Natural Grocers by Vitamin Cottage, Inc. Annual Report 2016

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FY2016 Annual Report · Natural Grocers by Vitamin Cottage, Inc.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.2016 ANNUAL REPORTNATURAL GROCERS BY VITAMIN COTTAGE, INC.

2016 ANNUAL REPORT

NATURAL GROCERS
IS A RAPIDLY EXPANDING
SPECIALTY RETAILER OF
NATURAL AND ORGANIC
GROCERIES AND SUPPLEMENTS

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

2016 ANNUAL REPORT

NET SALES (IN MILLIONS)

800

700

600

500

400

300

200

100

$336.4

$430.7

$520.7

$624.7

$705.5

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

DAILY AVERAGE COMPARABLE STORE SALES GROWTH

COMP

MATURE COMP

11.3%

7.3%

11.1%

6.4%

5.6%

3.4%

5.9%

2.6%

1.4%

-1.0%

FY 2012

FY 2013

FY 2014

FY 2015

FY 2016

WE OPERATE IN 19 STATES

DEAR FELLOW STOCKHOLDERS:

Consumer demand for healthy, organic, natural and minimally processed foods and dietary
supplements has never been stronger. The niche market we began to serve 61 years ago with
our first store has grown into a mainstream food movement, supporting the growth strategy
we have been pursuing for over half a century. This tremendous growth and expanding
consumer awareness have led to a rapid expansion of the availability of natural and organic
foods in all channels of distribution. The growing availability has not only expanded the
category and broadened the consumer base, but also increased competition at the retail
level. In the long-run, this growing validation of the natural and organic trend reinforces
our strategy and supports our assessment of the market opportunity. However, the short-
term impact of conventional supermarkets’ rapid expansion into healthier foods, coupled
with economic and political uncertainty, led to a deceleration of our comparable store sales
growth and pressured our earnings during fiscal 2016.

We have responded to the moderation in our comparable store sales growth during fiscal
2016 with initiatives to drive sales, reduce costs and enhance capital efficiency. Despite some
competitive pressure, we again delivered total sales growth that is above the average for the
industry, and thus continue to increase market share. Net sales increased 12.9% to $705.5
million in fiscal 2016, driven by 22.3% new unit growth and 1.4% daily average comparable
store sales growth.

During the second quarter of fiscal 2016, we encountered an unanticipated deceleration
in daily average comparable store sales growth. While we responded with sales and cost
initiatives, our profit levels were negatively impacted. By the end of the fourth quarter, we
began to see the positive effects of our cost-reduction initiatives, and we believe we enter
fiscal 2017 with a solid plan to realize our sales and earnings growth stategy. We have
moderated our new store growth plans for fiscal 2017 to 15 to 20 units; actual unit growth
will be based on the alignment of our capital investments with the company’s free cash flow.

As our market opportunity grows in the face of increasing competition, our mission
is to remain focused on our five founding principles: upholding only the highest quality
standards, providing free nutrition education, providing an EDAP–Every Day Affordable
Price®, supporting our communities and providing great jobs for our associates. In fiscal
2017, we will strive to spread the word about Natural Grocers to a broader audience. Not
all products marketed as “healthier” are created equal, and not all retailers of healthier
products share the same standards. We believe our commitment to helping people learn
about good nutrition, maintaining industry-leading product standards and supporting all of
our stakeholders sets us apart from our competitors.

We remain confident in our growth strategy and will continue to position our company at the
highest level of product standards, service and nutrition education to differentiate ourselves
within the growing consumer movement toward healthier eating.

CO-PRESIDENT

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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, 2016
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
(Registrant’s 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 ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

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

Indicate by check mark whether the registrant has submitted electronically 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 ☐

Indicate by check mark 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. ☐

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

Large accelerated filer ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Accelerated filer ☒
Smaller reporting company ☐

Yes ☐ No ☒

Based on the closing price of the registrant’s common stock on March 31, 2016, the aggregate market value of the voting

and non-voting common stock held by non-affiliates was approximately $204,601,384.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 2, 2016 was

22,453,463.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated
by reference from the registrant’s Definitive Proxy Statement on Schedule 14A for the 2017 Annual Meeting of the Stockholders,
which will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2016.

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Natural Grocers by Vitamin Cottage, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2016

Table of Contents

PART I

Item 1. Business ............................................................................................................................................
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 .............................................................................................................................
Item 6.
Selected Financial Data .....................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ............
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...........................................................
Item 8.
Financial Statements and Supplementary Data ..................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ............
Item 9.
Item 9A. Controls and Procedures ....................................................................................................................
Item 9B. Other Information ..............................................................................................................................

PART III

Item 10. Directors, Executive Officers and Corporate Governance .................................................................
Item 11. Executive Compensation ...................................................................................................................
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters ............................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence ...................................
Item 14. Principal Accounting Fees and Services ............................................................................................

Item 15. Exhibits and Financial Statement Schedules .....................................................................................

PART IV

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

Page
Number

1
16
33
34
34
35

35
37
41
56
57
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80

81
81

81
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Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’
‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its
consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous
year and ending on September 30 of such year (for example, “fiscal year 2016” refers to the year from October 1, 2015 to
September 30, 2016).

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (this 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 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 may use the words “anticipate,” “assume,”
“believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,”
“target” and similar terms and phrases to identify forward-looking statements in this Form 10-K.

The forward-looking statements contained in this 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, national,
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 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 applicable securities laws. You are advised, however, to
consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC).
Such reports may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549
and may also be accessed on the SEC’s website at www.sec.gov. Our filings with the SEC are also available, free of charge,
through our website at www.naturalgrocers.com.

PART I

Item 1. Business.

General

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 or
sweeteners or partially hydrogenated or hydrogenated oils;

● utilizing an efficient and flexible smaller-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 started by lending books on nutrition and providing samples

of whole grain bread door-to-door in Golden, Colorado and subsequently 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 with the objective of supporting 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 employees 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. Our mission
includes 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.

● EDAP - 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 help take
care of their health by buying high quality competitively priced 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.

● Employees. Our employees make our company great. We work hard to ensure that our employees 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 Isely 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 126 stores in 19 states as of September 30, 2016. 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 United States grocery industry and
the dietary supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food
markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug
stores, farmers’ markets, food co-ops, online retailers and multi-level marketers. Industry-wide sales of natural and organic
foods and dietary supplements have experienced meaningful growth over the past several years, and we believe that growth
will continue for the foreseeable future.

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

numerous factors, including:

● greater consumer focus on high-quality nutritional products;
●
●
● heightened consumer awareness about the importance of food quality and a desire to avoid pesticide residues,

an increased awareness of the importance of good nutrition to long-term wellness;
an aging United States population seeking to support healthy aging;

growth hormones, artificial ingredients and genetically engineered ingredients in foods;

● growing 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
the growth in the number of consumers with unique dietary requirements as a result of allergies, chemical
sensitivities, auto-immune disorders and other conditions.

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 21,100 Stock Keeping
Units (SKUs) of natural and organic products per comparable store (stores open for 13 months or longer), including an
average of approximately 6,500 SKUs of dietary supplements. We believe our broad product offering enables our customers
to shop our stores for substantially 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 grocery products that are known to contain artificial
colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In addition, we only sell pasture-
raised, non-confinement dairy products and free-range eggs. Consistent with this strategy, our product selection does not
include items that do 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 we believe 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 offer consistently
exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping
experience, enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service
model is to provide free nutrition education to our customers. We believe 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 employees, our Health Hotline® newsletter and sales flyer, community out-reach programs,
one-on-one nutrition health coaching, nutrition classes, cooking demonstrations, and our website. Our commitment to
nutrition education and customer empowerment is emphasized throughout our entire organization, from executive
management to store employees. Every store also maintains a Nutritional Health Coach, or NHC, position. The NHC is
responsible for training our store employees and educating our customers about nutrition in accordance with applicable local,
state and federal regulations. Each NHC must have earned a degree or certificate in nutrition 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 NHCs are full-time employees. We believe our NHC position 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 has been 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. We also have a comprehensive human resources information and learning management system (HRIS)
to further support the scalability of our operations. 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 lease execution.
The smaller-store footprint made possible by our limited offering of prepared foods reduces real estate costs, labor costs and
perishable inventory shrink and allows us to leverage our new store opening costs.

Experienced and committed management team with proven track record. Our executive management team has an
average of 38 years of experience in the natural grocery industry, while our entire management team has an average of over
30 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 stores to 126 stores as of September 30, 2016 by 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,
2016, approximately 48.0% of our store managers at comparable stores had tenures of over four years with us, and our store
and department managers at these stores had 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 maintaining operational excellence by driving efficiencies in store and back room
operations, managing inventory levels and focusing on exceptional customer service.

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 The Buxton Company, a customer analytics
firm, we believe the entire United States market can support over 1,100 Natural Grocers stores, including approximately 200
additional Natural Grocers stores in the 19 states in which we currently operate or have signed leases. In fiscal years 2016
and 2015, we opened 23 and 16 new stores, respectively, and we plan to open 15 to 20 new stores in fiscal year 2017, of
which three opened during the first quarter of fiscal year 2017 prior to the filing of this Form 10-K.

Current store locations, signed leases and new store locations.

*Includes signed leases for stores to be opened subsequent to fiscal year 2016. Between September 30, 2016 and
the date of this Form 10-K, we opened three new stores. Additionally, we have 18 signed leases for stores planned to open in
fiscal year 2017 and 2018.

Increase sales from existing customers. We have achieved positive comparable store sales growth for over 57
consecutive quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue
offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising
strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to
continue to utilize targeted marketing efforts to reach our existing customers, which we anticipate will drive customer
transactions and convert 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. During fiscal year 2016, we implemented several measures aimed at enhancing our brand awareness,
including: (i) increasing the Company’s presence on Facebook, Twitter and other social media platforms; (ii) organizing
special monthly promotions and events, such as Earth Day in April, on the anniversary of the Company’s founding in August
and during the entire month of September to coincide with National Organic Harvest Month; (iii) conducting outdoor
advertising campaigns in select markets; (iv) entering into sponsorship arrangements with a US speed skater and a health and
fitness expert; (v) teaming with a Grammy Music Educator Award-nominated musician to produce original Natural Grocers
organic-themed songs and music videos; (vi) extending home delivery services to select additional markets; and (vii)
developing new collateral marketing materials. We believe offering nutrition education has historically been one of our most
effective marketing strategies for reaching new customers and increasing the demand for natural and organic groceries and
dietary supplements in our markets. To maximize the impact of our Nutritional Health Coaches, we have increased their
focus on relationship-building opportunities in our communities and with our customers, including promotions and additional
educational cooking events, lectures and classes in our stores. Additionally, we seek to attract new customers by enhancing
their nutrition knowledge through printed and digital versions of our broad range of educational resources, including the

distribution of our Health Hotline newsletter and sales flyer, and via the internet and social media. In addition to offering
nutrition education, our strategy is to attract new customers with our EDAP - Every Day Affordable Price and to build
community awareness through our support of local vendors and charities.

Improve operating margins. We expect to continue our focus on improving our operating margins as we benefit
from investments we have made or are making in fixed overhead and information technology. 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. In addition, to achieve additional
operating margin expansion, we intend to further optimize performance, maintain appropriate store labor levels, reduce
inventory shrink and effectively manage product selection and pricing.

Our Stores

Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a smaller-
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 nutritional education and information, natural and organic products and dietary supplements.

Our Store Format. Our stores range from approximately 5,000 to 16,000 selling square feet, and average
approximately 11,000 selling square feet. In fiscal year 2016, our 23 new stores averaged approximately 11,000 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 gatherings, a demonstration kitchen for cooking education
and/or lecture space. Our comparable stores sell an average of approximately 21,100 SKUs of natural and organic products
per store, including an average of approximately 6,500 SKUs of dietary supplements.

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 Forum Analytics, LLC 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 model for selecting viable new store locations incorporates
factors such as target demographics, community characteristics, nearby retail activity and other measures and is based on
first-hand observation of the community’s characteristics surrounding each site. We have teams of employees dedicated to
opening new stores efficiently and quickly, typically within approximately nine months from the time of lease execution.

Store-Level Economics. Since January 1, 2005, opening new stores has required an average upfront capital
investment of approximately $2.1 million. We anticipate that our fiscal year 2017 new stores will require an average upfront
capital investment of approximately $2.2 million, consisting of capital expenditures of approximately $1.6 million, net of
tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of
approximately $0.3 million. We target approximately four years to recoup our initial net cash investments and approximately
30% 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 competitive considerations and a variety of other 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 employees. 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, or NHCs, are a core element of our nutrition education program. Every store has a
full-time NHC position to educate customers and train employees on nutrition. NHCs must have earned a degree or certificate
in nutrition or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly
committed to fulfilling our mission. To educate and empower customers to make informed nutrition choices, our NHCs are
available for complimentary one-on-one nutrition health coaching sessions. Each NHC is also responsible for various
relationship-building opportunities in our communities and with our customers, including educational activities such as
nutrition classes, lectures, seminars, health fairs and store tours. To maximize the impact of our NHCs, we have increased
their focus on hosting cooking events (at our stores with demonstration kitchens) and have increased the number of in-store
educational events they conduct. We believe that our NHCs’ focus on relationship-building opportunities in our communities
and with our customers helps to enhance our marketing and branding initiatives. Additionally, our NHCs are an onsite
resource for nutrition training and education for our employees. Each NHC trains our employees to use a compliant
educational approach to customer service without attempting to diagnose or treat specific conditions or ailments. We believe
our NHC position is a competitive differentiator and represents a key element of our customer service model.

Our training and education programs are supplemented by outside experts, online materials and printed handouts.
We also use our Health Hotline to educate our customers. The Health Hotline is a newsletter and sales flyer which was
published ten times in fiscal year 2016. Each issue of the Health Hotline includes in-depth articles on health and nutrition,
along with a selection of sale items. The Health Hotline is also distributed via the internet and social media. Consistent with
our strategy to shift a greater portion of our marketing efforts from print to digital, the printed Health Hotline newsletter is
scheduled
the
www.naturalgrocers.com website to enhance functionality and create a more engaging user experience, including readily
accessible additional nutritional education information and resources.

in fiscal year 2017. During fiscal year 2015, we redesigned

to be published seven

times

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 or 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 pasture-raised, non-confinement dairy products and free-range eggs;
● we only sell meats naturally raised without hormones, antibiotics or 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 through 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 believe
we need to sell conventional products to fill our selection, increase our margins or attract 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 fiscal year ended September 30, 2016:

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 or
sweeteners or partially hydrogenated 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 feasible. Our selection varies based on seasonal availability, and we strive to 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 repackaged bulk and
other products, including nuts, water, pasta, canned seafood, dried fruits, grains, granolas, honey, eggs,
herbs, spices and teas. We also sell peanut and almond butters, freshly 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 come from animals that are not known to have been treated with antibiotics or 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, Dairy Substitutes and Eggs. We offer a broad selection of natural and organic dairy
products such as milk, cheeses, yogurts and beverages, as well as eggs and non-dairy substitutes made
from almonds, coconuts, rice and soy. During fiscal year 2015, we began to sell only pasture-raised,
non-confinement dairy products at all our stores. During fiscal year 2016, we began to sell only free-
range eggs (from chickens that are not only cage-free but also provided with sufficient space to move)
at all our stores.

■ Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items,
including salads, sandwiches, salsa, 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

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 a
line of private label dietary supplements. The department is carefully organized to help both employees 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 that comply with our human food

guidelines.

■ Household and General Merchandise. Our offerings include sustainable, hypo-allergenic and
fragrance-free 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 each store’s book department. Titles cover
various approaches to diet, lifestyle and health. Additionally, we offer hundreds of 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 are compliant 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) current 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, and annually thereafter. We operate all our stores in compliance with the National Organic
Program standards, which restricts the use of certain substances for cleaning and pest control and requires rigorous
recordkeeping, among other requirements.

Our Pricing Strategy

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

The key elements of our pricing strategy include:

● EDAP - Every Day Affordable Price throughout our stores;
● heavily advertised Health Hotline deals supported by manufacturer participation;
●
● managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and
●

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

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 strive to keep our product,
operating and general and administrative costs low, which allows us to continue to offer attractive pricing for our customers.

Our Store Operations

Store Hours. Our stores typically are open from 8:00 a.m. to 9:04 p.m., Monday through Saturday, and from 8:00

a.m. to 7:35 p.m. on Sunday.

Store Management and Staffing. Our typical store staffing includes a manager and assistant manager, with
department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving
departments, as well as several non-management employees. Each store manager is responsible for 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 13 to 15 stores. Each regional manager reports to, and is supported by, a director of
store operations.

To ensure a high level of service, all employees receive training and guidance on customer service skills, product
attributes and nutrition education. Employees 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 employees are cross-trained in various functions, including cashier duties, stocking and receiving product.

Every store also maintains a Nutritional Health Coach, or NHC, position. The NHC is responsible for training our
store employees and educating our customers in accordance with applicable local, state and federal regulations. Each NHC
must have earned a degree or certificate in nutrition 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 NHCs are full-time
employees. The NHCs are overseen by Regional Nutritional Health Coach Managers.

Bulk Food Repackaging Facility and Distribution Center. We lease a 150,000 square foot bulk food repackaging
facility and distribution center located in Golden, Colorado. That facility also houses a training center and certain
administrative support functions.

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 approximately 1,200 suppliers, and offer over 3,100 brands. These suppliers
range from small independent businesses to multi-national conglomerates. As of September 30, 2016, we purchased
approximately 80% of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2016,
approximately 59% of our total purchases were from United Natural Foods Inc. and its subsidiaries (UNFI). In fiscal year
2016, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products
through May 31, 2021. We maintain good relations with UNFI and believe we have adequate alternative supply methods,
including self-distribution.

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.

