body care products, food products and bottled water. Third-party suppliers of our private
label products may not maintain adequate controls with respect to product specifications and quality. Such suppliers may be unable to

produce products on a timely basis or in a manner consistent with regulatory requirements. We depend upon our bulk food
repackaging facility and distribution center for the majority of our private label bulk food products. We may also be unable to
maintain adequate product specification and quality controls at our bulk food repackaging facility and distribution center, or produce
products on a timely basis and in a manner consistent with regulatory requirements. In addition, we may be required to find new third-
party suppliers of our private label products or to find third-party suppliers to source our bulk foods. There can be no assurance that
we would be successful in finding such third-party suppliers that meet our quality guidelines.

We, as well as our vendors, are subject to numerous laws and regulations and our compliance with these laws and
regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our ability to sell certain
products, raise regulatory enforcement risks not present in the past or otherwise adversely affect our business, results of operations
and financial condition.

As a retailer of food and dietary supplements and a seller of many of our own private label products, we are subject to

numerous federal and state health and safety laws and regulations. Our suppliers and contract manufacturers are also subject to such
laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacturing, packaging,
labeling, distribution, advertising, sale, quality and safety of our products, as well as the health and safety of our employees and the
protection of the environment. In the U.S., we are subject to regulation by various federal government agencies, including the FDA,
the USDA, the FTC, the Occupational Safety and Health Administration, the Consumer Product Safety Commission and the
Environmental Protection Agency, as well as various state and local agencies. We are also subject to the USDA’s Organic Rule, which
facilitates interstate commerce and the marketing of organically produced food, and provides assurance to our customers that such
products meet consistent, uniform standards. Compliance with the USDA’s Organic Rule also places a significant burden on some of
our suppliers, which may cause a disruption in some of our product offerings. In addition, our sales of dietary supplements are
regulated under the Dietary Supplement Health and Education Act of 1994, or DSHEA. DSHEA expressly permits dietary
supplements to bear statements describing how a product affects the structure, function and general well-being of the body. However,
no statement may expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease. If
these laws and regulations were violated by our management, associates, suppliers, distributors or vendors, we could be subject to
fines, penalties and sanctions, including injunctions against future shipment and sale of products, seizure and confiscation of products,
prohibition on the operation of our stores, restitution and disgorgement of profits, operating restrictions and criminal prosecution.

In connection with the marketing and advertisement of our products, we could be the target of claims relating to false or
deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states. These events
could interrupt the marketing and sales of products in our stores, including our private label products, severely damage our brand
reputation and public image, increase the cost of products in our stores, result in product recalls or litigation, and impede our ability to
deliver merchandise in sufficient quantities or quality to our stores, which could result in a material adverse effect on our business,
financial condition and results of operations.

New or revised government laws and regulations have been adopted in recent years, such as those relating to genetically

modified foods, could result in additional compliance costs and the increased use of civil remedies to enforce such laws and
regulations. Additionally, increased enforcement by government agencies could result in such costs and remedies, as well as the
payment of fines or penalties imposed by such agencies.

The Food Safety Modernization Act, or FSMA, passed in January 2011, granted the FDA greater authority over the safety of

the national food supply and required the FDA to issue regulations mandating that risk-based preventive controls be observed by the
majority of food producers. Regulations and rules issued under FSMA are in varying degrees of finalization. Regardless, the FDA’s
authority under FSMA applies to all domestic food facilities and, by way of imported food supplier verification requirements, to all
foreign facilities that supply food products. In addition, the FSMA required the FDA to establish science based minimum standards for
the safe production and harvesting of produce, required the FDA to identify “high risk” foods and “high risk” facilities and instructed
the FDA to set goals for the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign
facilities from which food is imported into the United States. With respect to both food and dietary supplements, the FSMA
meaningfully augmented the FDA’s ability to access a producer’s records and a supplier’s records. This increased access could permit
the FDA to identify areas of concern it had not previously considered to be problematic either for us or for our suppliers. The FSMA
also could result in the implementation of enhanced tracking and tracing of food requirements and, as a result, added recordkeeping
burdens upon our suppliers. In addition, under the FSMA, the FDA now has the authority to inspect certifications and therefore
evaluate whether foods and ingredients from our suppliers are compliant with the FDA’s regulatory requirements. Such inspections
may delay the supply of certain products or result in certain products being unavailable to us for sale in our stores.

DSHEA established that no notification to the FDA is required to market a dietary supplement if it contains only dietary

ingredients that were present in the U.S. food supply prior to DSHEA’s enactment. However, for a dietary ingredient not present in the
food supply prior to DSHEA’s enactment, the manufacturer is required to provide the FDA with information supporting the

conclusion that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into
interstate commerce. As required by the FSMA, the FDA issued draft guidance in July 2011, which attempted to clarify when an
ingredient would be considered a “new dietary ingredient,” the evidence needed to document the safety of a new dietary ingredient
and appropriate methods for establishing the identity of a new dietary ingredient. The draft guidance has not yet been finalized. If
finalized, the draft guidance may cause dietary supplement products available in the market before DSHEA to be classified to include
a new dietary ingredient if the dietary supplement product was produced using manufacturing processes different from those used in
1994. Accordingly, the finalization and adoption of the draft FDA guidance or similar guidance could materially adversely affect the
availability of dietary supplement products.

Furthermore, in recent years, the FDA has been and continues to be aggressive in enforcing its regulations with respect to

nutrient content claims (e.g., “low fat,” “good source of,” “calorie free,” etc.), unauthorized “health claims” (claims that characterize
the relationship between a food or food ingredient and a disease or health condition) and other claims that impermissibly suggest
therapeutic benefits for certain foods or food components. Such FDA enforcement with respect to such promotional practices could
result in costly product changes, potential private litigation, bad publicity and loss of consumer goodwill.

We are also subject to laws and regulations more generally applicable to retailers, including labor and employment, taxation,
zoning and land use. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could
cause us to incur additional wage and benefits costs, which could hurt our profitability.

We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either

additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory
schemes would have on our business in the future. They could, however, require the reformulation of certain products to meet new
standards, the recall or discontinuance of certain products not able to be reformulated, additional recordkeeping, expanded
documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all of such
requirements could have an adverse effect on our operating results.

The activities of our Nutritional Health Coaches and our nutrition education services may be impacted by government

regulation or our inability to secure adequate liability insurance.

Some of the activities of our Nutritional Health Coaches who, among other duties, provide nutrition oriented educational

services to our customers, may be subject to state and federal regulation, and oversight by professional organizations. In the past, the
FDA has expressed concerns regarding summarized health and nutrition related information that (1) does not, in the FDA’s view,
accurately present such information, (2) diverts a consumer’s attention and focus from FDA-required nutrition labeling and
information or (3) impermissibly promotes drug-type disease related benefits. Although we have provided training to our Nutritional
Health Coaches on relevant regulatory requirements, we cannot control the actions of such individuals, and our Nutritional Health
Coaches may not act in accordance with such regulations. If our Nutritional Health Coaches or other employees do not act in
accordance with regulatory requirements, we may become subject to penalties which could have a material adverse effect on our
business. We believe we are currently in compliance with relevant regulatory requirements, and we maintain professional liability
insurance on behalf of our Nutritional Health Coaches in order to mitigate risks associated with our Nutritional Health Coaches’
nutrition oriented educational activities. However, we cannot predict the nature of future government regulation and oversight,
including the potential impact of any such regulation on the services currently provided by our Nutritional Health Coaches.
Furthermore, the availability of professional liability insurance or the scope of such coverage may change, or our insurance coverage
may prove inadequate, which may adversely impact the ability of our Nutritional Health Coaches to provide some services to our
customers. The occurrence of any such developments could negatively impact the perception of our brand, our sales and our ability to
attract new customers.

Our future business, results of operations and financial condition may be adversely affected by reduced availability of

organic products.

Our ability to ensure a continuing supply of organic products at competitive prices depends on many factors beyond our

control, such as the number and size of farms that grow organic crops or raise organic livestock, the vagaries of these farming
businesses and our ability to accurately forecast our sourcing requirements. The organic ingredients used in many of the products we
sell are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and
pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn
could reduce the available supply of, or increase the price of, organic ingredients. Certain products we purchase from our suppliers
include organic ingredients sourced offshore, and the availability of such ingredients may be affected by events in other countries. In
addition, we and our suppliers compete with other food producers in the procurement of organic ingredients, which are often less
plentiful in the open market than conventional ingredients. This competition may increase in the future if consumer demand for
organic products increases. If supplies of organic ingredients are reduced or there is greater demand for such ingredients from us and

others, we may not be able to obtain sufficient supply on favorable terms, or at all, which could impact our ability to supply products
to our stores and may adversely affect our business, results of operations and financial condition.

The organic products we sell rely on independent certification and must comply with the requirements of independent

organizations or certification authorities in order to be labeled as such. Certain products we sell in our stores can lose their “organic”
certification if a contract manufacturing plant becomes contaminated with non-organic materials or if it is not properly cleaned after a
production run, among other issues. The loss of any independent certifications could reduce the availability of organic products that
we can sell in our stores and harm our business.

Disruptions affecting our significant suppliers, or our relationships with such suppliers, could negatively affect our

business.

United Natural Foods Inc., or UNFI, is our single largest third-party supplier, accounting for approximately 47% of our total
purchases in fiscal year 2013. In addition, approximately 8% of our purchases were made through Albert’s Organics, a subsidiary of
UNFI that distributes fresh produce and meat. During fiscal year 2012, we extended our long-term relationship with UNFI as our
primary supplier of dry grocery and frozen food products through 2016. Due to this concentration of purchases from a single third-
party supplier, the cancellation of our distribution agreement or the disruption, delay or inability of UNFI to deliver product to our
stores may materially and adversely affect our operating results and we may be unable to establish alternative distribution channels on
reasonable terms or at all.

Certain of our vendors use overseas sourcing to varying degrees to manufacture some or all of their products. Any event

causing a sudden disruption of manufacturing or imports from such foreign countries, including the imposition of additional import
restrictions, unanticipated political changes, increased customs duties, labor disputes, health epidemics, adverse weather conditions,
crop failure, acts of war or terrorism, legal or economic restrictions on overseas suppliers’ ability to produce and deliver products, and
natural disasters, could increase our costs and materially harm our operations, business and financial condition. Our business is also
subject to a variety of other risks generally associated with indirectly sourcing goods from abroad, such as political instability,
disruption of imports by labor disputes and local business practices. In addition, requirements imposed by the FSMA compel
importers to verify that food products and ingredients produced by a foreign supplier comply with all applicable legal and regulatory
requirements enforced by the FDA, which could result in certain products being deemed inadequate for import.

The current geographic concentration of our stores creates exposure to local economies, regional downturns or severe

weather or catastrophic occurrences.

As of September 30, 2013, we have store concentration in Colorado and Texas, operating 31 stores and 12 stores in those

states, respectively, or a total of 59.7% of our stores. As a result, our business is currently more susceptible to regional conditions than
the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any
unforeseen events or circumstances that negatively affect these areas could materially adversely affect our revenues and profitability.
These factors include, among other things, changes in demographics, population, competition, consumer preferences, new or revised
laws or regulations, fires, floods or other natural disasters in these regions.

If we fail to maintain our reputation and the value of our brand, our sales may decline.

We believe our continued success depends on our ability to maintain and grow the value of the Natural Grocers by Vitamin

Cottage® brand. Maintaining, promoting and positioning our brand and reputation will depend largely on the success of our marketing
and merchandising efforts and our ability to provide a consistent, high quality customer experience. Brand value is based in large part
on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse
publicity, governmental investigations or litigation. Our brand could be adversely affected if we fail to achieve these objectives, or if
our public image or reputation were to be tarnished by negative publicity. Sources of negative publicity may include, among others,
social media posts, investment or financial community posts and poor reviews of stores, products, customer service and employment.
Our reputation could also suffer from real or perceived issues involving the labeling or marketing of our products as “natural.”
Although the FDA and USDA each has issued statements regarding the appropriate use of the word “natural,” there is no single, U.S.
government regulated definition of the term “natural” for use in the food industry. The resulting uncertainty has led to consumer
confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against a number of food companies that market
“natural” products, asserting false, misleading and deceptive advertising and labeling claims, including claims related to genetically
modified ingredients. In limited circumstances, the FDA has taken regulatory action against products labeled “natural” but that
nonetheless contain synthetic ingredients or components. Should we become subject to similar claims, consumers may avoid
purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters
may discourage consumers from buying our products. The cost of defending against any such claims could be significant. Any loss of
confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome
and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our
sales, which would have a material adverse effect on our business, financial condition and results of operations.

Perishable food product losses could materially impact our results of operations.

Our stores offer a significant number of perishable products. Our offering of perishable products may result in significant
product inventory losses in the event of extended power or other utility outages, natural disasters or other catastrophic occurrences.

The decision by certain of our suppliers to distribute their specialty products through other retail distribution channels

could negatively impact our revenue from the sale of such products.

Some of the specialty retail products that we sell in our stores are not generally available through other retail distribution

channels such as drug stores, conventional grocery stores or mass merchandisers. In the future, our suppliers could decide to distribute
such products through other retail distribution channels, allowing more of our competitors to offer these products, and adversely
affecting the desirability of these products to our core customers, which could negatively impact our revenues.

Our ability to operate our business effectively could be impaired if we fail to retain or attract key personnel or are unable

to attract, train and retain qualified employees.

Our business requires disciplined execution at all levels of our organization. This execution requires an experienced and

talented management team. The loss of any member of our senior management team, particularly Kemper Isely or Zephyr Isely, our
Co-Presidents since 1998, or Heather Isely or Elizabeth Isely, our Executive Vice Presidents since 1998, could have a material adverse
effect on our ability to operate our business, our financial condition and results of operations, unless, and until, we are able to find a
qualified replacement. Furthermore, our ability to manage our new store growth will require us to attract, motivate and retain qualified
managers, Nutritional Health Coaches and store associates who understand and appreciate our culture and are able to represent our
brand effectively in our stores. Competition for such personnel is intense, and we may be unable to attract, assimilate and retain the
personnel required to grow and operate our business profitably.

Any significant interruption in the operations of our bulk food repackaging facility and distribution center could disrupt

our ability to deliver our merchandise in a timely manner.

Any significant interruption in the operation of our bulk food repackaging and distribution center infrastructure, such as

disruptions due to fire, severe weather or other catastrophic events, power outages, labor disagreements, or shipping problems, could
adversely impact our ability to receive and process orders, and distribute products to our stores. Such interruptions could result in lost
sales, cancelled sales and a loss of customer loyalty to our brand. While we maintain business interruption and property insurance, if
the operation of our distribution facility were interrupted for any reason causing delays in shipment of merchandise to our stores, our
insurance may not be sufficient to cover losses we experience. This could have a material adverse effect on our business, financial
condition and results of operations.

A widespread health epidemic could materially impact our business.

Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health

epidemic may cause customers to avoid public gathering places such as our stores or otherwise change their shopping behaviors.
Additionally, a widespread health epidemic could adversely impact our business by disrupting production and delivery of products to
our stores and by impacting our ability to appropriately staff our stores.

Union activity at third-party transportation companies or labor organizing activities among our employees could disrupt

our operations and harm our business.

Independent third-party transportation companies deliver the majority of our merchandise to our stores and to our customers.

Some of these third parties employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work
stoppages by employees of these third parties could delay the timely receipt of merchandise, which could result in cancelled sales, a
loss of loyalty to our stores and excess inventory. While all of our employees are currently non-union, attempts on the part of our
employees to organize labor or union activities among our employees could result in work slowdowns, reducing the efficiency of our
operations, which could have a material adverse effect on our business, financial condition and results of operations.

Our management has limited experience managing a public company.

We are subject to various regulatory requirements, including those of the SEC and The New York Stock Exchange, or the

NYSE. These requirements include, among other things, record keeping, financial reporting and corporate governance rules and
regulations. Our management has been managing a public company since the Company’s initial public offering, or IPO, in fiscal year

2012, and therefore its overall experience in managing a public company remains limited. Our public company reporting obligations
have increased, and continue to impose, demands on our internal infrastructure and resources. Although we have hired additional staff
in order to comply with these requirements, we may be unable to retain the staff necessary to comply with these requirements in the
future. In certain continuing respects, we rely on outside consultants and professionals to supplement our capacity to meet these
requirements. Our business could be adversely affected if we are unable to fulfill our public company obligations.

Future events could result in impairment of long-lived assets, which may result in charges that adversely affect our results

of operations and capitalization.

Our total assets included long-lived assets totaling $99.8 million at September 30, 2013. Long-lived assets are evaluated for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our
impairment evaluations require use of financial estimates of future cash flows. Application of alternative assumptions could produce
significantly different results. We may be required to recognize impairments of long-lived assets based on future economic factors
such as unfavorable changes in estimated future undiscounted cash flows of an asset group.

We have significant lease obligations, which may require us to continue paying rent for store locations that we no longer

operate.

Our stores, bulk food repackaging facility and distribution center and administrative facility are leased. We are subject to

risks associated with our current and future real estate leases. Our costs could increase because of changes in the real estate markets
and supply or demand for real estate sites. We generally cannot cancel our leases, so if we decide to close or relocate a location, we
may nonetheless be committed to perform our obligations under the applicable lease including paying the base rent for the remaining
lease term. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all and
may not be able to find replacement locations that will provide for the same success as current store locations. Of the current leases for
our stores, none expires in fiscal year 2014, two expire in fiscal year 2015, five expire in fiscal year 2016, one expires in fiscal year
2017, and the remainder expire between fiscal years 2018 and 2034.

Any material failure of our information systems could negatively impact our operations.

We are increasingly dependent on a variety of information systems to effectively manage the operations of our growing store

base, including our supply chain. The failure of our information systems to perform as designed, including the failure of our vendors
to maintain and make available software or the failure of our warehouse management software system to operate as expected or to
support our distribution facility, could have an adverse effect on our business and results of operations. Any material failure or
slowdown of our systems could disrupt our ability to track, record and analyze our merchandise, and could negatively impact our
operations, including, among other things, our ability to process and receive shipments of goods and process financial and credit card
transactions. Any security breaches of our information systems could disrupt our operational systems, resulting in a slowdown of our
normal business activities or limitations on our ability to process credit card transactions. Moreover, leaks of proprietary information,
including leaks of customers’ private data, could weaken customer confidence in our company and our ability to compete in the food
retail marketplace, which could have a material adverse effect on our business, financial condition and results of operations.
Additionally, changes in technology could cause our information systems to become obsolete and it may be necessary to incur
additional costs to upgrade such systems, and if our information systems prove inadequate to handle our growth, we could lose
customers, which could have a material adverse effect on our business, financial condition and results of operations. We are also
vulnerable to certain risks and uncertainties associated with our websites, including changes in required technology interfaces, website
downtime and other technical failures, security breaches and consumer privacy concerns. Our failure to successfully respond to these
risks could damage our reputation.

Claims under our self-insurance program may differ from our estimates, which could materially impact our results of

operations.

We currently maintain insurance customary for businesses of our size and type using a combination of insurance and self-

insurance plans to provide for the potential liabilities for workers’ compensation, general liability, professional liability, property
insurance, director and officers’ liability insurance, vehicle liability and employee health-care benefits. There are types of losses we
may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a
material adverse effect on our business and results of operations. In addition, liabilities associated with the risks that are retained by
the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other
actuarial assumptions. Our results could be materially impacted by claims and other expenses related to such plans if future
occurrences and claims differ from these assumptions and historical trends.

If we are unable to protect our intellectual property rights, our ability to compete and the value of our brand could be

harmed.

We believe that our trademarks or service marks, trade dress, copyrights, trade secrets, know-how and similar intellectual

property are important to our success. In particular, we believe that the Natural Grocers by Vitamin Cottage name is important to our
business, as well as to the implementation of our growth strategy. Our principal intellectual property rights include registered marks
on Vitamin Cottage®, Natural Grocers by Vitamin Cottage® and Vitamin Cottage Natural Grocers®, copyrights of our website
content, rights to our domain names including www.vitamincottage.com and www.naturalgrocers.com, and trade secrets and know-
how with respect to our product sourcing, sales and marketing and other aspects of our business. As such, we rely on trademark or
service mark and copyright law, trade secret protection and confidentiality agreements with our employees and certain of our
consultants, suppliers and others to protect our proprietary rights. If we are unable to defend or protect or preserve the value of our
trademarks or service marks, copyrights, trade secrets or other proprietary rights for any reason, our brand and reputation could be
impaired and we could lose customers.

Although several of our brand names are registered in the United States, we may not be successful in asserting trademark or

service mark or trade name protection and the costs required to protect our trademarks or service marks and trade names may be
substantial. In addition, the relationship between regulations governing domain names and laws protecting trademarks or service
marks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our trademarks or service marks and other proprietary rights.
Additionally, other parties may infringe on our intellectual property rights and may thereby dilute our brand in the marketplace. Third
parties could also bring additional intellectual property infringement suits against us from time to time to challenge our intellectual
property rights. Any such infringement of our intellectual property rights by others, or claims by third parties against us, would likely
result in a commitment of our time and resources to protect these rights through litigation or otherwise. If we were to receive an
adverse judgment in such a matter, we could suffer further dilution of our trademarks or service marks and other rights, which could
harm our ability to compete as well as our business prospects, financial condition and results of operations.

Our products could cause unexpected side effects, illness, injury or death that could result in their discontinuance or

expose us to lawsuits, either of which could result in unexpected costs and damage to our reputation.

There is substantial governmental scrutiny of and public awareness regarding food safety. We believe that many customers
hold us to a higher quality standard than other retailers. Unexpected side effects, illness, injury or death caused by our products could
result in the discontinuance of sales of our products or prevent us from achieving market acceptance of the affected products. Such
side effects, illnesses, injuries and death could also expose us to product liability or negligence lawsuits. Any claims brought against
us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy limits
would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital
resources to pay a judgment in which case our creditors could levy against our assets. The real or perceived sale of contaminated or
harmful products would cause negative publicity regarding our company, brand or products, including negative publicity in social
media, which could in turn harm our reputation and net sales, which could have a material adverse effect on our business, financial
condition and results of operations, or result in our insolvency.

Increase in the cost of raw materials could hurt our sales and profitability.

