Natural Grocers by Vitamin Cottage, Inc. Annual Report 2018

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FY2018 Annual Report · Natural Grocers by Vitamin Cottage, Inc.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

2018 ANNUAL REPORT

NATURAL GROCERS

IS AN EXPANDING

SPECIALTY RETAILER OF

NATURAL & ORGANIC

GROCERIES & SUPPLEMENTS

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

2018 ANNUAL REPORT

NET SALES (IN MILLIONS)

900

800

700

600

500

400

300

200

100

$521

$625

$705

$769

$849

FY 2014

FY 2015

FY 2016

FY 2017

FY 2018

DAILY AVERAGE COMPARABLE STORE SALES GROWTH

COMP

MATURE COMP

5.6%

3.4%

5.9%

2.6%

1.4%

-1.0%

0.1%

-1.6%

5.8% 3.0%

FY 2014

FY 2015

FY 2016

FY 2017

FY 2018

WE OPERATE IN 19 STATES*

3
12

3
8
7

*as of September 30, 2018

2018 ANNUAL REPORT

DEAR FELLOW STOCKHOLDERS:

We are pleased to report that we delivered strong sales and earnings
growth during fiscal 2018 while addressing a challenging competitive
environment. Our success and improved financial results over the
past year reflect the diligent efforts by our good4U crew along with
our unwavering commitment to our founding principles. We continued
to focus our marketing efforts on telling our differentiated story
while prudently investing in pricing and promotional activities to
drive customer traffic and sales growth. During 2018, daily average
comparable store sales increased 5.8%, which included a 3.0% increase
in our mature comparable store sales. These results mark over 15
consecutive years of positive comparable store sales.

During fiscal 2018, our focus was on driving customer traffic as well as
making significant strides in multiple areas to continue to position our
company for future growth and build value for our stockholders. Our
accomplishments included the introduction of 43 new Natural Grocers
brand products, with approximately 50 additional Natural Grocers brand
products planned to launch in fiscal 2019. By the end of fiscal 2018, our
{N}Power® customer loyalty program increased to 750,000 members,
representing 90% year-over-year growth. We continue to believe that
{N}Power provides a dynamic forum for customer engagement and
enhanced loyalty. Throughout the year, our store operations teams made
significant improvements in leadership development, training and
operational excellence throughout our store base, which is evident in
our improved labor and shrink metrics. We generated strong operating
cash flow and paid down our revolving credit line by $15 million, leaving
the company with significant incremental borrowing capacity and
financial flexibility. Our marketing team executed a variety of successful
initiatives, including monthly store events; expanded social and digital
media presence; TV and outdoor advertising campaigns; and targeted
direct mail efforts. In addition, we relaunched our website with enhanced
functionality and a refreshed appearance. I am very proud of the
company’s achievements over the past year.

As we look ahead to fiscal 2019, we have strong momentum and expect
to continue to execute on the formula that delivered the sales and profit
growth we realized over the past year. As the competitive environment
continues to evolve, Natural Grocers’ commitment to our core values
only magnifies our differentiation and importance in the market
place. For over 63 years, it has been our unwavering commitment to
the highest quality standards, affordable prices, nutritional education,
our communities and our good4U crew that sets us apart from the
competition and drives our success.

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, 2018

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 every Interactive Data File required to be submitted 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 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, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐
Non-accelerated filer ☐

Accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying

with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Based on the closing price of the registrant’s common stock on March 31, 2018, the aggregate market value of the voting and non-voting

common stock held by non-affiliates was approximately $64,654,678.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 3, 2018 was 22,392,310.

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 2019 Annual Meeting of the Stockholders, which will be filed with the
Securities and Exchange Commission not later than 120 days after September 30, 2018.

Natural Grocers by Vitamin Cottage, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2018

Table of Contents

Page
Number

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

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

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

PART III

1
15
33
33
34
34

35
36
39
55
55
80
80
80

81
81
81
81
81

Item 15. Exhibits, Financial Statement Schedules ...................................................................................................

PART IV

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

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 2018” refers to the year from October 1, 2017 to
September 30, 2018).

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, future
growth, pending legal proceedings and other financial and operating information, are forward looking statements. We may
use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in
this Form 10-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).
Our reports and other filings with the SEC are available at the SEC’s website at www.sec.gov. Our reports and other filings
with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.

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;
enhancing our customers’ shopping experience by providing free science-based nutrition education to help our
customers make well-informed health and nutrition choices; and
incorporating principles of ecological sustainability into our product standards and company practices.

●

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
1

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.

● 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 strive 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 148 stores in 19 states as of September 30, 2018. 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, domestic and foreign-based mass and discount retailers, warehouse clubs, independent health food stores, dietary
supplement retailers, drug stores, farmers’ markets, food co-ops, online retailers, meal delivery services 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;
concerns regarding antibiotic resistance caused by industrial livestock production practices;

●
● 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;
the growth in the number of consumers with unique dietary requirements as a result of allergies, chemical
sensitivities, auto-immune disorders and other conditions; and
concerns about the depletion of non-renewable resources and the effects of carbon release on the global climate.

●

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 22,000 Stock Keeping
Units (SKUs) of natural and organic products per comparable store (stores open for 13 months or longer), including an
average of approximately 6,600 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, free-range eggs (i.e., from chickens that are not only cage-free but also provided
with sufficient space to move) and naturally raised meats (i.e., from animals that are not known to have been treated with
antibiotics or hormones or fed animal by-products). 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® magazine, 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 (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.

Commitment to sustainable products and practices. We have put in place product standards for dairy, eggs, meat,
seafood and produce that support sustainable and ecologically responsible production methods. We believe our standards
help to enhance the health of our customers, promote animal welfare, reduce antibiotic resistance and protect the environment.
We have also instituted measures to eliminate food waste, divert usable products to food banks, reduce single use plastic bags
and reduce the use of toxic pesticides and antimicrobial products. We believe these efforts reflect our commitment to
corporate responsibility and demonstrate our support for sustainable regenerative agricultural practices.

Experienced and committed management team with proven track record. Our executive management team has an
average of 33 years of experience in the natural grocery industry, while our entire management team has an average of 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 148 stores as of September 30, 2018 by remaining dedicated to our founding
3

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,
2018, approximately 44% 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 four 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. In fiscal years 2018 and 2017, we opened eight and 14 new stores, respectively, and we plan to open seven to nine
new stores in fiscal year 2019, of which four opened during the first quarter of fiscal year 2019 prior to the filing of this Form
10-K. We have signed leases for an additional three new stores that we expect to open in fiscal years 2019 and beyond.

Store locations as of September 30, 2018.