Our Employees

Commitment to our employees is one of our five founding principles. Employees 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 employees are offered a 401(k) retirement savings plan with
discretionary contribution matching opportunities. We believe we pay above average retail wages, and all employees earn an
additional $1.00 per hour, up to $40 per week, in “Vitamin Bucks” which can be used to purchase products in our stores. It
is important to us that our employees live a healthy, balanced lifestyle, and we believe the Vitamin Bucks incentive provides
an additional resource for our employees to purchase natural and organic products. This further offers our employees the
opportunity to become more familiar with the products we sell, which we believe improves the customer service our

employees are able to provide. We believe these and other factors result in higher retention rates and encourage our employees
to appreciate our culture, which helps them better promote our brand.

All employees are eligible to participate in our discretionary pay-for-performance incentive compensation plan after
meeting certain length of service requirements. The pay-for-performance incentive compensation plan sets certain Company-
level financial goals that must be met before it can be funded. If the financial goals are achieved, additional criteria for store-
level incentive compensation include meeting sales projections, sales to labor hour goals and cost of goods sold metrics. We
believe these criteria help align all store employees with both corporate and store-level financial goals. We have an established
set of standard operating procedures, including 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.

As of September 30, 2016, we employed 2,651 full-time and 423 part-time (less than 30 hours per week) employees,
including a total of 278 employees at our home office and our bulk food repackaging facility and distribution center. None
of our employees is subject to a collective bargaining agreement. We believe we have good relations with our employees.

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 employees to be
highly knowledgeable about these topics and related products.

An analysis of our Health Hotline subscriber list 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 the 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;

●
●
● manage the waste stream services at all of our stores in order to optimize our diversion of waste to recycling and

compost and increase the environmental sustainability of our operations; 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 customers and community
influencers.

Health Hotline. Our Health Hotline is a 20-page newsletter and sales flyer which contains a mix of in-depth health
and nutrition articles, along with a selection of popular sale items. The articles aim to be relevant, science-based and written
to reflect the most recent research findings. In fiscal year 2016, the full version of the Health Hotline was published ten times
and mailed to subscribers and distributed in our stores. In fiscal year 2016, a condensed version of the Health Hotline, which
typically emphasizes only one article or topic, was inserted into the newspaper in many of our communities approximately
34 times. In addition, an electronic version of the condensed Health Hotline was distributed to subscribers in fiscal year 2016.
Consistent with our strategy to shift a greater portion of our marketing efforts from print to digital, we expect to publish the
printed Health Hotline newsletter seven times and the condensed Health Hotline 17 times in fiscal year 2017. 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 occurs concurrently with the release of each Health Hotline
to ensure that store staff are familiar with the content in each issue.

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 redesigned our website in fiscal year 2015 to enhance functionality, create a more engaging
user experience and increase its reach and effectiveness. The website redesign was intended to be part of an overall enhanced
branding strategy to more effectively communicate our brand’s unique and compelling attributes, including our founding
principles. 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, Instagram, Twitter, Pinterest and YouTube. During fiscal year 2016, we created an
individual Facebook page for each of our stores. We expect to increase such digital engagement activities during fiscal year
2017.

{N}Power® Customer Appreciation Program. During fiscal year 2015, we completed the introduction of the
{N}Power customer appreciation program at all our stores. We believe {N}Power has enhanced customer loyalty and
increased customer engagement levels. Registered users of {N}Power receive digital coupons, personalized offers and other
rewards, all by providing their phone number at the time of checkout.

Special Promotions. During fiscal year 2016, we organized special monthly promotions and events, such as Earth
Day in April, on the anniversary of the Company’s founding in August and during the entire month of September to coincide
with National Organic Harvest Month. Promotions included contests in connection with “good4u” nutrition challenges and
nutrition education classes. We expect to continue offering similar promotions and special events in the future.

Sponsorships. During fiscal year 2016, we entered into sponsorship arrangements with a US speed skater and a
health and fitness expert. Under these arrangements, the sponsored individuals attend “meet and greet” events at our stores,
contribute articles to the Health Hotline newsletter and sales flyer, share recipes and fitness tips on our website and participate
in social media and other promotional activities on our behalf.

Original Music. During fiscal year 2016, we entered into an agreement with a Grammy Music Educator Award-
nominated musician to produce original organic-themed songs and music videos for us. Under this agreement, the musician
also performed at new store openings and participated in social media and other promotional activities during fiscal year
2016.

Home Delivery Services. We offer home delivery services in select markets in partnership with a third party. We

currently provide home delivery services in the Portland, Oregon and Denver and Boulder, Colorado markets.

Other Marketing Activities. During fiscal year 2016, we implemented an outdoor advertising campaign in five

markets. In addition, we occasionally use television and radio advertising as part of our marketing activities.

New Store Openings. We use various targeted marketing efforts to support the successful introduction of our new
stores in their individual markets. In addition to the distribution of our Health Hotline newsletter and Internet and social
media efforts targeted to the region, we utilize direct mail distribution of a series of introductory postcards promoting our

brand and providing discounts and other incentives for new customers. We also focus on community relationship-building
activities, including a series of lectures and cooking and other demonstrations in each new store’s community room and/or
demonstration kitchen. Other new store promotional activities include gift card giveaways, musical performances,
appearances by our sponsorship partners and participation by local community leaders and organizations.

Competition

The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few
barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway,
mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh
Market, 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, food co-ops, online retailers and
multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer
service, shopping experience or any combination of these or other factors. They also compete with us for products and
locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe
our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary
supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive
advantage. In addition, we face internally generated competition when we open new stores in markets we already serve.

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, employee 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 and providers on an
ongoing basis.

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. In addition, we have received the
registration of service marks for EDAP – Every Day Affordable Price and {N}Power and the registration of a trademark for
These Came First®. We do not own or license for use any patents, franchises or concessions that are material to our business.
Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are
properly 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 functions are outsourced, which allows us to focus on our core business.
We also have an enterprise-wide HRIS, which has enabled us to more efficiently and 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 (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 (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 (DSHEA). DSHEA established a framework governing the
composition, safety, labeling, manufacturing and marketing of dietary supplements, defined “dietary supplement” and “new
dietary ingredient” (NDI) and established new statutory criteria for evaluating the safety of substances meeting the respective
definitions. In the process, DSHEA removed dietary supplements and NDIs 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 United States 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, or NDIs, 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 Food Safety Modernization Act (FSMA),
the FDA issued draft guidance in July 2011 and August 2016, which attempted to clarify when an ingredient would be
considered an NDI, the evidence needed to document the safety of an NDI and appropriate methods for establishing the
identity of an NDI. 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 an NDI if the dietary supplement product was
produced using manufacturing processes different from those used in 1994.

In certain circumstances, the FDA’s guidance regarding applications for approval of Investigational New Drugs
(INDs) applies to the food and dietary supplement industry. The FDA’s guidance states that certain dietary supplements
should not be marketed if they contain a substance that is undergoing substantial clinical investigations intended to evaluate
the dietary supplement’s ability to diagnose, cure, mitigate, treat, or prevent a disease when such investigations are public
knowledge, unless the article was marketed as a dietary supplement before the IND application became effective and before
any such investigations began. Although the boundaries of the FDA’s enforcement activities regarding alleged violations of
its guidance are not clear at this time, some dietary supplements might have to be immediately withdrawn from the market
even if they were marketed as a dietary supplement before initiation of substantial clinical investigations, the existence of
which has been made public. The potential need for withdrawal could negatively affect the supply chain for certain products.

DSHEA empowered the FDA to establish good manufacturing practice regulations governing key aspects of the
production of dietary supplements, including quality control, packaging and labeling. DSHEA also expressly permits dietary
supplements to bear statements describing how a product affects the structure, function and general well-being of the body,
if accompanied by a required disclaimer. Currently, 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 within 30 days of first marketing the product. 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 FSMA. 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 and implementation. 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, FSMA required the FDA to establish science-based
minimum standards for the safe production and harvesting of produce, identify “high risk” foods and “high risk” facilities,
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, FSMA
meaningfully augmented the FDA’s ability to access both producers’ and suppliers’ records, as well as added new records
that must be created and maintained. 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. 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,

FSMA increases the FDA’s authority for administrative detentions of adulterated and misbranded foods. 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 product identification, net quantity/weight, nutritional facts, ingredients,
manufacturer and the identity of certain allergens (if present). 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, transport 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 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. In addition, private parties are increasingly initiating legal action against dietary
supplement manufacturers for false or misleading labeling and/or advertising.

The FTC and FDA have authority to regulate the marketing and label claims of foods, functional foods, dietary
supplements, probiotic preparations and homeopathic remedies. The agencies have suggested in published comments and
court filings that health claims for these products should be based on two Random Controlled Trials (RTCs) or similar
investigational research methods. It is not clear that RTCs designed to measure the effects and side effects of a medical drug
on a human population suffering a disease are appropriate for measuring the efficacy of foods, functional foods, dietary
supplements, probiotic preparations and homeopathic remedies to help maintain an individual’s healthy non-diseased state.
If the FTC and FDA final guidance do not reflect these concerns, and if RTCs or similar methods are required in the future,
the high cost and delays of RTCs or other investigational methods may disrupt the supply chain for these products or cause
their removal from the market.

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 the
products we sell. 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 employees 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
responsibility 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, 2016, set forth in
Part IV of this Form 10-K, for financial information regarding this segment.

Available Information

Our website is located at www.naturalgrocers.com. We make our periodic reports and other information filed with
or furnished to the 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 Form 10-K.

Item 1A. Risk Factors.

Our business, financial condition and results of operations can be materially 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. Accordingly, you should carefully consider the risks described below as well
as the other information and data included in this Form 10-K.

Risks related to our business

We may not be successful in our efforts to grow.

Our continued growth largely depends on our ability to increase sales in our existing stores and successfully open
and operate new stores on a profitable basis. Our comparable store sales growth could be lower than our historical average
for various reasons, including the opening of new stores that cannibalize sales in existing stores, increased competition,
general economic conditions, regulatory changes, price changes as a result of competitive factors and product pricing and
availability.

During fiscal years 2016 and 2015, we opened 23 and 16 new stores, respectively. We plan to open 15 to 20 new
stores and relocate three existing stores in fiscal year 2017. 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 capacity 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 future growth.

We may not be able to open new stores on schedule or operate them successfully. Our ability to successfully open
new stores depends upon a number of factors, including our ability to select suitable sites for our new store locations; to
negotiate and execute leases on acceptable terms; to coordinate the contracting work on our new stores; to identify, recruit
and train 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, our efforts to open and operate new stores may be unsuccessful or unprofitable, which could
materially and adversely affect our operations, financial performance and future growth.

Our newly opened stores may negatively impact our financial results in the short-term, and may not achieve sales

and operating levels consistent with our more mature stores on a timely basis or at all.

We have actively pursued new store growth and plan to continue doing so in the future (although the rate of new
store growth in the foreseeable future is expected to moderate somewhat compared to recent years, depending on economic
and business conditions and other factors). Our new store openings may not be successful or reach the sales and profitability
levels of our existing stores. 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. New store openings may negatively impact our financial results in the short-term due
to the effect of store opening costs and lower sales and contribution to overall profitability during the initial period following
opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins
and higher operating expenses, as a percentage of net sales, than our existing stores. New stores may not achieve sustained
sales and operating levels consistent with our more mature store base on a timely basis or at all. This may have an adverse
effect on our business, financial condition and operating results.

In addition, we may not be able to successfully integrate new stores into our existing store base and those new stores
may not be as profitable as our existing stores. Further, we have experienced in the past, and expect to experience in the
future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to
new, closer locations. If our new stores are less profitable than our existing stores, or if we experience sales volume transfer
from our existing stores, our business, financial condition and operating results may be adversely affected.

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; and

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● develop and maintain vendor relationships that provide us access to the newest merchandise, and products that

satisfy our standards, 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, reduced or changed consumer
choices and the cost of these products. Our store offerings are comprised of natural and organic products and dietary
supplements. A change in consumer preferences away from our offerings, including as a result of, among other things,
reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity
regarding the safety of natural and organic products or dietary supplements, or new or upgraded regulatory standards, may
adversely affect demand for the products we sell 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 store sales growth and quarterly financial performance may fluctuate for a variety of reasons.

Our store sales growth 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 store sales growth 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;
slowing in the natural and organic retail sector;
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;
consumer preferences, buying trends and spending levels;
food and commodity price inflation or deflation;
seasonal fluctuations due to weather conditions and extreme weather-related disruptions;

●
●
●
●
●
●
●
● our ability to generate new and repeat visits to our stores and adequate levels of customer engagement;
●
●
●
● general United States economic conditions and, in particular, the retail sales environment.

actions by our existing or new competitors, including pricing changes;
regulatory changes affecting availability and marketability of products;
supply shortages; and

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 growth during any particular future period may decrease. In the
event of such a decrease, the price of our common stock could decline. For more information on our results of operations for
fiscal year 2016, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Disruptions in the national or worldwide economy and political instability 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, inflation, interest rates, the availability of credit, tax rates, fuel and energy costs, housing market conditions,
general business conditions, consumer confidence, and consumer perception of economic conditions. Economic conditions
and consumer spending may also be adversely impacted by political instability. Natural disasters, 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 or political
instability may have an adverse effect on our sales and profitability.

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

The markets for natural and organic groceries and dietary supplements are large, fragmented and highly competitive,
with few barriers to entry. Our competition varies by market and includes conventional supermarkets, natural, gourmet and
specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement
retailers, drug stores, farmers’ markets, food co-ops and online retailers and multi-level marketers. These businesses compete
with us for customers on the basis of price, product selection, quality, customer service, shopping experience or any
combination of these or other factors. They also compete with us for products and locations. To the extent our competitors
lower their prices, our ability to maintain sales levels and operating margins may be negatively impacted. In addition, some
of our competitors are expanding their natural and organic food offerings or increasing the space allocated to natural and
organic foods. Many of our competitors are larger, more established and have greater financial, marketing and other resources
than we do, 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. In addition, we face internally generated
competition when we open new stores in markets we already serve. An inability to compete effectively may cause us to lose
market share to our competitors and could have a material adverse effect on our business, financial condition and results of
operations.

An inability to maintain or increase our operating margins could adversely affect our results of operations.

We intend to continue our focus on improving our operating margins by leveraging more efficiencies of scale,
additional improved systems, further cost discipline, added focus on appropriate store labor levels and even more 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 capture greater efficiencies of
scale, improve our systems, further enhance our cost discipline and increase our focus on 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. Further, pricing pressures from competitors and the impact of the product discounts offered
by the {N}Power customer loyalty program may also adversely impact our operating margins. 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 common 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 could reduce our sales and leave us with excess inventory, which could have a material adverse effect on our
business, financial condition and results of operations. In response to such events, we may be required to increase markdowns
or initiate marketing promotions to reduce excess inventory, which could 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 quality specifications, 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 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 federal, state and local 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, require recalls of 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 sourcing
of ingredients, manufacturing, packaging, labeling, distribution, advertising, sale, quality and safety of the products we sell,
as well as the health and safety of our employees and the protection of the environment. In the United States, 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 and international
commerce and the marketing of certain organically produced products, and provides assurance to our customers that such
products meet consistent and uniform minimum base 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 FDCA, as revised by FSMA and DSHEA. The FDCA expressly permits
dietary supplements to bear statements describing how a product affects the structure, function and general well-being of the
body, if accompanied by a required disclaimer. 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, employees, 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 even criminal prosecution in some
circumstances.

In connection with the marketing and advertisement of the products we sell, we could be the target of claims relating
to false or deceptive advertising, including under the auspices of the FTC, the consumer protection statutes of some states
and non-government watchdog groups. 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.

FSMA grants 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 and dietary
supplement makers. Voluminous regulations and rules issued under FSMA are in varying degrees of finalization and
implementation. 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, FSMA required the
FDA to establish science-based minimum standards for the safe production and harvesting of produce, identify “high risk”
foods and “high risk” facilities and 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 both producers’ and suppliers’ records, as well
as added new records that must be created and maintained. 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. FSMA also requires the
implementation of enhanced tracking and tracing of food and dietary supplements 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. The implementation of FSMA requirements may be too expensive or too complicated for some of our suppliers, which
may result in certain products from small and/or local suppliers 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 United States food supply prior to October 15, 1994. However, a dietary ingredient
not present in the food supply prior to that date is considered an NDI and 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 an NDI into interstate commerce. As required by the FSMA, the FDA issued draft guidance in July 2011 and
August 2016, which attempted to clarify when an ingredient could be considered an NDI, the evidence needed to document
the safety of an NDI and appropriate methods for establishing the identity of an NDI. 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 an NDI 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.

The FDA also issued draft guidance on INDs in 2015. The guidance could classify a food or dietary supplement
ingredient as an investigational new drug and simultaneously force the ingredient to be removed from commerce if the
ingredient is being investigated as a potential drug treatment for a disease. The guidance has not been finalized. If the guidance
is finalized in its present form, some food and dietary supplement products containing certain ingredients may not be available
to us to sell in our stores.

The FDA and FTC have increased their regulatory scrutiny of homeopathic products through a public stakeholder
workgroup process. Although no guidance has been issued at this time, the stakeholder process may result in guidance that
reclassifies homeopathic products as drugs, requires homeopathic products to be approved for sale under a new approval or
review regimen, or otherwise lessens their availability to us to sell in our stores.

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 could 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.

We may experience product recalls, withdrawals or seizures which could reduce our sales and adversely affect

our results of operations.

We may be subject to product recalls, withdrawals or seizures if any of the products we sell is believed to cause
injury or illness or if we are alleged to have violated governmental regulations in the labeling, promotion, sale or distribution
of those products. A significant recall, withdrawal or seizure of any of the products we sell may require significant
management attention, could result in substantial and unexpected costs and may adversely affect our business, financial
condition or results of operations. Furthermore, a recall, withdrawal or seizure of any of the products we sell may adversely
affect consumer confidence in our brands and thus decrease consumer demand for the products we sell. We rely on our
suppliers to ensure that the products they manufacture and sell to us comply with all applicable regulatory and legislative
requirements. In general, we seek representation and warranties, indemnification and/or insurance from our suppliers.
However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage our
reputation and consumer confidence in the products we sell. In addition, the failure of those 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 the market, which in certain cases could materially and adversely affect our business, financial
condition and results of operations.