Many of the raw agricultural commodities used to make our private label products, including our bulk repackaged products,

further increased globally during fiscal year 2013, and are generally subject to availability constraints and price volatility caused by
weather, supply conditions, government regulations, energy prices, price inflation and general economic conditions and other
unpredictable factors. An increase in the demand for, or the price of, raw agricultural commodities could cause our vendors to seek
price increases from us, or may cause the retail price we charge for certain products to increase, in turn decreasing our sales of such
products. As a result, our profitability may be adversely impacted through reduced gross margins or a decline in the number and
average size of customer transactions. The cost of construction materials we use to build and remodel our stores is also subject to
significant price volatility based on market and economic conditions. Higher construction material prices would increase the capital
expenditures needed to construct a new store or remodel an existing store and, as a result, could increase the rent payable by the
Company under its leases.

Energy costs are a significant component of our operating expenses and increasing energy costs, unless offset by more

efficient usage or other operational responses, may impact our profitability.

We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in our trucks that deliver products

to our stores. Increases in energy costs, whether driven by increased demand, decreased or disrupted supply or an anticipation of any

such events will increase the costs of operating our stores. Our shipping costs have also increased due to fuel and freight prices, and
these costs may continue to increase. We may not be able to recover these rising costs through increased prices charged to our
customers, and any increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are
unsuccessful in attempts to protect against these increases in energy costs through long-term energy contracts, improved energy
procurement, improved efficiency and other operational improvements, the overall costs of operating our stores will increase which
would impact our profitability, financial condition and results of operations.

Increases in certain costs affecting our marketing, advertising and promotions may adversely impact our ability to

advertise effectively and reduce our profitability.

Postal rate increases, and increasing paper and printing costs affect the cost of our promotional mailings. Previous changes in
postal rates increased the cost of our Health Hotline® mailings and previous increases in paper and printing costs increased the cost of
producing our Health Hotline newspaper inserts. In response to any future increase in mailing costs, we may consider reducing the
number and size of certain promotional pieces. In addition, we rely on discounts from the basic postal rate structure, such as discounts
for bulk mailings and sorting by zip code and carrier routes. We are not party to any long-term contracts for the supply of paper. We
are also affected by increases in billboard costs and the cost of producing and broadcasting our television, radio and internet
advertising pieces. Previous changes in broadcast rates resulted in an increase in the cost of our television commercials. In response to
any future increase in broadcast costs, we may consider reducing the frequency, placement and length of certain promotional pieces.
We are not party to any long-term contracts for broadcast time. Future increases in costs affecting our marketing, advertising and
promotions could adversely impact our ability to advertise effectively and our profitability.

Our credit facility could limit our operational flexibility.

On December 12, 2013, we entered into an amended and restated credit facility. Our amended credit facility allows us to

borrow up to $25.0 million. As of September 30, 2013, no borrowings were outstanding under our credit facility. Our amended credit
facility is secured by a lien on substantially all of our assets and contains usual and customary restrictive covenants relating to our
management and the operation of our business. These covenants, among other things, restrict our ability to incur additional
indebtedness, grant liens, engage in certain merger, consolidation or asset sale transactions, make certain investments, make loans,
advances, guarantees or acquisitions, engage in certain transactions with affiliates or permit certain sale and leaseback transactions
without lender consent. We are also required to maintain certain financial ratios under our amended credit agreement, including a
consolidated leverage ratio and a consolidated fixed charge ratio. These covenants could restrict our operational flexibility, including
our ability to open stores, and any failure to comply with these covenants or our payment obligations would limit our ability to borrow
under our revolving credit facility and, in certain circumstances, may allow the lender thereunder to require repayment.

We may need to raise additional debt or equity capital.

We have depended primarily on cash flow from our operations, borrowings from our credit facility and a portion of the net

proceeds from our IPO to fund our business and execute on our growth strategy. From time to time, we may be required to seek
additional equity or debt financing in order to fund capital expenditures or to provide additional working capital for our business, or to
fund the execution of our growth strategy. In addition, changes in economic conditions, or market conditions requiring a shift in our
business model could result in our need for additional debt or equity financing. We cannot now predict the timing or amount of any
such capital requirements. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory
to us or at all. If financing is not available to us on satisfactory terms, or at all, we may be unable to operate or expand our business or
to successfully pursue our growth strategy, and our results of operations may suffer. Pursuant to the NYSE Listed Company Manual,
in order to rely on the “controlled company” corporate governance exemptions, the Isely family is, or entities controlled by the Isely
family are, required to retain more than 50% of the total voting power of our common shares for the election of directors. As long as
we intend to remain a “controlled company,” these voting requirements will constrain our ability to issue additional shares of our
common stock in the future.

Our political advocacy activities may reduce our customer count and sales.

We believe our ability to profitably operate our business depends, in part, upon our access to natural and organic products

and dietary supplements. We attempt to protect our interest in this access through ongoing and proactive political advocacy
campaigns, including participation in education programs, petitions, letter writing, phone calls, policy conferences, advisory boards,
industry groups, public commentary and meetings with trade groups, office holders and regulators. We may publicly ally with and
support trade groups, political candidates, government officials and regulators who support a particular policy we consider important
to our business and in alignment with our principles regarding access to natural and organic products and dietary supplements. We
may, from time to time, publicly oppose other trade groups, candidates, officeholders and regulators whose point of view we believe
will harm our business, or impede access to nutritious food and dietary supplements. In some cases, we may lose customers and sales

because our political advocacy activities are perceived to be contrary to those customers’ points of view, political affiliations, political
beliefs or voting preferences.

Effective tax rate changes and results of examinations by taxing authorities could materially impact our results of

operations.

Our future effective tax rates could be adversely affected by our earnings mix being lower than historical results in states

where we have lower statutory rates and higher than historical results in states where we have higher statutory rates, by changes in the
valuation of our deferred tax assets and liabilities or by changes in tax laws or interpretations thereof. In addition, we are subject to
periodic audits and examinations by the Internal Revenue Service, or the IRS, and other state and local taxing authorities. Our results
could be materially impacted by the determinations and expenses related to proceedings by the IRS and other state and local taxing
authorities.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial

reporting and could harm our ability to manage our expenses.

Our anticipated growth, and continuing reporting obligations as a public company, are placing a continuing and considerable
strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company,
we are required to document and test our internal controls over financial reporting pursuant to Section 404 of Sarbanes-Oxley Act of
2002, or Sarbanes-Oxley, so that our management can periodically certify the effectiveness of such controls. As an “emerging growth
company,” we have opted to take advantage of certain exemptions contained in the JOBS Act, and as a result, our independent
registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial
reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the
date we are no longer an “emerging growth company” as defined in the JOBS Act. We expect that we will remain an “emerging
growth company” until the earliest of (a) the last day of our fiscal year following the fifth anniversary of our IPO on July 25, 2012,
(b) the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more, (c) the date on which we have, during
the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (d) the date on which we are deemed to be a
“large accelerated filer,” which will occur at such time as we have (1) an aggregate worldwide market value of common equity
securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal
quarter, (2) been required to file annual, quarterly and current reports under the Exchange Act for a period of at least 12 calendar
months and (3) filed at least one annual report pursuant to the Exchange Act. As a result, we may qualify as an “emerging growth
company” until as late as September 30, 2017. At such time, our independent registered public accounting firm may issue a report that
is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. If our senior
management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of
such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s
assessment and the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are
identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on
our business and our stock price.

We are an “emerging growth company” and, although we do not now believe that investors have found our common stock
less attractive since our IPO as a result, we cannot be certain if the reduced disclosure requirements applicable to emerging growth
companies will make our common stock less attractive to investors in the future.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from
various reporting and other requirements that are applicable to other public companies that are not “emerging growth companies.” For
so long as we are an “emerging growth company,” we will, among other things:

• not be required to comply with the auditor attestation requirements of section 404(b) of Sarbanes-Oxley;

• not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of

the Exchange Act;

• not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to

Section 14A(b) of the Exchange Act;

• be exempt from any rule adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm

rotation or a supplemental auditor discussion and analysis; and

• be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

Although we do not now believe that investors have found our common stock less attractive since our IPO because we rely
on certain of these exemptions, we cannot predict if investors may in the future view our common stock less favorably as a result of
our “emerging growth company” status. If some investors in the future find our common stock less attractive as a result, there may be
a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or Securities Act, for complying with new
or revised accounting standards. An “emerging growth company” can delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies. However, we chose to “opt out” of such extended transition period, and as a
result, we have and will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is
required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended
transition period for complying with new or revised accounting standards is irrevocable.

Risks related to our stock

The market price of our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at

all.

The market price of our common stock is likely to fluctuate significantly from time to time in response to a number of
factors, most of which we cannot control, including those described under “—Risks related to our business” and the following:

• differences between our actual financial and operating results and those expected by investors;

• fluctuations in our quarterly operating results;

• market conditions in our industry and the economy as a whole;

• changes in our earnings guidance;

• a change in the recommendation by any research analyst that follows our stock or any failure to meet the estimates made by

research analysts;

• investor perceptions of our prospects and the prospects of the grocery and dietary supplement industries;

• the performance of our key vendors;

• announcements by us, our vendors or our competitors regarding performance, strategy, significant acquisitions, divestitures,

strategic partnerships, joint ventures or capital commitments;

• introductions of new product or new pricing policies by us or our competitors;

• failure to recruit or retain key personnel; and

• the level and quality of securities research analyst coverage for our common stock.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to

affect the market price of equity securities.

Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of

control or other business combination or otherwise cause us to take action with which you might not agree.

Members of the Isely family and certain persons, entities and accounts subject to a stockholders agreement relating to voting
and limitations on the sale of shares, own or control 57.6% of our common stock. Due to their holdings of common stock, members of
the Isely family are able to continue to determine the outcome of virtually all matters submitted to stockholders for approval, including
the election of directors, an amendment of our certificate of incorporation (except when a class vote is required by law), any merger or
consolidation requiring common stockholder approval, and a sale of all or substantially all of the Company’s assets. Members of the
Isely family have the ability to prevent change-in-control transactions as long as they maintain voting control of the Company. In

addition, members of the Isely family and trusts controlled by them entered into a stockholders agreement by which they agreed to
aggregate their voting power with regard to the election of directors.

In addition, because these holders have the ability to elect all of our directors, they are able to control our policies and

operations, including the appointment of management, future issuances of our common stock or other securities, the payments of
dividends on our common stock and entering into extraordinary transactions, and their interests may not in all cases be aligned with
your interests.

A substantial number of shares of our common stock are eligible for sale, and their sale could adversely affect our stock

price and could impair our ability to raise capital through the sale of equity securities.

If certain of our stockholders sell, or the market perceives that certain of our stockholders intend to sell, in the public market,

substantial amounts of our common stock, the market price of our common stock could decline significantly. These sales also might
make it more difficult for us to sell equity or equity related securities in the future at a time and price we deem appropriate. As of
December 9, 2013 we had a total of 22,442,389 shares of common stock outstanding. Of those, the 8,214,285 shares of common stock
issued in the IPO and the 226,341 shares that as of December 9, 2013 had been issued in connection with the vesting of restricted
stock units issued under the 2012 Omnibus Incentive Plan, are registered and freely tradable without restriction under the Securities
Act. The Company is aware that 34,947 shares have been sold, and 419,704 shares could be sold, in exempt transactions. Up to
approximately 13,547,112 additional shares of common stock could be sold, subject to compliance with the requirements of the
Securities Act and the stockholders agreement among members of the Isely family and certain persons, entities and accounts. The
market price of our common stock could drop significantly if the holders of restricted shares sell them or are perceived by the market
as intending to sell them. Also, in the future, we may issue shares of our common stock as a result of the vesting of up to 85,121
additional restricted stock units or in connection with investments or acquisitions. The amount of shares of our common stock issued
in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of our common
stock.

We do not anticipate paying dividends on our capital stock in the foreseeable future and capital appreciation may be your

sole source of potential gain.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their
recommendations regarding our stock or if our operating results do not meet their expectations, our stock price could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease to cover our company or fail to publish reports on us regularly, we may
lose visibility in the financial markets, which could cause our stock price or trading volume to decline. Moreover, if one or more of the
analysts who cover our company downgrades our stock, or if our operating results do not meet their expectations, our stock price
could decline.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in

control, even if a sale of the Company would be beneficial to our stockholders, which could cause our stock price to decline and
prevent attempts by our stockholders to replace or remove our current management.

Several provisions of our certificate of incorporation and amended and restated bylaws could make it difficult for our
stockholders to change the composition of our board, preventing them from changing the composition of management. In addition, the
same provisions may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable.

These provisions include:

• a staggered, or classified, board of directors;

• authorizing our board to issue “blank check” preferred stock without stockholder approval;

• prohibiting cumulative voting in the election of directors;

• limiting the persons who may call special meetings of stockholders;

• prohibiting stockholders from acting by written consent after the Isely family ceases to own more than 50% of the total

voting power of our shares; and

• establishing advance notice requirements for nominations for election to our board or for proposing matters that can be

acted on by stockholders at stockholder meetings.

These anti-takeover provisions could substantially impede the ability of our common stockholders to benefit from a change in

control and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any
potential change-in-control premium.

We are a “controlled company” within the meaning of the NYSE Listed Company Manual, and, as a result, rely on

exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

The Isely family, or entities controlled by the Isely family, own more than 50% of the total voting power of our common

shares for the election of directors, and therefore, we are considered a “controlled company” under the corporate governance standards
set forth in the NYSE Listed Company Manual. As a “controlled company,” certain exemptions under NYSE standards free us from
the obligation to comply with certain corporate governance requirements of the NYSE, including the requirements:

• that a majority of our board consists of “independent directors,” as defined under the rules of the NYSE;

• that our director nominees be selected, or recommended for our boards’ selection, either (1) by a majority of independent
directors in a vote by independent directors, pursuant to a nominations process adopted by a board resolution, or (2) by a
nominating and governance committee composed solely of independent directors with a written charter addressing the
nominations process; and

• that the compensation of our executive officers be determined, or recommended to the board for determination, by a

majority of independent directors in a vote by independent directors, or a compensation committee composed solely of
independent directors.

Accordingly, for so long as we are a “controlled company,” you will not have the same protections afforded to stockholders

of companies that are subject to all of the NYSE corporate governance requirements.

Our costs have increased significantly as a result of operating as a public company, and our management is required to

devote substantial time to complying with public company regulations.

Prior to our IPO in fiscal year 2012, we operated our business as a private company. As a public company, we have incurred
and will further incur additional legal, accounting, compliance and other expenses that we did not incur as a private company. We are
obligated to file with the SEC annual and quarterly reports and other reports that are specified in Section 13 and other sections of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, we have, and may in the future, become subject to
other reporting and corporate governance requirements, including certain requirements of the NYSE, and certain provisions of
Sarbanes-Oxley and the Dodd-Frank Wall Street Reform and Consumer Protection Act, (Dodd-Frank), which are imposing or will
impose significant compliance obligations upon us.

Sarbanes-Oxley and Dodd-Frank, as well as rules subsequently implemented by the SEC and the NYSE, have imposed

enhanced corporate governance and disclosure practices for public companies. Our efforts to comply with evolving laws, regulations
and standards in this regard have resulted and are likely to continue to result in increased administrative expenses and a diversion of
management’s time and attention from revenue generating activities to compliance activities. These changes have required and are
likely to continue to require a significant commitment of additional capital and resources. We may not be successful in implementing
these requirements, and implementing them could materially adversely affect our business, results of operations and financial
condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability
to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely
manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or
the NYSE. Any such action could harm our reputation and the confidence of investors and customers in our company and materially
adversely affect our business and cause our share price to fall.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

As of September 30, 2013, we had 72 stores located in 13 states, as shown in the chart below:

State
Arizona ...................................................................................
Colorado .................................................................................
Idaho .......................................................................................
Kansas ....................................................................................
Missouri ..................................................................................
Montana ..................................................................................
Nebraska .................................................................................
New Mexico ...........................................................................
Oklahoma ...............................................................................
Oregon ....................................................................................
Texas ......................................................................................
Utah ........................................................................................
Wyoming ................................................................................

Number
of Stores
3
31
1
4
1
4
3
4
2
4
12
1
2

In the fiscal years ended September 30, 2013 and 2012, we opened 13 and ten new stores, respectively. During fiscal year

2014, through the date of this report, we have opened three new stores in Tulsa, Oklahoma, Idaho Falls, Idaho and Wichita Falls,
Texas. We have signed leases for an additional nine of the 15 new stores expected to open in fiscal year 2014.

Our home office is located in Lakewood, Colorado. We occupy our home office under a lease for approximately 35,000
square feet that expires in 2026; this facility is co-located with one of our stores. Additionally, we have a bulk food repackaging
facility and distribution center located in Golden, Colorado.

All of our stores and facilities are leased, with varying terms and renewal options. Lease terms typically range between ten

and 20 years, with additional renewal options. We do not believe that any individual store property is material to our financial
condition or results of operations. Of the current leases for our stores, none expire in fiscal year 2014, two expire in fiscal year 2015,
five expire in fiscal year 2016, one expires in fiscal year 2017 and the remainder will expire between fiscal years 2018 and 2034. We
expect that we will be able to renegotiate these leases or relocate these stores as necessary.

In addition to new store openings, we remodel or relocate stores periodically in order to improve performance. For fiscal year

2014, we plan to remodel two stores.

Item 3. Legal Proceedings.

We periodically are involved in various legal proceedings that are incidental to the conduct of our business, including but not
limited to employment discrimination claims, customer injury claims and investigations. When the potential liability from a matter can
be estimated and the loss is considered probable, 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 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock has traded on the NYSE under the symbol “NGVC” since July 25, 2012, following the pricing of our

IPO. Prior to that date, there was no public market for our common stock.

Price Range of Our Common Stock

The following table shows the high and low sale prices per share of our common stock as quoted by the NYSE for the 2013

fiscal year periods and fourth quarter of fiscal year 2012 following the $15.00 pricing of our IPO on July 25, 2012:

Year ended September 30, 2013
First Quarter (October 1, 2012 – December 31, 2012) ...................
Second Quarter (January 1, 2013 – March 31, 2013) .....................
Third Quarter (April 1, 2013 – June 30, 2013) ...............................
Fourth Quarter (July 1, 2013 – September 30, 2013) .....................

High

Low

25.00
23.45
34.34
42.86

17.45
17.47
21.00
29.24

Year ended September 30, 2012
Fourth Quarter (from July 25, 2012 – September 30, 2012) ...........

High

Low

23.30

17.20

Holders of Record

As of September 30, 2013, there were 105 holders of record of our common stock, and the closing price of our common stock

was $39.70.

Dividend Policy

We anticipate that we will retain our future earnings, for the foreseeable future, in order to fund our growth strategy and for
general corporate purposes. The declaration and payment of future dividends to holders of our common stock will be at the discretion
of our board and will depend upon many factors, including our financial condition, earnings, legal requirements, and restrictions in our
debt agreements and other factors our board deems relevant. Additionally, the revolving credit facility to which we are a party under
which JPMorgan Chase Bank, N.A., or the bank, serves as the lender and administrative agent prohibits the payment of cash dividends
to Natural Grocers by Vitamin Cottage, Inc., the holding company, from Vitamin Cottage Natural Food Markets, Inc., the operating
company, without the bank’s consent except when no default or event of default exists. If no default or event of default exists,
dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable
expenses in the ordinary course of business.

Performance Graph

The graph below compares the cumulative return to shareholders of our common stock relative to the cumulative total returns
of the NYSE Composite Index and the S&P Food Retail Index from July 25, 2012 to September 30, 2013, which is the amount of time
our stock has been trading publicly following our IPO on July 25, 2012. The graph tracks the performance of a $100 investment in
our common stock and in each of the indexes from July 25, 2012 to September 30, 2013. The stock price performance included in this
graph is not necessarily indicative of future stock price performance.

Use of Proceeds From Registered Securities

None.

Unregistered Sales of Equity Securities

None.

Item 6. Selected Financial Data.

The following selected financial data presented below is derived from the Company’s consolidated financial statements and
should be read in conjunction with “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” Our historical results set forth below are not
necessarily indicative of results to be expected for any future period.

2013

2012

2011

2010

2009

Year ended September 30,

Statements of Income Data (dollars in

thousands):

Net sales ................................................................................................
Cost of goods sold and occupancy costs ................................

430,655
304,922
125,733
Gross profit ................................................................
89,935
Store expenses ................................................................
Administrative expenses ................................................................
13,479
3,231
Pre-opening and relocation expenses ................................
19,088

Operating income ................................................................

Other income (expense):
Interest expense ................................................................
Other income (expense), net ................................................................

(2,166)
9
16,931
Provision for income taxes ................................................................
(6,379)
10,552
—

Net income attributable to noncontrolling interest ................................

Net income ................................................................

Income before income taxes ................................

336,385
237,328
99,057
72,157
12,733
2,173
11,994

(568)
6
11,432
(3,955)
7,477
(828)

264,544
187,162
77,382
57,610
10,397
1,964
7,411

(669 )
35
6,777
(2,167 )
4,610
(1,106 )

226,910
159,797
67,113
47,162
9,631
1,293
9,027

(967)
3
8,063
(2,466)
5,597
(1,189)

206,080
145,937
60,143
41,992
8,619
1,236
8,296

(1,146)
(60)
7,090
(2,039)
5,051
(1,513)

Net income attributable to Natural Grocers by

10,552
Vitamin Cottage, Inc. ................................................................

6,649

3,504

4,408

3,538

2013

2012

2011

2010

2009

Year ended September 30,

Per Share Data:
Net income attributable to Natural Grocers by
Vitamin Cottage, Inc. per common share
Basic ................................................................................................
$
Diluted ................................................................ $

0.47
0.47

Shares used in computation of net income

attributable to Natural Grocers by Vitamin
Cottage, Inc. per common share
Basic ................................................................................................
Diluted ................................................................

22,399,346
22,441,382

Pro Forma Statements of Income Data
(Unaudited) (dollars in thousands)(1):

Income before income taxes ................................................................
Pro forma provision for income taxes ................................
Pro forma net income attributable to Natural

16,931
(6,379 )

0.30
0.30

0.16
0.16

0.20
0.20

0.16
0.16

22,372,184
22,463,093

22,372,184
22,461,405

22,372,184 22,372,184
22,461,405 22,461,405

11,432
(4,264)

6,777
(2,589 )

8,063
(2,892)

7,090
(2,592)

Grocers by Vitamin Cottage, Inc. ................................