Increase sales from existing customers. 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, including
through the {N}power® customer loyalty program, which we anticipate will drive customer transactions, increase the average
ticket 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 2018, we implemented several measures aimed at enhancing our brand awareness,
including: (i) increasing the reach and publication frequency of our Health Hotline magazine; (ii) conducting television
advertising campaigns in 17 markets; (iii) conducting radio advertising campaigns in support of new store openings and store
relocations; (iv) conducting outdoor advertising campaigns in approximately 75 markets; (v) enhancing our social media
reach through increased investment in paid and organic placements on platforms such as Facebook, Twitter and Instagram;
(vi) launching a new website that features more advanced ecommerce capabilities, enhanced product and recipe search
interfaces and improved functionality with mobile and tablet devices; (vii) increasing the frequency of offerings under
the{N}power customer loyalty program and introducing discounted pricing for{N}power members; (viii) 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 Organic Harvest Month; (ix) conducting targeted direct mail campaigns
in select markets, and (x) extending home delivery services from 70 to 118 stores.

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 their impact, we encourage our Nutritional Health Coaches to focus on relationship-building opportunities in
our communities and with our customers, including promotions, educational cooking events, lectures and classes in our stores.
Additionally, we seek to attract new customers by enhancing their nutrition knowledge through the distribution of printed
and digital versions of our broad range of educational resources, including the Health Hotline magazine. 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. To improve operating margins, we also intend to further optimize
performance, maintain appropriate store labor levels, reduce inventory shrink and effectively manage product selection and
pricing. In addition, we expect to achieve greater economies of scale through sourcing and distribution as we add more stores.

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 2018, our eight new stores averaged approximately 10,000 selling
square feet. Approximately one quarter of our stores’ selling square footage is dedicated to dietary supplements. Most 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 22,000 SKUs of natural and organic
products per store, including an average of approximately 6,600 SKUs of dietary supplements. During fiscal year 2017, we
introduced a new layout for our new stores, which is depicted in the following diagram:

Site Selection. Our real estate strategy is adaptable to a variety of market conditions. When selecting locations for
new stores, we use analytical models, based on research provided by The Buxton Company and our extensive experience, to
identify promising store locations. We typically locate new stores in prime locations which offer easy customer access and
high visibility. Many of our stores are near other supermarkets or gourmet food retailers, and we complement their
conventional product offerings with high-quality, affordable natural and organic groceries and dietary supplements in an
efficient and convenient retail setting. Our 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 employees dedicated to opening new stores efficiently and
quickly, typically within approximately nine months from the time of lease execution.

Store-Level Economics. Our new stores typically require an average upfront capital investment of approximately
$2.1 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 $0.2 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. Our actual payback period averages approximately five years.

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 (NHCs) are a core element of our nutrition education program. Every store has a
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 stress the
importance of their focusing on in-store educational events, offering health coaching sessions and holding nutrition classes
in the community by partnering with school, municipal and corporate wellness programs. During fiscal year 2018, our NHCs
increased the number of their health coaching sessions and community nutrition classes while continuing to offer a variety
of in-store education events. 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 magazine to educate our customers. The Health Hotline magazine, which was published 11
times in fiscal year 2018, includes in-depth articles on health and nutrition, along with a selection of sale items. The printed
version of the Health Hotline magazine is mailed to subscribers and distributed in our stores. In addition, an electronic version
of the Health Hotline magazine is distributed to subscribers via the internet and posted on our website.

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 naturally raised meats from animals that are not known to have been treated with antibiotics or

hormones or fed animal by-products; and

● we do not sell distilled spirits, tobacco products or e-cigarettes.

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, 2018:

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. We sell a wide selection of private label repackaged bulk products including dried fruits,
nuts, grains, granolas, teas, herbs and spices. We also sell peanut and almond butters, freshly ground
in-store under the Natural Grocers brand.

■ Natural Grocers Brand Products. We sell an expanding range of Natural Grocers brand private label
products, including pasta, pasta sauce, canned beans and vegetables, bread, olive oil, coconut oil, honey,
tortilla chips and eggs.

■ 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 naturally raised meat
products we offer come from animals that are not known to have been treated with antibiotics or
hormones, fed animal by-products or raised in concentrated animal feeding operations. 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. The seafood we sell is generally sourced from

sustainable fisheries or ecologically responsible farm-raised operations and excludes endangered
species.

■ 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. Our stores sell only pasture-raised, non-confinement dairy
products and free-range eggs (i.e., from chickens that are not only cage-free but also provided with
sufficient space to move).

■ Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items,
including salads, sandwiches, salsa, hummus 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. We offer kombucha on tap at substantially all of our stores.

■ Beer, wine and hard cider. In fiscal year 2017, we started selling craft beer, craft hard cider and organic
and biodynamic wine at one store in Denver, Colorado. In fiscal year 2018, we started selling craft beer,
craft hard cider and organic and biodynamic wine at six stores in Oregon. During fiscal year 2019, we
plan to commence selling craft beer and organic and biodynamic wine at several of our stores in
Oklahoma and to commence selling craft beer at additional stores in Colorado.

● 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 300 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 restrict the use of certain substances for cleaning and pest control and require rigorous
recordkeeping and methods to prevent co-mingling and contamination, 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;
● discounts offered to {N}power members;
●
●
● managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and
●

short term price promotions related to holidays, targeted campaigns and other events;
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 8:30 a.m. to 9:05 p.m., Monday through Saturday, and from 9:00

a.m. to 8:05 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 10 to 15 stores. Each regional manager reports to, and is supported by, a director of
store operations and other staff.

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 (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 most 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 3,300 brands. These suppliers
range from small independent businesses to multi-national conglomerates. As of September 30, 2018, we purchased
approximately 77% of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2018,
approximately 64% 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. In May 2018, we entered into an amendment to our agreement with UNFI pursuant to which we
appointed Albert’s Organics, a wholly owned subsidiary of UNFI, as our primary supplier of organic produce products for

the majority of our stores. 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 the Natural Grocers
brand. 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

We refer to our employees as our “Good4u Crew.” 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. In addition, all employees receive in store discounts and 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 that the discounts we offer our employees and the Vitamin Bucks benefit
provide 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 have a positive impact on employee retention rates and
encourage our employees to appreciate our culture, which helps them better promote our brand. 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, 2018, we employed 3,019 full-time and 579 part-time (less than 30 hours per week) employees,
including a total of 321 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 and supports environmentally sustainable products and practices. 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;

● partner with city and corporate wellness programs;
● 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;

● use healthy and environmentally responsible building materials and finishes in our new stores and remodels;
● promote environmentally responsible and sustainable practices in our supply chain; and
●

support the economic vitality of small producers and agricultural communities.

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, dietary supplements and our quality standards. 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. During fiscal year 2018, we increased the reach and publication frequency of our Health Hotline
magazine. The Health Hotline, which was converted from a 20-page newsletter into a 32-page four color magazine during
fiscal year 2017, 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. The Health Hotline
magazine was published 11 times during fiscal year 2018, compared to seven times during fiscal year 2017. The printed
version of the Health Hotline magazine is mailed to subscribers and distributed in our stores. In addition, an electronic version
of the Health Hotline magazine and a weekly electronic Health Hotline newsletter are distributed to subscribers via the
internet. We expect to publish the Health Hotline magazine 11 times in fiscal year 2019. 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.