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

government regulation or an inability to secure adequate liability insurance.

Some of the activities of our NHCs, 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: (i) does not, in the FDA’s view,
accurately present such information (ii) diverts a consumer’s attention and focus from FDA-required nutrition labeling and
information; or (iii) impermissibly promotes drug-type disease-related benefits. Although we provide training to our NHCs
on relevant regulatory requirements, we cannot control the actions of such individuals, and our NHCs may not act in
accordance with such regulations. If our NHCs 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 NHCs
in order to mitigate risks associated with our NHCs’ 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 NHCs. 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 NHCs
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 certified organic products or products that meet our other internal standards.

Our ability to ensure a continuing supply of products and ingredients at competitive prices that satisfy our minimum
standards depends on many factors beyond our control, such as the number and size of farms that grow organic crops, operate
pasture-based dairies, maintain free-range laying hens and undertake to raise livestock without the use of growth hormones,
antibiotics, and concentrated confinement feeding; 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 herd, flock and crop yields and reduce 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 products that satisfy our
minimum standards for organic produce, dairy products, eggs, and meat, which are often less plentiful in the open market
than conventional ingredients and products. This competition may increase in the future if consumer demand increases for

organic produce, pasture-raised dairy products, free-range eggs and naturally raised meat. If supplies of these products are
reduced, or there is greater demand for such ingredients and products 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 certified organic products we sell must be produced in compliance with government regulations and must
comply with the requirements of accredited independent certifiers in order to be labeled as such. Certain products we sell in
our stores can lose their “organic” certification if their operation does not comply with the applicable standards and required
practices of the USDA National Organic Program. The loss of any 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.

UNFI is our single largest third-party supplier, accounting for approximately 59% of our total purchases in fiscal
year 2016. In fiscal year 2016, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and
frozen food products through May 31, 2021. If our distribution agreement with UNFI were terminated or not renewed, we
may be unable to establish alternative distribution channels on reasonable terms or at all. Due to this concentration of
purchases from a single third-party supplier, the cancellation or non-renewal of our distribution agreement with UNFI, or the
disruption, delay or inability of UNFI to deliver product to our stores, could materially and adversely affect our business,
financial condition and results of operations. In addition, if UNFI or any of our other suppliers fail to comply with food safety,
labeling or other laws and regulations, or face allegations of non-compliance, that supplier’s operations may be disrupted,
which in turn could have a material adverse effect on our business, financial condition and results of operations.

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 business, financial
condition and results of operations. 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, currency fluctuations 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. In addition, the Department of Homeland
Security may at times prevent the importation or customs clearance of certain products and ingredients for reasons unrelated
to food safety.

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

severe weather and other catastrophic occurrences.

As of September 30, 2016, we had primary store concentration in Colorado and Texas, operating 36 stores and 18
stores in those states, respectively. 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, wage increases, new or revised laws or regulations, fires, floods or other natural disasters in these regions. Such
conditions may result in reduced customer traffic and spending in our stores, physical damage to our stores, loss of inventory,
closure of one or more of our stores, inadequate work force in our markets, temporary disruption in the supply of products,
delays in the delivery of goods to our stores and a reduction in the availability of products in our stores. Any of these factors
may disrupt our business and materially adversely affect our business, financial condition and results of operations.

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, concerns

regarding the safety of natural and organic products or dietary supplements and poor reviews of our stores, products, customer
service and employment environment.

Consumers or regulatory agencies may challenge certain claims made regarding the products we sell.

Our reputation could also suffer from real or perceived issues involving the labeling or marketing of the products
we sell. Products that we sell may carry claims as to their origin, ingredients, efficacy or health benefits, including, by way
of example, the use of the term “natural.” Although the FDA and USDA each has issued statements regarding the appropriate
use of the word “natural,” there is no single, United States 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 the products we sell. 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 could 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 could 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 and allowing more of our competitors to
offer 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, 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, NHCs and store employees 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 or

our supply chain network could disrupt our ability to deliver our merchandise in a timely manner.

We repackage and distribute some of the products we sell through our bulk food repackaging facility and distribution
center in Golden, Colorado. 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.

In addition, unexpected, prolonged delays in deliveries from vendors that ship directly to our stores or increases in
transportation costs (including as a result of increased fuel costs) could have a material adverse effect on our business,
financial condition and results of operations. Further, labor shortages or work stoppages in the transportation industry, long-
term disruptions to the national and international transportation infrastructure, reductions in capacity and industry-specific
regulations such as hours-of-service rules that lead to delays or interruptions of deliveries could adversely affect 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.

Higher wage and benefit costs could adversely affect our business.

Changes in federal and state minimum wage laws and other laws relating to employee benefits, including the Patient
Protection and Affordable Care Act, could cause us to incur additional wage and benefits costs. Increased labor costs brought
about by changes in minimum wage laws, other regulations or prevailing market conditions could increase our expenses,
which could have an adverse impact on our profitability, or decrease the number of employees we are able to employ, which
could decrease customer service levels and therefore adversely impact sales.

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 reduced sales, a loss of loyalty to our stores and excess inventory.

While all of our employees are currently non-union, our employees may attempt to organize and join a union. In
late fiscal year 2015 and early fiscal year 2016, the United Food and Commercial Workers Union (UFCW) sought
unsuccessfully to organize workers at one of our stores in Idaho. In October 2016, the UFCW filed a petition requesting
certification as the exclusive bargaining representative of the workers at one of our stores in Washington State. In November
2016, the employees at that store voted against joining the UFCW. The UFCW subsequently filed objections regarding the
conduct of that election with the National Labor Relations Board. Although we believe the UFCW’s objections are without
merit, we have stipulated and agreed (without admitting any wrongdoing) to conduct a new election at the store in question
on or about December 16, 2016.

We could face union organizing activities at other locations. The unionization of all or a portion of our workforce
could result in work slowdowns, could increase our overall costs and reduce the efficiency of our operations at the affected
locations, could adversely affect our flexibility to run our business competitively, and could otherwise have a material adverse
effect on our business, financial condition and results of operations.

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

our results of operations and capitalization.

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 adversely affect our liquidity and require us to raise additional

capital or continue paying rent for store locations that we no longer operate.

We lease our stores, administrative facility and bulk food repackaging facility and distribution center. Our significant
level of fixed lease obligations requires us to use a portion of cash generated by our operations to satisfy these obligations,
which could create liquidity problems and require us to raise additional capital through debt or equity financings, which may
not be available on terms satisfactory to us or at all. We require substantial cash flows from operations to make payments

under our leases, all of which provide for periodic increases in rent. If we are unable to make the required payments under
the leases, the owners of the relevant locations may, among other things, repossess those assets, which could adversely affect
our ability to conduct our operations. Further, the termination of a lease due to the non-payment of rent under such lease
would trigger an event of default under our Credit Facility if such termination could reasonably be expected to have a material
adverse effect on our business or our ability to meet our obligations thereunder.

In addition, our lease 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, two expire in fiscal year 2017 (with respect to which two leases for store relocations have been
signed), four expire in fiscal year 2018 (with respect to which two leases for store relocations have been signed), seven expire
in fiscal year 2019, six expire in fiscal year 2020 and the remainder expire between fiscal years 2021 and 2062.

Any material disruption to or 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 for point-of-sale processing in our stores, supply chain, financial reporting, human resources
and various other processes and transactions. Our information systems are subject to damage or interruption from power
outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events and usage errors
by our team members. If our information systems are breached, disrupted, damaged or fail to perform as designed, we may
have to make significant investments to repair or replace them, suffer interruptions in our operations and face costly litigation.
In addition, our failure to successfully address these risks could damage our reputation with our customers. Additionally,
changes in technology could cause our information systems to become obsolete, as a result of which it may be necessary to
incur additional costs to upgrade such systems. 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 website, including changes in required technology
interfaces, website downtime and other technical failures and consumer privacy concerns.

Various third parties, such as our suppliers and payment processors, also rely heavily on information technology
systems, and any failure of these third-party systems could also cause loss of sales, transactional or other data and significant
interruptions to our business. Any material interruption in the information technology systems we rely on could have a
material adverse effect on our business, operating results and financial condition.

Failure to protect our information systems against cyber-attacks or information security breaches, including
failure to protect the integrity and security of individually identifiable data of our customers and employees, could expose
us to litigation, damage our reputation and have a material adverse effect on our business.

We rely on computer systems and information technology to conduct our business, including to securely transmit
data associated with cashless payments. These systems are inherently vulnerable to disruption or failure, as well as internal
and external security breaches, denial of service attacks and other disruptive problems caused by hackers.

In addition, we receive and maintain certain personal information about our customers and employees. The use of
this information by us is regulated by applicable law. Privacy and information security laws and regulations change, and
compliance with updates may result in cost increases due to necessary systems changes and the development of new
administrative processes.

As of September 30, 2016, we had commenced the deployment of EMV, or chip and PIN, point-of-sales terminals
at our stores. We expect the process of deploying chip and PIN point-of-sales terminals at all our stores will be completed by
the second quarter of fiscal year 2017. Pending completion of the chip and PIN deployment process, our point-of-sales
systems may be more vulnerable to external security breaches and other data security incidents.

If our security and information systems are compromised or our employees fail to comply with applicable laws and
regulations and personal or other confidential information is obtained by unauthorized persons or used inappropriately, it
could interrupt our business, resulting in a slowdown of our normal business activities or limitations on our ability to process
credit card transactions, and could adversely affect our reputation, ability to compete in the food retail marketplace, financial
condition and results of operations. Additionally, a data security breach could subject us to litigation, customer demands for
indemnification for third party claims and/or the imposition of penalties, fines or other assessments. In such event, our liability

could exceed our insurance coverage or our ability to pay. In addition, a security breach could require that we expend
significant amounts to remediate the breach, including changes in our information security systems.

We were affected by a data security incident during fiscal year 2015. Since that incident, we have implemented
numerous additional security protocols in order to further tighten security, although there can be no assurance that data
security breaches will not occur in the future, or that any such data security breach will be detected in a timely manner.

Claims under our self-insurance program may differ from our estimates, which could negatively 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 us 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, Vitamin Cottage Natural Grocers, EDAP
- Every Day Affordable Price, {N}Power and These Came First, common law intellectual property rights in certain other
marks used
including
www.naturalgrocers.com and www.vitamincottage.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.

in our business, copyrights of our website content, rights

to our domain names,

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, could 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.

The products we sell could suffer from real or perceived quality or food safety concerns and may cause
unexpected side effects, illness, injury or death that could result in their discontinuance or expose us to lawsuits, any of
which could result in unexpected costs and damage to our reputation.

We could be materially, adversely affected if consumers lose confidence in the safety and quality of products we
sell. There is substantial governmental scrutiny of and public awareness regarding food and dietary supplement safety. We
believe that many customers hold us to a higher quality standard than other retailers. Many of the products we sell are
vitamins, herbs and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market
regulatory approval in the United States. The products we sell could contain contaminated substances, and some of the
products we sell contain ingredients that do not have long histories of human consumption. Previously unknown adverse
reactions resulting from human consumption of these ingredients could occur. Unexpected side effects, illness, injury or death
caused by the products we sell could result in the discontinuance of sales of the products we sell 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 could result in
government enforcement action, private litigation and product recalls. Such an occurrence could also cause negative publicity
regarding our company, brand or products, including negative publicity in social media. The real or perceived sale of
contaminated or harmful products could therefore harm our reputation and net sales, have a material adverse effect on our
business, financial condition and results of operations, or result in our insolvency.

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

Costs of the raw agricultural commodities used in our private label products, including our bulk repackaged
products, could increase. Such commodities 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 a reduced supply of raw agricultural commodities could cause our
vendors to seek price increases from us, which could cause the retail price we charge for certain products to increase, in turn
decreasing our sales of such products. Supply shortages may cause certain items to be unavailable, which could negatively
affect our sales. Our profitability may be adversely impacted as a result of such developments 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 could 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.

Deflation could adversely affect our business.

In addition to inflation, our business could be affected by deflationary pressures. Decreases in food and commodity
prices could negatively impact sales growth, operating margins and earnings if our competitors react by lowering their retail
pricing. As a result, our operating results and financial condition could be materially adversely affected.

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 could 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,
internet and social media advertising. 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.

Legal proceedings could adversely affect our business, financial condition and results of operations.

Our operations, which are characterized by transactions involving a high volume of customer traffic and a wide
variety of product selections, carry a higher exposure to consumer litigation risk when compared to the operations of
companies operating in certain other industries. Consequently, we have been, are, and may in the future become a party to
individual personal injury, product liability and other legal actions in the ordinary course of our business. While these actions
are generally routine in nature, incidental to the operation of our business and immaterial in scope, the outcome of litigation
is difficult to assess or quantify. Additionally, we could be exposed to industry-wide or class-action claims arising from the
products we carry or industry-specific business practices. Further, we have been, are and may in the future become subject
to claims for discrimination, harassment, wages and hours and other federal or state employment matters. While we maintain
insurance, such coverage may not be adequate or may not cover a specific legal claim. Moreover, the cost to defend against
litigation may be significant. As a result, litigation could have a material adverse effect on our business, financial position
and results of operations.

Our credit facility could limit our operational flexibility.

On January 28, 2016, we entered into a new $30.0 million credit facility, including a $5.0 million sublimit for
standby letters of credit (our Credit Facility). At the time we entered into the Credit Facility, we terminated our prior credit
agreement (the Prior Credit Facility). On May 10, 2016, the amount available for borrowing under our Credit Facility was
increased to $45.0 million, including a $5.0 million sublimit for standby letters of credit. Our 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 measurements under our Credit Facility, including
a consolidated leverage 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 could limit our ability to borrow under our Credit
Facility and, in certain circumstances, may allow the lender thereunder to require repayment.

We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could adversely

impact our business.

As of September 30, 2016, we had outstanding indebtedness of $27.4 million under our Credit Facility. We may
incur additional indebtedness in the future, including borrowings under our Credit Facility. Satisfying our debt repayment
obligations may require us to divert funds identified for other purposes and could impair our liquidity position. Our inability
to generate sufficient cash flow to satisfy our debt service obligations could have important consequences, including:

reducing our ability to execute our growth strategy and open new stores;
impacting our ability to continue to execute our operational strategies in existing stores;
impairing our liquidity position;
impacting our ability to obtain merchandise from our vendors;
requiring us to delay capital expenditures and divert funds intended for other purposes;
increasing our vulnerability to competitive and general economic conditions;

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● placing us at a competitive disadvantage compared to our competitors that have less debt;
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limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate; and
adversely affecting our ability to borrow additional funds.

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If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt,
dispose of assets or issue equity to obtain necessary funds. 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. In addition, if we fail to comply with any of the financial
covenants or the other restrictions contained in our Credit Facility, an event of default could occur, which may result in the
acceleration of all amounts owing under the Credit Facility.

Our ability to obtain necessary funds through borrowing will depend on our ability to generate cash flow from
operations. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control. If our business does not generate sufficient cash flow from operations or if future

borrowings are not available to us under our Credit Facility or otherwise in amounts sufficient to enable us to fund our
liquidity needs, our business, financial condition and results of operations may be adversely affected.

Our liquidity needs may require us to raise additional capital through debt or equity financings.

We depend upon cash flow from our operations and borrowings from our Credit Facility to fund our business and
execute on our growth strategy. In the absence of sufficient cash flow from operations, available cash and available borrowing
capacity under our Credit Facility, we may be unable to meet our liquidity needs. In that event, we may be required to seek
additional equity or debt financing in order to fund capital expenditures, 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 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 shares of common stock 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 share repurchase program may adversely affect our liquidity and cause fluctuations in our stock price.

On May 5, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may
repurchase up to $10.0 million in shares of our common stock. We have financed, and intend to continue financing, the share
repurchase program through borrowings under our Credit Facility. Such borrowings will reduce the amount of capital
available under the Credit Facility for other purposes, including our working capital needs, capital expenditures and funding
the execution of our growth strategy. Repurchases under the share repurchase program may therefore adversely affect our
liquidity, which in turn could impact our profitability, financial condition and results of operations. In addition, repurchases
under the share repurchase program will reduce the number of shares of our common stock available for purchase and sale
in the public market, which could affect the market price of our common stock.

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 (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 (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
Jumpstart Our Business Startups Act, or JOBS Act, and as a result, our independent registered public accounting firm will
not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the
date we are no longer an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth
company” until the earliest of (a) September 30, 2017, (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: (i) 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, (ii) been required to file
annual, quarterly and current reports under the Securities Exchange Act of 1934, as amended (the Exchange Act) for a period
of at least 12 calendar months and (iii) 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 control over financial reporting 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.

Changes in accounting standards may materially impact reporting of our financial condition and reported results

of operations.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and
interpretations for many aspects of our business, such as accounting for inventories, goodwill and intangible assets, store
closures, leases, insurance, income taxes, stock-based compensation and mergers and acquisitions, are highly complex and
involve subjective judgments. Changes in these rules or their interpretation or changes in underlying estimates, assumptions
or judgments could significantly change or add significant volatility to our reported earnings without a comparable underlying
change in cash flow from operations. As a result, changes in accounting standards may materially impact our reported results
of operations.

We are an “emerging growth company” and 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 may qualify as an “emerging growth
company” until as late as September 30, 2017. As an “emerging growth company,” 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 initial public
offering, or 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 (the 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 complied 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 common stock

The market price of our common stock has been volatile and may continue to be volatile, and you may not be

able to sell our common 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:

fluctuations in our quarterly comparable store sales growth;
competitive conditions in our industry;

● differences between our actual financial and operating results and those expected by investors;
●
●
● general economic conditions;
●
●

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;
the level and quality of securities research analyst coverage for our common stock;
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; and
failure to recruit or retain key personnel.