10,552

7,168

4,188

5,171

4,498

Pro Forma Per Share Data (Unaudited)(2):
Pro forma net income per common share

Basic ................................................................................................
$
Diluted ................................................................ $

0.47
0.47

0.32
0.32

0.19
0.19

0.23
0.23

0.20
0.20

Other Financial Data (Unaudited) (dollars in

thousands):

EBITDA(3) ................................................................
$
EBITDA margin(4) ................................................................
Other Operating Data (Unaudited):
Number of stores at end of period ................................
Change in comparable store sales(5) ................................
Change in daily average comparable store

32,593

7.6%

72
10.8%

sales(5) ................................................................
11.1%
6.1%
Change in mature store sales(6) ................................
Change in daily average mature store sales(6) ................................
6.4
1,097,708
Gross square footage at end of period(7) ................................
Selling square footage at end of period(7) ................................
728,609
Average comparable store size (gross square

21,949
6.5

59
11.6

11.3
7.6
7.3
801,914
572,132

15,137
5.7

14,540
6.4

12,442
6.0

49
4.9

4.9
2.0
2.0
619,172
459,435

39
2.1

33
2.6

2.1
0.2
0.2
472,393
360,764

2.9
2.8
3.1
401,919
309,792

feet)(8) ................................................................

13,900

12,816

12,239

12,328

12,189

Average comparable store size (selling square

feet)(8) ................................................................

9,872

Comparable store sales per selling square foot

during period(9) ................................................................

729

9,458

734

9,284

9,483

9,640

720

730

773

2013

2012

2011

2010

2009

As of September 30,

Selected Balance Sheet Data (dollars in

thousands):

Cash and cash equivalents ................................................................
$ 8,132
Total assets ................................................................
159,903
19,822
Total debt(10) ................................................................
84,533
Total stockholders’ equity ................................................................

17,291
125,662
5,808
72,949

378
78,915
28,442
15,927

446
60,272
23,748
12,307

2,140
48,565
20,410
7,791

(1)

In connection with our IPO in the fourth quarter of fiscal year 2012, we purchased the 45% noncontrolling interest in BVC not
previously owned by us. Prior to the purchase of the noncontrolling interest, we held a controlling 55% interest in BVC for all
periods presented. As such, our consolidated statements of income include the revenues and expenses of BVC for the fiscal
years ended September 30, 2012, 2011, 2010 and 2009 as required by generally accepted accounting principles in the United
States of America (GAAP). We previously reported the 45% of BVC’s net income as net income attributable to noncontrolling

interest in our consolidated statements of income for the periods in which we did not own 100% of BVC. The pro forma
financial data presented above illustrates what our net income would have been had we owned 100% of BVC for the fiscal years
ended September 30, 2012, 2011, 2010 and 2009. Our effective tax rate increased as a result of the BVC acquisition, as the
income attributable to the noncontrolling interest was nontaxable income prior to the acquisition, but is included in our taxable
income after the acquisition. The following table reconciles our effective tax rate to our pro forma effective tax rate had we
owned 100% of BVC for the fiscal years ended September 30, 2012, 2011, 2010 and 2009:

2013

2012

2011

2010

2009

Year ended September 30,

Statutory tax rate .........................................
Nontaxable net income attributable to

34.0%

34.0

noncontrolling interest ............................

—

(2.7)

(6.2)

(5.3)

State income taxes, net of federal

income tax expense .................................
Other, net ....................................................
Effective tax rate .....................................
Pro forma adjustment to exclude nontaxable
net income attributable to noncontrolling
interest ....................................................
Pro forma effective tax rate ....................

3.3
0.4
37.7

—
37.7%

3.0
0.3
34.6

2.7
37.3

3.4
0.8
32.0

6.2
38.2

2.5
(0.6)
30.6

5.3
35.9

34.0

(7.7)

3.1
(0.6)
28.8

7.7
36.5

Effective October 31, 2012, BVC merged with and into our operating company and ceased to exist.

(2) Pro forma per share data is calculated using pro forma net income had we owned 100% of BVC for the fiscal years ended

September 30, 2012, 2011, 2010 and 2009, as discussed above, divided by basic and diluted weighted average shares outstanding
for those fiscal periods.

(3) Earnings before interest, taxes, depreciation and amortization, or EBITDA, is not a measure of financial performance under
GAAP. We define EBITDA as net income attributable to Natural Grocers by Vitamin Cottage, Inc. before interest expense,
provision for income tax, depreciation and amortization, and for the fiscal years ended September 30, 2012, 2011, 2010 and
2009, net income attributable to the noncontrolling interest. 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 measure in our debt covenants under the credit facility, and our incentive compensation plans base
incentive compensation payments on our EBITDA performance.

Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating
performance of companies in our industry. Management believes that 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 attributable to Natural Grocers
by Vitamin Cottage, Inc., we believe we are enhancing investors’ understanding of our business and our results of operations, as
well as assisting investors in evaluating how well we are executing our strategic initiatives. Our competitors may define
EBITDA differently, and as a result, our measure of EBITDA may not be directly comparable to EBITDA 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 our consolidated financial statements as
indicators of financial performance. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or
as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

• 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. We further believe that our presentation of this non-GAAP financial measurement provides
information that is useful to analysts and investors because it is an important indicator of the strength of our operations and the
performance of our business.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA, dollars in
thousands:

2013

Year ended September 30,
2011

2012

2010

2009

Net income attributable to

Natural Grocers by Vitamin
Cottage, Inc. ................................
$
Net income attributable to

noncontrolling interest ..............
Net income .......................................
Interest expense ............................
Provision for income taxes ...........
Depreciation and

10,552

—
10,552
2,166
6,379

6,649

828
7,477
568
3,955

3,504

1,106
4,610
669
2,167

4,408

1,189
5,597
967
2,466

3,538

1,513
5,051
1,146
2,039

amortization ..............................
$
EBITDA ...........................................

13,496
32,593

9,949
21,949

7,691
15,137

5,510
14,540

4,206
12,442

(4) EBITDA margin is defined as the ratio of EBITDA to net sales. We present EBITDA margin because it is used by management

as a performance measurement of EBITDA generated from net sales. See footnote (3) above for a discussion of EBITDA as a
non-GAAP financial measure and a reconciliation of net income to EBITDA.

(5) When calculating change in comparable store sales, we begin to include sales from a store in our comparable store base 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.
When calculating daily average comparable store sales, we include the 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.

(6) When calculating change in mature store sales, we begin to include sales from a store in our mature store base after the store has

been open for any part of five fiscal years (for example, our mature stores for fiscal year 2013 are stores that opened during or
before fiscal year 2008). 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. When calculating daily average mature store sales, we
include the 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 we are open during the comparable periods.

(7) Gross square footage and selling square footage at the end of the period include the square footage for all stores that were open

as of the end of the period presented.

(8) Average comparable store size for gross square feet and selling square feet are calculated using the average store size for all

stores that were in the comparable store base as of the end of the period presented.

(9) Comparable store sales per selling square foot is calculated using comparable store sales for the period divided by the weighted
average selling square feet per store based on the amount of time the store was included in the comparable store base during the
period.

(10) Total debt includes capital and financing lease obligations, notes payable to related parties, the outstanding principal balance of

our term loan and outstanding borrowings on our revolving credit facility. As of September 30, 2012, the term loan was fully
repaid. As of September 30, 2013, the notes payable to related parties was fully repaid. As of both September 30, 2013 and
September 30, 2102, no amounts were outstanding under our revolving credit facility.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be

read in conjunction with our consolidated financial statements and notes thereto and “Selected Financial Data,” which are included
elsewhere in this report on Form 10-K. This discussion and analysis contains forward-looking statements. Refer to “Forward-Looking
Statements” at the beginning of this report on Form 10-K for an explanation of these types of statements. 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
2013” refers to the year from October 1, 2012 to September 30, 2013). 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 believe we have been at the
forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado, and as of
September 30, 2013, we operated 72 stores in 13 states, including Colorado, Arizona, Idaho, Kansas, Missouri, Montana, Nebraska,
New Mexico, Oklahoma, Oregon, Texas, Utah and Wyoming, as well as a bulk food repackaging facility and distribution center in
Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The size of

our stores varies from 5,000 to 16,000 selling square feet. For the year ended September 30, 2013, our new stores averaged
approximately 11,500 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition has enabled us to

continue to open new stores and enter new markets. In fiscal year 2013, we opened 13 new stores, in each of fiscal years 2012 and
2011, we opened ten new stores, and in each of fiscal years 2010 and 2009, we opened six new stores. We currently plan to open 15
new stores in fiscal year 2014, three of which we opened in Oklahoma, Idaho and Texas between September 30, 2013 and the date of
the filing of this report on Form 10-K. As of the date of this report, we have signed leases for an additional nine new store locations
expected to open in fiscal year 2014 in Colorado, Idaho, Kansas, New Mexico, Oregon, Utah and Washington.

Performance Highlights

Key highlights of our recent performance are discussed briefly below and are discussed 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 $430.7 million for the year ended September 30, 2013, which is a $94.3 million, or 28.0%,

increase compared to net sales of $336.4 million for the year ended September 30, 2012. Net sales increased at a compound
annual growth rate of 27.6% from fiscal year 2011 to fiscal year 2013.

• Comparable store sales. Comparable store sales for the year ended September 30, 2013 increased 10.8% over the year
ended September 30, 2012. As of September 30, 2013, we have had over 45 consecutive quarters of positive comparable
store sales growth.

• Daily average comparable store sales. Daily average comparable store sales for the year ended September 30, 2013

increased 11.1% over the year ended September 30, 2012.

• Mature store sales. Mature store sales for the year ended September 30, 2013 increased 6.1% over the year ended
September 30, 2012. For fiscal year 2013, mature stores include all stores open during or before fiscal year 2008.

• Daily average mature store sales. Daily average mature store sales for the year ended September 30, 2013 increased 6.4%

over the year ended September 30, 2012.

• Net income. Net income was $10.6 million for the year ended September 30, 2013 which increased $3.1 million, or 41.1%,

when compared to net income of $7.5 million for the year ended September 30, 2012.

• Net income attributable to Natural Grocers by Vitamin Cottage, Inc. Net income attributable to Natural Grocers by

Vitamin Cottage, Inc. was $10.6 million for the year ended September 30, 2013, an increase of $3.9 million, or 58.7%,
when compared to net income attributable to Natural Grocers by Vitamin Cottage, Inc. of $6.6 million for the year ended
September 30, 2012.

• EBITDA. EBITDA was $32.6 million in the year ended September 30, 2013, which increased $10.6 million, or 48.5%,
from $21.9 million in the year ended September 30, 2012. EBITDA is not a measure of financial performance under
GAAP. Refer to the “Selected Financial Data” section of this report on Form 10-K for a definition of EBITDA and a
reconciliation of net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA.

• Liquidity. As of September 30, 2013, cash and cash equivalents was $8.1 million, restricted cash was $0.5 million,

available-for-sale securities was $1.1 million, and there was $15.0 million available under our $15.0 million revolving
credit facility.

• New store growth. We have opened 45 new stores since the beginning of fiscal year 2009, ending with 72 stores as of
September 30, 2013. We opened 13, ten and ten new stores in the years ended September 30, 2013, 2012 and 2011,
respectively. New store compound annual growth rate was 21.2% from fiscal year 2011 to fiscal year 2013.

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:

• 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 continued to open new stores, including 13 new stores
during the year ended September 30, 2013, and expanded into new geographies, including Oregon. 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, general economic conditions, and the amount of time it takes for the store to become
“mature”. New stores generally have lower sales compared to stores that have been open for longer than five years. Once a
new store is open, it typically grows at a faster rate than mature stores for several years after its opening date. Mature stores
are stores that have been open for any part of five fiscal years or longer.

In addition, as we expand across the U.S. 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 in the year ended September 30, 2013 and we anticipate these increased costs
continuing into the foreseeable future. Our financial results for the year ended September 30, 2013 reflect the effects of
these factors, and we anticipate future periods will be impacted likewise.

• Impact of broader economic trends. The grocery industry and our sales are affected by general economic conditions,

including, but not limited to, consumer spending, economic conditions, the level of disposable consumer income, consumer
debt, interest rates, the price of commodities, the political environment and consumer confidence. During the year ended
September 30, 2013, consumer confidence and consumer spending continued to increase, and these positive economic
trends were reflected in our results of operations during the year ended September 30, 2013. In the twelve months ended
September 30, 2013, 2012 and 2011 our comparable store sales grew 10.8%, 11.6% and 4.9%, respectively.

Outlook

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

We plan for the foreseeable future to continue opening new stores and entering new markets at or above recent levels of

growth. During the past few years, we have successfully expanded our infrastructure to enable us to support our continued growth.
This has included successfully implementing our ERP system, hiring key personnel and developing efficient, effective new store
opening construction and operations processes and relocating and expanding our bulk food repackaging facility and distribution center
in September of fiscal year 2012. We plan to implement a HRIS in fiscal year 2014 which we believe will allow us to more efficiently
and effectively onboard and train our employees at all locations.

We believe there are attractive opportunities for us to continue to expand our store base and focus on increasing comparable
store sales. As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as
administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to providing
high-quality products at affordable prices, such sourcing economies may not be reflected in our gross margin in the near term.
Additionally, higher fixed costs of our bulk food repackaging facility and distribution center resulting from the September 2012
relocation and expansion may not be offset by retail price changes or volume increases in the near term.

Our operating results may be affected by a variety of internal and external factors and trends described more fully in the

section “Risk Factors” contained elsewhere in this report on Form 10-K.

Key Financial Metrics in Our Business

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

Net sales

Our net sales are comprised of gross sales net of discounts, in-house coupons, returns and allowances. In comparing net sales

between periods we monitor the following:

• 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.

• 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. The year ended September 30, 2013 had one less selling day than the year
ended September 30, 2012 due to the occurrence of leap year in the year ended September 30, 2012.

• 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 2013 are stores that opened during or before
fiscal year 2008). 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. The year ended September 30, 2013 had one less selling day than the year ended September 30,
2012 due to the occurrence of leap year in the year ended September 30, 2012.

• Transaction count. Transaction count represents the number of transactions reported at our stores over such period and

includes transactions that are voided, return transactions and exchange transactions.

• Average transaction size. Average transaction 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 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 report on Form 10-K may not be identical to those of our
competitors, and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of sales
typically decrease as new stores mature and increase sales. We do not record straight-line rent expense in cost of goods sold and
occupancy costs for the leases classified as capital and financing lease obligations, but rather rent payments are recognized as a
reduction of the related obligations and as interest expense. Additionally, depreciation expense related to the capitalized asset is
recorded in store expenses.

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 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
capitalized real estate leases, land improvements, leasehold improvements, fixtures and equipment and computer hardware and
software. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store
relocations. The majority of store expenses are comprised of salary 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 certain 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.

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 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. We expect that our administrative expenses will continue to increase in future periods due to additional legal,
accounting, insurance, share-based compensation and other expenses we have incurred and will continue to incur as a result of being a
public company.

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.

Operating income

Operating income consists of gross profit less store expenses, administrative expenses and pre-opening and relocation
expenses. Operating income can be impacted by a number of factors, including the timing of new store openings and store relocations,
whether or not a store lease is classified as an operating or a capital or financing lease, as well as increases in store expenses and
administrative expenses. The amount of time it takes for new stores 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, general economic
conditions and the amount of time it takes a new store to become mature.

Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations. Interest expense also includes

interest we pay on our outstanding indebtedness, which includes our revolving credit facility and related party notes payable. As of
September 30, 2012, the term loan was fully repaid. As of September 30, 2013, the notes payable to related parties was fully repaid.
As of both September 30, 2013 and September 30, 2102, no amounts were outstanding under our revolving credit facility.

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:

Statements of Income Data:*
Net sales .........................................................................
Cost of goods sold and occupancy costs ........................
Gross profit .................................................................
Store expenses ................................................................
Administrative expenses ................................................
Pre-opening and relocation expenses .............................
Operating income .......................................................
Interest expense ..............................................................
Income before income taxes .......................................
Provision for income taxes .............................................
Net income .................................................................
Net income attributable to noncontrolling interest .........
Net income attributable to Natural Grocers by Vitamin
Cottage, Inc. ...........................................................

__________________________

*Figures may not sum due to rounding.

Other Operating Data:
Number of stores at end of period ...................................
Store unit count increase period over period ...................
Change in comparable store sales ...................................
Change in daily average comparable store sales .............
Change in mature store sales ...........................................
Change in daily average mature store sales .....................

Year ended September 30,
2012

2011

2013

100.0%
70.8
29.2
20.9
3.1
0.8
4.4
(0.5)
3.9
(1.5)
2.5
—

100.0
70.6
29.4
21.5
3.8
0.6
3.6
(0.2)
3.4
(1.2)
2.2
(0.2)

100.0
70.7
29.3
21.8
3.9
0.7
2.9
(0.3)
2.6
(0.9)
1.7
(0.4)

2.5%

2.0

1.3

72
22.0%
10.8%
11.1%
6.1%
6.4%

59
20.4
11.6
11.3
7.6
7.3

49
25.6
4.9
4.9
2.0
2.0

Year ended September 30, 2013 compared to the year ended September 30, 2012

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

thousands:

Year ended September 30,
2012
2013

Increase (Decrease)
Dollars

Percent

Statements of Income Data:
Net sales .............................................................................
Cost of goods sold and occupancy costs ............................
Gross profit ................................................................
Store expenses ....................................................................
Administrative expenses ....................................................
Pre-opening and relocation expenses .................................
Operating income .......................................................

430,655
304,922
125,733
89,935
13,479
3,231
19,088

336,385
237,328
99,057
72,157
12,733
2,173
11,994

94,270
67,594
26,676
17,778
746
1,058
7,094

28.0%
28.5
26.9
24.6
5.9
48.7
59.1

Other income (expense):

Dividends and interest income .......................................
Interest expense ..............................................................
Income before income taxes ......................................
Provision for income taxes .................................................
Net income .................................................................
Net income attributable to noncontrolling interest .............

Net income attributable to Natural Grocers by

Year ended September 30,
2012
2013

Increase (Decrease)
Dollars

Percent

9
(2,166)
16,931
(6,379)
10,552
—

6
(568)
11,432
(3,955)
7,477
(828)

3
(1,598)
5,499
(2,424)
3,075
828

50.0
281.3
48.1
61.3
41.1
(100.0)

Vitamin Cottage, Inc. .............................................

10,552

6,649

3,903

58.7%

Net sales

Net sales increased $94.3 million, or 28.0%, to $430.7 million for the year ended September 30, 2013 compared to $336.4

million for the year ended September 30, 2012 primarily due to a $58.2 million increase in new store sales and a $36.1 million, or
10.8%, increase in comparable store sales. Daily average comparable store sales increased 11.1% for the year ended September 30,
2013 as compared to the year ended September 30, 2012. The daily average comparable store sales increase was primarily driven by a
5.9% increase in daily average transaction count and a 4.9% increase in average transaction size. Comparable store average
transaction size was $35.96 in the year ended September 30, 2013 compared to $34.88 in the year ended September 30, 2012.

Gross profit

Gross profit increased $26.7 million, or 26.9%, to $125.7 million for the year ended September 30, 2013 compared to

$99.1 million for the year ended September 30, 2012 primarily driven by positive comparable store sales and new store growth. Gross
margin decreased to 29.2% for the year ended September 30, 2013 from 29.4% for the year ended September 30, 2012 due to a shift in
sales mix toward products with lower margins, partially offset by purchasing improvements. Additionally, there was a decrease in
product margin for bulk products due to increased production costs as a result of the relocation to a larger bulk food repackaging and
distribution center in September 2012. Occupancy costs as a percentage of sales for the year ended September 30, 2013 remained flat
as compared to the year ended September 30, 2012. For the year ended September 30, 2013, the Company had nine leases for stores
which were classified as capital and financing lease obligations, one of which was under construction as of September 30, 2013 and
opened in the first quarter of fiscal year 2014. For the year ended September 30, 2012, the Company had four leases for stores which
were classified as capital and financing lease obligations, two of which were opened in the fourth quarter of fiscal year 2012 and two
of which were under construction as of September 30, 2012 and opened in the first quarter of fiscal year 2013. If these leases had
qualified as operating leases, the straight-line expense would have been included in occupancy costs, and our costs of goods sold and
occupancy costs as a percentage of sales during the year ended September 30, 2013 would have been approximately 55 basis points
higher than as reported.

Store expenses

Store expenses increased $17.8 million, or 24.6%, to $89.9 million in the year ended September 30, 2013 from $72.2 million

in the year ended September 30, 2012. Store expenses as a percentage of sales were 20.9% and 21.5% for the years ended
September 30, 2013 and 2012, respectively. The decrease in store expenses as a percentage of sales was primarily due to a decrease in
salary related expenses as a percentage of sales, due to leverage from the increase in sales, as the increased salary related expenses
required to support the sales growth was less than the increase in sales. Advertising and other expense as a percentage of sales
decreased in fiscal year 2013 as compared to fiscal year 2012 due to leverage from the increase in sales, partially offset by an increase
in depreciation expense as a percentage of sales.

Administrative expenses

Administrative expenses increased $0.7 million, or 5.9%, to $13.5 million for the year ended September 30, 2013 compared

to the year ended September 30, 2012, primarily due to the increased costs as a result of being a public company for a full year in
fiscal year 2013, including $0.1 million of share-based compensation expense for shares issued to members of our Board of Directors,
and the addition of general and administrative positions to support our store growth. Additionally, administrative expenses include
$0.3 million and $1.4 million in share-based and IPO incentive compensation expense in the years ended September 30, 2013 and
2012, respectively, associated with awards granted in fiscal year 2012 related to our IPO and the portion of subsequent awards to
certain employees who are not named executive officers that were issued in the fourth quarter of fiscal year 2013. Administrative
expenses as a percentage of sales were 3.1% and 3.8% for the years ended September 30, 2013 and 2012, respectively. Excluding
share-based and IPO incentive compensation expenses noted above, exclusive of the share-based compensation expense for shares
issued to members of our Board of Directors, administrative expenses as a percentage of sales were 3.1% and 3.4% for the years
ended September 30, 2013 and 2012, respectively. The decrease in administrative expenses as a percentage of sales was a result of
our ability to support additional store investments and sales without proportionate investments in overhead.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $1.1 million, or 48.7%, in the year ended September 30, 2013 to $3.2 million

compared to the prior year due to the increased number of new store openings in fiscal year 2013, as well as the timing of new store
openings and increased per-store expenses, due to the Company entering into more expensive leases. Pre-opening and relocation
expenses as a percentage of sales were 0.8% and 0.6% for the years ended September 30, 2013 and 2012, respectively. The numbers
of stores opened, relocated and remodeled were as follows for the periods presented:

New stores ......................................................................
Relocated stores ..............................................................
Remodeled stores ...........................................................