Website and Social Media. We maintain www.naturalgrocers.com as our official company website to host store
information, sale and discount offers, educational materials, product and standards information, policies and contact forms,
advocacy and news items and e-commerce capabilities. Our website is 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.
In September 2018, we launched a new website that was designed to offer a more personalized and convenient online
experience for our customers. The new website features more advanced ecommerce capabilities, enhanced product and recipe
search interfaces and improved functionality with mobile and tablet devices. 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 2018, we increased our investment in paid and organic placements on platforms
such as Facebook, Twitter and Instagram, resulting in enhanced social media reach. We expect to continue investing in such
digital engagement activities during fiscal year 2019.

Advertising. Our advertising activities in fiscal year 2018 included: (i) conducting television advertising campaigns
in 17 markets (compared to six markets in fiscal year 2017); (ii) conducting radio advertising campaigns in support of new
store openings and store relocations; (iii) conducting outdoor advertising campaigns in approximately 75 markets (compared
to approximately 50 markets in fiscal year 2017); (iv) conducting targeted direct mail campaigns in select markets, and (v)
utilizing organic search, search engine marketing, search engine optimization and display advertisements to deliver more
customer traffic to our website and stores.

{N}power Customer Loyalty Program. The {N}power customer loyalty program was introduced in fiscal year 2015.
Registered users of {N}power receive digital coupons, personalized offers and other rewards, all by providing their phone
number at the time of checkout. During fiscal year 2018, we increased the frequency of our {N}power offerings and
introduced discounted pricing for{N}power members on certain staple items, such as free-range eggs. We believe these steps
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helped to increase membership in the {N}power program during fiscal year 2018. We believe {N}power has enhanced
customer loyalty and increased customer traffic and engagement levels. As of September 30, 2018, we had approximately
750,000 registered {N}power members.

Special Promotions. During fiscal year 2018, 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 Organic Harvest Month. Promotions included sweepstakes drawings and nutrition education classes. We expect to
continue offering similar promotions and special events in the future.

Sponsorships. During fiscal year 2018, we sponsored a US speed skater and a number of nutrition experts. In
addition, in September 2018 and 2017, to coincide with Organic Harvest Month, we collected donations from our customers
on behalf of the Organic Farmers Association.

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

fiscal year 2018, we expanded our home delivery services offering from 70 to 118 stores.

Online Pre-Ordering of Holiday Turkeys. During fiscal year 2017, we implemented an online process to pre-order
organic and free-range turkeys for the Thanksgiving and Christmas holidays. During fiscal year 2018, we expanded this
program to include organic and free-range ducks and geese.

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 magazine 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, foreign-based discount retailers such as Aldi and Lidl, specialty food retailers such as Sprouts and Trader Joe’s,
warehouse clubs such as Sam’s Club and Costco, independent health food stores, dietary supplement retailers, drug stores,
farmers’ markets, food co-ops, online retailers such as Amazon, meal delivery services such as Blue Apron and multi-level
marketers. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among
other things, Amazon’s acquisition of Whole Foods in August 2017, the plans of Aldi and Lidl to expand their presence in
the United States and the expanding availability of grocery ordering, pick-up and delivery options. 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, cyber risk, 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, {N}power, Organic Headquarters®, Organic Month
Headquarters® and Natural Grocers Cottage Wine and Craft Beer® 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 manage our human resources
and payroll needs at all locations. During fiscal year 2018, we implemented a company-wide scheduling system for our stores,
deployed new handheld technology at all our stores and started to deploy VOIP telephony solutions at our stores. In fiscal
year 2019, we expect to leverage cloud technology in our information technology systems and continue the deployment of
VOIP telephony solutions at our stores. We plan to continue investing in our information technology infrastructure with
systems that scale with and add efficiencies to our operations as we continue to grow.

Regulatory Compliance

We are subject to various federal, state and local laws, regulations and administrative practices that affect our
business. 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 (the CPSC) and the Environmental Protection Agency (the EPA), as well as by various state and local agencies.

Food Products. The FDA has comprehensive authority to regulate the safety of food and food ingredients (including
pet food and pet food ingredients but excluding meat, poultry, catfish and certain egg products) under the Federal Food, Drug,
and Cosmetic Act (the FDCA). The USDA’s Food Safety Inspection Service is responsible for ensuring that the nation’s
commercial supply of meat, poultry, catfish and certain egg products is safe, wholesome and correctly labeled and packaged
under the Federal Meat Inspection Act and the Poultry Products Inspection Act.

The Food Safety Modernization Act (the FSMA), enacted in 2011, amended the FDCA and significantly expanded
food safety requirements and the FDA’s regulatory authority over food safety. The FSMA requires the FDA to impose
comprehensive, prevention-based controls across the food supply chain, further regulates food products imported into the
United States and provides the FDA with mandatory recall authority. In addition, the FSMA requires the FDA to undertake
numerous rulemakings and to issue numerous guidance documents, as well as reports, plans, standards, notices and other
tasks. As a result, implementation of the legislation is ongoing and likely to take several years.

The FDA also exercises broad jurisdiction over the labeling and promotion of food. Labeling is a broad concept that,
under most 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 standards of product identity, net quantity/weight, nutrition facts labeling,
ingredient statements, identity and location of manufacturer/packer/distributor, and allergen disclosures. The FDA also
regulates the use of structure/function claims (e.g., “calcium builds strong bones”), health claims (e.g., "adequate calcium
throughout life may reduce the risk of osteoporosis"), nutrient content claims (e.g., “high in antioxidants”) and “natural” and
“all natural” claims. “Organic” claims, however, are primarily regulated by the USDA. New food labeling requirements,
including disclosure of calories and other nutrient information are scheduled to go into effect on January 1, 2020 for
manufacturers with $10.0 million or more in annual food sales and on January 1, 2021 for manufacturers with less than $10.0
million in annual food sales.

Dietary Supplements. The FDA also has comprehensive authority to regulate the safety of dietary supplements,
dietary ingredients, labeling and current good manufacturing practices. The Dietary Supplement Health and Education Act
(DSHEA), enacted in 1994, greatly expanded the FDA’s regulatory authority over dietary supplements. Through DSHEA,
dietary supplements became a separately regulated commodity and the FDA was empowered 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, although no statement may expressly or implicitly represent that a
dietary supplement will diagnose, cure, mitigate, treat or prevent a disease.