●
●
●
●

●
●

In addition, extreme price and volume fluctuations in the stock markets could affect the market price of equity

securities.

An inability to maintain or improve levels of sales growth could cause our stock price to decline.

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

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

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

the impact of the product discounts offered by the {N}Power customer loyalty program;
internally generated competition when we open new stores in markets we already serve;
regulatory changes;

sales consistent with our existing stores;
consumer preferences;
competitive conditions in our industry;

●
●
● general economic conditions;
●
●
●
● product pricing and availability;
●
●
●
● our ability to source and distribute products efficiently.

in-store merchandising-related activities;
consumer confidence;
initial sales performance at our new stores; and

In addition, many specialty retailers have been unable to sustain high levels of store sales growth during and after
periods of substantial expansion. These factors may cause our store sales growth 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 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 approximately 57.3% 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 2, 2016, we had a total of 22,453,463 shares of common stock outstanding, of which
8,214,285 shares of common stock were issued in the IPO and 349,542 shares 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 approximately 39,000 shares have been sold, and believes approximately
440,000 additional shares could be sold, in exempt transactions. Up to approximately 13,400,000 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 related to them. The market price
of our common stock could drop significantly if the holders of restricted stock 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 92,586
additional restricted stock units or in connection with investments or acquisitions. The number 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 common stock or if our operating results do not meet their expectations, our
common 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 common stock, or if our operating results
do not meet their expectations, our common 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 could 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;
authorizing our Board to issue “blank check” preferred stock without stockholder approval;

●
●
● prohibiting cumulative voting in the election of directors;
●
● prohibiting stockholders from acting by written consent after the Isely family ceases to own more than 50% of

limiting the persons who may call special meetings of stockholders;

●

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 Board’s selection, either: (i) by a majority of
independent directors in a vote by independent directors, pursuant to a nominations process adopted by a Board
resolution or (ii) 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,” stockholders will not have the same protections afforded

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

As of September 30, 2016, we had 126 stores located in 19 states, as shown in the following chart:

State
Arizona ..................................................................
Arkansas ................................................................
Colorado ................................................................
Idaho ......................................................................
Iowa .......................................................................
Kansas ...................................................................
Minnesota ..............................................................
Missouri .................................................................
Montana .................................................................
Nebraska ................................................................
Nevada ...................................................................
New Mexico ...........................................................
North Dakota .........................................................
Oklahoma ..............................................................
Oregon ....................................................................
Texas .....................................................................
Utah .......................................................................
Washington ............................................................
Wyoming ...............................................................

Number
of Stores
12
2
36
4
1
8
1
3
4
3
3
5
2
7
8
18
5
2
2

During the fiscal years ended September 30, 2016 and 2015, we opened 23 and 16 new stores, respectively. We plan
to open 15 to 20 new stores in fiscal year 2017, of which three new stores opened during the first quarter of fiscal year 2017
prior to the filing of this Form 10-K. In addition, we plan to relocate three stores in fiscal year 2017. As of the date of the
filing of this Form 10-K, we have signed leases for 18 new stores that we expect to open in fiscal years 2017 and 2018.

Our home office is located in Lakewood, Colorado. We occupy our home office under a lease covering
approximately 35,000 square feet that expires in 2026; this facility is co-located with one of our stores. Additionally, we lease
a 150,000 square foot bulk food repackaging facility and distribution center located in Golden, Colorado. That facility also
houses a training center and certain administrative support functions.

Currently, we own buildings in which three of our stores are located; those buildings are located on land that is
leased pursuant to a ground lease. All of our other stores and facilities are leased. 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, two expire in fiscal year 2017 (with respect to which
two leases for store relocations have been signed), four expire in fiscal year 2018 (with respect to which two leases for store
relocations have been signed), seven expire in fiscal year 2019, six expire in fiscal year 2020; and the remainder will expire
between fiscal years 2021 and 2062. We expect that we will be able to renegotiate these leases or relocate these stores as
necessary.

Item 3. Legal Proceedings.

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

dismissing the plaintiff’s complaint without prejudice. On September 21, 2016, the United States District Court for the
District of Colorado issued an Opinion and Order adopting the Magistrate Judge’s Recommendation and dismissing the
plaintiff’s complaint without prejudice. On November 10, 2016, the Company and the plaintiff entered into a Settlement
Agreement and Release pursuant to which: (i) the plaintiff agreed not to appeal the Court’s dismissal of his complaint and
(ii) the Company agreed not to seek reimbursement of its attorneys’ fees and legal costs from the plaintiff.

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 is traded on the NYSE under the symbol “NGVC.”

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 periods indicated:

Fiscal year ended September 30, 2016
First Quarter (October 1, 2015 – December 31, 2015) ................... $
Second Quarter (January 1, 2016 – March 31, 2016).....................
Third Quarter (April 1, 2016 – June 30, 2016) ..............................
Fourth Quarter (July 1, 2016 – September 30, 2016) .....................

High

Low

25.85 $
22.43
21.97
14.21

Fiscal year ended September 30, 2015
First Quarter (October 1, 2014 – December 31, 2014) ................... $
Second Quarter (January 1, 2015 – March 31, 2015).....................
Third Quarter (April 1, 2015 – June 30, 2015) ..............................
Fourth Quarter (July 1, 2015 – September 30, 2015) .....................

High

Low

28.72 $
35.00
29.90
28.67

19.50
16.59
12.29
10.63

15.89
24.84
22.55
19.82

Holders of Record

As of December 2, 2016, there were 102 holders of record of our common stock, and the closing price of our

common stock was $10.82.

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, our Credit
Facility prohibits the payment of cash dividends, except that so long as no default exists or would arise as a result thereof,
Vitamin Cottage Natural Food Markets, Inc. (the operating company) may pay cash dividends to Natural Grocers by Vitamin
Cottage, Inc. (the holding company) for various audit, accounting, tax, securities, indemnification, reimbursement, insurance
and other reasonable expenses incurred in the ordinary course of business, and for repurchases of shares of common stock in
an amount not to exceed $10.0 million.

Performance Graph

The graph below compares the cumulative return to holders 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, 2016, 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, 2016. 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.

Issuer Purchases of Equity Securities

The following table presents information with respect to purchases of the Company’s common stock during the
fourth quarter ended September 30, 2016 by the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under
the Exchange Act.

Total

Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs(2)

Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs (in
thousands)

Average
Price Paid
Per Share(1)

Total
Number of
Shares
Purchased

Period
July 1, 2016 to July 31, 2016 .......................................
August 1, 2016 to August 31, 2016 ..............................
September 1, 2016 to September 30, 2016 ...................
Total .............................................................................

— $
47,670
10,000
57,670

—
12.02
11.77
11.97

— $
47,670
10,000
57,670

9,861
9,289
9,171

(1) Average price paid per share includes commissions paid.

(2) On May 5, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may

repurchase up to $10.0 million in shares of the Company’s common stock.

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.

Statements of Income Data (dollars in

thousands):

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

Other (expense) income:
Interest expense ...................................................
Other income, net ................................................
Income before income taxes ............................
Provision for income taxes ..................................
Net income .......................................................

Net income attributable to non-controlling

interest ...............................................................
Net income attributable to Natural Grocers by

2016

Year ended September 30,
2014

2015

2013

705,499
503,727
201,772
156,158
19,242
5,993
20,379

(3,044)
—
17,335
(5,864)
11,471

624,678
442,582
182,096
132,131
17,514
3,822
28,629

(2,993)
—
25,636
(9,432)
16,204

520,674
369,172
151,502
108,657
14,823
3,774
24,248

(2,496)
2
21,754
(8,281)
13,473

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

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

2012

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

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

—

(828)

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

11,471

16,204

13,473

10,552

6,649

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

Shares used in computation of EPS

0.51
0.51

0.72
0.72

0.60
0.60

0.47
0.47

0.30
0.30

Basic ................................................................ 22,492,986 22,490,260 22,466,432 22,399,346 22,372,184
Diluted ............................................................. 22,507,152 22,500,833 22,479,835 22,441,382 22,463,093

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 .......................................... $
Pro Forma Per Share Data (Unaudited)(2):
Pro forma net income per share of common stock
Basic ................................................................ $
Diluted ............................................................. $

Other Financial Data (Unaudited) (dollars in

thousands):

17,335
(5,864)
11,471

25,636
(9,432)
16,204

21,754
(8,281)
13,473

16,931
(6,379)
10,552

11,432
(4,264)
7,168

0.51
0.51

0.72
0.72

0.60
0.60

0.47
0.47

0.32
0.32

EBITDA(3) ........................................................... $
EBITDA margin(4) ...............................................

45,912
6.5%

49,966
8.0

41,462
8.0

32,593
7.6

21,949
6.5

Other Operating Data (Unaudited):
Number of stores at end of period .......................
Number of stores opened during the period ........
Number of stores relocated and remodeled

during the period ...............................................
Change in comparable store sales(5) ....................
Change in daily average comparable store sales(5)
Change in mature store sales(6) .............................
Change in daily average mature store sales(6) .......

126
23

5
1.7%
1.4%
(0.7)%
(1.0)%

103
16

2
5.9
5.9
2.6
2.6

87
15

2
5.6
5.6
3.4
3.4

72
13

3
10.8
11.1
6.1
6.4

59
10

1
11.6
11.3
7.6
7.3

Gross square footage at end of period(7) .............. 2,031,711
Selling square footage at end of period(7) ............ 1,331,785
Average comparable store size (gross square

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

16,239

Average comparable store size (selling square

1,668,534 1,354.204 1,097,708
728,609
1,089,020

892,908

801,914
572,132

15,579

15,250

13,900

12,816

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

10,581

10,250

10,125

9,872

9,458

Comparable store sales per selling square foot

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

645

678

708

729

734

2016

As of September 30,
2014

2013

2015

2012

Selected Balance Sheet Data (dollars in

thousands):

Cash and cash equivalents ................................... $
Total assets ..........................................................
Total debt(10) ........................................................
Total stockholders’ equity ...................................

4,017
282,246
59,335
126,725

2,915
233,924
27,607
115,488

5,113
188,985
21,977
98,854

8,132
159,903
19,822
84,533

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

(1)

In connection with our IPO in the fourth quarter of fiscal year 2012, we purchased the 45% non-controlling interest in
Boulder Vitamin Cottage Group, LLC (BVC) not previously owned by us. Prior to the purchase of the non-controlling
interest, we held a controlling 55% interest in BVC. As such, our consolidated statements of income include the revenues
and expenses of BVC for the fiscal year ended September 30, 2012 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 non-controlling 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 year ended September 30, 2012. Pro forma net income attributable to Natural Grocers
by Vitamin Cottage, Inc., is not a measure of financial performance under GAAP. 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. We further believe that our presentation of this non-GAAP financial measure 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. 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
attributable to Natural Grocers by Vitamin Cottage, Inc. 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.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to pro forma net
income, dollars in thousands, except per share data:

2016

Year ended September 30,
2014

2015

2013

2012

Net income attributable to Natural Grocers by
Vitamin Cottage, Inc. ........................................ $
Net income attributable to non-controlling
interest ...............................................................
Net income ..........................................................
Provision for income taxes .................................
Income before income taxes ..............................
Pro forma provision for income taxes ................
Pro forma net income .......................................... $
Per Share Data:
Pro forma net income per share of common
stock
Basic .................................................................. $
Diluted ............................................................... $

11,471

16,204

13,473

10,552

6,649

—
11,471
5,864
17,335
(5,864)
11,471

—
16,204
9,432
25,636
(9,432 )
16,204

—
13,473
8,281
21,754
(8,281)
13,473

—
10,552
6,379
16,931
(6,379)
10,552

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

0.51
0.51

0.72
0.72

0.60
0.60

0.47
0.47

0.32
0.32

Our effective tax rate increased as a result of the BVC acquisition, as the income attributable to the non-controlling
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 year ended September 30, 2012:

2016

Year ended September 30,
2014
2015

2013

2012

Statutory tax rate .................................................
Nontaxable net income attributable to non-
controlling interest ............................................
State income taxes, net of federal income tax
expense .............................................................
Other, net ............................................................
Effective tax rate .................................................
Pro forma adjustment to exclude nontaxable net
income attributable to non-controlling interest ..
Pro forma effective tax rate ................................

34.0%

35.0

34.0

—

(2.7)

2.9
(3.0)
33.9

—
33.9%

2.9
(1.1)
36.8

—
36.8

3.0
0.1
38.1

—
38.1

3.3
0.4
37.7

—
37.7

3.0
0.3
34.6

2.7
37.3

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 year ended
September 30, 2012, as discussed above, divided by basic and diluted weighted average shares of common stock
outstanding for those fiscal periods.

(3) Earnings before interest, taxes, depreciation and amortization (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 year ended September 30, 2012, net
income attributable to the non-controlling 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 component of a measure in our financial covenants under our Credit
Facility. Further, our incentive compensation plans base incentive compensation payments on EBITDA.

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
should not be considered in isolation and that does not represent, and should not be considered 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.

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

2016

Year ended September 30,
2014

2015

2013

2012

Net income attributable to Natural Grocers by

Vitamin Cottage, Inc. .................................... $
Net income attributable to non-controlling

interest .......................................................
Net income .......................................................
Interest expense ............................................
Provision for income taxes ...........................
Depreciation and amortization .....................
EBITDA .......................................................... $

11,471

16,204

13,473

10,552

6,649

—
11,471
3,044
5,864
25,533
45,912

—
16,204
2,993
9,432
21,337
49,966

—
13,473
2,496
8,281
17,212
41,462

—
10,552
2,166
6,379
13,496
32,593

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

(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 2016 are stores that
opened during or before fiscal year 2011). 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 under our Credit Facility. As of September 30, 2012, a prior term
loan was fully repaid. As of September 30, 2013, the notes payable to related parties were fully repaid. As of September
30, 2015, 2014 and 2013, no amounts were outstanding under our Prior Credit Facility. As of September 30, 2016, $27.4
million was outstanding under our 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 Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-
Looking Statements” at the beginning of this Form 10-K for an explanation of these types of statements. Summarized numbers
included in this section, and corresponding percentage or basis point changes may not sum due to the effects of rounding.

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high quality
products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety
of natural and organic groceries and dietary supplements that meet our strict quality standards. We believe we have been at
the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado.
As of September 30, 2016, we operated 126 stores in 19 states, including Colorado, Arizona, Arkansas, Idaho, Iowa, Kansas,
Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah,
Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in 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 approximately 5,000 to 16,000 selling square feet. For the year ended September 30, 2016,
our new stores averaged approximately 11,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have
enabled us to continue to open new stores and enter new markets. Over the last five fiscal years, our store base has grown at
a compound annual growth rate of 20.79%, including 23, 16 and 15 new stores in fiscal year 2016, 2015 and 2014,
respectively. We relocated four existing stores and remodeled one store in fiscal year 2016. We plan to open 15 to 20 new
stores and relocate three stores in fiscal year 2017. Between September 30, 2016 and the date of this Form 10-K, we opened
a total of three stores in Iowa, Missouri and Texas. As of the date of this report, we also have signed leases for an additional 18
new store locations expected to open in fiscal years 2017 and 2018.

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 $705.5 million for the year ended September 30, 2016, an increase of $80.8 million,
or 12.9%, compared to net sales of $624.7 million for the year ended September 30, 2015. Net sales increased
at a compound annual growth rate of 16.4% from fiscal year 2014 to fiscal year 2016.

● Comparable store sales. Comparable store sales for the year ended September 30, 2016 increased 1.7% over the
year ended September 30, 2015. As of September 30, 2016, we have had over 57 consecutive quarters of positive
comparable store sales growth.

● Daily average comparable store sales. Daily average comparable store sales, which removes the effect of one
more selling day in the year ended September 30, 2016 as a result of the occurrence of leap year in fiscal 2016,
increased 1.4% over the year ended September 30, 2015. As of September 30, 2016, we have had over 57
consecutive quarters of positive daily average comparable store sales growth.

● Mature store sales. Mature store sales for the year ended September 30, 2016 decreased 0.7% from the year
ended September 30, 2015. For fiscal year 2016, mature stores include all stores open during or before fiscal
year 2011.

● Daily average mature store sales. Daily average mature store sales, which removes the effect of one more selling
day in the year ended September 30, 2016, as a result of the occurrence of leap year in fiscal 2016, decreased
1.0% from the year ended September 30, 2015.

● Net income. Net income was $11.5 million for the year ended September 30, 2016, a decrease of $4.7 million,

or 29.2%, compared to net income of $16.2 million for the year ended September 30, 2015.

● EBITDA. EBITDA was $45.9 million in the year ended September 30, 2016, a decrease of $4.1 million, or 8.1%,
compared to EBITDA of $50.0 million for the year ended September 30, 2015. EBITDA is not a measure of
financial performance under GAAP. Refer to the “Selected Financial Data” section of this Form 10-K for a
definition of EBITDA and a reconciliation of the Company’s net income to EBITDA.

● Liquidity. As of September 30, 2016, cash and cash equivalents was $4.0 million, $27.4 million was outstanding
under our Credit Facility and there was $16.6 million available for borrowing under our $45.0 million Credit
Facility. As of September 30, 2016, the Company had outstanding letters of credit of $1.0 million, which amount
was reserved against the amount available for borrowing under the terms of our Credit Facility.

● New store growth. We have opened 87 new stores since the beginning of fiscal year 2011, with 126 stores open
as of September 30, 2016. Our new store compound annual growth rate was 20.3% from fiscal year 2014 to
fiscal year 2016.

● Store Relocations and Remodels. We relocated four stores and remodeled one store in fiscal year 2016.