Year ended September 30,
2012
2013

13
1
2
16

10
1
—
11

Interest expense

Interest expense increased $1.6 million, or 281.3%, in the year ended September 30, 2013 compared to the year ended

September 30, 2012 primarily due to a $2.1 million increase in interest expense related to capital and financing lease obligations,
partially offset by a $0.5 million decrease in interest expense due to the payoff of all outstanding amounts under the term loan and
revolving credit facility in July 2012 in conjunction with our IPO. If the capital and financing lease obligations had qualified as
operating leases, interest expense as a percent of sales in the year ended September 30, 2013 would have been approximately 50 basis
points lower than as reported.

Income taxes

Our effective income tax rate for the years ended September 30, 2013 and 2012 was 37.7% and 34.6%, respectively. The

increase in our effective income tax rate was due in part to changes in the blended state tax rates. In addition, due to the purchase of
BVC at the time of the IPO in fiscal year 2012, the Company no longer has net income attributable to noncontrolling interest.
Excluding the impact of BVC for fiscal year 2012, our tax rate for the year ended September 30, 2013 remained relatively consistent
with the year ended September 30, 2012. We expect our effective tax rate to increase in the future due to anticipated increases in
taxable net income, due in part to the impact of reversing past deductions for bonus depreciation.

Additionally, we anticipate that during the first quarter of fiscal year 2014, the Company will experience benefits from the

American Taxpayer Relief Act of 2012, which extended the 50% bonus depreciation on qualifying assets and the special 15 year life
for qualified leasehold property and qualified retail improvement property for property acquired from January 1, 2013 through
December 31, 2013. We expect that the Company will also benefit by the extension of the Work Opportunity Tax Credit through
December 31, 2013.

Net income attributable to noncontrolling interest

Net income attributable to noncontrolling interest decreased $0.8 million to zero for the year ended September 30, 2013 as
compared to the year ended September 30, 2012, due to the purchase of the remaining noncontrolling interest in BVC in July 2012.
As a result of the purchase, we acquired 100% of the equity interest in BVC. Effective October 31, 2012, BVC merged with and into
our operating company and ceased to exist.

Net income attributable to Natural Grocers by Vitamin Cottage, Inc.

Net income attributable to Natural Grocers by Vitamin Cottage, Inc. increased 58.7% to $10.6 million, or $0.47 per diluted

earnings per share, in the year ended September 30, 2013 from $6.6 million, or $0.30 per diluted earnings per share, in the year ended
September 30, 2012.

In connection with our IPO in the fourth quarter of fiscal year 2012, we purchased the 45% noncontrolling interest in BVC

not previously owned by us. Prior to the purchase of the noncontrolling interest, we held a controlling 55% interest in BVC. As such,
our consolidated statements of income for the years ended September 30, 2012 and 2011 include the revenues and expenses of BVC as
required by GAAP, with 45% of BVC’s net income reported as net income attributable to noncontrolling interest in our consolidated
statements of income for the years ended September 30, 2012 and 2011.

The pro forma net income presented below illustrates what our net income would have been had we owned 100% of BVC for
the full year ended September 30, 2012. On a comparative basis, pro forma net income increased 47.2% to $10.6 million or $0.47 per
diluted earnings per share for the year ended September 30, 2013 as compared to pro forma net income of $7.2 million, or $0.32 per
diluted earnings per share for the year ended September 30, 2012. Our effective tax rate increased as a result of the BVC acquisition,

as the income attributable to the noncontrolling interest was nontaxable income prior to the acquisition, but is included in our taxable
income after the acquisition.

Adjusted pro forma net income reflects pro forma net income and further excludes the after tax impact of share-based and incentive
compensation expenses related to the July 25, 2012 IPO and subsequent awards to certain employees who are not named executive
officers in the fourth quarter of fiscal year 2013. On a comparative basis, adjusted pro forma net income increased 35.0% to $10.9
million, or $0.48 per diluted earnings per share for the year ended September 30, 2013 as compared to adjusted pro forma net income
of $8.0 million, or $0.36 per diluted earnings per share for the year ended September 30, 2012.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to pro forma net income

and adjusted pro forma net income, dollars in thousands, except per share data:

Net income attributable to Natural Grocers by Vitamin

Year ended September 30,

2013

2012

Cottage, Inc. .............................................................................................

$
Net income attributable to noncontrolling interest ................................
Net income ................................................................................................
Provision for income taxes ................................................................
Income before income taxes ................................................................
Pro forma provision for income taxes ..........................................................
Pro forma net income ..................................................................................
Share-based compensation (excluding Board of Directors share-
based compensation) of $489 and $1,106, net of income taxes
of $184 and $412, respectively ................................................................

IPO incentive compensation of $0 and $286, net of income taxes

of $0 and $107, respectively ................................................................
Adjusted pro forma net income ................................................................

Per Share Data:
Adjusted pro forma net income per common share ................................
Basic ................................................................................................
$
$
Diluted ................................................................................................

10,552
—
10,552
6,379
16,931
(6,379)
10,552

305

—
10,857

0.48
0.48

6,649
828
7,477
3,955
11,432
(4,264)
7,168

694

179
8,041

0.36
0.36

Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial

measure of pro forma net income, together with a reconciliation from net income attributable to Natural Grocers by Vitamin Cottage,
Inc., as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the
performance of our business by comparing our results from ongoing operations period over period, and we believe this non-GAAP
measure provides investors with comparable data period over period to illustrate pro forma results had we owned 100% of BVC for all
periods presented, excluding the after tax impact of share-based compensation expense for our Chief Financial Officer and certain
employees who are not named executive officers. Our competitors may define this non-GAAP financial measure differently, and as a
result, our measure of pro forma net income may not be directly comparable to those of other companies. Items excluded from pro
forma net income are significant components in understanding and assessing financial performance. This non-GAAP measure 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. This non-GAAP financial measure has limitations as an analytical tool, and should not be considered in
isolation, or as a substitute for analysis of our results as reported under GAAP. We further believe that our presentation of this non-
GAAP financial measurement provides information that is useful to analysts and investors because they are important indicators of the
strength of our operations and the performance of our business.

EBITDA

EBITDA increased 48.5% to $32.6 million in the year ended September 30, 2013 compared to $21.9 million in the year
ended September 30, 2012. EBITDA as a percent of sales was 7.6% and 6.5% for the year ended September 30, 2013 and 2012,
respectively. Adjusted EBITDA (which excludes $0.5 million and $1.4 million for fiscal year 2013 and 2012, respectively, of share-
based and IPO incentive compensation expenses) increased 41.7% to $33.1 million for the year ended September 30, 2013 as
compared to $23.3 million for the year ended September 30, 2012. The stores with leases that are classified as capital and financing

lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 60
basis points for the year ended September 30, 2013, due to the impact on cost of goods sold and occupancy costs as discussed above,
as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening date if these leases had
been accounted for as operating leases.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA and to

Adjusted EBITDA, dollars in thousands:

Year ended September 30,
2012
2013

Net income attributable to Natural Grocers by Vitamin

Cottage, Inc. ...............................................................
Net income attributable to noncontrolling interest .....
Net income .....................................................................
Interest expense ..........................................................
Provision for income taxes .........................................
Depreciation and amortization ...................................
EBITDA .........................................................................
Share-based compensation (excluding Board of Directors
share-based compensation) ..........................................
IPO incentive compensation ...........................................
Adjusted EBITDA ..........................................................

10,552
—
10,552
2,166
6,379
13,496
32,593

489
—
33,082

6,649
828
7,477
568
3,955
9,949
21,949

1,106
286
23,341

For a discussion of our use of the non-GAAP financial measure EBITDA, please refer to the “Selected Financial Data”

section of this report on Form 10-K. For a discussion of our use of the non-GAAP financial measure Adjusted EBITDA, please refer
to the paragraph immediately preceding “Liquidity and Capital Resources” below in this “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” section of this report on Form 10-K.

Year ended September 30, 2012 compared to the year ended September 30, 2011

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

thousands:

Year ended September 30,
2011
2012

Increase (Decrease)
Dollars

Percent

Other income (expense):

Dividends and interest income .......................................
Interest expense ..............................................................
Other income, net ...........................................................
Income before income taxes ......................................
Provision for income taxes .................................................
Net income .................................................................
Net income attributable to noncontrolling interest .............

Net income attributable to Natural Grocers by

336,385
237,328
99,057
72,157
12,733
2,173
11,994

6
(568)
—
11,432
(3,955)
7,477
(828)

Vitamin Cottage, Inc. .............................................

6,649

Other Operating Data:
Number of stores at end of period ......................................
Store unit count increase period over period ......................
Change in comparable store sales ......................................

59
20.4%
11.6%

264,544
187,162
77,382
57,610
10,397
1,964
7,411

10
(669)
25
6,777
(2,167)
4,610
(1,106)

3,504

49
25.6
4.9

71,841
50,166
21,675
14,547
2,336
209
4,583

(4)
101
(25)
4,655
(1,788)
2,867
278

27.2%
26.8
28.0
25.3
22.5
10.6
61.8

(40.0)
(15.1)
n/a
68.7
82.5
62.2
(25.1)

3,145

89.8%

Net sales

Net sales increased $71.8 million, or 27.2%, to $336.4 million for the year ended September 30, 2012 compared to $264.5

million for the year ended September 30, 2011 due to a $41.3 million increase in new store sales and a $30.5 million, or 11.6%,
increase in comparable store sales. Daily average comparable store sales increased 11.3% for the year ended September 30, 2012 as
compared to the year ended September 30, 2011. The increase in comparable store sales was due to a 7.0% increase in transaction
count and a 4.3% increase in average transaction size at comparable stores. Comparable store average transaction size increased to
$34.88 in the year ended September 30, 2012 from $33.43 in the year ended September 30, 2011.

Gross profit

Gross profit totaled $99.1 million for the year ended September 30, 2012 compared to $77.4 million for the year ended

September 30, 2011. Cost of goods sold and occupancy costs increased $50.2 million, or 26.8%, to $237.3 million for the year ended
September 30, 2012 compared to $187.2 million for the year ended September 30, 2011 primarily due to an increase in cost of goods
sold and occupancy costs from new stores. Gross margin increased to 29.4% for the year ended September 30, 2012 from 29.3% for
the year ended September 30, 2011. Product margin remained relatively flat year over year with the increase in gross margin being
driven by a decrease in occupancy costs as a percentage of sales. The decrease in occupancy costs as a percentage of sales was driven
by leverage at comparable stores as a result of increased comparable store sales compared with fixed occupancy costs.

Store expenses

Store expenses increased $14.5 million, or 25.3%, to $72.2 million in the year ended September 30, 2012 from $57.6 million

in the year ended September 30, 2011. Store expenses as a percentage of sales were 21.5% and 21.8% for the years ended
September 30, 2012 and 2011, respectively. The decrease in store expenses as a percentage of sales was primarily due to a decrease in
salary related expenses as a percentage of sales, and to a lesser extent, a decrease in advertising expense, offset by an increase in
depreciation expense as a percentage of sales at new stores. Store labor related expenses as a percentage of sales decreased 30 basis
points for the year ended September 30, 2012 compared to the prior year, due to leverage from the increase in comparable store sales,
as the increased salary related expenses required to support the sales growth was less than the increase in sales. Direct store
advertising expense as a percentage of sales decreased as a result of decreased production costs as we began producing our Health
Hotline newsletter and sales flyer in-house in fiscal year 2012. This decrease in production costs was offset by an increase in the
volume of newspaper advertising as a result of entering new markets. Additionally, in fiscal year 2012, store expenses included $0.3
million in loss on disposal of fixed assets primarily associated with the relocation of one store.

Administrative expenses

Administrative expenses increased $2.3 million, or 22.5%, to $12.7 million for the year ended September 30, 2012 compared
to the year ended September 30, 2011, primarily due to a $1.1 million share-based incentive compensation expense and a $0.3 million
cash incentive compensation expense including payroll taxes, both associated with our IPO, as well as an increase in general and
administrative positions in fiscal year 2012 to support our store growth. Administrative expenses as a percentage of sales were 3.8%
and 3.9% for the years ended September 30, 2012 and 2011, respectively. Excluding the $1.4 million in share-based and IPO
incentive compensation expenses associated with our IPO, administrative expenses as a percentage of sales were 3.4% and 3.9% for
the years ended September 30, 2012 and 2011, respectively. The decrease in administrative expenses as a percentage of sales was a
result of our ability to support additional store investments and sales without proportionate investments in additional overhead.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $0.2 million, or 10.6%, in the year ended September 30, 2012 compared to the

prior year due to the timing of new store openings and number of store relocations period over period. Additionally, we moved our
bulk food repackaging and distribution center in fiscal year 2012. Pre-opening and relocation expenses as a percentage of sales were
0.6% and 0.7% for the years ended September 30, 2012 and 2011, respectively. The numbers of stores opened, relocated and
remodeled were as follows for the periods presented:

Year ended September 30,
2011
2012

10
1
—
11

10
—
1
11

Interest expense

Interest expense decreased $0.1 million, or 15.1%, in the year ended September 30, 2012 compared to the year ended
September 30, 2011 due to the payoff of all outstanding amounts under the term loan and revolving credit facility in July 2012. This
decrease was offset by an increase in interest expense as a result of interest related to two capital and financing lease obligations that
were entered into in fiscal year 2012 and resulted in less than $0.1 million in interest expense in the three months ended September 30,
2012.

Income taxes

Our effective income tax rate for the years ended September 30, 2012 and 2011 was 34.6% and 32.0%, respectively. The

increase in our effective income tax rate was primarily due to changes in nontaxable net income attributable to noncontrolling interest
and, to a lesser extent, different state income tax rates in the states where we operate and the mix of our earnings in those states.

Net income attributable to noncontrolling interest

Net income attributable to noncontrolling interest decreased $0.3 million, or 25.1%, in the year ended September 30, 2012

compared to the year ended September 30, 2011, as a result of the purchase of the remaining noncontrolling interest in BVC in
July 2012. As a result of the purchase, we now own 100% of BVC. Effective October 31, 2012, BVC merged with and into our
operating company and ceased to exist.

Net income attributable to Natural Grocers by Vitamin Cottage, Inc.

Net income attributable to Natural Grocers by Vitamin Cottage, Inc. increased 89.8% to $6.6 million in the year ended
September 30, 2012 from $3.5 million in the year ended September 30, 2011. Pro forma net income attributable to Natural Grocers by
Vitamin Cottage, Inc. (which illustrates net income as if we owned 100% of BVC for all periods presented) increased 71.2% to $7.2
million or $0.32 per diluted earnings per share. Adjusted pro forma net income attributable to Natural Grocers by Vitamin
Cottage, Inc. (which illustrates net income as if we owned 100% of BVC for all periods presented, excluding the after tax impact of
share-based and IPO incentive compensation expenses which were entirely contingent upon the completion of our IPO) increased
92.0% to $8.0 million for fiscal year 2012 with diluted earnings per share of $0.36.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to pro forma net income

and adjusted pro forma net income, dollars in thousands, except per share data:

Year ended September 30,

2012

2011

Net income attributable to Natural Grocers by Vitamin Cottage, Inc. ......... $
Net income attributable to noncontrolling interest ......................................
Net income ...................................................................................................
Provision for income taxes ..........................................................................
Income before income taxes ........................................................................
Pro forma provision for income taxes ..........................................................
Pro forma net income ..................................................................................
Share-based compensation of $1,106 and $0, net of income taxes

of $412 and $0, respectively ....................................................................

IPO incentive compensation of $286 and $0, net of income taxes of $107,

and $0, respectively .................................................................................
Adjusted pro forma net income ................................................................... $
Per Share Data:
Adjusted pro forma net income per common share ......................................

Basic ........................................................................................................ $
Diluted ..................................................................................................... $

6,649
828
7,477
3,955
11,432
(4,264)
7,168

694

179
8,041

0.36
0.36

3,504
1,106
4,610
2,167
6,777
(2,589)
4,188

—

—
4,188

0.19
0.19

EBITDA

EBITDA increased 45.0% to $21.9 million in the year ended September 30, 2012. Adjusted EBITDA (which excludes $1.4
million and $0 for fiscal year 2012 and 2011, respectively, of share-based and IPO incentive compensation expenses associated with
the IPO) increased 54.2% to $23.3 million for fiscal year 2012.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA and to

Adjusted EBITDA, dollars in thousands:

Year ended September 30,
2011
2012

Net income attributable to Natural Grocers by Vitamin

Cottage, Inc. ...............................................................
Net income attributable to noncontrolling interest .....
Net income .....................................................................
Interest expense ..........................................................
Provision for income taxes .........................................
Depreciation and amortization ...................................
EBITDA .........................................................................
Share-based compensation .............................................
IPO incentive compensation ...........................................
Adjusted EBITDA ..........................................................

6,649
828
7,477
568
3,955
9,949
21,949
1,106
286
23,341

3,504
1,106
4,610
669
2,167
7,691
15,137
—
—
15,137

Management believes that some investors’ understanding of our performance is enhanced by including these non-GAAP
financial measures of EBITDA and Adjusted EBITDA, Pro forma net income and Adjusted pro forma net income as a reasonable
basis for comparing our ongoing results of operations. Some investors are interested in understanding the performance of our business
by comparing our results from ongoing operations period over period and we believe these non-GAAP measures provide some
investors with comparable data period over period to illustrate pro forma results had we owned 100% of BVC for all periods presented
and to exclude expenses that were contingent upon the completion of our IPO. By providing these non-GAAP financial measures,
together with reconciliations from net income attributable to Natural Grocers by Vitamin Cottage, Inc., we believe we are enhancing
some investors’ understanding of our business and our results of operations, as well as assisting some investors in evaluating how well
we are executing our strategic initiatives. Our competitors may define these non-GAAP financial measures differently, and as a result,
our measure of EBITDA and Adjusted EBITDA, Pro forma net income and Adjusted pro forma net income may not be directly
comparable to those of other companies. Items excluded from EBITDA and Adjusted EBITDA, Pro forma net income and Adjusted
pro forma net income are significant components in understanding and assessing financial performance. These non-GAAP measures
are supplemental measures of operating performance that do not represent and should not be considered in isolation or as an
alternative to, or substitute for net income or other financial statement data presented in the consolidated financial statements as
indicators of financial performance. These non-GAAP financial measures have limitations as analytical tools, and should not be
considered in isolation, or as a substitute for analysis of our results as reported under GAAP. We further believe that our presentation
of these GAAP and non-GAAP financial measurements provide information that is useful to analysts and some investors because they
are important indicators of the strength of our operations and the performance of our business. For a discussion of our use of the non-
GAAP financial measure EBITDA, please refer to the “Selected Financial Data” section of this report on Form 10-K.

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents,
available-for-sale securities and borrowings under our revolving credit facility. Additionally, we received $58.1 million in proceeds,
net of underwriting fees, from our IPO in the fourth quarter of fiscal year 2012. The net proceeds of our IPO were used to repay our
term loan and all outstanding amounts under our revolving credit facility, purchase the noncontrolling interest in BVC, pay expenses
associated with the IPO and pay the cash portion of certain restricted stock awards issued at the date of our IPO.

Our primary uses of cash are for capital expenditures predominantly in connection with opening new stores and relocating

and remodeling certain existing stores, purchases of inventory, operating expense, debt service and corporate taxes. As of
September 30, 2013, we had $8.1 million in cash and cash equivalents, $0.5 in restricted cash and $1.1 million in available-for-sale
securities, as well as $15.0 million available under our revolving credit facility. On October 31, 2012, we amended our revolving
credit facility and reduced the amount of available credit to $15.0 million and reduced the unused commitment fee from 0.375% to
0.20%. On December 12, 2013, we entered into an amended and restated credit agreement that, among other things, extends the
maturity date of the Company’s existing revolving credit facility by three years to January 31, 2017, provides the Company with the
right to request the issuance of letters of credit, allows the Company to increase the amount available under the revolving credit
facility, which currently continues to be $15.0 million, up to an additional amount that may not exceed $10.0 million by obtaining an
additional commitment or commitments, and eliminates a requirement for a consolidated EBITDA to revenue ratio.

We plan to continue to open new stores, which has previously required and may require us to borrow additional amounts

under our revolving credit facility in the future. We plan to spend approximately $35 million to $37 million on capital expenditures
during fiscal year 2014. We believe that cash and cash equivalents and short-term investments, together with the cash generated from
operations and the borrowing availability under our revolving 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.

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

2013

Year ended September 30,
2012

2011

Net cash provided by operating activities .............
Net cash used in investing activities .....................
Net cash (used in) provided by financing activities

...........................................................................

Net (decrease) increase in cash and cash

25,717
(34,624 )

25,202
(25,558)

16,742
(20,512)

(252 )

17,269

3,702

equivalents ........................................................
Cash and cash equivalents, beginning of year ......
Cash and cash equivalents, end of year ................

(9,159 )
17,291
8,132

16,913
378
17,291

(68)
446
378

Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation

and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $0.5 million,
or 2.0%, to $25.7 million in the year ended September 30, 2013, from $25.2 million in the year ended September 30, 2012. The
increase in cash provided by operating activities was primarily due to an increase in net income, as adjusted for depreciation and
amortization resulting from the addition of new stores, offset by changes in working capital driven by the timing of payment on
inventory purchases. Our working capital requirements for inventory will likely continue to increase as we continue to open new
stores.

Cash provided by operating activities increased $8.5 million, or 50.5%, to $25.2 million in the year ended September 30,

2012 compared to $16.7 million in the year ended September 30, 2011. The increase in cash provided by operating activities period
over period was primarily due to an increase in net income adjusted for non-cash items and changes in working capital driven by
fluctuations in the timing of payment on accounts payable, accrued expenses and inventory purchases.

Investing Activities

Cash used in investing activities consists primarily of capital expenditures. Cash used in investing activities increased $9.1
million, or 35.5%, to $34.6 million in the year ended September 30, 2013 from $25.6 million in the year ended September 30, 2012.
The increase in capital expenditures from the year ended September 30, 2013 compared to the year ended September 30, 2012, was
primarily driven by the timing, increased costs and increased number of new stores opened during the year ended September 30, 2013.
The use of cash for capital expenditures was partially offset by an increase in proceeds from investing activities from the sale of
property and equipment of $5.0 million, primarily related to the sale of land and the respective building under a sale-leaseback
transaction. Additionally, we purchased $0.5 million in available-for-sale securities, offset by maturities of available-for-sale
securities of $1.0 million in the year ended September 30, 2013.