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 food products from the market, and request the Department of Justice to initiate a seizure
action, an injunction action or a criminal prosecution. Pursuant to the FSMA, the FDA also has the power to refuse the import
of any food or dietary supplement from a foreign supplier that is not appropriately verified as being in compliance with all
FDA laws and regulations. Moreover, the FDA has the authority to administratively suspend the registration of any facility
that produces or processes food, including supplements, that it deems 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, including the use of “green” claims on products, general claims about environmental benefits and claims about
whether product packaging is recyclable or compostable. 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 broad consumer class actions against food and dietary supplement manufacturers for false
or misleading labeling and/or advertising.

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 statutory 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.

We regularly train our in-store employees to provide an educational customer service approach that is ethical, honest
and accurate and that does not cross over into a scope of practice reserved for licensed healthcare professionals. For example,
our employees are not allowed to discuss 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. Our NHCs are responsible for overseeing compliance with FDA and FTC regulations. While we
believe that our nutrition education practices are in compliance with federal and state requirements, a finding to the contrary
could pose significant issues with respect to our business and our 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, 2018, 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. 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 2018 and 2017, we opened eight and 14 new stores, respectively. We plan to open seven to nine
new stores and relocate five to six existing stores in fiscal year 2019. We expect our rate of new store growth in the foreseeable
future to continue to moderate compared to years prior to fiscal year 2017, depending on economic and business conditions
and other factors. 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 continue to moderate compared to years prior to fiscal year 2017,
depending on economic and business conditions and other factors). Our new store openings may not be successful or reach
15

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

●
● 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 factors affect our store sales growth and quarterly financial performance, including:

●
●
●
●

changes in our merchandising strategy or product mix;
the 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;
the 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;
●

actions by our existing or new competitors, including pricing changes and delivery and fulfillment options;

regulatory changes affecting availability and marketability of products;
supply shortages or other operational disruptions; and

●
●
● general United States economic conditions and, in particular, the retail sales environment.

Accordingly, our results for any one fiscal year or quarter are not necessarily indicative of the results to be expected
for any other year or quarter. Our comparable store sales during any particular future period may decrease. In the event of
any future decrease, the price of our common stock could decline. For more information on our results of operations for fiscal
years 2017 and 2018, 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, foreign-based discount retailers, warehouse clubs, 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, 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
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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 enhanced customer reliance on
ecommerce to meet their shopping needs, 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 suppliers, 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.

We are subject to various federal, state and local laws, regulations and administrative practices that affect our
business. Our suppliers and contract manufacturers are also subject to such laws and regulations. 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 FTC,
the USDA, the CPSC and the EPA, as well as by various state and local agencies.

Dietary Supplement Risks. Our sale of dietary supplements is subject to the FDA’s comprehensive regulatory
authority under the FDCA, as amended by DSHEA. DSHEA greatly expanded the FDA’s regulatory authority over dietary
supplements and empowered the FDA to establish good manufacturing practice regulations governing key aspects of the
production of dietary supplements, including quality control, packaging and labeling. Under DSHEA, no dietary supplement
may bear a statement that expressly or implicitly represents that such 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 the 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 addition, other public and private actors are
increasingly targeting dietary supplement retailers and manufacturers with class action lawsuits for selling products that
allegedly fail to adhere to the requirements of FDCA and DSHEA, including for failing to adhere to current good

manufacturing practices and for false or misleading product statements, as well as state common and statutory laws regarding
deceptive trade practices.

In addition, DSHEA differentiates between old dietary ingredients, or ODIs (i.e., those ingredients present in the
food supply prior to October 15, 1994, which require no pre-market notification to the FDA), and new dietary ingredients, or
NDIs (i.e., those ingredients not present in the food supply prior to October 15, 1994, which do require pre-market notification
to the FDA). The FDA has not yet issued final guidance regarding the identification of a NDI or the evidence needed to
document a NDI’s safety, but when it does such guidance may increase the cost of compliance in establishing the identity
and safety of a NDI. In addition, the FDA has not yet promulgated a definitive list of ODIs, but when it does, such a list of
ODIs could disrupt the supply of any dietary supplements made from ingredients that are currently believed to pre-date
DSHEA but are not ultimately classified as a ODI. Accordingly, changes in dietary supplement regulation could materially
adversely affect the cost and availability of the dietary supplement products that we sell.

Advertising and Products Claims Risks. We could be the target of claims relating to false or deceptive advertising
in connection with the marketing and advertisement of the products we sell, including under the auspices of the FTC, the
consumer protection statutes of some states and some non-government watchdog groups. In addition, the FDA has
aggressively enforced its regulations with respect to structure/function claims (e.g., “calcium builds strong bones”), health
claims (e.g., "adequate calcium throughout life may reduce the risk of osteoporosis"), nutrient content claims (e.g., “high in
antioxidants”) and other claims that impermissibly suggest therapeutic benefits for certain foods or food components. In
addition, the number of private consumer class actions relating to false or deceptive advertising against food, beverage and
nutritional supplement manufacturers has increased in recent years. 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, results of operations and cash flows.

Our reputation could also suffer from real or perceived issues involving the labeling or marketing of products we
sell as “natural.” Although the FDA and the USDA have each issued statements regarding the appropriate use of the word
“natural,” and the FDA has indicated it intends to define the term, there is currently no single U.S. government-regulated
definition of the term “natural” for use in the food industry. The resulting uncertainty has led to consumer confusion, distrust
and a growing number of legal challenges. Plaintiffs have commenced legal actions against a number of food companies and
retailers that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims. 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 ultimately determined to be unfounded. Adverse publicity about these matters may discourage consumers
from buying our products. Further, the cost of defending against any such class actions could be significant. Any loss of
confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to
overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand
and decrease our sales, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.

Organic and GMO Claims. We are also subject to the requirements of the USDA’s National Organic Program
(NOP), which establishes national standards for organically produced agricultural products. The NOP regulations assure our
customers that products with the “USDA Organic” seal meet consistent and uniform standards. The failure of one or more of
our suppliers to comply with the NOP regulations could cause a disruption in the supply of our product offerings. In addition,
although it failed to do so by the July 29, 2018 deadline set by the Federal Bioengineered Food Disclosure Act (FBFDA), the
USDA is still working to publish final rules on the labeling of food containing genetically modified ingredients. While it is
uncertain when these final rules will be issued, we and our suppliers will likely have one or more years thereafter to comply
with these new labeling requirements.

FSMA Implementation Risks. The FSMA significantly expanded food safety requirements and the FDA’s regulatory
authority over food safety. Voluminous regulations and rules issued under the FSMA are in varying degrees of
implementation. In addition, the FSMA required the FDA to establish science-based minimum standards for the safe
production and harvesting of produce and increase inspection of foreign and domestic facilities. With respect to both food
products and dietary supplements, the FSMA meaningfully augmented the FDA’s ability to access both producers’ and
suppliers’ records and added new records that must be created and maintained. The 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, and
regulatory actions therefrom, may delay the supply of certain products or result in certain products being unavailable to us
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for sale in our stores. The implementation of the FSMA requirements may be too expensive or too complicated for some of
our suppliers, which may increase the cost, or curtail or eliminate the supply, of certain products that we purchase from small
and/or local suppliers.