Industry Trends and Economics

We have identified the following recent trends and factors that have impacted and may continue to impact our results

of operations and financial condition:

●

Impact of broader economic trends. The grocery industry and our sales are affected by general economic
conditions, including, but not limited to, consumer spending, economic conditions, the level of disposable
consumer income, consumer debt, interest rates, the price of commodities, the political environment and
consumer confidence. In this regard, we believe our financial results for the year ended September 30, 2016
reflected economic pressures in several of the markets we serve due to depressed oil and natural gas prices
(although we believe those pressures have begun to moderate slightly).

● Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry,
which includes organic and natural foods and dietary supplements, continues to experience growth driven
primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to
open new stores and enter new markets. As we open new stores, our results of operations have been and may
continue to be materially adversely affected based on the timing and number of new stores we open, their initial
sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending
on a number of factors, including location, competition, a new market versus an existing market, the strength of
store management and general economic conditions. Once a new store is open, it typically grows at a faster rate

than mature stores for several years. Mature stores are stores that have been open for any part of five fiscal years
or longer.
As we expand across the United States and enter markets where consumers may not be as familiar with our
brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers
in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will
continue into the foreseeable future. Our financial results for the year ended September 30, 2016 reflect the
effects of these factors, and we anticipate future periods will be similarly impacted.
Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-
home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products
might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer
choices and the cost of these products. Our store offerings consist of natural and organic products and dietary
supplements. A change in consumer preferences away from our offerings, including those resulting from
reductions or changes in our offerings, would have a material adverse effect on our business. Additionally,
negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory
standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales
and results of operations.
Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly
competitive industry, with few barriers to entry. Our competition varies by market and includes conventional
supermarkets such as Kroger and Safeway, mass or discount retailers such as Wal-Mart and Target, natural and
gourmet markets such as Whole Foods and The Fresh Market, 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, food co-ops, online retailers and multi-level marketers. These businesses
compete with us on the basis of price, selection, quality, customer service, shopping experience or any
combination of these or other factors. They also compete with us for products and locations. In addition, some
of our competitors are expanding to offer a greater range of natural and organic foods. We believe our
commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products
and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry
and provide a competitive advantage. In addition, we face internally generated competition when we open new
stores in markets we already serve.

●

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. These factors include a loyal customer base, increasing basket size,
growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service,
nutrition education and a 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. The rate of new store
growth in the foreseeable future is expected to moderate somewhat compared to recent years, depending on economic and
business conditions and other factors. During the past few years, we have expanded our infrastructure to enable us to support
our continued growth. This has included implementing our enterprise resource planning system, hiring key personnel,
developing efficient new store opening construction and operations processes and relocating and expanding our bulk food
repackaging facility and distribution center. During fiscal year 2015, we redesigned our website (www.naturalgrocers.com)
to enhance functionality, create a more engaging user experience and increase its reach and effectiveness. In addition, in
fiscal year 2015 we introduced the {N}Power customer appreciation program at all of our stores, which we believe has
enhanced customer loyalty and increased customer engagement levels.

We believe there are opportunities for us to continue to expand our store base, expand profitability and increase
comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due
to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and
general economic conditions. In this regard, during the fiscal year ended September 30, 2016 the rate of growth in our
comparable store sales moderated compared to the prior fiscal years in part due to the impact of increased competition in the
natural and organic retail sector and internally generated competition due to opening new stores in our existing markets. To
a lesser extent, during fiscal year 2016 we experienced economic pressures in several of the markets we serve due to depressed
oil and natural gas prices (which pressures we believe have begun to moderate slightly).

As we continue to expand our store base, we believe there are opportunities for increased leverage in costs, such as
administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to
providing high-quality products at affordable prices and increased competition, such sourcing economies and efficiencies at
our bulk food repacking facility and distribution center may not be reflected in our gross margin in the near term. In addition,
our ability to leverage costs may be limited due to the fixed nature of our rent obligations and related occupancy expenses.

Our operating results may be affected by a variety of internal and external factors and trends, which are described

more fully in the section entitled “Risk Factors” appearing elsewhere in this Form 10-K.

Key Financial Metrics in Our Business

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

as follows:

Net sales

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

net sales between periods we monitor the following:

● 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 (for example, as a result of leap years
or the Easter holiday shift between quarters).

● Change in mature store sales. We begin to include sales from a store in mature store sales after the store has
been open for any part of five fiscal years (for example, our mature stores for fiscal year 2016 are stores that
opened during or before fiscal year 2011). We monitor the percentage change in mature store sales by comparing
sales from all stores in our mature store base for a reporting period against sales from the same stores for the
same number of operating months in the comparable reporting period of the prior year. When a store that is
included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be
mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.
● Change in daily average mature store sales. Daily average mature store sales are mature store sales divided by
the number of selling days in each period. We use this metric to remove the effect of differences in the number
of selling days during the comparable periods (for example, as a result of leap years or the Easter holiday shift
between quarters).

● Transaction count. Transaction count represents the number of transactions reported at our stores during the

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

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

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts
and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food
repackaging facility), buying costs, inventory 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 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 in cost of goods sold and occupancy costs rent payments for leases classified as capital and financing lease obligations.

Rather, these 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.

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 and the
strength of store management.

Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations, net of capitalized
interest. Interest expense also includes interest we incur on our outstanding indebtedness, including under our Credit Facility.
As of September 30, 2016, $27.4 million was outstanding under the Credit Facility. As of September 30, 2015 and 2014, no
amounts were outstanding under our Prior 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:

Year ended September 30,
2015

2016

2014

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

__________________________
*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 ............

100.0%
71.4
28.6
22.1
2.7
0.8
2.9
(0.4)
2.5
(0.8)
1.6%

126
22.3%
1.7%
1.4%
(0.7)%
(1.0)%

100.0
70.8
29.2
21.2
2.8
0.6
4.6
(0.5)
4.1
(1.5)
2.6

103
18.4
5.9
5.9
2.6
2.6

100.0
70.9
29.1
20.9
2.8
0.7
4.7
(0.5)
4.2
(1.6)
2.6

87
20.8
5.6
5.6
3.4
3.4

Year ended September 30, 2016 compared to Year ended September 30, 2015

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

in thousands:

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 ......................................... $

Year ended
September 30,

Change in

2016

2015

Dollars

Percent

705,499
503,727
201,772
156,158
19,242
5,993
20,379
(3,044)
17,335
(5,864)
11,471

624,678
442,582
182,096
132,131
17,514
3,822
28,629
(2,993 )
25,636
(9,432 )
16,204

80,821
61,145
19,676
24,027
1,728
2,171
(8,250)
(51)
(8,301)
3,568
(4,733)

12.9%
13.8
10.8
18.2
9.9
56.8
(28.8)
1.7
(32.4)
(37.8)
(29.2)%

Net sales

Net sales increased $80.8 million, or 12.9%, to $705.5 million for the year ended September 30, 2016 compared to
$624.7 million for the year ended September 30, 2015, primarily due to a $70.5 million increase in new store sales and a
$10.3 million, or 1.7%, increase in comparable store sales. Daily average comparable store sales increased 1.4% for the year
ended September 30, 2016 compared to the year ended September 30, 2015. The daily average comparable store sales increase
resulted from a 1.1% increase in average transaction size and a 0.2% increase in daily average transaction count. Comparable

store average transaction size was $35.82 for the year ended September 30, 2016. Daily average mature store sales decreased
1.0% for the year ended September 30, 2016 compared to the year ended September 30, 2015.

Our 1.7% increase in comparable store sales in fiscal year 2016 compares to a 5.9% increase in comparable store
sales in fiscal year 2015. The rate of growth in our comparable store sales moderated in fiscal year 2016 in part due to the
impact of increased competition in the natural and organic sector, internally generated competition due to opening new stores
in our existing markets and the impact of the product discounts offered by the {N}Power customer loyalty program. To a
lesser extent, we experienced economic pressures in several of the markets we serve due to depressed oil and natural gas
prices (which pressures we believe have begun to moderate slightly).

Gross profit

Gross profit increased $19.7 million, or 10.8%, to $201.8 million for the year ended September 30, 2016 compared
to $182.1 million for the year ended September 30, 2015, primarily driven by an increase in the number of comparable stores,
comparable store sales growth and one additional selling day due to the leap year. Gross margin decreased to 28.6% for the
year ended September 30, 2016 from 29.2% for the year ended September 30, 2015. Gross margin for the year ended
September 30, 2016 was negatively impacted by an increase in occupancy costs as a percentage of sales. The increase in
occupancy costs as a percentage of sales was primarily due to higher average lease expenses at newer and relocated stores
and also reflects the decrease in mature store sales and the fixed nature of our rent obligations and related occupancy expenses.
Additionally, product margin improved, offset by increased shrink expense, all as a percentage of sales.

For the years ended September 30, 2016 and 2015, the Company had 16 and 13 leases respectively, for stores which
were classified as capital and financing lease obligations. If these leases had qualified as operating leases, the straight-line
rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage
of sales during each of the years ended September 30, 2016 and 2015 would have been approximately 55 and 60 basis points
higher, respectively, than as reported.

Store expenses

Store expenses increased $24.0 million, or 18.2 %, to $156.2 million in the year ended September 30, 2016 from
$132.1 million in the year ended September 30, 2015. Store expenses as a percentage of sales were 22.1% and 21.2% for the
years ended September 30, 2016 and 2015, respectively. The increase in store expenses as a percentage of sales in fiscal year
2016 was primarily due to increases in salary-related expenses, depreciation and other store expenses.

Administrative expenses

Administrative expenses increased $1.7 million, or 9.9%, to $19.2 million for the year ended September 30, 2016
compared to $17.5 million for the year ended September 30, 2015, primarily due to the addition of senior management
positions to support our growth, together with increased legal and public company costs. Administrative expenses as a
percentage of sales were 2.7% and 2.8% for the years ended September 30, 2016 and 2015, respectively.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $2.2 million, or 56.8%, to $6.0 million for the year ended September
30, 2016 compared to $3.8 million for the year ended September 30, 2015. The increase in pre-opening and relocation
expenses was primarily due to the impact of the number and timing of new store openings and relocations. Pre-opening and
relocation expenses as a percentage of sales were 0.8% and 0.6% for the years ended September 30, 2016 and 2015,
respectively. The numbers of stores opened, relocated and remodeled were as follows for the periods presented:

Year ended September 30,

2016

2015

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

23
4
1
28

16
1
1
18

Interest expense

Interest expense, net of capitalized interest, increased $0.1 million, or 1.7%, in the year ended September 30, 2016
compared to the year ended September 30, 2015, primarily due to an increase in interest expense associated with our Credit

Facility due to higher average borrowings, partially offset by an increase in capitalized interest during the year ended
September 30, 2016. If our capital and financing lease obligations had qualified as operating leases, interest expense as a
percent of sales would have been approximately 50 basis points lower than as reported in each of the years ended September
30, 2016 and 2015, respectively.

Income taxes

Provision for income taxes decreased $3.6 million, or 37.8%, in the year ended September 30, 2016 compared to
the year ended September 30, 2015, primarily due to an $8.3 million decrease in income before income taxes and a decrease
in the estimated annual tax rate in the year ended September 30, 2016. The effective tax rate decreased from 36.8% in the
year ended September 30, 2015 to 33.9% in the year ended September 30, 2016, primarily due to a revision in our estimated
annual federal tax rate from 35% to 34% and federal and state tax credits in our fiscal 2015 tax return that were higher than
previously estimated in the provision for the year ended September 30, 2015. For the year ended September 30, 2016, the
federal tax rate remained at 35% for our deferred tax assets and liabilities.

Net income

Net income was $11.5 million, or $0.51 in diluted earnings per share, in the year ended September 30, 2016

compared to $16.2 million, or $0.72 in diluted earnings per share, in the year ended September 30, 2015.

Year ended September 30, 2015 compared to the year ended September 30, 2014

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

in thousands:

Year ended
September 30,

Change in

2015

2014

Dollars

Percent

Statements of Income Data:
Net sales ..................................................... $ 624,678
442,582
Cost of goods sold and occupancy costs .....
182,096
Gross profit ..........................................
132,131
Store expenses ............................................
17,514
Administrative expenses .............................
3,822
Pre-opening and relocation expenses ..........
28,629
Operating income ................................

Other income (expense):

Dividends and interest income ................
Interest expense .......................................
Income before income taxes ................
Provision for income taxes .........................
Net income .......................................... $

—
(2,993)
25,636
(9,432)
16,204

520,674
369,172
151,502
108,657
14,823
3,774
24,248

2
(2,496)
21,754
(8,281)
13,473

104,004
73,410
30,594
23,474
2,691
48
4,381

(2)
(497)
3,882
(1,151)
2,731

20.0%
19.9
20.2
21.6
18.2
1.3
18.1

(100.0)
19.9
17.8
13.9
20.3%

Net sales

Net sales increased $104.0 million, or 20.0%, to $624.7 million for the year ended September 30, 2015 compared
to $520.7 million for the year ended September 30, 2014, primarily due to a $73.3 million increase in new store sales and a
$30.7 million, or 5.9%, increase in comparable store sales. The comparable store sales increase was driven by a 3.6% increase
in daily average transaction count and a 2.2% increase in average transaction size. Comparable store average transaction size
was $35.98 in the year ended September 30, 2015.

Gross profit

Gross profit increased $30.6 million, or 20.2%, to $182.1 million for the year ended September 30, 2015 compared
to $151.5 million for the year ended September 30, 2014, primarily driven by positive comparable store sales and an increase
in the number of stores. Gross margin increased to 29.2% for the year ended September 30, 2015 from 29.1% for the year
ended September 30, 2014. Gross margin was positively impacted by an increase in product gross margin, partially offset by
an increase in occupancy costs as a percentage of sales for the year ended September 30, 2015 as compared to the year ended
September 30, 2014. The positive impact in product margin is due to increases in product margin across most departments in

the year ended September 30, 2015 as compared to the year ended September 30, 2014. Occupancy costs as a percentage of
sales increased in the year ended September 30, 2015 as compared to the year ended September 30, 2014, primarily due to
increased average lease expenses at newer stores.

For the years ended September 30, 2015 and 2014, the Company had 13 and ten leases respectively, for stores which
were classified as capital and financing lease obligations. If these leases had qualified as operating leases, the straight-line
rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage
of sales during the years ended September 30, 2015 and 2014 would have been approximately 60 basis points higher than as
reported.

Store expenses

Store expenses increased $23.5 million, or 21.6%, to $132.1 million in the year ended September 30, 2015 from
$108.7 million in the year ended September 30, 2014, primarily due to increases in salary related expenses, depreciation, and
other store expenses related for the most part to increases in store count. Store expenses as a percentage of sales were 21.2%
and 20.9% for the years ended September 30, 2015 and 2014, respectively. The increase in store expenses as a percentage of
sales was primarily due to increases in other store expense and depreciation expense, partially offset by decreases in salary
related expenses, all as a percentage of sales. The increase in other store expense as a percentage of sales was primarily driven
by increases in ongoing facilities maintenance, other promotions and marketing support. Store expenses for the year ended
September 30, 2015 were also impacted by higher incentive compensation and other discretionary benefit expense, reflecting
our pay-for-performance philosophy.

Administrative expenses

Administrative expenses increased $2.7 million, or 18.2%, to $17.5 million for the year ended September 30, 2015
compared to $14.8 million for the year ended September 30, 2014, primarily due to increases in salary-related expenses,
various professional fees and other administrative expenses. Administrative expenses as a percentage of sales were 2.8% for
each of the years ended September 30, 2015 and 2014.

Pre-opening and relocation expenses

Pre-opening and relocation expenses were $3.8 million in each of the years ended September 30, 2015 and 2014.
Pre-opening and relocation expenses as a percentage of sales were 0.6% and 0.7% for the years ended September 30, 2015
and 2014, respectively. The numbers of stores opened, relocated and remodeled were as follows for the periods presented:

Year ended September 30,

2015

2014

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

16
1
1
18

15
─
2
17

Interest expense

Interest expense, net of capitalized interest, increased $0.5 million, or 19.9%, in the year ended September 30, 2015
compared to the year ended September 30, 2014, primarily due to a $0.4 million increase in interest expense related to capital
and financing lease obligations. If our capital and financing lease obligations had qualified as operating leases, interest
expense as a percent of sales would have been approximately 50 and 45 basis points lower than as reported in the years ended
September 30, 2015 and 2014, respectively.

Income taxes

Provision for income taxes increased $1.2 million, or 13.9%, in the year ended September 30, 2015 compared to the
year ended September 30, 2014, primarily due to a $3.9 million increase in income before income taxes, partially offset by
favorable return to provision adjustments recognized in the year ended September 30, 2015. The effective tax rate decreased
from 38.1% in the year ended September 30, 2014 to 36.8% in the year ended September 30, 2015, primarily due to the
favorable return to provision adjustments resulting from lower federal taxable income due to the extension of 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 acquired from January 1, 2014 through December

31, 2014. The lower taxable income reduced our actual federal income tax rate for fiscal year 2014 to 34.4%, compared to
35.0% estimated in our fiscal year 2014 tax provision. In addition, our return to provision adjustments were also favorably
impacted by extension of the Work Opportunity Tax Credit (WOTC) through December 31, 2014 and other state tax credits.

Net income

Net income increased 20.3% to $16.2 million, or $0.72 in diluted earnings per share, in the year ended September

30, 2015 from $13.5 million, or $0.60 in diluted earnings per share, in the year ended September 30, 2014.

Non-GAAP financial measure

EBITDA

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

Year ended September 30,
2015

2016

2014

Net income ................................................ $
Interest expense .....................................
Provision for income taxes ....................
Depreciation and amortization ..............
EBITDA .................................................... $

11,471
3,044
5,864
25,533
45,912

16,204
2,993
9,432
21,337
49,966

13,473
2,496
8,281
17,212
41,462

EBITDA decreased 8.1% to $45.9 million in the year ended September 30, 2016 compared to $50.0 million in the
year ended September 30, 2015. EBITDA as a percentage of sales was 6.5% and 8.0% for the years ended September 30,
2016 and 2015, respectively. 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 55 and 60 basis points,
respectively, for the years ended September 30, 2016 and 2015 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.