We opened 13 new stores in the year ended September 30, 2013, relocated one store and remodeled two stores. In addition,

we plan to open 15 new stores and remodel two stores in fiscal year 2014. Since September 30, 2013, we have opened three new
stores, and we have signed leases for an additional nine new stores expected to open in fiscal year 2014. We plan to spend
approximately $35 million to $37 million on capital expenditures during fiscal year 2014 in association with the 15 planned new stores
and two store remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately
$2.5 million per store.

Acquisition of property and equipment not yet paid decreased $1.5 million to $3.5 million in fiscal year 2013 compared to
fiscal year 2012 due to the timing of new store openings and relocations. We opened four new stores and relocated one store in the
fourth quarter of fiscal year 2013 compared to opening four new stores, relocating one store and moving our bulk food repackaging
and distribution center in the fourth quarter of fiscal year 2012.

Cash used in investing activities increased $5.0 million, or 24.6%, to $25.6 million in the year ended September 30, 2012
from $20.5 million in the year ended September 30, 2011 and is due to the timing of capital expenditures related to new stores and
relocation of one store, and the bulk food repacking and distribution center in fiscal year 2012, as well as the purchase of $1.8 million

in available-for-sale securities, offset by an increase in proceeds from the sale of property and equipment of $0.6 million, and $0.9
million received from payments on related party notes receivable and reimbursement of premiums paid on split-dollar life insurance.

Financing Activities

Cash used in financing activities consists primarily of payments of capital and financing lease obligations, repayments of

related party note payable and paid equity issuance costs for the year ended September 30, 2013. Cash used in financing activities was
$0.3 million for the year ended September 30, 2013, as compared to cash provided by financing activities of $17.3 million in the year
ended September 30, 2012. The cash provided by financing activities for the year ended September 30, 2012 included $58.1 million in
proceeds from our fourth quarter 2012 IPO, offset by $39.8 million use of proceeds for repayment of amounts outstanding under our
term loan and revolving credit facility, purchase of the noncontrolling interest in BVC and payment of expenses associated with the
IPO.

Cash provided by financing activities increased $13.6 million, or 366.4%, to $17.3 million in the year ended September 30,

2012 compared to $3.7 million in the year ended September 30, 2011. The increase in cash provided by financing activities period
over period is due to $58.1 million in proceeds received from our IPO, offset by $27.2 million in repayment of all amounts
outstanding under our term loan and revolving credit facility, $10.1 million used to purchase the noncontrolling interest in BVC and
$2.5 million in expenses paid in association with our IPO.

For the fiscal year ended September 30, 2013, we made no distributions to noncontrolling interests. For the fiscal years

ended September 30, 2012 and 2011, we made distributions of $0.8 million and $1.0 million, respectively, to noncontrolling interests.
Due to our acquisition of the 45% noncontrolling interest in BVC in connection with our IPO, these distributions ceased during fiscal
year 2012 and will not be incurred beyond fiscal year 2012.

Credit Facility and Note Payable—Related Party

Credit Facility

We are a party to a revolving credit facility. JPMorgan Chase Bank, N.A. serves as the lender and administrative agent under

the credit facility.

Effective October 31, 2012, we signed an amendment to the credit facility to reduce the amount available for borrowing
under the revolving credit facility to $15.0 million from $21.0 million and to reduce the unused commitment fee from 0.375% to
0.20%. The reduction in the unused commitment fee was retroactive to August 1, 2012. On December 12, 2013, we entered into an
amended and restated credit agreement, as further described in Item 8, Note 22, contained elsewhere in this report on Form 10-K.

The amount available under the revolving credit facility is $15.0 million. Prior to the amendment and restatement of the
credit facility noted above, the credit facility was scheduled to mature on June 30, 2014. We had no amounts outstanding on the
revolving credit facility at September 30, 2013 and $15.0 million available for borrowing as of September 30, 2013. Interest is
determined by the lender’s administrative agent and is stated at the adjusted LIBOR rate for the interest period plus the lender spread.
The average annual interest rates for the years ended September 30, 2013 and 2012 were 3.30% and 2.54%, respectively.

The term loan commitment associated with the revolving credit facility was initially set at $21.0 million. In July 2012, we

repaid all amounts outstanding under the term loan of $15.8 million. Prior to the payoff, we were required to make quarterly
payments of $0.1 million on the term loan. Interest was determined by the lender’s administrative agent and was stated at the base
rate for the interest period plus the applicable lender spread. The average annual interest rates for the years ended September 30, 2012
and 2011 were 2.02% and 2.19%, respectively.

The revolving credit facility requires compliance with certain operational and financial covenants (including a leverage ratio
and a fixed charge coverage ratio). The revolving credit facility also contains certain other limitations on our ability to incur additional
debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the agreement. Additionally,
the revolving credit facility prohibits the payment of cash dividends to the holding company from the operating company, without the
bank’s consent except when no default or event of default exists. If no default or event of default exists, dividends are allowed for
various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary
course of business. We do not expect such restrictions to impact our ability to meet our cash obligations. The terms and conditions of
the agreement for the revolving credit facility and associated documents are customary and include, among other things, guarantees,
security interest grants, pledges and subordinations. As of September 30, 2013 we were in compliance with the debt covenants.

Note Payable—Related Party

At September 30, 2012, we had one outstanding unsecured note payable to a related party, which bore interest at 5.33%

annually and had a scheduled maturity of October 2013. In May 2013, we paid the remaining outstanding balance of this note to The
Margaret A. Isely Spouse’s Trust. As of September 30, 2013, no further commitment remained under this note payable.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2013, dollars in thousands:

Interest payments (1) ....................................
Operating leases (2) .....................................
Capital and financing lease obligations,

including principal and interest payments
(3) .............................................................

Contractual obligations for construction

related activities (4) ..................................

Total

Less than
1 year

1 - 3 years

3 - 5 years

More than
5 years

Payments Due by Period

22
208,866

22
16,760

—
36,191

—
34,937

—
120,978

43,831

2,969

5,956

5,961

28,945

1,542
254,261

1,542
21,293

—
42,147

—
40,898

—
149,923

(1) We assumed the interest payments to be paid during the remainder of the revolving credit facility using an unused commitment

fee of 0.20% for amounts not borrowed as of September 30, 2013.

(2) Represents the minimum lease payments due under our operating leases, excluding annual common area maintenance, insurance

and taxes related to our operating lease obligations.

(3) Represents the payments due under our capital and financing lease obligations for nine stores, eight of which were open as of

September 30, 2013 and one that opened in the first quarter of fiscal year 2014. We do not record rent expense for these capital
leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease
obligations and interest expense.

(4) Contractual obligations for construction related activities include future payments to general contractors that are legally binding

as of September 30, 2013 and relate to new store construction, relocations and remodels.

Off-Balance Sheet Arrangements

As of September 30, 2013, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our

revolving credit facility. All of our stores, bulk food repackaging facility and distribution center and administrative facilities are
leased, and as of September 30, 2013, nine leases were classified as capital and financing lease obligations, and the remaining leases
were classified as operating leases in our consolidated financial statements. We have no other off-balance sheet arrangements that
have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial
condition.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,

No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 supersedes
the presentation requirements for reclassifications out of accumulated other comprehensive income in both ASU No. 2011-12 and
2011-05. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income
either on the face of the income statement or as a separate disclosure in the notes. Amounts that are not required to be reclassified in
their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This update is effective for our
first quarter of fiscal year 2014. We do not expect the adoption of this update to have a material effect on our consolidated financial
statements.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. 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.

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

Income Taxes

We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and

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

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained.

Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in
recognition or measurement are reflected in the period in which the change in judgment occurs.

Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax

assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is
uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities.
Although we believe that our estimates are reasonable, actual results could differ from these estimates.

To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our

reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax
settlement would require use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A
favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

Impairment of Long-Lived Assets

We assess our long-lived assets, principally property and equipment, for possible impairment at least annually, or whenever
events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability is measured by a
comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. We
aggregate long-lived assets at the store level which we consider to be the lowest level in the organization for which independent
identifiable cash flows are available. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted
cash flow basis, impairment is recognized to the extent the carrying value exceeds its fair value.

Our judgment regarding events or changes in circumstances that indicate an asset’s carrying value may not be recoverable is

based on several factors such as historical and forecasted operating results, significant industry trends and other economic factors.
Further, determining whether an impairment exists requires that we use estimates and assumptions in calculating the future
undiscounted cash flows expected to be generated by the assets. These estimates and assumptions look several years into the future
and include assumptions on future store revenue growth, potential impact of operational changes, competitive factors, inflation and the
economy. Application of alternative assumptions could produce materially different results.

Leases

We lease retail stores, a bulk food repackaging facility and distribution center, and administrative offices under long-term

operating, capital financing leases or capital leases. Accounting for leased properties requires compliance with technical accounting
rules and significant judgment by management. Application of these accounting rules and assumptions made by management will

determine whether the lease is accounted for as an operating lease, whether we are considered the owner for accounting purposes or
whether the lease is accounted for as a capital lease in accordance with ASC 840, Leases.

If the lease is classified as an operating lease, it is not recognized on our consolidated balance sheet, and rent expense,

including rent holidays and escalating payment terms, is recognized on a straight-line basis over the expected lease term.

If we are determined to be the owner for accounting purposes, we record the fair market value of the leased asset and a
related capital lease finance obligation on our consolidated balance sheet. The leased asset is then depreciated over the estimated
useful life of the asset. Rent payments for these properties are not recorded as rent expense, but rather rent payments are recognized
as a reduction of the capital lease finance obligation and as interest expense.

If the lease is classified as a capital lease, we record the present value of the minimum lease payments and a related capital

lease obligation on our consolidated balance sheet. The asset is then depreciated over the expected lease term. Rent payments for these
properties are not recorded as rent expense, but rather rent payments are recognized as a reduction of the capital lease obligation and
as interest expense.

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

• fair market value of the leased asset, which is generally estimated based on project costs or comparable market data. Fair
market value is used as a factor in determining whether the lease is accounted for as an operating or capital lease, and is
used for recording the leased asset when we are determined to be the owner for accounting purposes;

• expected lease term that includes contractual lease periods, and may also include the exercise of renewal options if the

exercise of the option is determined to be reasonably assured or where failure to exercise such options would result in an
economic penalty. The expected lease term is used as a factor in determining whether the lease is accounted for as an
operating lease or a capital lease and in determining the period over which to depreciate the capital lease asset ; and

• incremental borrowing rate which is estimated based on treasury rates for debt with maturities comparable to the expected
lease term and our credit spread and other premiums. The incremental borrowing rate is used as a factor in determining the
present value of the minimum lease payments which is then used in determining whether the lease is accounted for as an
operating lease or capital lease, as well as for allocating our rental payments on capital leases between interest expense and
a reduction of the outstanding obligation.

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

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

speculative purposes.

Interest Rate Risk

Our principal exposure to market risk relates to changes in interest rates with respect to our revolving credit facility. As of

September 30, 2013 we had no amounts outstanding on our credit facility. Our credit facility carries floating interest rates that are tied
to the one month LIBOR, and therefore, our statements of income and our cash flows are exposed to changes in interest rates. Based
upon a sensitivity analysis at September 30, 2013, a hypothetical 100 basis point change in interest rates would change our annual
interest expense by an insignificant amount in the year ended September 30, 2013.

Item 8. Financial Statements and Supplementary Data.

Natural Grocers by Vitamin Cottage, Inc.
Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm ................................................................................................
Consolidated Balance Sheets as of September 30, 2013 and 2012 ......................................................................................
Consolidated Statements of Income for the years ended September 30, 2013, 2012 and 2011 ...........................................
Consolidated Statements of Comprehensive Income for the years ended September 30, 2013, 2012 and 2011 .................
Consolidated Statements of Cash Flows for the years ended September 30, 2013, 2012 and 2011 ....................................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2013, 2012 and 2011 ...
Notes to Consolidated Financial Statements ........................................................................................................................

Page
Number

52
53
54
55
56
57
58

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Natural Grocers by Vitamin Cottage, Inc.:

We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries (the
Company) as of September 30, 2013 and 2012, and the related consolidated statements of income, comprehensive income, cash flows,
and changes in stockholders’ equity for each of the years in the three-year period ended September 30, 2013. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Natural Grocers by Vitamin Cottage, Inc. and subsidiaries as of September 30, 2013 and 2012, and the results of their operations and
their cash flows for each of the years in the three-year period ended September 30, 2013, in conformity with U.S. generally accepted
accounting principles.

Denver, Colorado
December 12, 2013

/s/ KPMG LLP

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)

September 30,

2013

2012

Current assets:

Assets

Cash and cash equivalents ....................................................................................................
Restricted cash .....................................................................................................................
Short term investments — available-for-sale securities ........................................................
Accounts receivable, net ......................................................................................................
Merchandise inventory .........................................................................................................
Prepaid expenses and other current assets ............................................................................
Deferred income tax assets ..................................................................................................
Total current assets ..........................................................................................................
Property and equipment, net ....................................................................................................
Other assets:

Long-term investments — available-for-sale securities .......................................................
Deposits and other assets .....................................................................................................
Goodwill and other intangible assets, net ............................................................................
Deferred financing costs, net ...............................................................................................
Total other assets ..............................................................................................................
Total assets .......................................................................................................................

Current liabilities:

Liabilities and Stockholders’ Equity

Accounts payable .................................................................................................................
Accrued expenses .................................................................................................................
Capital and financing lease obligations, current portion ......................................................
Note payable – related party, current portion .......................................................................
Total current liabilities .....................................................................................................

Long-term liabilities:

Capital and financing lease obligations, net of current portion ............................................
Deferred income tax liabilities .............................................................................................
Deferred rent .........................................................................................................................
Leasehold incentives .............................................................................................................
Note payable—related party, net of current portion .............................................................
Total long-term liabilities .................................................................................................
Total liabilities .................................................................................................................
Commitments (Notes 13 and 21) ..............................................................................................
Stockholders’ equity:

Common stock, $0.001 par value. Authorized 50,000,000 shares, 22,441,253 and

22,372,184 issued and outstanding, respectively .............................................................
Additional paid in capital .....................................................................................................
Accumulated other comprehensive loss ...............................................................................
Retained earnings .................................................................................................................
Total stockholders’ equity ................................................................................................
Total liabilities and stockholders’ equity .........................................................................

8,132
500
1,149
2,401
45,472
1,097
1,114
59,865
98,910

—
203
900
25
1,128
159,903

28,918
9,306
174
—
38,398

19,648
6,877
4,731
5,716
—
36,972
75,370

22
53,704
—
30,807
84,533
159,903

17,291
—
778
1,855
37,544
596
843
58,907
64,603

974
196
927
55
2,152
125,662

26,032
7,783
12
260
34,087

5,514
4,144
3,618
5,328
22
18,626
52,713

22
52,676
(4)
20,255
72,949
125,662

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income
(Dollars in thousands, except share and per share data)

Year ended September 30,
2012

2013

2011

Net sales ....................................................................................................
Cost of goods sold and occupancy costs ....................................................
Gross profit .......................................................................................
Store expenses............................................................................................
Administrative expenses ............................................................................
Pre-opening and relocation expenses ........................................................
Operating income ..............................................................................

Other income (expense):

Dividends and interest income ..............................................................
Interest expense .....................................................................................
Other income, net ..................................................................................
Total other expense ...........................................................................
Income before income taxes .............................................................
Provision for income taxes ........................................................................
Net income ........................................................................................
Net income attributable to noncontrolling interest ....................................

430,655
304,922
125,733
89,935
13,479
3,231
19,088

9
(2,166)
—
(2,157)
16,931
(6,379)
10,552
—

Net income attributable to Natural Grocers by
Vitamin Cottage, Inc. ........................................................................

10,552

336,385
237,328
99,057
72,157
12,733
2,173
11,994

6
(568)
—
(562)
11,432
(3,955)
7,477
(828)

6,649

264,544
187,162
77,382
57,610
10,397
1,964
7,411

10
(669)
25
(634)
6,777
(2,167)
4,610
(1,106)

3,504

Net income attributable to Natural Grocers by Vitamin Cottage, Inc. per

common share:

Basic .................................................................................................
Diluted ..............................................................................................

$
$

0.47
0.47

0.30
0.30

0.16
0.16

Weighted average common shares outstanding:

22,399,346
22,441,382

22,372,184
22,463,093

22,372,184
22,461,405

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Comprehensive Income
(Dollars in thousands)

Net income ................................................................................................
Other comprehensive income (loss), net of tax:

Unrealized gain (loss) on available-for-sale securities, net of tax

(expense) benefit ............................................................................
Other comprehensive income (loss) ...................................................
Comprehensive income ..............................................................................
Less: Comprehensive income attributable to noncontrolling interest ...

Comprehensive income attributable to Natural Grocers by

Year ended September 30,
2012

2013

2011

10,552

7,477

4,610

4
4
10,556
—

(4)
(4)
7,473
(828)

6,645

—
—
4,610
(1,106)

3,504

Vitamin Cottage, Inc. ........................................................................

10,556

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows
(Dollars in thousands)

2013

Year ended September 30,
2012

2011

Operating activities:

Net income ...............................................................................................................
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization .............................................................................
Loss (gain) on disposal of property and equipment .............................................
Share-based compensation (excluding cash portion of restricted stock award paid
of $0, $335 and $0, respectively) ....................................................................
Excess tax benefit from share-based compensation .............................................
Deferred income tax expense ...............................................................................
Non-cash interest expense ...................................................................................
Interest accrued on investments and amortization of premium .............................
Other amortization ...............................................................................................
Changes in operating assets and liabilities ............................................................

(Increase) decrease in:

Accounts receivable, net .............................................................................
Income tax receivable .................................................................................
Merchandise inventory ...............................................................................
Prepaid expenses and other assets ..............................................................

Increase in:

Accounts payable .......................................................................................
Accrued expenses .......................................................................................
Deferred rent and leasehold incentives .......................................................
Net cash provided by operating activities ..............................................

Investing activities:

Acquisition of property and equipment ....................................................................
Proceeds from sale of property and equipment ........................................................
Purchase of available-for-sale securities ..................................................................
Proceeds from sale of available-for-sale securities ....................................................
Proceeds from maturity of available-for-sale securities ............................................
Increase in restricted cash .........................................................................................
Payments received on notes receivable, related party ...............................................
Payments received for premiums paid on split-dollar life insurance ........................
Notes receivable, related party—insurance premiums .............................................
Increase in split-dollar life insurance premiums .......................................................
Net cash used in investing activities ......................................................

Financing activities:

Borrowings under credit facility ...............................................................................
Repayments under credit facility ..............................................................................
Repayments under notes payable .............................................................................
Repayments under notes payable, related party ........................................................
Capital and financing lease obligations payments ....................................................
Distributions to noncontrolling interests ..................................................................
Purchase of remaining 45% noncontrolling interest in BVC ....................................
Proceeds from common stock issued in initial public offering, net of commissions
Excess tax benefit from share-based compensation ..................................................
Equity issuance costs and BVC transaction costs .....................................................
Payments on withholding tax for restricted stock unit vesting ..................................
Loan fees paid ..........................................................................................................
Net cash (used in) provided by financing activities ...............................
Net (decrease) increase in cash and cash equivalents ............................
Cash and cash equivalents, beginning of year ...............................................................
Cash and cash equivalents, end of year .........................................................................
Supplemental disclosures of cash flow information:

Cash paid for interest, net of capitalized interest of $0, $25 and $21, respectively ..
Cash paid for interest on capital and financing lease obligations .............................
Income taxes paid .....................................................................................................

Supplemental disclosures of non-cash investing and financing activities:

Acquisition of property and equipment not yet paid .................................................
Property acquired through capital and financing lease obligations ...........................
Equity issuance costs not yet paid ............................................................................
Tax benefit associated with acquisition of noncontrolling interest in BVC ..............

10,552

13,496
43

602
(592)
2,452
47
27
26

(546)
(601)
(7,928)
105

4,480
2,283
1,271
25,717

(39,708)
5,005
(521)
90
1,010
(500)
—
—
—
—
(34,624)

81
(81)
—
(282)
(121)
—
—
—
592
(268)
(155)
(18)
(252)
(9,159)
17,291
8,132

7
2,036
3,916

3,545
14,372
—
—

See accompanying notes to consolidated financial statements.

7,477

9,949
301

780
(620)
2,673
38
(4)
68

283
1,489
(7,724)
(170)

6,860
2,561
1,241
25,202

(25,259)
608
(1,751)
—
—
—
270
660
(4)
(82)
(25,558)

—
(27,236)
—
(924)
—
(810)
(10,051)
58,135
620
(2,460)
—
(5)
17,269
16,913
378
17,291

524
39
519

5,007
5,526
256
3,592

4,610

7,691
(25)

—
—
3,938
50
—
68

56
(712)
(4,256)
76

2,108
849
2,289
16,742

(20,446)
35
—
—
—
—
—
—
(36)
(65)
(20,512)

5,847
(500)
(120)
(533)
—
(990)
—
—
—
—
—
(2)
3,702
(68)
446
378

615
—
12

2,055
—
—
—

NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Fiscal years ended September 30, 2013, 2012 and 2011
(Dollars in thousands, except per share data)

Common Stock – Vitamin Cottage Natural
Food Markets, Inc.

Class A

Class B

Common Stock –
NGVC, $0.001 par
value

Amount

Accumulated
other
comprehensive
(loss) income

Additional
paid in
capital

Natural
Grocers by
Vitamin

Retained
earnings

Cottage, Inc.
total equity

Noncontrolling
interest

Total
stockholders’
equity

— $

10,102

10,896 $

1,411 $

12,307

Balances September 30, 2010 ..........
Distributions to noncontrolling

interest ..................................
Net income attributable to Natural
Grocers by Vitamin Cottage,
Inc. .......................................

Net income attributable to

noncontrolling interest ..........
Balances September 30, 2011 ..........
Distributions to noncontrolling

interest ..................................

Net income attributable to

noncontrolling interest ..........
Accumulated other comprehensive
loss ........................................
Net income attributable to Natural
Grocers by Vitamin Cottage,
Inc. .......................................

Exchange of Vitamin Cottage

Natural Food Markets, Inc. stock
for common stock of Natural
Grocers by Vitamin Cottage,
Inc. .......................................

Purchase of noncontrolling

interest ...................................

Tax benefit of purchase of
noncontrolling interest
(Note 1) .................................
Shares issued upon consummation
of initial public offering, net of
$4,376 underwriter discounts
and commissions (Note 1) ....
Issuance costs .............................
Share-based compensation .........
Excess tax benefit of share-based
compensation ........................

Balances September 30, 2012

Net income attributable to Natural
Grocers by Vitamin Cottage,
Inc. .......................................
Accumulated other comprehensive
income ..................................
Issuance costs ..............................
Share-based compensation ..........
Excess tax benefit of share-based
compensation ........................
Balances September 30, 2013 ..........