Homeopathic Products. In recent years, the FDA and FTC have increased their regulatory scrutiny of homeopathic
products. In December 2017, the FDA released draft guidance on homeopathic products, stating that the agency intends to
take a risk-based approach to homeopathic products, prioritizing enforcement actions on products labeled as homeopathic
and marketed without the required FDA approval. Although no final guidance has yet been issued, such guidance may require
homeopathic products to be approved for sale under a new approval or review regimen or otherwise lessen their availability
to us to sell in our stores.

Third-Party Risks. We rely on our suppliers and contract manufacturers to ensure that the products they manufacture
and sell to us comply with all applicable regulatory requirements. In general, we seek certifications of compliance,
representations and warranties, indemnification and/or insurance from our suppliers and contract manufacturers. However,
even with adequate insurance and indemnification, the failure of any products to comply with applicable regulatory
requirements could prevent us from marketing such products or require us to recall or remove such products from our stores.
In addition, any claims of non-compliance could significantly damage our reputation and consumer confidence in the products
we sell.

Other Regulatory Risks. We are also subject to laws and regulations more generally applicable to retailers, including
labor and employment, taxation, zoning and land use, environmental protection, workplace safety, public health and alcoholic
beverage sales. 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 materially and adversely affect our business, financial condition and
results of operations.

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 any such 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
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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 or 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.

For our organic produce suppliers, there is some concern that implementation of the FSMA may impact the ability
of produce growers to farm organically. In the final Produce Safety Regulation, the FDA stated that it would exercise
enforcement discretion against farmers complying with NOP standards for the application of biological soil amendments, a
significant source of fertility input for organic production. But at the same time, the FDA stated that the NOP standard is not
a food safety standard and that it would study and set a science based minimum standard at a later date and may promulgate
a standard for the application of biological soil amendments that limits the ability of organic growers to use these inputs. The
increased regulation and cost of growing produce due to the Produce Safety Regulation may impact organic produce
suppliers.

The Trump administration has delayed or cancelled certain proposed rules designed to strengthen the NOP standard
and proposed to ease existing restrictions on the use of certain substances on the National List of Allowed and Prohibited
Substances for use in organic farming. These changes may affect consumer confidence in the NOP standard, which may
adversely affect our business.

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 USDA accredited certifiers in order to be labeled as such. Certain products we sell in our
stores could lose their “organic” certification if their operation does not comply with the applicable standards and required
practices of the NOP. 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 64% of our total purchases in fiscal
year 2018. 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. In May 2018, we entered into an amendment to our agreement with UNFI
pursuant to which we appointed Albert’s Organics, a wholly owned subsidiary of UNFI, as our primary supplier of organic
produce products for the majority of our stores. 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,
21

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.

We and certain of our vendors use overseas sourcing to varying degrees to manufacture some or all of the products
we sell. 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.

If the United States were to withdraw from or materially modify the North American Free Trade Agreement
(NAFTA) or certain international trade agreements, or if the United States were to withdraw from the World Trade
Organization (the WTO), our business, financial condition and results of operations could be materially adversely
affected.

Certain of the produce and other products that we sell at our stores are purchased, or contain ingredients sourced,
from suppliers in Mexico, Canada and other foreign countries. President Donald Trump has expressed antipathy towards
certain existing international trade agreements and organizations, including NAFTA and the United States’ membership in
the WTO. In November 2018, the United States, Mexico and Canada signed the United States-Mexico-Canada Agreement
(USMCA), which is designed to overhaul and update NAFTA. The USMCA still requires ratification by legislative bodies
in all three countries before it can take effect. Although the USMCA is not yet effective, we believe that its provisions, as
currently drafted, will not have a material adverse effect on our business, financial condition and results of operations. It
remains unclear what actions, if any, President Trump will take with respect to NAFTA, other international trade agreements
to which the United States is a party and the WTO. If the USMCA is not ratified and the United States were to withdraw
from NAFTA, or if the United States were to withdraw from or materially modify other international trade agreements to
which it is a party, or if the United States were to withdraw from the WTO, certain foreign-sourced goods that we sell may
no longer be available at a commercially attractive price or at all, which in turn could have a material adverse effect on our
business, financial condition and results of operations.

New or increased tariffs on the foreign-sourced goods that we sell or the foreign-sourced materials incorporated

into such goods could have a material adverse effect on our business, financial condition and results of operations.

During fiscal year 2018, the Trump Administration imposed tariffs on a broad range of foreign-sourced products
and materials. In response, various trading partners of the United States have imposed retaliatory tariffs on goods
manufactured in the United States. As of the date of this Form 10-K, it remains unclear what additional actions, if any, the
Trump Administration will take with respect to tariffs on goods imported into the United States. During fiscal year 2018,
newly imposed tariffs resulted in higher costs for certain metal products that we purchase, such as store shelving and cans
for our private label products. Although the tariffs imposed to date have not had a material impact on the cost or availability
of the foreign-sourced goods that we sell or the foreign-sourced materials that are incorporated into such goods, there can be
no assurance that this will continue to be the case. If existing tariffs were raised, or if new tariffs were imposed, on the
foreign-sourced goods that we sell or the foreign-sourced materials that are incorporated into such goods, such goods and
materials may no longer be available at a commercially attractive price or at all, which in turn could have a material adverse
effect on our business, financial condition and results of operations.

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

severe weather and other catastrophic occurrences.

As of September 30, 2018, we had primary store concentration in Colorado and Texas, operating 37 stores and 24
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
22

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 and state attorneys general have 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, 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
23

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. Our ability to meet our labor
needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a
sufficient number of qualified persons in the work force in the markets in which we are located, unemployment levels within
those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment
legislation. If we are unable to offer competitive wages, it may be more difficult for us identify, hire and retain qualified
personnel or the quality of our workforce could decline, causing customer service to suffer.

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 (or its successor or replacement), 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 fiscal year 2017, the UFCW sought unsuccessfully to
organize workers at one of our stores in Washington.

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 2019 (with respect to which one store was relocated prior to the filing
of this Form 10-K), six expire in fiscal year 2020, 10 expire in fiscal year 2021, three expire in fiscal year 2022 and the
remainder expire between fiscal years 2023 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. Furthermore,
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 and technology are increasingly complex and vital to our operations,
which has resulted in an expansion of our technological presence and corresponding risk exposure. In addition, these systems
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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. If we were to experience difficulties maintaining or operating existing
systems or implementing new systems, or were subject to a significant security breach or attack, we could incur significant
losses due to disruptions in our operations.

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.