EBITDA increased 20.5% to $50.0 million in the year ended September 30, 2015 compared to $41.5 million in the
year ended September 30, 2014. EBITDA as a percent of sales was 8.0% for each of the years ended September 30, 2015
and 2014, respectively. 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 each of the
years ended September 30, 2015 and 2014 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.

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

Our competitors may define EBITDA differently, and as a result, our measure of EBITDA may not be directly
comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and
assessing financial performance. EBITDA is a supplemental measure of operating performance that does not represent, and

should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data
presented in the consolidated financial statements as indicators of financial performance. EBITDA has limitations as an
analytical tool, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results
as reported under GAAP. For additional discussion of our use of EBITDA, and some of the limitations, please refer to the
“Selected Financial Data” section of this 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 and borrowings under our Credit Facility. Our primary uses of cash are for purchases of inventory, operating
expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service and
corporate taxes. As of September 30, 2016, we had $4.0 million in cash and cash equivalents, as well as $16.6 million
available for borrowing under our Credit Facility.

On May 5, 2016, our Board authorized a new two-year share repurchase program pursuant to which the Company
may expend up to $10.0 million to repurchase shares of the Company’s common stock. During the year ended September 30,
2016, we purchased 67,970 shares of our common stock for approximately $0.8 million (an average price of $12.20 per share)
under the share repurchase program. We expect funding of share repurchases will come from operating cash flow, excess
cash and/or borrowings under the Credit Facility. The timing and the number of shares purchased will be dictated by our
capital needs and stock market conditions.

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

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

thousands:

Year ended September 30,
2015

2016

2014

Net cash provided by operating activities ...................... $
Net cash used in investing activities ..............................
Net cash provided by (used in) financing activities .......
Net increase (decrease) in cash and cash equivalents ....
Cash and cash equivalents, beginning of year ...............
Cash and cash equivalents, end of year ......................... $

28,827
(53,740)
26,015
1,102
2,915
4,017

41,003
(42,338)
(863)
(2,198)
5,113
2,915

31,749
(34,872)
104
(3,019)
8,132
5,113

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including
depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by
operating activities decreased $12.2 million, or 29.7%, to $28.8 million in the year ended September 30, 2016, from $41.0
million in the year ended September 30, 2015. The decrease in cash provided by operating activities was primarily due to a
decrease in net income, as adjusted for non-cash items such as depreciation and amortization resulting from the addition of
new stores and deferred tax expense as well as changes in working capital driven by the timing of payment on inventory and
other 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 $9.3 million, or 29.1%, to $41.0 million in the year ended September
30, 2015, from $31.7 million in the year ended September 30, 2014. 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 and other purchases. Our
working capital requirements for inventory will likely continue to increase as we continue to open new stores.

Investing Activities

Net cash used in investing activities consists primarily of capital expenditures. Net cash used in investing activities
increased $11.4 million, or 26.9%, to $53.7 million in the year ended September 30, 2016 compared to $42.3 million in the
year ended September 30, 2015 due to the increased number and timing of new store openings, relocations and remodels,
partially offset by a decrease in the payment for the Store Acquisition described below. Cash paid for capital expenditures
increased $17.0 million in the year ended September 30, 2016 compared to the year ended September 30, 2015, driven by
the number and the timing of new store openings.

During the year ended September 30, 2016, we opened 23 new stores, relocated four stores and remodeled one store.
We plan to spend approximately $40.0 million to $48.0 million on capital expenditures during fiscal year 2017 in connection
with the opening of 15 to 20 planned new stores and three store relocations. We anticipate that our new stores will require,
on average, an upfront capital investment of approximately $2.2 million per store.

Acquisition of property and equipment not yet paid increased $0.4 million to $6.8 million in fiscal year 2016
compared to $6.4 million in fiscal year 2015 due to the timing of new store openings and relocations. We opened eight new
stores in the fourth quarter of fiscal year 2016 compared to opening four new stores in the fourth quarter of fiscal year 2015.

In 2015, net cash used in investing activities consisted primarily of capital expenditures. Cash used in investing
activities increased $7.5 million, or 21.4%, to $42.3 million in the year ended September 30, 2015 compared to $34.9 million
in the year ended September 30, 2014 due to the Company’s purchase of substantially all the assets and assumption of certain
liabilities of natural foods retailer Nature’s Pantry, Inc. (the Store Acquisition), which operated one retail store in
Independence, Missouri. We paid $5.6 million during the year ended September 30, 2015 related to the Store Acquisition.
Cash paid for capital expenditures increased $0.2 million in the year ended September 30, 2015 compared to the year ended
September 30, 2014, driven by the number and the timing of new store openings.

Financing Activities

Cash provided by or used in financing activities consists primarily of borrowings and repayments under our Credit
Facility and the Prior Credit Facility and payments of capital and financing lease obligations. Cash provided by financing
activities was $26.0 million for the year ended September 30, 2016, compared to cash used in financing activities of $0.9
million in the year ended September 30, 2015. The increase in cash provided by financing activities for the year ended
September 30, 2016 was primarily due to net borrowings of $27.4 million under our Credit Facility during the year ended
September 30, 2016.

Cash used in financing activities was $0.9 million for the year ended September 30, 2015, compared to cash provided
by financing activities of $0.1 million in the year ended September 30, 2014. The decrease in cash provided by financing
activities for the year ended September 30, 2015 was primarily due to the payment of $0.5 million of contingent consideration
related to the Store Acquisition and a $0.4 million decrease in the excess tax benefit from share-based compensation.

Credit Facility

On January 28, 2016, the Company entered into the Credit Facility. The operating company is the borrower under
the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and Vitamin Cottage
Two Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets.

The amount originally available for borrowing under the Credit Facility was $30.0 million, including a $5.0 million
sublimit for standby letters of credit. On May 10, 2016, the operating company entered into an amendment to the Credit
Facility, pursuant to which the amount available for borrowing thereunder was increased to $45.0 million, including a $5.0
million sublimit for standby letters of credit. The Company has the ability to increase the amount available for borrowing by
an additional amount that may not exceed $5.0 million if the existing lenders or other eligible lenders agree to provide an
additional commitment or commitments. The Company has the right to borrow, prepay and re-borrow amounts under the
Credit Facility at any time prior to the maturity date. The Credit Facility matures on January 31, 2021.

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

The Credit Facility requires compliance with certain customary operational and financial covenants, including a
leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur
additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other
limitations. Additionally, the Credit Facility prohibits the payment of cash dividends, except that so long as no default exists
or would arise as a result thereof, the operating company may pay cash dividends to the holding company for various audit,
accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary
course of business, and for repurchases of shares of common stock in an amount not to exceed $10.0 million.

At the same time it entered into the Credit Facility, the Company terminated the Prior Credit Facility.

We had $27.4 million outstanding under the Credit Facility as of September 30, 2016 and zero outstanding under
the Prior Credit Facility as of September 30, 2015. As of September 30, 2016, we had undrawn, issued and outstanding letters
of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit
Facility. As of September 30, 2015, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were
reserved against the amount available for borrowing under the terms of the Prior Credit Facility. We had $16.6 million
available for borrowing under the Credit Facility as of September 30, 2016 and $14.0 million available for borrowing under
the Prior Credit Facility as of September 30, 2015.

As of September 30, 2016, the Company was in compliance with the debt covenants under the Credit Facility. As

of September 30, 2015, the Company was in compliance with the debt covenants under the Prior Credit Facility.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2016, dollars in thousands:

Payments Due by Period

Total

Less than
1 year

1–3 years 3-5 years

More than
5 years

Operating leases (1) ............................................... $ 504,576
Capital and financing lease obligations, including

36,138

78,021

74,345

316,072

principal and interest payments (2) ...................
Debt obligations (3) ...............................................
Interest payments (4) .............................................
Contractual obligations for construction related

48,207
27,428
1,845

3,933
─
425

7,990
─
850

8,061
27,428
570

28,223
─
─

activities (5) .......................................................

4,532
$ 586,588

4,532
45,028

─

86,861

─
110,404

─
344,295

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

insurance and taxes related to our operating lease obligations.

(2) Represents the payments due under our 16 capital and financing lease obligations, 15 of which were open as of
September 30, 2016. 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.

(3) Represents the outstanding balance on our Credit Facility as of September 30, 2016. For purposes of this table, the
outstanding balance was considered outstanding until January 31, 2021, which is the maturity date of the Credit Facility.
In order to calculate future interest payments during the remaining term of our Credit Facility, current amounts were
considered outstanding until January 31, 2021, which is the maturity date of the Credit Facility.

(4)

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

binding as of September 30, 2016 and relate to new store construction, relocations and remodels.

Off-Balance Sheet Arrangements

As of September 30, 2016, our off-balance sheet arrangements consisted of operating leases and the undrawn portion
of our Credit Facility. The majority of our stores and facilities are leased, with varying terms and renewal options. Currently,
we own buildings in which three of our stores are located; those buildings are located on land that is leased pursuant to a
ground lease. As of September 30, 2016, 16 store 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 effect on our consolidated financial statements
or financial condition.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2016-09, “Improvements to Employee Share-Based Payment Accounting,” Topic 718, “Compensation-Stock Compensation”
(ASU 2016-09). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments
are accounted for and presented in the financial statements. The main provision requires all excess tax benefits and tax
deficiencies to be recognized as income tax benefit or expense in the statement of income. The tax effects of exercised or
vested awards should be treated as discrete items in the reporting period in which they occur. The ASU also allows an entity
to make an entity-wide election to either estimate the number of awards that are expected to vest (current GAAP) or account
for forfeitures when they occur. Other provisions in ASU 2016-09 permit tax withholding up to the maximum statutory tax
rates in the applicable jurisdictions. Under ASU 2016-09 excess tax benefits must be classified along with other income tax
cash flows as an operating activity. The provisions of ASU 2016-09 are effective for the Company’s first quarter of the fiscal
year ending September 30, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the
adoption of ASU 2016-09 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases,” Topic 842, “Leases” (ASU 2016-02). ASU 2016-02
intends to improve financial reporting about leasing transactions. The ASU will require organizations that lease assets to
recognize on the balance sheet assets and liabilities for the rights and obligations created by those leases. For income
statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or capital. Operating
leases will result in straight-line expense while capital leases will result in a front-loaded expense pattern. Classification will
be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The
amendments also require certain quantitative and qualitative disclosures. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018 and interim periods within those years. The provisions of ASU 2016-02 are effective for the
Company’s first quarter of the fiscal year ending September 30, 2020. Early adoption is permitted. The new standard must
be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require
application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently
evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements but expects it to
have a significant impact on its balance sheet due to the number of operating leases to which the Company is a party.

In November 2015, the FASB issued Accounting Standards Update 2015-17, “Income Taxes,” Topic 740, “Income
Taxes” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. The amendments in ASU
2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The Company elected early adoption of the provisions of ASU 2015-17 prospectively for the periods ended March 31, 2016
and thereafter and has presented its deferred tax liabilities and assets as noncurrent in its consolidated financial statements as
of March 31, 2016 and periods ended thereafter.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory”
(ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than
the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net
realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for
fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are
effective for the Company’s first quarter of the fiscal year ending September 30, 2018. The Company does not expect the
adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing
Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05
provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service,
infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that
determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a
prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after
December 15, 2015 and interim periods within those fiscal years. The provisions of ASU 2015-05 are effective for the
Company’s first quarter of the fiscal year ending September 30, 2017. The Company does not expect the adoption of these
provisions to have a significant impact on the Company’s consolidated financial statements.

“Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-
09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public
companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However,
earlier adoption is permitted only for annual reporting periods beginning after December 15, 2016. The guidance in ASU
2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company is
currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.

Critical Accounting Policies

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

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

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

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

Goodwill and Intangible Assets

We assess our goodwill and intangible assets primarily consisting of trademarks, favorable operating leases and
covenants-not-to-compete at least annually. The Company’s annual impairment testing of goodwill is performed as of
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 performs the two-step impairment test. There are significant
judgments and estimates within the processes; it is therefore possible that materially different amounts could be recorded if
we used different assumptions or if the underlying circumstances were to change.

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, land and administrative offices under
long-term operating leases, 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.

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 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 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;

● minimum 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 minimum 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 minimum 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 Credit Facility. As of
September 30, 2016, $27.4 million was outstanding under our Credit Facility. Our Credit Facility carries floating interest
rates that are tied to the prime rate, and therefore, our statements of income and our cash flows are exposed to changes in
interest rates. Based upon a sensitivity analysis at September 30, 2016, a hypothetical 100 basis point change in interest rates
would change our annual interest expense by $0.2 million in the year ended September 30, 2016.

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, 2016 and 2015 .........................................................................
Consolidated Statements of Income for the years ended September 30, 2016, 2015 and 2014 ..............................
Consolidated Statements of Cash Flows for the years ended September 30, 2016, 2015 and 2014 ........................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2016, 2015

Page
Number
58
59
60
61

and 2014 ...............................................................................................................................................................
Notes to Consolidated Financial Statements ...........................................................................................................

62
63

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, 2016 and 2015, and the related consolidated statements of income, cash flows, and
changes in stockholders’ equity for each of the years in the three-year period ended September 30, 2016. 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, 2016 and 2015, and the results of
their operations and their cash flows for each of the years in the three-year period ended September 30, 2016, in conformity
with U.S. generally accepted accounting principles.

Denver, Colorado
December 8, 2016

/s/ KPMG LLP

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

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

Current assets:

Assets

Cash and cash equivalents ........................................................................................... $
Accounts receivable, net ..............................................................................................
Merchandise inventory ................................................................................................
Prepaid expenses and other current assets ....................................................................
Deferred income tax assets ..........................................................................................
Total current assets ...................................................................................................
Property and equipment, net ............................................................................................
Other assets:

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 ..............................................
Total current liabilities .............................................................................................

Long-term liabilities:

Capital and financing lease obligations, net of current portion ...................................
Revolving credit facility ..............................................................................................
Deferred income tax liabilities .....................................................................................
Deferred compensation ................................................................................................
Deferred rent .................................................................................................................
Leasehold incentives .....................................................................................................
Total long-term liabilities .........................................................................................
Total liabilities .........................................................................................................

Commitments (Notes 10 and 17)
Stockholders’ equity:

Common stock, $0.001 par value. 50,000,000 shares authorized, 22,510,279 and
22,496,628 shares issued, at 2016 and 2015, respectively and 22,452,609 and
22,496,628 outstanding, at 2016 and 2015, respectively ...........................................
Additional paid-in capital ............................................................................................
Retained earnings ........................................................................................................
Common stock in treasury at cost, 57,670 and no shares, at 2016 and 2015,

respectively ...............................................................................................................
Total stockholders’ equity ........................................................................................
Total liabilities and stockholders’ equity ................................................................. $

See accompanying notes to consolidated financial statements.

September 30,

2016

2015

4,017
3,747
86,330
3,233
—
97,327
178,297

971
5,601
50
6,622
282,246

53,615
12,448
478
66,541

31,429
27,428
12,178
757
8,809
8,379
88,980
155,521

23
55,437
71,955

(690)
126,725
282,246

2,915
2,576
74,818
1,108
866
82,283
145,219

778
5,623
21
6,422
233,924

49,896
19,649
333
69,878

27,274
—
6,073
314
6,922
7,975
48,558
118,436

22
54,982
60,484

—
115,488
233,924

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

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

Year ended September 30,
2015

2016

2014

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, net .............................................................
Income before income taxes .......................................................
Provision for income taxes ................................................................
Net income .................................................................................

705,499
503,727
201,772
156,158
19,242
5,993
20,379

—
(3,044)
(3,044)
17,335
(5,864)
11,471

624,678
442,582
182,096
132,131
17,514
3,822
28,629

—
(2,993 )
(2,993 )
25,636
(9,432 )
16,204

520,674
369,172
151,502
108,657
14,823
3,774
24,248

2
(2,496 )
(2,494 )
21,754
(8,281 )
13,473

Net income per share of common stock:

Basic ........................................................................................... $
Diluted ....................................................................................... $
Weighted average number of shares of common stock outstanding:

0.51
0.51

0.72
0.72

0.60
0.60

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

22,492,986
22,507,152

22,490,260
22,500,833

22,466,432
22,479,835

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows
(Dollars in thousands)

Operating activities:

Net income ................................................................................................ $
Adjustments to reconcile net income to net cash provided by operating

activities:
Depreciation and amortization ..............................................................
(Gain) loss on disposal of property and equipment ...............................
Share-based compensation .....................................................................
Excess tax benefit from share-based compensation ..............................
Deferred income tax expense (benefit) ..................................................
Non-cash interest expense .....................................................................
Interest accrued on investments and amortization of premium ..............
Changes in operating assets and liabilities

(Increase) decrease in:

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

Increase (decrease) in:

Accounts payable ..........................................................................
Accrued expenses ..........................................................................
Deferred compensation .................................................................
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 .........................................
Payment for acquisition ............................................................................
Proceeds from maturity of available-for-sale securities .............................
Decrease in restricted cash .........................................................................
Net cash used in investing activities ..........................................

Financing activities:

Borrowings under credit facility ...............................................................
Repayments under credit facility ...............................................................
Repurchases of common stock ..................................................................
Capital and financing lease obligations payments .....................................
Contingent consideration payments for acquisition ..................................
Excess tax benefit from share-based compensation ..................................
Payments on withholding tax for restricted stock unit vesting ...................
Loan fees paid ...........................................................................................
Net cash provided by (used in) financing activities ...................
Net increase (decrease) 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 ................................................................................. $
Cash paid for interest on capital and financing lease obligations, net of

capitalized interest of $538, $309 and $364, respectively .....................
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 ...........
Direct bank to bank payment for a change in credit facility provider .......