Amount
1

1,000 $

—

—
1,000

—

—
1

—

625,112 $

—

—
625,112

—

793

—

—
793

—

—
—

—

(1,000)

(1 )

(625,112)

(793)

17,378,625

—

—
—
—

—
—

—

—
—
—

—
— $

—

—
—
—

—
—

—

—
—
—

—
—

—

—
—
—

—
—

—

—
—
—

—
— $

—

670,056

—

—
—
—

—
—

—

—
—
—

—
—

—

4,167,367
—
156,136

—
22,372,184

—

—
—
69,069

—

22,441,253 $

—

—
—

—

4
—
—

—
22

—

—
—
—

—

—
—

—

(4)

—

—
—
—

—
(4)

—

4
—
—

—

—
—

—

777

(8,507 )

3,592

58,131
(2,717 )
780

620
52,676

—

—
(12 )
448

—

(990)

(990 )

3,504

—
13,606

—

3,504

—
14,400

—

(4 )

6,649

—

1,106
1,527

(810)

828

—

3,504

1,106
15,927

(810 )

828

(4 )

6,649

—

(8,506 )

(1,545)

(10,051 )

3,592

—

3,592

—

—
—
—

—
20,255

58,135
(2,717 )
780

620
72,949

10,552

—
—
—

4
(12 )
448

—
—
—

—
—

—

—
—
—

58,135
(2,717 )
780

620
72,949

10,552

4
(12 )
448

—
22 $

—
— $

592
53,704 $

—
30,807

592
84,533 $

—
— $

592
84,533

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Consolidated Financial Statements
September 30, 2013 and 2012

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 and dietary supplements. The
Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage® with 72 stores as of September 30, 2013,
including 31 stores in Colorado, 12 in Texas, four each in Kansas, Montana, New Mexico and Oregon, three each in Arizona and
Nebraska, two each in Oklahoma and Wyoming, and one each in Idaho, Missouri and Utah, as well as a bulk food repackaging facility
and distribution center in Colorado. The Company had 59 and 49 stores as of September 30, 2012 and 2011, respectively.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The holding company was incorporated in Delaware on April 9, 2012. The accompanying consolidated financial statements

include all the accounts of the Company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating
company), Vitamin Cottage Two Ltd. Liability Company (VC2), Natural Systems, LLC and Boulder Vitamin Cottage Group, LLC
(BVC). The operating company formed the holding company in order to facilitate the purchase of the remaining noncontrolling
interest in BVC and consummation of the Company’s initial public offering (IPO) during fiscal year 2012. Prior to the Company’s
IPO on July 25, 2012, the Company had a majority 55% ownership of BVC. Prior to the settlement of the IPO, the Company issued
670,056 shares of stock in the holding company and paid approximately $10.1 million in cash to purchase the remaining 45%
noncontrolling interest in BVC. Prior to the merger, BVC owned five Natural Grocers by Vitamin Cottage retail stores, which were
managed by the operating company. Effective October 31, 2012, BVC merged with and into the operating company and ceased to
exist. All significant intercompany balances and transactions have been eliminated in consolidation.

Initial Public Offering

The holding company was incorporated in anticipation of the Company’s IPO. Prior to the IPO, the holding company was a

wholly owned subsidiary of the operating company. In connection with the Company’s IPO during the fourth quarter of fiscal year
2012, the Company completed a reorganization in which a) the existing shareholders of the operating company exchanged capital
stock of the operating company for shares of common stock of the holding company and b) the operating company purchased the
remaining 45% noncontrolling interest in BVC for a combination of cash and common stock of the holding company as described
above. The holding company’s only material asset is its direct 100% ownership in the operating company. On July 25, 2012, the
Company issued 4,167,367 shares to the public. Simultaneously with the IPO, certain selling shareholders sold 4,046,918 shares to
the public resulting in no additional proceeds to the Company. The total number of shares issued in the IPO was 8,214,285.

Based on the public offering price of $15.00, the Company received gross proceeds from the issuance of 4,167,367 shares

issued to the public in the IPO of approximately $62.5 million, and paid underwriting costs of 7%, or approximately $4.4 million, for
net proceeds of approximately $58.1 million. The Company also incurred issuance costs of approximately $2.7 million.

The Company accounted for the acquisition of the BVC noncontrolling interest, as described above, as an equity transaction.

Since the transaction was treated as an equity transaction, the transaction costs were also reflected as a reduction of equity and a
financing activity in the statement of cash flows for the year ended September 30, 2012. The Company recorded the issuance of the
670,056 shares in common stock at par value, reduced cash and cash equivalents by approximately $10.1 million, eliminated
approximately $1.5 million in noncontrolling interest on the balance sheet as of September 30, 2012, and recorded the remaining
amount as additional paid in capital. As a result of the acquisition of the remaining noncontrolling interest, the Company was entitled
to tax deductions to the extent of any step up in tax basis on the assets of BVC, limited to the cash consideration paid. Accordingly,
the tax basis in excess of book basis at the date of purchase resulted in deferred tax assets of approximately $3.6 million as of
September 30, 2012.

As of September 30, 2012, the Company used approximately $39.2 million of the net proceeds from the IPO to pay down all

outstanding amounts under the credit facility of approximately $26.4 million, pay the cash portion of the BVC purchase of
approximately $10.1 million, pay expenses associated with the IPO of approximately $2.4 million, and pay the cash portion of

restricted stock awards of approximately $0.3 million. For the year ended September 30, 2013, the Company used approximately $0.3
million of the proceeds to pay the remaining issuance costs associated with the IPO, and the remaining proceeds from the IPO of
approximately $18.6 million were used to fund working capital and for general corporate purposes.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of
America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for
self-insurance reserves, valuation of inventories, useful lives for depreciation and amortization of property and equipment, valuation
allowances for deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and
circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Information

The Company has one reporting segment, natural and organic retail stores. Financial Accounting Standards Board (FASB)

Accounting Standards Codification (ASC) Topic 280, Segment Reporting, establishes standards for reporting information about a
company’s operating segments.

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash totals $0.5 million as of September 30, 2013 and represents cash that was pledged in the second quarter 2013
as collateral for a standby letter of credit related to the Company’s workers’ compensation insurance. The Company elected to pledge
this cash as collateral for the letter of credit to reduce cost associated with its workers’ compensation insurance. There was no
restricted cash balance as of September 30, 2012.

Investments

Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses on available-for-sale
investments are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. A decline in
the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary for a period greater than two
fiscal quarters results in a reduction of the fair value. Declines in fair value deemed to be other-than-temporary are charged against
net earnings. Investments that have an original maturity date of less than one year are classified as short-term assets, and investments
that have an original maturity date greater than one year are classified as long-term assets.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, newsletter advertising

and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Vendor receivable balances are
generally presented on a gross basis separate from any related payable due. The Company evaluates the ability to collect the
receivables and believes the amounts appearing on the consolidated balance sheets to be fully collectible as of September 30, 2013 and
2012. Accordingly, no allowance for doubtful accounts has been recorded for the years ended September 30, 2013, 2012 and 2011.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments

in cash and cash equivalents, accounts receivable and investments in available-for-sale securities. The Company’s cash and cash
equivalent account balances, which are held in major financial institutions, exceeded the Federal Deposit Insurance Corporation’s
federally insured limits by approximately $4.2 million as of September 30, 2013.

Vendor Concentration

For the years ended September 30, 2013, 2012 and 2011, purchases from the Company’s largest vendor and one of its
subsidiaries represented approximately 55%, 53% and 53% of all product purchases made during the respective periods. However, the
Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material
disruption to operations.

Merchandise Inventory

Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the

preparation of inventory for sale including inventory overhead costs. Merchandise inventory is carried at the lower of cost or market.
Cost is determined using the weighted average cost method.

Property and Equipment

Property and equipment is stated at historical cost less accumulated depreciation. In accordance with FASB ASC

Topic 835, Interest, the Company capitalizes interest, if applicable, as part of the historical costs of leasehold improvements.
Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets.

Land improvements ...............................................................................................
Leasehold and building improvements ..................................................................
Capitalized real estate leases for build-to-suit stores ..............................................
Capitalized real estate leases .................................................................................
Fixtures and equipment .........................................................................................
Computer hardware and software ..........................................................................

Useful lives
(in years)
5 – 15
2 – 20
40
15
5 – 7
3 – 5

For land improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’

useful lives or the lease terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong
its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in
the year of disposition, and primarily relate to store relocations.

The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software

costs are included in property and equipment in the consolidated balance sheets and are amortized over the estimated useful lives of
the software. Software costs that do not meet capitalization criteria are expensed as incurred.

Fair Value of Financial Instruments

Level 1—
Level 2—

Level 3—

Inputs are unadjusted quoted prices for identical assets or liabilities in active markets;
Inputs include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for
the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Inputs are unobservable and are considered significant to the fair value measurement.

Transfers between levels of the fair value hierarchy are deemed to have occurred as of the date of the event or transfer.

Goodwill and Intangible Assets

Intangible assets primarily consist of goodwill, trademarks, favorable operating leases and covenants-not-to-compete.

Goodwill and the Vitamin Cottage® trademark have indefinite lives and are not amortized; rather, they are tested for impairment at
least annually. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the
reasonableness of the useful lives of these intangibles at least annually.

In accordance with ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350); Testing Goodwill for Impairment,

goodwill is reviewed for impairment at least annually. The Company’s annual impairment testing is performed as of September 30. In

performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and
circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If
it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not
necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then
the Company would perform the two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its
carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill
impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step
two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair
value of that goodwill. Thus far, the Company has recorded no impairment charges related to goodwill.

Impairment of Intangible and Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The
Company aggregates long-lived assets at the store level which the Company considers to be the lowest level in the organization for
which independent identifiable cash flows are available. If circumstances require a long-lived asset or asset group to be tested for
possible impairment, the Company first compares undiscounted cash flows expected to be generated by that store to its carrying value.
If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is
recognized to the extent that the carrying value exceeds its fair value. The Company considers factors such as historic and forecasted
operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory
factors in performing these analyses. Thus far, the Company has recorded no impairment charges related to intangible or long-lived
assets.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the

life of the borrowing or the life of the credit facility using the effective interest method.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under

long-term operating or capital and financing leases. These leases include scheduled increases in minimum rents and renewal
provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes
possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be
reasonably assured at the inception of the lease.

Operating leases

The Company accounts for operating leases with rent holidays and escalating payment terms by recognizing the associated

expense on a straight-line basis over the lease term. For certain leases, the Company has also received cash from landlords to
compensate for costs incurred by the Company in making the store locations ready for operation (leasehold incentives or tenant
allowances). Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent
expense over the lease term.

Capital financing leases

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution,
the Company analyzes its involvement during the construction period with respect to ASC Topic 840, Leases. As a result of defined
forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and
may be required to capitalize the project costs on its balance sheet. If the project costs are capitalized, the Company performs a sale-
leaseback analysis upon completion of the construction, pursuant to ASC Topic 840, Leases, to determine if the Company can remove
the assets from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains
recognized as an asset on the balance sheet, along with a corresponding capital lease financing obligation equal to the fair market
value of the building less any amount the Company contributed towards construction. The Company does not record rent expense for
the rental payments under capital financing leases, but rather rental payments under the capital financing lease obligations are
recognized as a reduction of the capital lease financing obligation and as interest expense. The capital lease asset is depreciated on a
straight line basis over a 40 year life for buildings and an indefinite life for land.

Capital leases

Also from time to time, the Company enters into leases that per ASC Topic 840, Leases, are deemed to be capital leases. On

these leases, the Company capitalizes the present value of the minimum lease payments and records a corresponding capital lease
obligation. The Company does not record rent expense for the rental payments under capital leases, but rather rental payments under
the capital lease obligations are recognized as a reduction of the capital lease obligation and as interest expense. The capital lease
asset is depreciated on a straight line basis over the term of the related lease.

Self-Insurance

The Company is self-insured for certain losses relating to employee medical, dental benefits and workers compensation.

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

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts, returns and allowances. Sales taxes are not

included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate
taxing jurisdiction. The Company records a deferred revenue liability within accrued expenses when it sells the Company’s gift cards
or issues gift cards to employees or for loyalty, award or promotional purposes, and records a sale when a customer redeems the gift
card. Generally, the gift cards do not expire. The Company currently does not record breakage for unused portions of gift cards.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances,

as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and
distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and
payments. Vendor consideration associated with product discounts is recorded as either a reduction of merchandise inventory or cost
of goods sold. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not
include any rent amounts for the store leases classified as capital and financing lease obligations (see Note 13).

Store Expenses

Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities,

depreciation, gain or loss on disposal of assets and other related costs associated with operations support. Store expenses also include
purchasing support services and advertising and marketing costs.

Administrative Expenses

Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office

supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.

Pre-Opening and Relocation Expenses

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

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening and relocation
expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2013,
2012 and 2011 were approximately $6.2 million, $5.1 million and $5.4 million, respectively, net of vendor reimbursements received
for newsletter advertising. Advertising expense reimbursements received from vendors totaled approximately $1.5 million, $1.3
million and $1.1 million for the years ended September 30, 2013, 2012 and 2011, respectively.

Share-Based Compensation

The Company adopted an Omnibus Incentive Plan in connection with the IPO on July 25, 2012. Restricted common stock

units are granted at the market price of the stock on the day of grant and expensed over the applicable vesting period.

The excess tax benefits for recognized compensation costs are reported as a credit to additional-paid-in capital and as

operating cash outflows, but only when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

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

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the

Company believes are more likely than not to be recovered.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being

sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although the Company
believes that its estimates are reasonable, actual results could differ from these estimates. In addition, the Company is subject to
periodic audits and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities.

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

tax purposes.

Noncontrolling Interest in Consolidated Financial Statements

Prior to the Company’s IPO on July 25, 2012, the Company had a majority 55% ownership of BVC which owned five

Natural Grocers by Vitamin Cottage retail stores managed by the operating company. Immediately prior to the IPO, the Company
issued common stock and paid cash to purchase the remaining 45% noncontrolling interest in BVC. Noncontrolling interest in the
Company’s consolidated financial statements relates to the noncontrolling 45% ownership in BVC prior to the purchase. Net income
attributable to noncontrolling interest and net income attributable to the Company are reported separately in the consolidated
statements of income and statements of comprehensive income.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU,

No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 supersedes
the presentation requirements for reclassifications out of accumulated other comprehensive income in both ASU No. 2011-12 and
2011-05. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income
either on the face of the income statement or as a separate disclosure in the notes. Amounts that are not required to be reclassified in
their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This update is effective for the
Company beginning in the first quarter of fiscal year 2014. The Company does not expect the adoption of this update will have a
material effect on its consolidated financial statements.

3. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income attributable to Natural Grocers by

Vitamin Cottage, Inc. stockholders by the weighted average shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if the Company’s granted but unvested restricted stock units were to vest, resulting in the
issuance of common stock that would then share in the earnings of the Company. Presented below is basic and diluted earnings per
share for the years ended September 30, 2013, 2012 and 2011, dollars in thousands, except share and per share data:

Net income attributable to Natural Grocers by

Vitamin Cottage, Inc. .......................................

10,552

6,649

3,504

2013

Year ended September 30,
2012

2011

Weighted average common shares

outstanding .......................................................
Effect of dilutive securities ...................................
Weighted average common shares outstanding

22,399,346
42,036

22,372,184
90,909

22,372,184
89,221

including effect of dilutive securities ...............

22,441,382

22,463,093

22,461,405

Basic earnings per share ........................................
Diluted earnings per share ....................................

$
$

0.47
0.47

0.30
0.30

0.16
0.16

The Company did not declare any dividends in the years ended September 30, 2013, 2012 and 2011.

As of September 30, 2013, the Company had 50,000,000 shares of common stock authorized and 22,441,253 shares issued

and outstanding, as well as 10,000,000 shares of preferred common stock authorized with none issued and outstanding.

4. Investments

The Company holds money market fund investments that are classified as cash and cash equivalents of approximately $0.5

million and $0.2 million as of September 30, 2013 and 2012, respectively.

The Company also had available-for-sale securities, generally consisting of certificates of deposit, corporate bonds and

municipal bonds totaling approximately $1.1 million and $1.8 million, of which approximately $1.1 million and $0.8 million were
classified as short-term as of September 30, 2013 and 2012, respectively. At September 30, 2013, the average maturities of the
Company’s short-term investments was approximately five months. At September 30, 2012, the average maturities of the Company’s
short-term and long-term investments were approximately eight and 17 months, respectively.

The Company established an investment policy in the fourth quarter of fiscal year 2012, with the objective to achieve

maximum yields on invested funds while protecting principal, as well as ensuring that funds will be available to meet operating cash
flow requirements. The investment policy establishes the type of investments that are acceptable, requires that each investment have a
certain high level of rating as established by Standard and Poor’s or Moody’s and limits the amount of any one investment that may be
held based on the market value of the total funds at the time of investment purchase. As of September 30, 2013 and 2012, the
Company’s investments in available-for-sale securities were in compliance with the Company’s investment policy.

During the years ended September 30, 2013 and 2012, the Company recorded insignificant amounts of interest income and

expense relating to amortized premiums paid. The Company had no money market fund investments or available-for-sale investments
as of September 30, 2011.

As of September 30, 2013, available-for-sale securities totaling approximately $1.1 million were in net unrealized gain

positions with an insignificant amount recorded in accumulated other comprehensive income for temporary increases in fair value,
consisting of five securities in gain positions and four securities in loss positions due to the amortization of premiums paid to acquire
the securities. As of September 30, 2012, available-for-sale securities totaling approximately $1.8 million were in net unrealized loss
positions with an insignificant amount recorded in accumulated other comprehensive income for temporary declines in fair value,
consisting of three securities in gain positions and nine securities in loss positions due to the amortization of premiums paid to acquire
the securities. There was no other-than-temporary impairment on available-for-sale securities as of September 30, 2013 or September
30, 2012.

5. Fair Value Measurements

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

The carrying amounts of financial instruments not included in the table below, including those cash and cash equivalents that

are not invested in money market funds, restricted cash, accounts receivable, accounts payable and other accrued expenses,
approximate fair value because of the short maturity of those instruments. The Company believes that the carrying values approximate
fair values of note payable- related party within all material respects, as the spread between the stated interest rate and market rates do
not cause a material difference in valuation, as well as the absence of credit risk on the instrument. As of September 30, 2013, the
entire balance of the note payable- related party had been paid.

As of September 30, 2013 and 2012, the Company had the following financial assets and liabilities that were subject to fair

value measurements according to the fair value hierarchy, dollars in thousands:

Cash and cash equivalents:

Money market fund ......................................

Investments — available-for-sale securities:

Certificates of deposit ..................................
Corporate bonds ...........................................
Municipal bonds ...........................................

Input
Level

Carrying
Amount

Fair Value

2013

2012

Carrying
Amount

Fair Value

As of September 30,

2
2
2

501

585
376
188

501

585
376
188

246

979
485
288

246

979
485
288

The money market fund and available-for-sale securities are carried at fair value. For debt securities for which quoted market
prices are not available, the fair value is determined using an income approach valuation technique that considers, among other things,
rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk. During the
years ended September 30, 2013 and 2012, the Company purchased approximately $0.5 million and $1.8 million, respectively, in
available-for-sale securities. During the years ended September 30, 2013 and 2012, available-for-sale securities of approximately $1.0
million and $0, respectively, matured, and available-for-sale securities of approximately $0.1 million and $0 million, respectively,
were sold, resulting in an increase in the money market fund (level 1) and a decrease in available-for-securities (level 2). During the
years ended September 30, 2013 and 2012, there were no transfers between levels and the Company had no level 3 assets. See Note 4
for additional disclosures.

6. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2013 and 2012, dollars in thousands:

Construction in process .................................
Capitalized real estate leases for build-to-suit
stores, including unamortized land of $617
and $600, respectively ...............................
Capitalized real estate leases .........................
Land improvements .......................................
Leasehold and building improvements ..........
Fixtures and equipment .................................
Computer hardware and software ..................

Less accumulated depreciation and

amortization ...............................................
Property and equipment, net ......................

Useful lives
(in years)
n/a

As of September 30,

2013
$ 5,421

2012

3,642

40
15
5 - 15
2 - 20
5 - 7
3 - 5

15,774
4,866
1,000
59,058
56,459
8,252
150,830

(51,920 )
98,910

5,205
—
832
45,438
41,830
6,697
103,644

(39,041)
64,603

Capitalized real estate leases include the assets for build-to-suit stores and buildings under capital leases as of September 30,

2013 and 2012, respectively (see Note 2 and Note 13).

Construction in process includes approximately $1.3 million and $1.9 million as of September 30, 2013 and 2012,
respectively, related to construction costs for build-to-suit leases in process for which the Company was deemed the owner during the
construction period.

Costs capitalized for computer software development for the years ended September 30, 2013 and 2012 were approximately

$0.1 million and $0.1 million, respectively, primarily due to capitalization of internal staff compensation. Total costs capitalized for
qualifying construction projects on leasehold and building improvements and fixtures and equipment includes approximately $0.4
million and $0.3 million, for the years ended September 30, 2013 and 2012, respectively, related to internal staff compensation.
Insignificant amounts of interest costs were capitalized for the year ended September 30, 2012. Amortization expense related to
capitalized internal staff compensation was approximately $0.3 million and $0.5 million for the years ended September 30, 2013 and
2012, respectively.

Depreciation and amortization expense for the years ended September 30, 2013, 2012 and 2011 is summarized as follows,

dollars in thousands:

2013

Year ended September 30,
2012

2011

Depreciation and amortization expense included in
cost of goods sold and occupancy costs ...........
Depreciation and amortization expense included in
store expenses ....................................................
Depreciation and amortization expense included in
administrative expenses ....................................
Total depreciation and amortization expense .....

709

12,365

422
13,496

436

8,710

803
9,949

449

6,403

839
7,691

7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2013 and 2012, are summarized as follows, dollars in thousands:

Useful lives
(in years)

As of September 30,

2013

2012

Amortizable intangible assets:

Covenants-not-to-compete ............................
Favorable operating lease .............................
Other intangibles ..........................................
Amortized intangible assets ......................
Less accumulated amortization ....................
Amortized intangible assets, net ...............
Trademark ........................................................
Total other intangibles, net .......................
Goodwill ...........................................................
Total goodwill and other intangibles,

net .........................................................