Although we have implemented procedures to protect our information, we cannot be certain that our security systems
will successfully defend against rapidly evolving, increasingly sophisticated cyber-attacks as they become more difficult to
detect and defend against. Our continued investment in our information technology systems may not effectively insulate us
from potential attacks, breaches or disruptions to our business operations. If our security and information systems are
breached or compromised, or if 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 data 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 enhance security. During fiscal year 2017, we completed the
installation of EMV, or chip and PIN, point-of-sale terminals at all our stores. However, 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, cyber risk, 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, Health Hotline, Natural Grocers by Vitamin Cottage, Vitamin Cottage Natural
Grocers, EDAP - Every Day Affordable Price, {N}power, Organic Headquarters, Organic Month Headquarters, Natural
Grocers Cottage Wine and Craft Beer and These Came First, common law intellectual property rights in certain other marks
used in our business, copyrights of our website content, rights to our domain names, 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.

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
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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
27

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.

Postage, 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.

We are party to a $50.0 million credit facility (our Credit Facility). 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, 2018, we had outstanding indebtedness of $13.2 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;

●
●
●
●
● placing us at a competitive disadvantage compared to our competitors that have less debt;
●

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.

●

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 our 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 New York Stock Exchange (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 4, 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. On May 2, 2018, our Board of Directors authorized a two-
year extension of the share repurchase program. As a result of such extension, the share repurchase program will terminate
on May 4, 2020. 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 our 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
29

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 effective internal control over financial reporting could lead to material misstatements in
our financial statements, in which case investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock may decline.

As a public company, we are required to maintain internal control over financial reporting. Pursuant to Section 404
of the Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley), we are required to file a report by management on the
effectiveness of our internal control over financial reporting, and our independent registered public accounting firm is
required to attest to the effectiveness of our internal control over financial reporting.

If we are unable to maintain effective internal control over financial reporting, if we identify any material weaknesses
therein, if we are unsuccessful in our efforts to remediate any such material weakness, if our management is unable to report
that our internal control over financial reporting is effective when required, or if our independent registered public accounting
firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting when required,
investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common
stock could be negatively affected. In addition, we could become subject to investigations by the SEC, the NYSE or other
regulatory authorities, which could require additional financial and management resources.

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, useful lives of long-lived assets for
depreciation and amortization, impairment of finite-lived intangible and long-lived assets, impairment of goodwill and
intangible assets, lease assumptions, self-insurance reserves, income taxes and share-based compensation assumptions, 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.

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;
changes in our new store growth rate;
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. Our
overall sales growth has fluctuated in the past and 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

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 prior 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 59.4% 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 September 30, 2018, we had a total of 22,373,382 shares of common stock outstanding, of which
8,214,285 shares of common stock were issued in the IPO and 294,231 shares had been issued in connection with the vesting
of restricted stock units and the award of common stock grants issued under the 2012 Omnibus Incentive Plan, are registered
and are freely tradable without restriction under the Securities Act. Up to approximately 13,300,000 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 Company
believes approximately 440,000 additional restricted shares could be sold in exempt transactions. The market price of our
common stock could drop significantly if the holders of restricted shares of common 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 418,982 restricted stock units that were outstanding as of September 30, 2018 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 downgrade 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, 2018, we had 148 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
3
37
4
5
8
1
5
4
3
3
5
2
7
12
24
8
3
2

During the fiscal years ended September 30, 2018 and 2017, we opened eight and 14 new stores, respectively. We
plan to open seven to nine new stores in fiscal year 2019, of which four new stores opened during the first quarter of fiscal
year 2019 prior to the filing of this Form 10-K. In addition, we plan to relocate five to six stores in fiscal year 2019. We have
signed leases for an additional three new stores that we expect to open in fiscal years 2019 and beyond.

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.

As of September 30, 2018, we owned buildings in which six of our stores are located; those buildings are located
on land that is leased pursuant to a ground lease. In November 2018, we purchased the land upon which our store in Tigard,
Oregon is located. Lease terms typically range between 10 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 2019, six expire in fiscal year 2020, 10 expire in fiscal year 2021, three expire in fiscal year
2022 and the remainder expire between fiscal years 2023 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.

Item 4. Mine Safety Disclosures.

Not applicable.

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

PART II

Market Information

Our common stock is traded on the NYSE under the symbol “NGVC.”

Holders of Record

As of December 3, 2018, there were 182 holders of record of our common stock, and the closing price of our

common stock was $18.91.

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.

Use of Proceeds From Registered Securities

None.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

Certain information about our share repurchases is set forth under the heading "Stockholders’ Equity - Share

Repurchases" in Note 12 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.

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.

2018

Year ended September 30,
2016

2017

2015

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 .............................................
Interest expense, net .............................................
Other income, net .................................................
Income before income taxes .............................
Benefit from (provision for) income taxes ...........
Net income ........................................................ $

Per Share Data:
Net income per share of common stock (EPS)

849,042
623,469
225,573
186,741
21,506
2,273
15,053
(4,560)
—
10,493
2,168
12,661

769,030
556,694
212,336
174,350
20,089
3,799
14,098
(3,793)
—
10,305
(3,414)
6,891

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

2014

520,674
369,172
151,502
108,657
14,823
3,774
24,248
(2,496)
2
21,754
(8,281)
13,473

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

0.57
0.56

0.31
0.31

0.51
0.51

0.72
0.72

0.60
0.60

Shares used in computation of EPS

Basic ................................................................. 22,361,898 22,453,409 22,492,986 22,490,260 22,466,432
Diluted .............................................................. 22,413,038 22,463,675 22,507,152 22,500,833 22,479,835

Other Financial Data (Unaudited)

(dollars in thousands):

EBITDA(1) ............................................................ $
EBITDA margin(2) ................................................
Adjusted EBITDA(1) ............................................. $
Adjusted EBITDA margin(2) ................................

44,483
5.2%
45,068
5.3%

43,609
5.7
43,609
5.7

45,912
6.5
45,912
6.5

49,966
8.0
49,966
8.0

41,462
8.0
41,462
8.0

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(3) .....................
Change in daily average comparable store

sales(3) ...............................................................
Change in mature store sales(4) .............................
Change in daily average mature store sales(4) .......

148
8

3
5.8%

5.8%
3.0%
3.0%

140
14

2
(0.2 )

0.1
(1.9 )
(1.6 )

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

Gross square footage at end of period(5) ............... 2,378,240 2,260,914 2,031,711 1,668,534 1,354.204
Selling square footage at end of period(5) ............. 1,565,498 1,483,413 1,331,785 1,089,020
892,908
Average comparable store size (gross square

feet)(6) ................................................................

16,149

16,125

16,239

15,579

15,250

Average comparable store size (selling square

feet)(6) ................................................................

10,596

10,570

10,581

10,250

10,125

Comparable store sales per selling square foot

during period(7) ................................................. $

547

577

645

678

708

2018

2017

As of September 30,
2016

2015

2014

Selected Balance Sheet Data

(dollars in thousands):

Cash and cash equivalents ........................... $
Total assets ..................................................
Total debt(8) .................................................
Total stockholders’ equity ...........................