Year ended September 30,
2015

2016

2014

11,471

16,204

13,473

25,533
(3)
879
—
6,971
13
—

(1,171)
(1,776)
(11,512)
(542)

3,314
(7,345)
443
2,552
28,827

(53,759)
19
—
—
—
(53,740)

234,604
(207,176)
(829)
(423)
—
—
(119)
(42)
26,015
1,102
2,915
4,017

21,337
56
573
—
630
15
—

(430 )
—
(15,711 )
(533 )

12,891
3,848
314
1,809
41,003

(36,750 )
13
(5,601 )
—
—
(42,338 )

202,878
(202,878 )
—
(247 )
(514 )
—
(102 )
—
(863 )
(2,198 )
5,113
2,915

331

2,637
6,370

6,837
4,438
18,858

2,809
8,194

6,429
5,772
—

17,212
1
532
(399 )
(1,186 )
19
9

255
612
(12,909 )
(665 )

5,202
6,952
—
2,641
31,749

(36,512 )
—
—
1,140
500
(34,872 )

46,440
(46,440 )
—
(182 )
—
399
(83 )
(30 )
104
(3,019 )
8,132
5,113

2,423
3,762

3,260
2,300
—

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity
Fiscal Years Ended September 30, 2016, 2015 and 2014
(Dollars in thousands, except per share data)

Common stock –$0.001
par value

outstanding Amount

Additional
paid-in
capital

Retained
earnings

Treasury
stock

Total
stockholders’
equity

— $
—
—

—
—
—
—

—
—
—
139

—
(829)
(690) $

84,533
13,473
449

399
98,854
16,204
471

(41)
115,488
11,471
749

(154)
(829)
126,725

Balances September 30, 2013 ....... 22,441,253 $
—
44,235

Net income .................................
Share-based compensation .........
Excess tax benefit from share-

based compensation ..............

—
Balances September 30, 2014 ....... 22,485,488
—
11,140

Net income .................................
Share-based compensation .........
Tax shortfall related to share-

based compensation ...............

—
Balances September 30, 2015 ...... 22,496,628
—
23,951

Net income ................................
Share-based compensation .........
Tax shortfall related to share-

22 $
—
—

53,704 $
—
449

30,807 $
13,473
—

—
22
—
—

—
22
—
1

399
54,552
—
471

(41)
54,982
—
609

—
44,280
16,204
—

—
60,484
11,471
—

based compensation ...............
Repurchase of common stock ....

—
(67,970)
Balances September 30, 2016 ...... 22,452,609 $

—
—
23 $

(154)
—
55,437 $

—
—
71,955 $

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Consolidated Financial Statements
September 30, 2016 and 2015

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 126 stores as of September
30, 2016, including 36 stores in Colorado, 18 in Texas, 12 in Arizona, eight each in Kansas and Oregon, seven in Oklahoma,
five each in New Mexico and Utah, four each in Idaho and Montana, three each in Missouri, Nebraska and Nevada, two each
in Arkansas, North Dakota, Washington and Wyoming, and one each in Iowa and Minnesota. The Company also has a bulk
food repackaging facility and distribution center in Colorado. The Company had 103 and 87 stores as of September 30, 2015
and 2014, respectively.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with 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 of property and
equipment for depreciation and amortization, 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.

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. The Company considers all highly liquid
investments with a remaining maturity of 90 days or less when acquired to be cash equivalents.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, 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. Allowance for doubtful
accounts is calculated based on historical experience and application of the specific identification method. Allowance for
doubtful accounts totaled less than $0.1 million as of September 30, 2016 and 2015.

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 and accounts receivable. 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 $3.8 million as of September 30, 2016.

Vendor Concentration

For the years ended September 30, 2016, 2015 and 2014, purchases from the Company’s largest vendor and its
subsidiaries represented approximately 59%, 57% and 56%, respectively, of all product purchases made during such periods.
However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to
avoid material disruptions to operations.

Merchandise Inventory

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

Property and Equipment

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

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

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). The three levels are
defined as follows:

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.

The Company’s annual impairment testing of goodwill 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 performs 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. As of September 30, 2016 the Company has
recorded no impairment charges related to goodwill.

Impairment of Finite-Lived 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. As of September
30, 2016, the Company has recorded no impairment charges related to finite-lived 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 credit facility using the straight-line method.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices
under long-term operating or capital or 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, and the difference between the average rental amount charged
to expense and amounts payable under the leases are included in deferred rent. 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. 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 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 payments under the capital financing lease obligations are
recognized as a reduction of the capital lease financing obligation and as interest expense. The capital financing lease asset
is depreciated on a straight-line basis over the estimated useful life of the asset.

Capital leases

Occasionally, the Company enters into leases that are deemed to be capital leases. For these leases, the Company
capitalizes the lower of the present value of the minimum lease payments or the fair value of the leased asset at inception and
records a corresponding capital lease obligation. The Company does not record rent expense for the rental payments under
capital leases, but rather 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 and dental benefits and workers
compensation. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses
are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience.
The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from
historical trends.

Revenue Recognition

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

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and
allowances, as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging
facility and distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity
discounts and payments. Vendor consideration associated with product discounts is recorded as 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.

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, 2016, 2015 and 2014 were approximately $10.8 million, $9.3 million and $7.8 million, respectively, net of
vendor reimbursements received for newsletter advertising of approximately $3.2 million, $2.5 million and $1.9 million for
the years ended September 30, 2016, 2015 and 2014, respectively.

Share-Based Compensation

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

The excess tax benefits for recognized compensation costs are reported as a credit to additional-paid-in capital and

as operating cash outflows when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

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

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the

amounts the Company believes are more likely than not to be recovered.

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

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent

differences for tax purposes.

Recent Accounting Pronouncements

In November 2015, the FASB issued Accounting Standards Update 2015-17, “Income Taxes,” Topic 740, “Income
Taxes” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. The amendments in ASU
2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The Company elected early adoption of the provisions of ASU 2015-17 prospectively for the period ended March 31, 2016
and thereafter and has presented its deferred tax liabilities and assets as noncurrent in its consolidated financial statements as
of March 31, 2016 and periods ended thereafter.

fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are
effective for the Company’s first quarter of the fiscal year ending September 30, 2018. The Company does not expect the
adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” Topic 606, “Revenue
from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace
most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a
company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits
the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14,
“Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-
09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public
companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However,
earlier adoption is permitted only for annual reporting periods beginning after December 15, 2016. The guidance in ASU
2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company is
currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.

3. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number
of shares of common stock 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, 2016, 2015 and 2014, dollars in thousands, except per share data:

Year ended September 30,
2015

2016

2014

13,473
Net income ......................................................................................................... $
Weighted average number of shares of common stock outstanding .................. 22,492,986 22,490,260 22,466,432
Effect of dilutive securities ................................................................................
13,403
Weighted average number of shares of common stock outstanding including

16,204

10,573

11,471

14,166

the effect of dilutive securities ........................................................................ 22,507,152 22,500,833 22,479,835

Basic earnings per share ...................................................................................... $
Diluted earnings per share .................................................................................. $

0.51
0.51

0.72
0.72

0.60
0.60

There were 61,115, 120,674 and 3,558 non-vested restricted stock units (RSUs) for the years ended September 30,

2016, 2015 and 2014, respectively, excluded from the calculation as they are antidilutive.

The Company did not declare or pay any dividends in the years ended September 30, 2016, 2015 or 2014.

As of September 30, 2016, the Company had 50,000,000 shares of common stock authorized, of which 22,510,279
shares were issued and 22,452,609 were outstanding, as well as 10,000,000 shares of preferred common stock authorized, of
which none was issued and outstanding.

4. Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring
fair value. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data

(observable inputs) and market participant’s assumptions (unobservable inputs). Non-financial assets, such as goodwill and
long-lived assets, are accounted for at fair value on a non-recurring basis. These items are tested for impairment on the
occurrence of a triggering event or in the case of goodwill, at least on an annual basis.

As of September 30, 2016 and 2015, the Company did not have any financial assets or liabilities that were subject
to fair value measurements. The carrying amounts of the Company’s financial assets and liabilities, including cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and other accrued expenses, approximate fair value
because of the short maturity of those assets and liabilities.

5. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2016 and 2015, dollars in

thousands:

Construction in process .......................................................................
Capitalized real estate leases for build-to-suit stores, including

Useful lives
(in years)
n/a

unamortized land of $617 and $617, respectively ...........................
Capitalized real estate leases ...............................................................
Land ....................................................................................................
Buildings .............................................................................................
Land improvements .............................................................................
Leasehold and building improvements ................................................
Fixtures and equipment .......................................................................
Computer hardware and software ........................................................

40
15
n/a

5 - 24
1 - 25
5 - 7
3 - 5

Less accumulated depreciation and amortization .................................
Property and equipment, net ............................................................

As of September 30,
2015
2016

6,561

10,150

28,393
5,735
192
12,546
1,055
118,119
103,415
16,737
292,753
(114,456)
178,297

24,774
4,866
192
4,980
1,015
91,865
83,932
13,834
235,608
(90,389)
145,219

As of September 30, 2016 and 2015, construction in process included $1.1 million and approximately zero,
respectively, related to construction costs for build-to-suit leases in process for which the Company was deemed the owner
during the construction period. As of September 30, 2016 and 2015, construction in process included zero and $0.9 million,
respectively, for capital real estate leases.

Capitalized costs for computer software development were less than $0.1 million and $0.2 million for the years
ended September 30, 2016 and 2015, 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 included
approximately $0.9 million and $0.6 million, for the years ended September 30, 2016 and 2015, respectively, related to
internal staff compensation. Interest costs of approximately $0.5 million, $0.3 million and $0.4 million were capitalized for
the years ended September 30, 2016, 2015 and 2014, respectively. Depreciation expense related to capitalized internal staff
compensation was approximately $0.5 million, $0.4 million and $0.3 million for the years ended September 30, 2016, 2015,
and 2014, respectively.

Depreciation and amortization expense for the years ended September 30, 2016, 2015 and 2014 is summarized as

follows, dollars in thousands:

Year ended September 30,
2015

2016

2014

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 ................................................. $

868
23,428
1,237
25,533

796
19,635
906
21,337

770
15,861
581
17,212

6. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2016 and 2015, are summarized as follows, dollars in

thousands:

Useful lives
(in years)

As of September 30,
2015
2016

Amortizable intangible assets:

Covenants-not-to-compete ...................................
Favorable operating lease ....................................
Other intangibles ..................................................
Amortizable intangible assets ...........................
Less accumulated amortization ............................
Amortizable intangible assets, net ....................
Trademark ...............................................................
Total other intangibles, net ...............................
Goodwill ..................................................................
Total goodwill and other intangibles, net .........

2 - 5
5
0.5 - 1

Indefinite

353
—
41
394
(380)
14
389
403
5,198
5,601

353
339
27
719
(683)
36
389
425
5,198
5,623

Amortization expense was less than $0.1 million, less than $0.1 million and $0 million for the years ended September
30, 2016, 2015 and 2014, respectively. The aggregate estimated amortization expense for the years ending September 30,
2017 and 2018 is less than $0.1 million. There is no estimated amortization expense for the years ending September 30, 2019,
2020 and 2021.

7. Accrued Expenses

The composition of accrued expenses as of September 30, 2016 and 2015, is summarized as follows, dollars in

thousands:

As of September 30,
2015

2016

Payroll and employee-related expenses ............................ $
Accrued income taxes payable ..........................................
Accrued property, sales and use tax payable ....................
Accrued marketing expenses .............................................
Deferred revenue related to gift card sales ........................
Other .................................................................................
Total accrued expenses .................................................. $

4,395
—
5,648
567
866
972
12,448

7,795
5,540
4,365
532
864
553
19,649

8. Deferred Financing Costs

The Company has capitalized costs incurred in securing its credit facility (see Note 9). Deferred financing costs, net
of accumulated amortization were less than $0.1 million as of September 30, 2016 and 2015. Accumulated amortization was
less than $0.1 million and $0.9 million as of September 30, 2016 and 2015, respectively.

Total amortization expense for deferred financing costs was less than $0.1 million for each of the years ended

September 30, 2016, 2015 and 2014.

9. Long-Term Debt

Credit Facility

On January 28, 2016, the Company entered into a new $30.0 million credit facility, including a $5.0 million sublimit
for standby letters of credit (the Credit Facility). The operating company is the borrower under the Credit Facility and its
obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a
lien on substantially all of the Company’s assets.

On May 10, 2016, the operating company entered into an amendment to the Credit Facility, pursuant to which the
amount available for borrowing thereunder was increased to $45.0 million, including a $5.0 million sublimit for standby

letters of credit. The Company has the ability to increase the amount available for borrowing by an additional amount that
may not exceed $5.0 million if the existing lenders or other eligible lenders agree to provide an additional commitment or
commitments. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time
prior to the maturity date. The Credit Facility matures on January 31, 2021.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a
leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur
additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other
limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the
operating company without the administrative agent’s consent, 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 incurred in the ordinary course of business, including cash dividends to the holding
company for the repurchase of shares of common stock in an amount not to exceed $10.0 million.

At the same time it entered into the Credit Facility, the Company terminated its prior credit agreement (the Prior

Credit Facility).

The Company had $27.4 million outstanding under the Credit Facility as of September 30, 2016 and zero outstanding
under the Prior Credit Facility as of September 30, 2015. As of September 30, 2016, the Company had undrawn, issued and
outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms
of the Credit Facility. As of September 30, 2015, the Company had undrawn, issued and outstanding letters of credit of $1.0
million, which were reserved against the amount available for borrowing under the terms of the Prior Credit Facility. The
Company had $16.6 million available for borrowing under the Credit Facility as of September 30, 2016 and $14.0 million
available for borrowing under the Prior Credit Facility as of September 30, 2015.

Capital and Financing Lease Obligations

The Company had 16 and 13 leases as of September 30, 2016 and 2015, respectively, that are included in capital
and financing lease obligations (see Notes 2 and 10). 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 10). The interest rate on capital and financing lease obligations is
determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $3.5 million, $3.3 million and $2.9 million in the
years ended September 30, 2016, 2015 and 2014, respectively. Interest expense for the years ended September 30, 2016,
2015 and 2014 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of
approximately $0.5 million, $0.3 million and $0.4 million for the years ended September 30, 2016, 2015 and 2014,
respectively.

10. 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 2062. These leases include scheduled increases in minimum rents and renewal
provisions at the option of the Company. Deferred rent expense as of September 30, 2016 and 2015 was approximately $8.8
million and $6.9 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, 2016 and 2015 were approximately $8.4 million and $8.0 million, respectively. Sublease rental income was
less than $0.1 million for each of the years ended September 30, 2016, 2015 and 2014, respectively.

The Company has five operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely
Family Land Trust LLC and one operating lease with FTVC, LLC, all related parties (see Note 13). 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. Currently, annual lease payments range from less than $0.1 million to approximately $0.3 million
per lease.

Minimum rental commitments and sublease rental income under the terms of the Company’s operating leases are as

follows, dollars in thousands:

Fiscal Year
2017 ......................................... $
2018 .........................................
2019 .........................................
2020 .........................................
2021 .........................................
Thereafter .................................
Total payments ......................... $

Third
parties

Related
parties

35,463
38,325
37,412
36,739
35,524
319,577
503,040

1,329
1,329
1,329
1,333
1,310
6,595
13,225

Sublease
rental
income

Total
operating
leases

(315)
(342)
(332)
(296)
(283)
(928)
(2,496)

36,477
39,312
38,409
37,776
36,551
325,244
513,769

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2016,
2015, and 2014 totaled approximately $34.6 million, $26.3 million and $20.5 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 $1.4 million, $0.8 million and $1.0 million is included in pre-opening and relocation expense associated with
rent expense for stores prior to their opening date for the years ended September 30, 2016, 2015 and 2014, respectively.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of September 30, 2016 and 2015, were as follows, dollars in thousands:

Capital lease finance obligations, due in monthly installments through fiscal year 2031 ...... $
Capital lease obligations due in monthly installments through fiscal year 2041 .....................
Capital lease finance obligations for assets under construction, due in monthly installments

As of September 30,
2015
2016

25,619
5,213

22,096
4,539

through fiscal year 2032 ......................................................................................................

1,075

—

Capital lease obligations for assets under construction, due in monthly installments through

fiscal year 2041 ....................................................................................................................
Total capital and financing lease obligations ......................................................................
Less current portion .................................................................................................................
Total capital and financing lease obligations, net of current portion .................................. $

—
31,907
(478)
31,429

972
27,607
(333)
27,274

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. 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 $25.6 million and $22.1 million as of September 30, 2016 and 2015, respectively. The leases that created the
obligations expire or become subject to renewal clauses at various dates through fiscal year 2031. 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 derecognized.

During the quarter ended December 31, 2014, the Company amended an existing lease with Chalet Properties, LLC,
a related party (see Note 13) to obtain additional square footage at one Company store. Due to the Company’s involvement
with construction for the additional space, the amended lease was deemed to be a capital financing lease in the quarter ended
December 31, 2014.

Capital lease obligations

The Company had capital lease obligations totaling approximately $5.2 million and $4.5 million as of September
30, 2016 and 2015, respectively. 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 2041. 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 obligations for assets under construction

As of September 30, 2016, the Company had $1.1 million in construction in process related to capital lease finance
obligations. As of September 30, 2015, the Company had no construction in process related to 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 derecognized.

Capital lease obligations for assets under construction

The Company had recorded approximately zero and $1.0 million for capital lease obligations for assets under
construction as of September 30, 2016 and 2015, respectively. The lease that created the obligation as of September 30, 2015
expires or becomes subject to renewal clauses in fiscal year 2041. 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 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 obligation will be $0.