5.0
5.0
0.5

Indefinite

293
339
22
654
(654 )
—
389
389
511

900

293
339
22
654
(627)
27
389
416
511

927

Amortization expense was less than $0.1 million, approximately $0.1 million and $0.1 million for the years ended

September 30, 2013, 2012 and 2011, respectively. There is no scheduled amortization expense for the year ended September 30, 2014
as the Company’s amortized intangible assets are fully amortized as of September 30, 2013.

8. Accrued Expenses

The composition of accrued expenses as of September 30, 2013 and 2012, are summarized as follows, dollars in thousands:

Payroll and employee-related expenses .........................................
Accrued income, property, sales and use tax payable ...................
Deferred revenue related to gift card sales ....................................
Other ..............................................................................................
Total accrued expenses ..............................................................

5,247
2,686
625
748
9,306

4,413
2,197
556
617
7,783

As of September 30,

2013

2012

9. Deferred Financing Costs

The Company has capitalized costs incurred in securing its credit facility (see Note 10). Deferred financing costs, net of

accumulated amortization were less than $0.1 million and approximately $0.1 million as of September 30, 2013 and 2012,
respectively. Accumulated amortization was approximately $0.9 million and $0.8 million as of September 30, 2013 and 2012,
respectively.

Total amortization expense for deferred financing costs was less than $0.1 million for the years ended September 30, 2013
and 2012, respectively, and approximately $0.1 million for the year ended September 30, 2011. Scheduled amortization expense is
less than $0.1 million for the year ending September 30, 2014 at which time the deferred financing costs will be fully amortized.

10. Long-Term Debt

Credit Facility

The Company has a credit facility which consists of a revolving credit facility and had a term loan that was fully repaid in

fiscal year 2012 (see further discussion of the revolving credit facility and the term loan below). The operating company is the
borrower under the credit facility and its obligations under the credit facility are guaranteed by the holding company.

The credit facility requires compliance with certain operational and financial covenants including a leverage ratio and fixed

charge coverage ratio. The credit facility also contains certain other limitations on the Company’s ability to incur additional debt,
guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the credit facility agreement.
Additionally, the revolving credit facility prohibits the payment of cash dividends to the holding company from the operating
company, without the bank’s consent except when no default or event of default exists.

If no default or event of default exists dividends are allowed for various audit, accounting, tax, securities, indemnification,

reimbursement, insurance and other reasonable expenses in the ordinary course of business. The Company does not expect such
restrictions to impact its ability to meet cash obligations. The terms and conditions of the agreement for the revolving credit facility
and associated documents are customary and include, among other things, guarantees, pledges and subordinations. At September 30,
2013 and 2012, the Company was in compliance with the debt covenants.

On December 12, 2013, the Company entered into an amended and restated credit agreement. See Note 22 for further

discussion.

Revolving Credit Facility

On October 31, 2012, the Company amended the agreement governing the revolving credit facility to decrease the credit

facility limit from $21.0 million to $15.0 million and to lower the unused commitment fee to 0.20% from 0.375%. The reduction in
the unused commitment fee was retroactive to August 1, 2012. The credit facility was scheduled to mature on June 30, 2014 before the
Company entered into the amended and restated credit facility (see Note 22). The Company may borrow, prepay and re-borrow
amounts under this revolving credit facility at any time prior to the maturity date.

The Company had no amounts outstanding on its revolving credit facility as of September 30, 2013 and 2012. During the

year ended September 30, 2013, the Company had approximately $0.1 million drawn on the revolving credit facility, for one day.
Proceeds from the Company’s IPO on July 25, 2012 were used to pay off outstanding amounts under the revolving credit facility of
$10.6 million. Interest is determined by the lender’s administrative agent and is stated at the adjusted LIBOR rate for the interest
period plus the lender spread. The average annual interest rate for the years ended September 30, 2013, 2012 and 2011 was 3.30%,
2.54% and 2.38%, respectively.

Term Loan

The Company had no amounts outstanding under the term loan as of September 30, 2013 and 2012. Proceeds from the

Company’s IPO on July 25, 2012 were used to prepay the then outstanding amount under the term loan of $15.8 million. The
Company cannot borrow additional amounts on the term loan and as such had no activity under the term loan in the fiscal year ended
September 30, 2013. Interest was determined by the lender’s administrative agent and was stated at the alternate base rate for the
interest period plus the applicable lender spread. The average interest rate for the years ended September 30, 2012 and 2011 was
approximately 2.02% and 2.19%, respectively.

Capital and Financing Lease Obligations

The Company has nine leases that are included in capital and financing lease obligations (see Notes 2 and 13). The Company

does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized
as a reduction of the capital and financing lease obligation and as interest expense (see Note 13).

Interest

The Company incurred gross interest expense of approximately $2.2 million, $0.6 million and $0.7 million in the years ended
September 30, 2013, 2012 and 2011, respectively. Interest expense for the year ended September 30, 2013 relates primarily to interest
on capital and financing lease obligations. Interest expense for the years ended September 30, 2012 and 2011 relates primarily to
interest for activity under the credit facility, including amortization of deferred financing costs. The Company did not capitalize any
interest for the year ended September 30, 2013 and had insignificant amounts of interest capitalized for the years ended September 30,
2012 and 2011.

11. Note Payable—Related Party

As of September 30, 2012, the Company had an unsecured note payable, bearing interest at 5.33% annually with an
outstanding balance of approximately $0.3 million. The balance of the note payable – related party was fully repaid during fiscal year
2013.

12. Split-Dollar Life Insurance Premiums—Related Party

The Company had an agreement with a related party trust that owned a split-dollar life insurance policy dated January 1,

1994, on Philip Isely. One of the semiannual policy premium payments was paid by the Company each year. Additionally, the
Company entered into a note receivable on August 16, 2004, with the co-trustees of the related party trust whereby the Company had
agreed to pay the other semiannual policy premium due each policy year. The agreement stated that when the policy was paid, the
Company would be repaid the premiums paid plus interest at 2.5% per annum. The Company entered into a collateral assignment with
the related party trust whereby the split-dollar life insurance policy was held as collateral security for its advances for premiums paid
to date.

On June 14, 2012, the Company entered into an agreement with Zephyr Isely, Kemper Isely and Heather C. Isely, as co-

trustees of The Philip and Margaret A. Isely Joint Trust Number One to terminate and cancel the split-dollar life insurance agreement,
the collateral assignment, the loan agreement and related promissory note effective with the payment by the co-trustees/trust of all
outstanding sums payable to the Company. As of June 14, 2012, the outstanding amounts were approximately $0.7 million for the
premiums paid under the split-dollar life insurance agreement and $0.2 million for the premiums paid and interest accrued per the loan
agreement for a total receivable to the Company of $0.9 million. On June 15, 2012, the trust repaid this amount in full, and consistent
with the original terms of the agreement, the Company has no further arrangements with the related parties or the trust and no further
obligations to pay the split-dollar life insurance policy premiums or any death benefit.

13. Lease Commitments

Operating Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under
long-term operating leases through 2033. These leases include scheduled increases in minimum rents and renewal provisions at the
option of the Company. Deferred rent expense as of September 30, 2013 and 2012 was approximately $4.7 million and $3.6 million,
respectively. Tenant improvement allowances received from landlords (leasehold incentives) are recorded as liabilities and recognized
evenly as a reduction to rent expense over the lease term. Leasehold incentives at September 30, 2013 and 2012 were approximately
$5.7 million and $5.3 million, respectively.

The Company has seven leases with Chalet Properties, LLC (Chalet), one lease with the Isely Family Land Trust LLC and

one lease with 3801 East Second Avenue LLC, all related parties (see Note 16). The terms and rental rates of these related party leases
are similar to leases with nonrelated parties and are at market rental rates. The leases began at various times with the earliest occurring
in November 1999, continue for various terms through February 2027 and include various options to renew. Present annual lease
payments range from less than $0.1 million to approximately $0.3 million per lease.

The future minimum annual commitments under the terms of the Company’s operating leases having initial or remaining

terms in excess of one year as of September 30, 2013 are as follows, dollars in thousands:

Third
parties

Related
parties

Total Operating
Leases

2014 ..................................................
2015 ..................................................
2016 ..................................................
2017 ..................................................
2018 ..................................................
Thereafter .........................................

15,110
16,578
16,326
15,883
15,784
108,861
188,542

1,650
1,654
1,633
1,635
1,635
12,117
20,324

16,760
18,232
17,959
17,518
17,419
120,978
208,866

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2013, 2012 and

2011 totaled approximately $14.8 million, $12.1 million and $9.9 million, respectively, which is included in cost of goods sold and
occupancy costs and administrative expenses in the consolidated statements of income. In addition, approximately $0.6 million, $0.5
million and $0.4 million is included in pre-opening and relocation expense associated with rent expense for stores that had not yet
opened for the years ended September 30, 2013, 2012 and 2011, respectively.

For the year ended September 30, 2013, the Company completed one sale-leaseback transaction with an unrelated party for

proceeds of approximately $5.0 million, with a gain on the sale of approximately $0.2 million which has been deferred and will be
amortized over the initial lease term. Concurrent with the sale, the Company entered into an agreement to lease the property back
from the purchaser over an initial lease term of 15 years. The Company classified the lease as operating and considers the transaction
as a normal leaseback under the provisions of ASC Topic 840, Leases, with no other continuing involvement.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of September 30, 2013 and 2012, are as follows, dollars in thousands:

As of September 30,

2013

2012

Capital lease finance obligations, due in monthly installments

through fiscal year 2028 and 2027, respectively ................................

13,746

4,181

Capital lease obligations due in monthly installments through fiscal

year 2028 ................................................................................................

4,792

—

Capital lease finance obligation for assets under construction, due in

monthly installments through fiscal year 2028 and 2027,
respectively ................................................................................................

1,284

Total capital and financing lease obligations .................................................

19,822

1,345

5,526

Less current portion .............................................................................................

(174 )

(12 )

Total capital and financing lease obligations, net of current

$
portion ................................................................................................

19,648

5,514

Capital lease finance obligations

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution,
the Company analyzes its involvement during the construction period with respect to ASC Topic 840, Leases. As a result of defined
forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and
would be required to capitalize construction costs on its balance sheet. If the project costs were capitalized, the Company performs a
sale-leaseback analysis upon completion of the project to determine if the Company can remove the asset from its balance sheet. If
the asset cannot be removed from the balance sheet, the fair market value of the building remains on the balance sheet along with a
corresponding capital lease finance obligation equal to the fair market value of the building less any amounts the Company
contributed toward construction. The Company had capital lease finance obligations totaling approximately $13.7 million and $4.2
million as of September 30, 2013 and 2012, respectively. The leases that created the obligations expire or become subject to renewal
clauses at various dates through fiscal year 2028. The Company does not record rent expense for capital lease finance obligations, but

rather rent payments per the leases are recognized as a reduction of the related capital lease finance obligation and as interest expense.
Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At
the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and capital lease finance
obligation will be de-recognized.

Capital lease obligations

The Company had capital lease obligations totaling approximately $4.8 million as of September 30, 2013. The Company had
no capital lease obligations as of September 30, 2012. Per ASC Topic 840, Leases, certain of the Company’s leases for store locations
are considered capital leases, and as such, the Company has capitalized the present value of the minimum lease payments under the
leases for the stores and recorded related capital lease obligations. The leases that created the obligation expire or become subject to
renewal clauses at various dates through fiscal year 2028. The Company does not record rent expense for capital lease obligations,
but rather rent payments per the leases are recognized as a reduction of the related capital lease obligation and as interest expense.
Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income.

Capital lease finance obligation for assets under construction

As of September 30, 2013, the Company has recorded approximately $1.3 million for construction in process and

approximately $1.3 million in capital lease finance obligations for assets under construction. Once construction is complete, the
Company expects to be deemed to have continuing involvement and to capitalize any additional costs of construction. As of
September 30, 2012, the Company had recorded approximately $1.9 million for construction in process and approximately $1.3
million in capital lease finance obligations. The Company will not record rent expense for these leases, but rather rental payments
under the leases will be recognized as a reduction of the capital lease finance obligation and as interest expense. Depreciation expense
for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease
term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease finance obligation will be
de-recognized.

Future payments for capital lease finance obligations and capital lease obligations

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, 2013 are as follows, dollars in thousands:

Interest
expense on
capital lease
finance
obligations

Principal
payments on
capital lease
finance
obligations

Interest
expense on
capital lease
obligations

Payments on
capital lease
obligations

Total future
payments on
capital lease
finance and capital
lease obligations

2014 ...............................................................
2015 ...............................................................
2016 ...............................................................
2017 ...............................................................
2018 ...............................................................
Thereafter ................................
$

1,979
1,971
1,961
1,950
1,938
16,386
26,185

51
59
69
79
99
3,402
3,759

681
667
650
631
608
3,597
6,834

120
134
151
170
192
4,025
4,792

2,831
2,831
2,831
2,830
2,837
27,410
41,570

Future payments under the terms of the lease for the store location at which construction was in progress as of September 30,

2013, based on the store opening date in the first quarter of fiscal 2014, is as follows, dollars in thousands:

Interest expense on
capital lease
finance obligation
for assets under
construction
2014 ................................................................................................
2015 ................................................................................................
2016 ................................................................................................
2017 ................................................................................................
2018 ................................................................................................
Thereafter ................................................................

135
134
133
131
129
1,132
1,794

Payments on
capital lease
finance obligation
for assets under
construction
3
13
14
16
18
403
467

Future
payments under terms of
capital lease finance
obligation for assets
under construction

138
147
147
147
147
1,535
2,261

14. Stockholders’ Equity

The Company did not pay dividends during the years ended September 30, 2013, 2012 or 2011.

15. Share-Based Compensation

The Company adopted an Omnibus Incentive Plan (the Plan) on July 17, 2012. Restricted stock unit awards granted pursuant

to the Plan, if they vest, will be settled in shares of the Company’s common stock. At the adoption of the Plan, there were 1,090,151
shares of common stock available for issuance or delivery under the Plan, of which 751,889 remain available for grants as of
September 30, 2013. The Plan provides for awards of options, stock appreciation rights, stock grants, restricted stock units, other
share-based awards and cash-based incentive awards to officers, board members and key employees and consultants. As of September
30, 2013, only restricted stock units had been granted under the Plan, at no out-of-pocket cost to officers, board members and key
employees. Except as described below with respect to the Chief Financial Officer, these restricted stock units vest subject to requisite
service requirements, immediately in part or annually in terms over a one-to-four year period. The award recipients are not entitled to
cash dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture during the vesting
period. Restricted stock units are granted at the market price of the Company’s stock on the day of grant and are expensed on a
straight-line basis over the vesting period.

The shares of non-vested restricted stock units as of September 30, 2013 were as follows:

Non-vested as of September 30, 2011 .............
Granted ............................................................
Forfeited .........................................................
Vested .............................................................
Non-vested as of September 30, 2012 ............
Granted ...........................................................
Forfeited ..........................................................
Vested ..............................................................
Non-vested as of September 30, 2013 .............

— $

269,351
—
(178,442 )
90,909
68,911
(204 )
(73,563 )
86,053

Weighted average
grant date fair value
—
1.41
—
1.32
1.66
32.87
34.07
7.25
21.80

As of September 30, 2012, the Company had issued restricted stock unit awards to its Chief Financial Officer and a member
of the Board of Directors (Board). The restricted stock grant to the Chief Financial Officer (CFO Award) was in accordance with the
terms of her employment agreement that was signed in June 2008 which stated she was entitled to receive a grant of restricted stock
units equal to 1.2% of the fully diluted shares of the Company in connection with an IPO. Two thirds of the CFO Award vested
immediately upon completion of the IPO and was settled in a combination of common stock and cash. The remaining one third,
which has vested or will vest in three equal parts over a six, 12 and 18 month period following the IPO, have been or are to be settled
100% in shares of common stock. Per ASC Topic 718, Stock Compensation, the occurrence of the IPO was deemed a performance
condition, and therefore no expense for fiscal year 2012 was recorded until the performance condition was deemed probable (i.e. the
closing of the IPO). Upon completion of the IPO in the fourth quarter of fiscal year ended September 30, 2012, the Company
recorded the entire expense associated with the two thirds of the CFO Award that vested immediately, the portion that was settled in
common shares was equity classified and expensed at the grant date fair value and the portion that was settled in cash was liability
classified and expensed at the market value on the date of the IPO. The remaining one third of the CFO Award was valued at the
grant date fair value, once the performance condition was deemed probable (occurrence of the IPO) a portion of the expense relating
to the vesting period that had already expired (June 2008 to July 25, 2012) was expensed, and the remaining amount was or will be
expensed ratably over vesting period.

Each independent member of the Company’s Board is granted a number of non-vested stock units under the Plan equal to the

number of shares of common stock having a value of $50,000 (based on the closing price of common stock on the New York Stock
Exchange on the date of grant), which is granted each year on the date of the Company’s annual meeting of stockholders, or a pro rata
portion in the case of a mid-year appointment.

The Company recorded total share-based compensation expense before income taxes of approximately $0.6 million and $1.1

million in the years ended September 30, 2013 and 2012, respectively. No share-based compensation expense was recorded in the
year ended September 30, 2011. The share-based compensation expense is included in cost of goods sold and occupancy expenses,
store expenses or administrative expenses in the consolidated statements of income consistent with the manner in which the applicable
officer, board member or key employee’s compensation expense is recorded. As of September 30, 2013, there was approximately

$1.6 million of unrecognized share-based compensation expense related to non-vested restricted stock units, net of estimated
forfeitures, which the Company anticipates will be recognized over a weighted average period of approximately four years.

16. Related Party Transactions

The Company has ongoing relationships with related entities as noted:

3801 East Second Avenue, LLC: The Company has one operating lease (see Note 13) for a store location with 3801 East

Second Avenue LLC, an entity owned by the Margaret A. Isely Family Trust. The trust is controlled by Kemper Isely, Zephyr Isely
and Heather Isely, who act as its trustees. Rent paid to 3801 East Second Avenue LLC was less than $0.1 million for each of the years
ended September 30, 2013, 2012 and 2011.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 13) for a store location with the Isely Family
Land Trust LLC (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 $0.3 million for each of the years ended September 30, 2013, 2012 and 2011.

Chalet: The Company has seven operating leases (see Note 13) with Chalet. Chalet is owned by four of the Company’s non-
independent board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent
paid to Chalet was approximately $1.3 million, $1.5 million and $1.2 million for the years ended September 30, 2013, 2012 and 2011,
respectively.

17. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2013, 2012 and 2011, respectively,

dollars in thousands:

2013

Year ended September 30,
2012

2011

Current federal income tax expense

(benefit) ....................................................... $

Current state income tax expense (benefit) .....

Deferred federal income tax ............................
Deferred state income tax ................................

3,376
551
3,927

2,156
296
2,452

Total provision for income taxes ................. $

6,379

1,102
180
1,282

2,339
334
2,673

3,955

(1,547)
(224)
(1,771)

3,425
513
3,938

2,167

The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate are as follows:

Statutory tax rate ...........................................
Nontaxable income attributable to

noncontrolling interest ...............................

State income taxes, net of federal income tax

expense ......................................................
Other, net .......................................................
Effective tax rate .......................................

2013

Year ended September 30,
2012

2011

34.0 %

—

3.3
0.4
37.7 %

34.0

(2.7)

3.0
0.3
34.6

34.0

(6.2)

3.4
0.8
32.0

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

Current assets ..........................................................................
Long-term liabilities ................................................................
Net deferred tax liabilities ...................................................

1,114
(6,877)
(5,763)

843
(4,144)
(3,301)

As of September 30,

2013

2012

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities

are as follows, dollars in thousands:

As of September 30,

2013

2012

Deferred tax assets ...............................................................
Capital and financing lease obligations ...........................
Goodwill and BVC related intangibles ............................
Leasehold incentives .......................................................
Deferred rent ...................................................................
Trademarks ......................................................................
Accrued employee benefits .............................................
Other ................................................................................
Intangible assets - other ...................................................
Gross deferred tax assets .............................................
Deferred tax liabilities ..........................................................
Property and equipment ...................................................
Leasehold improvements .................................................
Favorable operating lease ................................................
Gross deferred tax liabilities ........................................
Net deferred tax liabilities ...........................................

7,553
3,209
2,179
1,803
1,024
728
386
80
16,962

(20,497)
(2,228)
—
(22,725)
(5,763)

2,052
3,377
1,978
1,344
998
515
329
88
10,681

(11,960)
(2,012)
(10)
(13,982)
(3,301)

Prior to the purchase of the noncontrolling interest in BVC in connection with the IPO (see Note 2), BVC was treated as a

partnership under the Internal Revenue Code and similar state statutes; therefore, no provision or liability for federal or state income
taxes related to the noncontrolling interest in BVC was included in the consolidated financial statements for the years ended
September 30, 2012 and prior. The deferred tax amounts for the Company’s book versus tax basis in its 55% interest of BVC was
reflected in the consolidated tax provision as outside basis in BVC for the year ended September 30, 2012, prior to acquisition and for
the years ended September 30, 2011 and prior. Following the purchase of the noncontrolling interest in BVC, income from BVC is
treated as taxable income to the Company and included in the provision for federal and state income taxes. As a result of the
acquisition of the remaining noncontrolling interest, the Company is entitled to tax deductions to the extent of any step up in tax basis
on the assets of BVC, limited to the cash consideration paid. Additionally, for tax purposes, in the year ended September 30, 2012,
the Company recorded the noncontrolling interest purchase by stepping up acquired fixed asset balances by approximately $0.8
million to reflect fair market value and recorded additional intangibles of approximately $9.2 million. Accordingly, the tax basis in
excess of book basis at the date of purchase resulted in deferred tax assets of approximately $3.6 million.

The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future

deductions based on the nature of the deductible temporary differences and expected future taxable income.

As of September 30, 2013 and 2012, the Company had approximately $0.1 million and $0.2 million, respectively, in tax

effected operating loss carryforwards related to state income taxes. The Company utilized less than $0.1 million in tax effected state
income tax carryforwards in the year ended September 30, 2012, and will utilize less than $0.1 million in tax effected state income tax
carryforwards in the year ended September 30, 2013.

The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is
no longer subject to federal income tax examinations for fiscal years 2011 and prior and is no longer subject to state and local income
tax examinations for fiscal years 2008 and prior.

The American Taxpayer Relief Act of 2012 was enacted in January 2013. The impact of the new law has been recognized in

the period of enactment. The primary impact affecting the Company is the extension of the 50% bonus depreciation on qualifying
assets and the special 15 year depreciation life for qualified leasehold property and qualified retail improvement property for property
acquired from January 1, 2013 through December 31, 2013. The Company may also benefit from the American Taxpayer Relief Act
of 2012 and by the extension of the Work Opportunity Tax Credit through December 31, 2013.

18. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who

meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of
Section 401(k) of the Internal Revenue Code. Employees may defer up to the annual maximum limit prescribed by the Internal
Revenue Code. The Company, on a discretionary basis, matches 25% of participant contributions up to a maximum annual employer

match of $2,500. The Company’s matching contribution included in administrative expenses was approximately $0.4 million, $0.3
million and $0.3 million for the years ended September 30, 2013, 2012 and 2011, respectively.

19. Segment Reporting

The Company has one reporting segment, natural and organic retail stores. The Company’s revenues are derived from the

sale of natural and organic products at its stores. All existing operations are domestic.

Sales from the Company’s natural and organic retail stores are derived from sales of the following products which are

presented as a percentage of sales for the years ended September 30, 2013, 2012 and 2011 as follows:

Grocery ..........................................................
Dietary supplements ......................................
Other ..............................................................

2013

As of September 30,
2012

2011

65.2 %
24.8
10.0
100.0 %

62.7
27.0
10.3
100.0

59.8
29.3
10.9
100.0

20. Selected Quarterly Financial Data (Unaudited)

The summarized quarterly financial data presented below reflect all adjustments, which in the opinion of management, are of

a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

Summarized unaudited quarterly financial data for fiscal year is as follows, dollars in thousands, except per share data:

Fiscal Year Ended September 30, 2013

Three months ended

December 31,
2012

March 31,
2013

June 30,
2013

September 30,
2013

Net sales ......................................................................
Cost of goods sold and occupancy costs .....................
Gross profit .........................................................
Store expenses.............................................................
Administrative expenses .............................................
Pre-opening and relocation expenses ..........................
Operating income ................................................

Other income (expense):

Dividends and interest income ................................
Interest expense .......................................................
Total other expense .............................................
Income before income taxes ...............................
Provision for income taxes ..........................................
Net income ..........................................................
Net income attributable to noncontrolling interest ......
Net income attributable to Natural Grocers by

95,831
67,994
27,837
20,203
3,326
519
3,789

2
(255)
(253)
3,536
(1,315)
2,221
—

Vitamin Cottage, Inc. ......................................

2,221

Basic earnings per share(1) ........................................
Diluted earnings per share(1) .....................................

0.10
0.10

106,485
74,668
31,817
22,163
3,342
796
5,516

2
(401)
(399)
5,117
(1,900)
3,217
—

3,217

0.14
0.14

113,164
80,571
32,593
23,181
3,242
961
5,209

3
(610)
(607)
4,602
(1,716)
2,886
—

2,886

0.13
0.13

115,175
81,689
33,486
24,388
3,569
955
4,574

2
(900)
(898)
3,676
(1,448)
2,228
—

2,228

0.10
0.10

Fiscal Year Ended September 30, 2012

Three months ended

December 31,
2011

March 31,
2012

June 30,
2012

September 30,
2012

Net sales .....................................................................
Cost of goods sold and occupancy costs ....................
Gross profit ........................................................
Store expenses ............................................................
Administrative expenses ............................................
Pre-opening and relocation expenses .........................
Operating income ...............................................

74,839
53,240
21,599
16,440
2,712
427
2,020

84,907
59,223
25,684
18,028
2,813
427
4,416

86,707
61,307
25,400
18,199
2,760
458
3,983

89,932
63,558
26,374
19,490
4,448
861
1,575

Fiscal Year Ended September 30, 2012

Three months ended

December 31,
2011

March 31,
2012

June 30,
2012

September 30,
2012

Other income (expense):

Dividends and interest income ...............................
Interest expense ......................................................
Total other expense ............................................
Income before income taxes ..............................
Provision for income taxes .........................................
Net income .........................................................

Net (income) loss attributable to noncontrolling

interest ....................................................................
Net income attributable to Natural Grocers by

Vitamin Cottage, Inc. .....................................

Basic earnings per share .............................................
Diluted earnings per share .........................................

21. Commitments and Contingencies

Self-Insurance

1
(175)
(174)
1,846
(586)
1,260

(270)

990

0.04
0.04

3
(155)
(152)
4,264
(1,487)
2,777

(292)

2,485

0.11
0.11

1
(144)
(143)
3,840
(1,300)
2,540

(339)

2,201

0.10
0.10

1
(94)
(93)
1,482
(582)
900

973

0.04
0.04

The Company is self-insured for claims under its health benefit plans, subject to a stop loss policy. The self-insurance

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

Legal

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

22. Subsequent Events

Effective December 12, 2013, the Company entered into an amended and restated credit agreement that, among other things,

extends the maturity date of the Company’s existing revolving credit facility by three years to January 31, 2017, provides the
Company with the right to request the issuance of letters of credit, allows the Company to increase the amount available under the
revolving credit facility, which continues to be $15.0 million, up to an additional amount that may not exceed $10.0 million by
obtaining an additional commitment or commitments, and eliminates a requirement for a consolidated EBITDA to revenue ratio.

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

None.

Item 9A. Controls and Procedures.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in

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

•

pertain to the maintenance of records that, in a reasonable detail, accurately and fairly reflect the dispositions of our
transactions and assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated
financial statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition
of our assets that could have a material adverse effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,

projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have assessed the effectiveness of our internal control over financial reporting as of September 30, 2013 using the criteria

described in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment of the design and related testing of the internal control over financial reporting, management
has concluded that, as of September 30, 2013, we have maintained effective internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officers and principal financial and accounting officer,
evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of
1934 as of the end of the period covered by this report on Form 10-K. The evaluation included certain internal control areas in which
we have made and are continuing to make changes to improve and enhance controls. 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 September 30, 2013.

Changes in Internal Control over Financial Reporting

During the fiscal year ended September 30, 2013, we developed and implemented new controls and took additional actions to

address a previously identified material weakness in our internal control over financial reporting as of September 30, 2012 related to
our evaluation and accounting for lease transactions, including build-to-suit leases. These new controls and additional actions
included, among other things, changes in personnel, hiring of an external consulting firm to provide guidance on applying the complex
accounting standards related to leases, developing and implementing improved policies, processes and procedures to review and
document lease activities, and hiring an external consulting firm to assist with implementation of the Company’s internal audit
function, as further discussed in our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2013, March 31, 2013 and
December 31, 2012. After completion of the testing of the design and operating effectiveness of these new controls, we concluded that
we had remediated the previously identified material weakness as of September 30, 2013.

Except as described above, 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.

Item 9B. Other Information.

None.

Item 10. Directors, Executive Officers and Corporate Governance.

PART III

The information required by this item is incorporated herein by reference to the information provided under the headings

“Executive Officers and Directors," “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our
definitive Proxy Statement for the 2014 Annual Meeting of Stockholders to be filed with the Commission within 120 days of
September 30, 2013 (the “2014 Proxy Statement”). We have adopted a code of business conduct and ethics that establishes the
standards of ethical conduct applicable to all of our directors, officers, including our principal executive, financial and accounting
officers, employees, consultants and contractors. Our code of business conduct and ethics is publicly available on our website at
www.naturalgrocers.com and we will post any amendments to, or waivers from, a provision of this Code of Business Conduct and
Ethics by posting such information on our website, at the address and location specified above.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information in the 2014 Proxy Statement

under the headings “Executive Compensation” and “Director Compensation.”

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

The information required by this item concerning securities authorized for issuance under equity compensation plans and
security ownership of certain beneficial owners and management is incorporated by reference to the information in the 2014 Proxy
Statement under the headings “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of
Certain Beneficial Owners and Management.”

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

The information required by this item concerning transactions with related persons and director independence is incorporated

by reference to the information in the 2014 Proxy Statement under the headings “Certain Relationships and Related Party
Transactions” and “Corporate Governance.”

Item 14. Principal Accounting Fees and Services.

The information required by this item is incorporated by reference to the information in the 2014 Proxy Statement under the

heading “Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”

Item 15. Exhibits and Financial Statement Schedules.

PART IV

1. Financial Statements: See Part II, Item 8 of this report on Form 10-K.
2. Financial Statement Schedules: Schedules not listed above have been omitted because the information required to be set forth

therein is not applicable or is shown in the financial statements or notes herein.

3. Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this report on

Form 10-K.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused

this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 12, 2013.

SIGNATURES

Natural Grocers by Vitamin Cottage, Inc.

By:

/s/ KEMPER ISELY
Kemper Isely,
Its Co-President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following

persons in the capacities and on the dates indicated.

Name

Title

Date

/s/ KEMPER ISELY
Kemper Isely

(Principal Executive Officer, Co-President,

Director)

December 12, 2013

/s/ ZEPHYR ISELY
Zephyr Isely

(Principal Executive Officer, Co-President,

Director)

December 12, 2013

/s/ SANDRA BUFFA
Sandra Buffa

(Principal Financial and Accounting Officer,

Chief Financial Officer)

December 12, 2013

/s/ ELIZABETH ISELY
Elizabeth Isely

/s/ HEATHER ISELY
Heather Isely

Director

/s/ MICHAEL CAMPBELL
Michael Campbell

Director

/s/ EDWARD CERKOVNIK
Edward Cerkovnik

Director

/s/ RICHARD HALLE
Richard Halle

Director

December 12, 2013

EXHIBIT INDEX

Exhibit
Number
2.1

2.2

3.1
3.2
4.1
4.2
4.3
4.4
10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

Description

Limited Liability Company Interest Purchase and
Contribution Agreement between Vitamins, Inc., Howard
& Forey, Inc., Natural Grocers by Vitamin Cottage, Inc.
and Vitamin Cottage Natural Food Markets, Inc. dated June
14, 2012
Form of Agreement and Plan of Merger by and among
Vitamin Cottage Natural Food Markets, Inc., Vitamin
Merger, Inc. and Natural Grocers by Vitamin Cottage, Inc.

Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Reference is made to Exhibits 3.1 and 3.2
Specimen Common Stock Certificate
Form of Notice of Grant of Stock Unit Award
Form of Registration Rights Agreement

Amended and Restated Employment Agreement by and
between Vitamin Cottage Natural Food Markets, Inc.,
Natural Grocers by Vitamin Cottage, Inc. and Sandra M.
Buffa, dated June 26, 2012*
Credit Agreement among Vitamin Cottage Natural Food
Markets, Inc., the Lenders Party thereto, and JPMorgan
Chase Bank, N.A., as Administrative Agent, dated
September 29, 2006
First Amendment to Credit Agreement by and among
Vitamin Cottage Natural Food Markets, Inc. and JPMorgan
Chase Bank, N.A., dated November 2, 2006
Second Amendment to Credit Agreement by and among
Vitamin Cottage Natural Food Markets, Inc. and JPMorgan
Chase Bank, N.A., dated December 13, 2006
Third Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc. the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated June 26, 2007
Fourth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated November 30,
2008
Fifth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated June 30, 2009
Sixth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated June 30, 2010
Seventh Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated December 21,
2010
Eighth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated May 13, 2011
Ninth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the

Form
Form S-1

File No.
333-182186

Exhibit
Number
2.1

Filing Date
June 29, 2012

Form S-1

333-182186

2.2

July 12, 2012

Form S-1
Form S-1

333-182186
333-182186

Form S-1
Form S-8
Form S-1
Form S-1

333-182186
333-182886
333-182186
333-182186

3.1
3.2

4.2.
4.2.
4.3
10.1

July 5, 2012
July 5, 2012

July 20, 2012
July 27, 2012
July 5, 2012
June 29, 2012

Form S-1

333-182186

10.2

June 29, 2012

Form S-1

333-182186

10.3

June 29, 2012

Form S-1

333-182186

10.4

June 29, 2012

Form S-1

333-182186

10.5

June 29, 2012

Form S-1

333-182186

10.6

June 29, 2012

Form S-1

333-182186

10.7

June 29, 2012

Form S-1

333-182186

10.8

June 29, 2012

Form S-1

333-182186

10.9

June 29, 2012

Form S-1

333-182186

10.10

June 29, 2012

Form S-1

333-182186

10.11

June 29, 2012

Exhibit
Number

10.12

10.13

10.14

10.15

10.16
10.17

10.18
10.19

10.20

10.21

10.22

10.23

10.24

10.25

10.26

10.27

10.28

10.29

10.30

Description

Form

File No.

Exhibit
Number

Filing Date

Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated July 11, 2011
Tenth Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated January 26, 2012
Subordination Agreement by and among Vitamin Cottage
Two Ltd. Liability Company, and Vitamin Cottage Natural
Food Markets, Inc., in favor of JPMorgan Chase Bank,
N.A., as administrative agent, dated September 29, 2006
First Amendment to Subordination Agreement by and
between Vitamin Cottage Two Ltd. Liability Company, and
Vitamin Cottage Natural Food Markets, Inc., in favor of
JPMorgan Chase Bank, N.A., as administrative agent, dated
June 26, 2007
Amended and Restated Promissory Note by Vitamin
Cottage Natural Food Markets, Inc., for the benefit of
JPMorgan Chase Bank, N.A., as Lender, dated
December 21, 2010

Form of Omnibus Incentive Plan*

Summary of Compensation Arrangements for Non-
Employee Directors*

Form of Indemnification Agreement*

Shopping Center Lease by and between Chalet Properties,
LLC and Vitamin Cottage Natural Food Markets, Inc.,
dated January 1, 2010
Ground lease by and between 3801 East Second Avenue,
LLC and Vitamin Cottage Natural Food Markets, Inc.,
dated March 1, 2001
Commercial Lease by and between Chalet Properties, LLC
and Vitamin Cottage Natural Food Markets, Inc., dated
June 1, 2006
Sublease by and between Chalet Properties, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated June 1,
2006
Lease by and between Chalet Properties, LLC and Vitamin
Cottage Natural Food Markets, Inc., dated September 1,
2011
Lease by and between Chalet Properties, LLC and Boulder
Vitamin Cottage Group, LLC, dated July 1, 2011
Lease by and between Isely Family Land Trust, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated
February 29, 2012
Lease by and between Chalet Properties, Austin, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated
February 29, 2012
Building Lease by and between Chalet Properties, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated
December 8, 2010
Distribution Agreement between United Natural Foods, Inc.
and Vitamin Cottage Natural Food Markets, Inc., dated
May 20, 2008#
Addendum A to Distribution Agreement between United
Natural Foods, Inc. and Vitamin Cottage Natural Food
Markets, Inc., dated February 27, 2009#
Agreement Addendum to Distribution Agreement between
United Natural Foods, Inc. and Vitamin Cottage Natural

Form S-1

333-182186

10.12

June 29, 2012

Form S-1

333-182186

10.13

June 29, 2012

Form S-1

333-182186

10.14

June 29, 2012

Form S-1

333-182186

10.15

June 29, 2012

Form S-1
Form S-1

333-182186
333-182186

Form S-1
Form S-1

333-182186
333-182186

10.16
10.17

10.18
10.19

July 5, 2012
June 29, 2012

June 29, 2012
June 29, 2012

Form S-1

333-182186

10.20

June 29, 2012

Form S-1

333-182186

10.21

July 5, 2012

Form S-1

333-182186

10.22

June 29, 2012

Form S-1

333-182186

10.23

June 29, 2012

Form S-1

333-182186

10.24

June 29, 2012

Form S-1

333-182186

10.25

June 29, 2012

Form S-1

333-182186

10.26

June 29, 2012

Form S-1

333-182186

10.27

June 29, 2012

Form S-1

333-182186

10.28

June 29, 2012

Form S-1

333-182186

10.29

June 29, 2012

Form S-1

333-182186

10.30

June 29, 2012

Exhibit
Number

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

21.1

23.1
31.1

31.2

31.3

32.1

Description

Form

File No.

Exhibit
Number

Filing Date

Food Markets, Inc., dated March 10, 2012#
Third Amendment to Distribution Agreement between
United Natural Foods, Inc. and Vitamin Cottage Natural
Food Markets, Inc., dated June 3, 2012#
Form of Stockholders Agreement, by, between and among
Natural Grocers by Vitamin Cottage, Inc. and the
stockholders to be named therein
Eleventh Amendment to Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders under the
Credit Agreement and JPMorgan Chase Bank, N.A., as
Lender and Administrative Agent, dated October 31, 2012
Third Amended and Restated Promissory Note by Vitamin
Cottage Natural Food Markets, Inc., for the benefit of
JPMorgan Chase Bank, N.A., as Lender, dated October 31,
2012
Pledge and Security Agreement by and between Natural
Grocers by Vitamin Cottage, Inc. and JP Morgan Chase
Bank, N.A., as Administrative Agent, for the ratable benefit
of the Secured Parties, dated October 31, 2012
Guaranty made by Natural Grocers by Vitamin
Cottage, Inc. in favor of JP Morgan Chase Bank, N.A., as
Administrative Agent, for the ratable benefit of the Secured
Parties, dated October 31, 2012

Amended and Restated Credit Agreement among Vitamin
Cottage Natural Food Markets, Inc., the Lenders Party
thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent, dated December 12, 2013

Amendment and Reaffirmation of Loan Documents dated
December 12, 2013 among Vitamin Cottage Natural Food
Markets, Inc., Natural Grocers by Vitamin Cottage, Inc.,
Natural Systems, LLC, Vitamin Cottage Two Ltd. Liability
Company and JPMorgan Chase Bank, N.A., as
Administrative Agent for the Lenders and each other
Secured Party under the Amended and Restated Credit
Agreement referred to above
Code of Ethics

List of subsidiaries

Consent of KPMG LLP

Certification of Kemper Isely, a Principal Executive Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act
of 2002
Certification of Zephyr Isely, a Principal Executive Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act
of 2002
Certification of Sandra Buffa, Principal Financial Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act
of 2002
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†

Form S-1

333-182186

10.31

June 29, 2012

Form S-1

333-182186

10.32

July 12, 2012

Form 10-K

001-35608

10.33

Form 10-K

001-35608

10.34

Form 10-K

001-35608

10.35

Form 10-K

001-35608

10.36

December 13,
2012

—

Form 10-K

001-35608

Form 10-K

001-35608

21.1

—
—

—

—
—

—

—
—

—

December 13,
2012
December 13,
2012
—
—

—

101^

The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended
September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated
Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to
Consolidated Financial Statements.

*Indicates a management contract or compensatory plan or arrangement

# Confidential portions have been omitted pursuant to a request for confidential treatment.

† The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, 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-K, irrespective of any general incorporation language contained in such filing.

^ Furnished, not filed. Users of this data submitted electronically herewith are advised pursuant to Rule 406T of Regulation S-T that
the interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the
Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Act of 1933, and otherwise are not subject to
liability under these sections.

Page intentionally left blank.

Corporate and Shareholder Information – January, 2014

Board of Directors
Kemper Isely, Chairman of the Board, Director
Zephyr Isely, Director
Heather Isely, Director, Corporate Secretary, Chair of the Compensation Committee
Elizabeth Isely, Director
Michael T. Campbell, Director, Chair of the Audit Committee
Richard Halle, Director
Edward Cerkovnik, Director

Named Executive Officers
Kemper Isely, Co-President
Zephyr Isely, Co-President
Heather Isely, Executive Vice President
Elizabeth Isely, Executive Vice President
Sandra Buffa, Chief Financial Officer

Ordering Financial Statements
A copy of our Annual Report and Form 10-K may be obtained by written, phone or email requests to:
Investor Relations
Natural Grocers by Vitamin Cottage
12612 West Alameda Parkway
Lakewood, Colorado 80228
(303) 986-4600
SBuffa@VitaminCottage.com

Annual Meeting
March 5, 2014
1:00 p.m. mountain time
Natural Grocers by Vitamin Cottage
12612 West Alameda Parkway
Lakewood, Colorado 80228

Transfer Agent & Registrar
Information about stock certificates, change of address, ownership transfer or other stock matters
can be obtained from American Stock Transfer & Trust Company, LLC via:
Mail: American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
Email: info@amstock.com
Phone: 1-800-937-5449
Hearing Impaired (TTY): 1-866-703-9077 or 718-921-8386
Web: www.amstock.com

Independent Registered Public Accounting Firm
KPMG LLP

Trading Information
The common stock of Natural Grocers by Vitamin Cottage is traded on the New York Stock Exchange
(symbol: NGVC). If you wish to become a shareholder, please contact a stockbroker.

Natural Grocers is a rapidly expanding specialty retailer

of natural and organic groceries and dietary supplements.

Welcome to Natural Grocers
Your Real Natural Food StoreSM

USDA Organic Produce Refrigerated Bulk Foods Gluten Free Vegetarian Vegan Paleo Healthy and Delicious on a Budget Nutritional Health Coach Political Advocacy World Class Customer Service Refrigerated Bulk foods Naturally Raised Meat Cage Free Eggs Fair Trade Non-GMO Allergen-free Low VOC Geothermal Bag Free Check Out Strict Product Guidelines Natural Products Association New Product Approval Committee Five Founding Principles No artiﬁcial Colors No Artiﬁcial Flavors No Artiﬁcial Preservatives No Hydrogenated Oils Homeopathic Ayurvedic Local Food Small Vendor Incubation Health Hotline Earth Day Nutrition Research Review FDA Compli-ance Structure and Function Statements Glycemic Index USDA Organic Produce Gluten Free Vegetarian Vegan Paleo Healthy and Delicious on a Budget Nutritional Health Coach Political Advocacy World Class Customer Service Refrigerated Bulk foods Naturally Raised Meat Cage Free Eggs Fair Trade Non-GMO Allergen-free Low VOC Geothermal Bag Free Check Out Day on the Hill Strict Product Guidelines New Product Approval Committee Five Founding Principles Cruelty-Free No artiﬁcial Colors Committee Five Founding Principles No arti-ﬁcial Colors No Artiﬁcial Flavors No Artiﬁcial Preservatives No Hydrogenated Oils Homeopathic Ayurvedic Local Food Small Vendor Incubation Education Health Hotline Vegetarian Vegan Paleo Healthy and Delicious on a Budget Nutritional Health Coach Political Advocacy World Class Customer Service Refrigerated Bulk foods Naturally Raised Meat Cage Free Eggs Fair Trade Non-GMO Allergen-free Low VOC Geothermal Bag Free Affordable PricesGreat JobsFocus on Nutrition EducationStrict Product Guidelinesand the EnvironmentSupporting Local Communitiesby vitamin cottage

For over 55 years we have built our
business on these founding principles

Focus on Nutrition Education

Strict Product Guidelines

Affordable Prices

Support for Local Communities
and the Environment

Great Jobs

Your Real
Natural Food Store SM