9,398
307,083
54,334
146,726

6,521
299,991
61,820
133,883

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

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

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

(1)

EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as
EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it
more difficult to assess the Company’s actual operating performance, including certain items which are generally non-
recurring, such as impairment of long-lived assets charges and store closing costs. EBITDA and Adjusted EBITDA
are not measures of financial performance under GAAP. We believe EBITDA and Adjusted EBITDA provide
additional information about: (i) our operating performance, because they assist us in comparing the operating
performance of our stores on a consistent basis, as they remove the impact of non-cash depreciation and amortization
expense as well as items not directly resulting from our core operations, such as interest expense and income taxes and
(ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a
measure in our financial covenants under our Credit Facility.

Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to
evaluate the overall operating performance of companies in our industry. Management believes that some investors’
understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis
for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a
reconciliation from net income, we believe we are enhancing investors’ understanding of our business and our results
of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Our
competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA and
Adjusted EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items
excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial
performance. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not
represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other
financial statement data presented in the consolidated financial statements as indicators of financial performance.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as
a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

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

expenditures or contractual commitments;

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

● EBITDA and Adjusted EBITDA do not reflect any impact for straight-line rent expense for leases classified as

capital and financing lease obligations;

● EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service

interest or principal payments on our debt;

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

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

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

2018

Year ended September 30,
2016

2017

2015

Net income ............................................. $
Interest expense, net ...........................
(Benefit from) provision for income

12,661
4,560

6,891
3,793

11,471
3,044

16,204
2,993

taxes ................................................
Depreciation and amortization ...........

(2,168)
29,430

3,414
29,511

5,864
25,533

9,432
21,337

2014

13,473
2,496

8,281
17,212

EBITDA .................................................
Impairment of long-lived assets and

store closing costs ...........................
Adjusted EBITDA ................................. $

44,483

43,609

45,912

49,966

41,462

585
45,068

—
43,609

—
45,912

—
49,966

—
41,462

(2)

EBITDA margin is defined as the ratio of EBITDA to net sales. Adjusted EBITDA margin is defined as the ratio of
Adjusted EBITDA to net sales. We present EBITDA margin and Adjusted EBITDA margin because they are used by
management as a performance measurement of EBITDA and Adjusted EBITDA generated from net sales. See footnote
(1) above for a discussion of EBITDA and Adjusted EBITDA as non-GAAP financial measures and a reconciliation
of net income to EBITDA and Adjusted EBITDA.

(3) 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.

(4) 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 2018 are stores
that opened during or before fiscal year 2013). 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.

(5)

(6)

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.

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.

(7)

(8)

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.

Total debt includes capital and financing lease obligations and outstanding borrowings under our Credit Facility. As
of September 30, 2018 and 2017, $13.2 million and $28.4 million, respectively, 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, 2018, we operated 148 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, 2018,
our new stores averaged approximately 10,000 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 15.5%, including eight, 14 and 23 new stores in fiscal years 2018, 2017 and 2016,
respectively. We relocated three existing stores in fiscal year 2018. We plan to open seven to nine new stores and relocate
five to six stores in fiscal year 2019. Between September 30, 2018 and the date of this Form 10-K, we have opened four new
stores (in Colorado, Iowa, Oregon and Texas) and relocated one store (in New Mexico). As of the date of this report, we also
have signed leases for an additional three new store locations expected to open in fiscal years 2019 and beyond.

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 $849.0 million for the year ended September 30, 2018, an increase of $80.0 million,

or 10.4%, compared to net sales of $769.0 million for the year ended September 30, 2017.

● Comparable store sales and daily average comparable store sales. Comparable store sales and daily average
comparable store sales for the year ended September 30, 2018 each increased 5.8% from the year ended
September 30, 2017.

● Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales
for the year ended September 30, 2018 each increased 3.0% from the year ended September 30, 2017. For fiscal
year 2018, mature stores include all stores open during or before fiscal year 2013.

● Net income. Net income was $12.7 million for the year ended September 30, 2018, an increase of $5.8 million,

or 83.7%, compared to net income of $6.9 million for the year ended September 30, 2017.

● EBITDA. EBITDA was $44.5 million in the year ended September 30, 2018, an increase of $0.9 million, or
2.0%, compared to EBITDA of $43.6 million for the year ended September 30, 2017. 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.

● Adjusted EBITDA. Adjusted EBITDA was $45.1 million in the year ended September 30, 2018, an increase of
$1.5 million, or 3.3%, compared to Adjusted EBITDA of $43.6 million for the year ended September 30, 2017.
Adjusted 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 Adjusted EBITDA and a reconciliation of the Company’s
net income to Adjusted EBITDA.

● Liquidity. As of September 30, 2018, cash and cash equivalents was $9.4 million. As of September 30, 2018,
$13.2 million was outstanding and $35.8 million was available for borrowing under our $50.0 million Credit
Facility. As of September 30, 2018, 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 opened 76 new stores between the beginning of fiscal year 2014 and the end of fiscal
year 2018, with 148 stores open as of September 30, 2018. We opened eight new stores in fiscal year 2018.

● Store Relocations and Remodels. We relocated three existing stores in fiscal year 2018.

Industry Trends and Economics

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

of operations and financial condition:

●

Impact of broader economic trends. The grocery industry and our sales are affected by general economic
conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer
debt, interest rates, the price of commodities, the political environment and consumer confidence. In this regard,
we believe our financial results for the year ended September 30, 2018 reflected improvement in the oil and gas
markets we serve, although they generally continue to lag behind our non-oil and gas markets.

● 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, 2018 reflect the
effects of these factors, and we anticipate future periods will be similarly impacted.
Our performance is also impacted by trends regarding natural and organic products, dietary supplements and
at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food
products might shift as a result of, among other things, economic conditions, food safety perceptions, changing
consumer choices and the cost of these products. A change in consumer preferences away from our offerings,
including those resulting from reductions or changes in our offerings, would have a material adverse effect on
our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or
new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in
lower consumer traffic, sales and results of operations.
Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly
competitive industry, with few barriers to entry. Our competition varies by market and includes conventional
supermarkets such as Kroger and Safeway, mass or discount retailers such as Wal-Mart and Target, natural and
gourmet markets such as Whole Foods and The Fresh Market, foreign-based discount retailers such as Aldi and
Lidl, specialty food retailers such as Sprouts and Trader Joe’s, warehouse clubs such as Sam’s Club and Costco,
independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, online
retailers such as Amazon, meal delivery services such as Blue Apron and multi-level marketers. Competition in
the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things,
Amazon’s acquisition of Whole Foods in August 2017, the plans of Aldi and Lidl to expand their presence in

●

the United States and the expanding availability of grocery ordering, pick-up and delivery options. These
businesses compete with us on the basis of price, selection, quality, customer service, shopping experience, ease
of ordering and delivery or any combination of these or other factors. They also compete with us for products
and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic
foods. We 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 increase our
comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing basket size,
growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service,
nutrition education and a 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 continue to moderate compared to years prior to fiscal year 2017, depending
on economic and business conditions and other factors. During the past few years, we have enhanced our infrastructure to
enable us to support our continued growth. In addition, in recent years we believe we have enhanced customer loyalty and
increased customer engagement by expanding our digital and social media presence and further developing the {N}power
customer loyalty program. In September 2018, we launched a new website (www.naturalgrocers.com) which was designed
to offer a more personalized and convenient online experience for our customers. The new website features more advanced
ecommerce capabilities, enhanced product and recipe search interfaces and improved functionality with mobile and tablet
devices.