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, 2016 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

Principal
payments
on capital
lease
obligations

2017 ..................................................................... $
2018 .....................................................................
2019 .....................................................................
2020 .....................................................................
2021 .....................................................................
Thereafter ............................................................
Non-cash derecognition of capital lease finance

obligations at end of lease term .......................
Total payments ..................................................... $

2,793
2,768
2,737
2,701
2,658
14,751

261
300
367
405
479
5,220

—
28,408

18,587
25,619

528
505
481
453
423
2,511

—
4,901

Total
future
payments
on capital
lease
finance
and capital
lease
obligations
3,796
3,809
3,846
3,847
3,879
26,377

214
236
261
288
319
3,895

—
5,213

18,587
64,141

Future payments under the terms of the lease for the store location at which construction was in progress as of
September 30, 2016, based on the store opening date in the first quarter of fiscal year 2017, are as follows, dollars in
thousands:

Interest expense
on capital
lease finance
obligations for
assets under
construction

Principal
payments on
capital lease
finance
obligations
for assets under
construction

Total future
payments on
capital
lease finance
obligations for
assets under
construction

2017 ....................................................................................... $
2018 .......................................................................................
2019 .......................................................................................
2020 .......................................................................................
2021 .......................................................................................
Thereafter ..............................................................................
Non-cash derecognition of capital lease finance obligations

at end of lease term ............................................................
Total payments ....................................................................... $

135
164
164
163
163
1,450

—
2,239

2
3
4
4
5
396

661
1,075

137
167
168
167
168
1,846

661
3,314

11. Share-Based Compensation

The Company adopted the 2012 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 new shares of the Company’s common stock or shares of common
stock held in treasury. At the adoption of the Plan, there were 1,090,151 shares of common stock available for issuance or
delivery under the Plan, of which 599,790 remain available for grants as of September 30, 2016. The Plan provides for awards
of options, stock appreciation rights, stock grants, restricted stock units, other share-based awards and cash-based incentive
awards to officers, members of the Board of Directors (the Board) and certain employees who are not named executive
officers and consultants. As of September 30, 2016, only restricted stock units had been granted under the Plan, at no out-of-
pocket cost to officers, Board members and key employees. These restricted stock units vest subject to requisite service
requirements, immediately in part or annually in installments over a one-to-five year period. The award recipients are not
entitled to cash dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture
during the vesting period. Restricted stock units are granted at the market price of the Company’s stock on the date of grant
and are expensed on a straight-line basis over the vesting period.

The shares of non-vested restricted stock units as of September 30, 2016 were as follows:

Weighted
average grant
date fair value

Non-vested as of September 30, 2014 ...................
Granted .................................................................
Forfeited ...............................................................
Vested ...................................................................
Non-vested as of September 30, 2015 ..................
Granted .................................................................
Forfeited ...............................................................
Vested ...................................................................
Non-vested as of September 30, 2016 ..................

37,194 $
127,751
(17,560 )
(15,529 )
131,856
20,790
(26,601 )
(33,459 )
92,586

34.77
24.14
25.04
32.34
26.05
20.68
25.36
27.50
24.52

Share-based compensation expense for awards to certain employees who are not named executive officers was
approximately $0.7 million, $0.4 million and $0.4 million for the years ended September 30, 2016, 2015, and 2014,
respectively.

Prior to fiscal year 2015, each independent member of the Board was annually granted a number of non-vested
restricted stock units under the Plan equal to the number of shares of common stock having a value equal to $50,000 (based
on the closing price of common stock on the New York Stock Exchange on the date of grant). In December 2014, the
disinterested members of the Board increased the value of the annual grant of restricted stock to each independent director to

$60,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). Such grants
are made each year on the date of the Company’s annual meeting of stockholders, or on a pro rata basis in the case of a mid-
year appointment. Share-based compensation expense for the Company’s awards to its Board members was approximately
$0.2 million, $0.2 million and $0.1 million for the years ended September 30, 2016, 2015 and 2014, respectively.

The Company recorded total share-based compensation expense before income taxes of approximately $0.9 million,
$0.6 million and $0.5 million in the years ended September 30, 2016, 2015, and 2014, respectively. 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 presented. The Company did not realize a tax benefit from share-based compensation
expense in the years ended September 30, 2016 and 2015 and realized a tax benefit from share-based compensation expense
of approximately $0.4 million in the year ended September 30, 2014.

As of September 30, 2016, there was approximately $1.9 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 three years.

12. Stockholders’ Equity

Share Repurchases

On May 5, 2016, the Board authorized a two-year share repurchase program pursuant to which the Company may
repurchase up to $10.0 million in shares of the Company’s common stock. Repurchases under the Company’s share
repurchase program are made from time to time at management’s discretion on the open market or through privately
negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the
Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of
common stock may also be made under a Rule 10b5-1 plan, which would permit common stock to be repurchased when the
Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not
obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued
by the Company without prior notice.

The following table summarizes share repurchase activity for the periods indicated (in thousands, except number of

shares acquired and average per share cost):

As of September 30,

2016

2015

Number of common shares acquired ...........................................................................
Average price per common share acquired (including commissions) .......................... $
Total cost of common shares acquired ........................................................................ $

67,970
12.20
829

—
—
—

During fiscal years 2016 and 2015, the Company reissued 10,300 treasury shares at a cost of $0.1 million and
zero treasury shares, respectively, to partially satisfy the issuance of common stock pursuant to the vesting of certain restricted
stock unit awards. At September 30, 2016 and September 30, 2015, the Company held in treasury 57,670 shares and zero
shares, respectively, totaling approximately $0.7 million and zero, respectively.

Between October 1 and December 2, 2016 (the latest practicable date for making the determination), the Company

has not repurchased any additional shares of the Company’s common stock.

13. Related Party Transactions

The Company has ongoing relationships with related parties as noted:

Chalet Properties, LLC: The Company has five operating leases and one capital lease finance obligation (see Note
10) with Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members, Kemper
Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was
approximately $1.2 million, $1.1, million and $1.3 million for the years ended September 30, 2016, 2015 and 2014,
respectively. During the year ended September 30, 2015, Chalet sold one property to a third party in connection with one of
the Company’s planned store relocations for the year ended September 30, 2016. The Company leased a new property with
a non-related party for the relocated store’s new location. During the quarter ended December 31, 2014, the Company

amended an existing lease with Chalet to obtain additional square footage at one Company store. Due to the Company’s
involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the
quarter ended December 31, 2014.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 10) 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, 2016, 2015, and 2014.

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the
Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than
$0.1 million for each of the years ended September 30, 2016 and 2015 and zero for the year ended September 30, 2014.

14. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2016, 2015 and 2014,

respectively, dollars in thousands:

Year ended September 30,
2015

2016

2014

Current federal income tax (benefit) expense ......... $
Current state income tax (benefit) expense .............
Total current income tax (benefit) expense .............

Deferred federal income tax expense (benefit) .......
Deferred state income tax expense (benefit) ...........
Total deferred income tax expense (benefit) ...........

(853)
(254)
(1,107)

6,103
868
6,971

7,769
1,033
8,802

514
116
630

8,304
1,163
9,467

(1,112)
(74)
(1,186)

Total provision for income taxes ......................... $

5,864

9,432

8,281

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

are as follows:

Year ended September 30,
2015

2014

2016

Statutory tax rate .....................................................
State income taxes, net of federal income tax

expense ................................................................
Other, net ................................................................
Effective tax rate .................................................

34.0%

35.0

2.9
(3.0)
33.9%

2.9
(1.1)
36.8

35.0

3.0
0.1
38.1

The Company’s effective tax rate decreased from 36.8% in the year ended September 30, 2015 to 33.9% in the year
ended September 30, 2016 primarily due to a revision in its estimated annual federal tax rate from 35% to 34% and federal
and state tax credits in its fiscal 2015 tax return that were higher than previously estimated in the provision for the year ended
September 30, 2015.

The Company has early adopted the requirements of ASU No. 2015-17 and applied the amended provisions

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

Current assets ....................................... $
Long-term liabilities ............................
Net deferred tax liabilities ................ $

—
(12,178)
(12,178)

866
(6,073)
(5,207)

As of September 30,
2015
2016

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:

Deferred tax assets

Capital and financing lease obligations ............. $
Goodwill .............................................................
Leasehold incentives .........................................
Deferred rent ......................................................
Trademarks ........................................................
Accrued employee benefits ...............................
Other ..................................................................
Gross deferred tax assets ................................

Deferred tax liabilities

Property and equipment .....................................
Leasehold improvements ...................................
Other ..................................................................
Gross deferred tax liabilities ..........................
Net deferred tax liabilities .............................. $

As of September 30,
2015
2016

12,091
2,222
3,187
3,350
1,021
734
597
23,202

(32,103)
(3,195)
(82)
(35,380)
(12,178)

10,473
2,582
3,025
2,627
1,018
729
363
20,817

(22,909)
(3,087)
(28)
(26,024)
(5,207)

The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of

future deductions based on the nature of the deductible temporary differences and expected future taxable income.

The Company utilized zero and less than $0.1 million in tax effected state income tax carryforwards in the years

ended September 30, 2016 and 2015, respectively.

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 2012 and prior and is no longer subject to
state and local income tax examinations for fiscal years 2011 and prior.

15. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees
who meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral
provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Employees may defer up to the
annual maximum limit prescribed by the Code. The Company, on a discretionary basis, may match 25% of participant
contributions up to a maximum annual employer match of $2,500. For the year ended September 30, 2016, the Company did
not make a matching contribution due to the Company’s failure to meet certain targets. In addition, during the year ended
September 30, 2016, the Company reversed a $0.2 million accrual for a matching contribution that was recorded during the
year ended September 30, 2015 with respect to the year ended September 30, 2016. For the years ended September 30, 2015
and 2014, the Company’s matching contribution consisted of an expense of approximately $0.6 million and $0.1 million,
respectively.

16. 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, 2016, 2015 and 2014 as follows:

Grocery ..................................................
Dietary supplements ...............................
Body care, pet care and other .................

As of September 30,
2015

2016

2014

66.5%
22.2
11.3
100.0%

66.4
22.5
11.1
100.0

66.7
23.2
10.1
100.0

17. Commitments and Contingencies

Self-Insurance

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
materially differ from these assumptions and historical trends.

Legal

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

In Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc.,
filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against
the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint
purported to state an action on behalf of a class of customers who used debit or credit cards at the Company’s stores. On June
20, 2016, a Magistrate Judge of the United States District Court for the District of Colorado issued a Recommendation and
Order dismissing the plaintiff’s complaint without prejudice. On September 21, 2016, the United States District Court for the
District of Colorado issued an Opinion and Order adopting the Magistrate Judge’s Recommendation and dismissing the
plaintiff’s complaint without prejudice. On November 10, 2016, the Company and the plaintiff entered into a Settlement
Agreement and Release pursuant to which: (i) the plaintiff agreed not to appeal the Court’s dismissal of his complaint and
(ii) the Company agreed not to seek reimbursement of its attorneys’ fees and legal costs from plaintiff.

18. Selected Quarterly Financial Data (Unaudited)

The summarized unaudited 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 each fiscal year is as follows, dollars in thousands, except per

share data:

Fiscal Year Ended September 30, 2016

Three months ended

December 31,
2015

March 31,
2016

June 30,
2016

September 30,
2016

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 ............................................... $

167,786
119,491
48,295
35,899
4,754
948
6,694
(653 )
6,041
(2,293 )
3,748

177,395
125,792
51,603
38,774
4,936
1,444
6,449
(733)
5,716
(2,139)
3,577

179,274
128,344
50,930
40,095
4,813
2,007
4,015
(768)
3,247
(567)
2,680

181,044
130,100
50,944
41,390
4,739
1,594
3,221
(890 )
2,331
(865 )
1,466

Basic earnings per share ................................. $
Diluted earnings per share ..............................

0.17
0.17

0.16
0.16

0.12
0.12

0.07
0.07

Fiscal Year Ended September 30, 2015

Three months ended

December 31,
2014

March 31,
2015

June 30,
2015

September 30,
2015

145,887
103,593
42,294
31,049
4,227
577
6,441
(735 )
5,706
(2,142 )
3,564

157,744
110,874
46,870
32,461
4,156
870
9,383
(714)
8,669
(3,266)
5,403

158,650
112,508
46,142
33,508
4,322
1,078
7,234
(768)
6,466
(2,121)
4,345

162,397
115,607
46,790
35,113
4,809
1,297
5,571
(776 )
4,795
(1,903 )
2,892

Basic earnings per share ................................. $
Diluted earnings per share ..............................

0.16
0.16

0.24
0.24

0.19
0.19

0.13
0.13

19. Subsequent Events

On October 7, 2016, the Company completed a sale-leaseback transaction for a store building with an unrelated
party for proceeds of approximately $2.6 million. 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. For the year ended September 30, 2016, the
building is considered to be held for sale. The Company anticipates a loss on the sale of the building of approximately $0.3
million, which will be deferred and recognized over the initial lease term.

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

None.

Item 9A. Controls and Procedures.

Internal Control Over Financial Reporting

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

● 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, 2016 using
the criteria described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment of the design and related testing of the internal control
over financial reporting, management concluded that, as of September 30, 2016, we 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 Exchange
Act as of the end of the period covered by this 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, 2016.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016

that 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 on Schedule 14A for the 2016 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of September 30, 2016 (the “2017 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 2017 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
2017 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 2017 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 2017 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 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

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 8, 2016.

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 8, 2016

/s/ ZEPHYR ISELY
Zephyr Isely

(Principal Executive Officer, Co-President,
Director)

December 8, 2016

/s/ SANDRA BUFFA
Sandra Buffa

(Principal Financial and Accounting Officer,
Chief Financial Officer)

December 8, 2016

/s/ ELIZABETH ISELY
Elizabeth Isely

Director

/s/ HEATHER ISELY
Heather Isely

Director

/s/ MICHAEL CAMPBELL
Michael Campbell

Director

/s/ EDWARD CERKOVNIK
Edward Cerkovnik

Director

/s/ RICHARD HALLÉ
Richard Hallé

Director

EXHIBIT INDEX

Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
10.1

Description

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

Second 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*

Form of Omnibus Incentive Plan*

Summary of Compensation Arrangements for Non-
Employee Directors*

Form of Indemnification Agreement*

Form
Form S-1
Form S-1

File No.
333-182186
333-182186

Exhibit
Number Filing Date
July 5, 2012
July 5, 2012

3.1
3.2

Form S-1
Form S-8
Form S-1

Form 10-Q

333-182186
333-182886
333-182186
001-35608

4.2
4.2
4.3
10.1

July 20, 2012
July 27, 2012
July 5, 2012
January 29,
2015

Form S-1
Form S-1

333-182186
333-182186

10.16
10.17

July 5, 2012

June 29, 2012

Form S-1
Form S-1

333-182186
333-182186

10.18
10.19

June 29, 2012
June 29, 2012

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

10.31

10.32

10.39

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
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
Credit Agreement dated as of January 28, 2016 by and
among Vitamin Cottage Natural Food Markets, Inc., the
Guarantors party thereto, the Lenders Party thereto and Bank
of America, N.A., as Administrative Agent and L/C Issuer

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

Form S-1

333-182186

10.31

June 29, 2012

Form S-1

333-182186

10.32

July 12, 2012

Form 10-Q

001-35608

10.39

January 28,
2016

Exhibit
Number
10.40

10.41

10.42

21.1

23.1
31.1

31.2

31.3

32.1

101

Description
Security and Pledge Agreement dated as of January 28, 2016
by and among Vitamin Cottage Natural Food Markets, Inc.,
Natural Grocers by Vitamin Cottage, Inc., Vitamin Cottage
Two Ltd. Liability Company, the other Obligors thereunder
and Bank of America, N.A.
Customer Distribution Agreement by and among United
Natural Foods, Inc., Tony’s Fine Foods, Albert’s Organics
and Vitamin Cottage Natural Food Markets, Inc. dated as of
June 21, 2016#
First Amendment to Credit Agreement dated as of May 10,
2016, by and among Vitamin Cottage Natural Food Markets,
Inc., the Guarantors party thereto, the Lenders Party thereto
and Bank of America, N.A., as Administrative Agent and
L/C Issuer
Code of Ethics

List of subsidiaries

Consent of KPMG LLP

Form
Form 10-Q

File No.
001-35608

Exhibit
Number Filing Date
10.40

January 28,
2016

Form 10-Q

001-35608

10.41

July 28, 2016

Form 10-Q

001-35607

10.42

July 28, 2016

Form 10-K

001-35608

Form 10-K

001-35608

21.1

December 13,
2012
December 13,
2012

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—

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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†
The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended
September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in
Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements.

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*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.

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BOARD OF DIRECTORS

KEMPER ISELY Chairman of the Board

HEATHER ISELY Corporate Secretary

Chair of the Compensation Committee

MICHAEL T. CAMPBELL Chair of the Audit Committee

EDWARD CERKOVNIK

RICHARD HALLÉ

ELIZABETH ISELY

ZEPHYR ISELY

EXECUTIVE OFFICERS

KEMPER ISELY Co-President

ZEPHYR ISELY Co-President

ELIZABETH ISELY Executive Vice President

HEATHER ISELY Executive Vice President

SANDRA BUFFA Chief Financial Officer

ORDERING FINANCIAL STATEMENTS

A copy of our 2016 Annual Report and Form 10-K may be obtained
by written, phone or email requests to:
Mail:

Investor Relations
Natural Grocers by Vitamin Cottage, Inc.
12612 West Alameda Parkway
Lakewood, Colorado 80228

Email: IR@NaturalGrocers.com
Phone: (303) 986-4600

ANNUAL MEETING

March 1, 2017
1:00 p.m. Mountain Time
Natural Grocers by Vitamin Cottage, Inc.
Home Office Auditorium
12612 West Alameda Parkway
Lakewood, Colorado 80228

TRANSFER AGENT AND REGISTRAR

Information about stock certificates, address changes, ownership transfers 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, Inc. is traded on the
New York Stock Exchange (symbol: NGVC).

2016 ANNUAL REPORT