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. 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 repackaging 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 2018 are stores that
opened during or before fiscal year 2013). We monitor the percentage change in mature store sales by comparing
sales from all stores in our mature store base for a reporting period against sales from the same stores for the
same number of operating months in the comparable reporting period of the prior year. When a store that is
included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be
mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.
● Change in daily average mature store sales. Daily average mature store sales are mature store sales divided by
the number of selling days in each period. We use this metric to remove the effect of differences in the number
of selling days during the comparable periods (for example, as a result of leap years or the Easter holiday shift
between quarters).

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

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

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

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts
and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food
repackaging facility), buying costs, shrink expense and store occupancy costs. Store occupancy costs include rent, common
area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets
directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not
be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form
10-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. Rent
payments for leases classified as capital and financing lease obligations are not recorded in cost of goods sold and occupancy
costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.
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 net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix
of products sold, as well as the rate at which we open new stores.

Store expenses

Store expenses consist of store level expenses, such as salary and benefits, share-based compensation, supplies,
utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing
support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including
depreciation on 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, any long-lived asset impairment charges and store closing expenses. 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
42

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

Pre-opening and relocation expenses

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

Interest expense, net

Interest expense consists of the interest associated with 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.

Income tax expense

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform Act)
was enacted into law. The Tax Reform Act changes various corporate income tax provisions within the existing Internal
Revenue Code. Substantially all the provisions of the Tax Reform Act are effective for taxable years beginning after
December 31, 2017. The most significant change that impacts us is the reduction in the corporate federal income tax rate
from 35% to 21%.

Results of Operations

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

the periods presented:

Statements of Income Data:*
Net sales .................................................................................
Cost of goods sold and occupancy costs ................................
Gross profit .........................................................................
Store expenses ........................................................................
Administrative expenses ........................................................
Pre-opening and relocation expenses .....................................
Operating income ...............................................................
Interest expense, net ...............................................................
Income before income taxes ...............................................
Benefit from (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 ............................

2018

Year ended September 30,
2017

2016

100.0%
73.4
26.6
22.0
2.5
0.3
1.8
(0.5)
1.2
0.3
1.5%

148
5.7%
5.8%
5.8%
3.0%
3.0%

100.0
72.4
27.6
22.7
2.6
0.5
1.8
(0.5)
1.3
(0.4)
0.9

140
11.1
(0.2)
0.1
(1.9)
(1.6)

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)

Year ended September 30, 2018 compared to Year ended September 30, 2017

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, net .....................................................................
Income before income taxes .....................................................
Benefit from (provision for) income taxes ...................................
Net income ................................................................................ $

Net sales

Year ended
September 30,

Change in

2018

2017

Dollars

Percent

849,042
623,469
225,573
186,741
21,506
2,273
15,053
(4,560)
10,493
2,168
12,661

769,030
556,694
212,336
174,350
20,089
3,799
14,098
(3,793)
10,305
(3,414)
6,891

80,012
66,775
13,237
12,391
1,417
(1,526)
955
(767)
188
5,582
5,770

10.4%
12.0
6.2
7.1
7.1
(40.2)
6.8
20.2
1.8
(163.5)
83.7

Net sales increased $80.0 million, or 10.4%, to $849.0 million for the year ended September 30, 2018 compared to
$769.0 million for the year ended September 30, 2017, primarily due to a $44.7 million, or 5.8%, increase in comparable
store sales, and a $35.4 million increase in new store sales. Comparable store sales increased 5.8% for the year ended
September 30, 2018 compared to a decrease of 0.2% for the year ended September 30, 2017. Daily average comparable store
sales increased 5.8% for the year ended September 30, 2018 compared to an increase of 0.1% for the year ended September
30, 2017. The daily average comparable store sales increase in fiscal year 2018 resulted from a 1.4% increase in average
transaction size and a 4.4% increase in daily average transaction count. Comparable store average transaction size was $35.35
for the year ended September 30, 2018. Daily average mature store sales increased 3.0% for the year ended September 30,
2018 compared to a decrease of 1.6% for the year ended September 30, 2017.

Gross profit

Gross profit increased $13.2 million, or 6.2%, to $225.6 million for the year ended September 30, 2018 compared
to $212.3 million for the year ended September 30, 2017, primarily driven by an increase in the number of comparable stores.
Gross margin decreased to 26.6% for the year ended September 30, 2018 from 27.6% for the year ended September 30, 2017.
Gross margin for the year ended September 30, 2018 was negatively impacted by our promotional pricing campaigns, a shift
in sales to lower margin products and a slight increase in occupancy expense as a percentage of sales.

For the years ended September 30, 2018 and 2017, the Company had 20 and 17 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, 2018 and 2017 would have been approximately 55 basis points higher
for each period.

Store expenses

Store expenses increased $12.4 million, or 7.1%, to $186.7 million in the year ended September 30, 2018 from
$174.4 million in the year ended September 30, 2017. Store expenses as a percentage of sales were 22.0% and 22.7% for the
years ended September 30, 2018 and 2017, respectively. The decrease in store expenses as a percentage of sales was primarily
due to decreases in marketing, depreciation and labor-related expenses, partially offset by an increase in other expenses, all
as a percentage of sales. Other expenses included long-lived asset impairment charges and store closing expenses totaling
approximately $0.6 million.

Administrative expenses

Administrative expenses increased $1.4 million, or 7.1%, to $21.5 million for the year ended September 30, 2018
compared to $20.1 million for the year ended September 30, 2017. Administrative expenses as a percentage of sales were
2.5% and 2.6% for the years ended September 30, 2018 and 2017, respectively. The increase in administrative expenses was
due primarily to compensation, legal, and software-related expenses.

Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased $1.5 million, or 40.2%, to $2.3 million for the year ended September
30, 2018 compared to $3.8 million for the year ended September 30, 2017. The decrease 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 0.3% and 0.5% for the years ended September 30, 2018 and 2017,
respectively. The numbers of stores opened and relocated were as follows for the periods presented:

Year ended September 30,
2017
2018

8
3
11

14
2
16

Interest expense, net

Interest expense, net of capitalized interest, increased $0.8 million, or 20.2%, in the year ended September 30, 2018
compared to the year ended September 30, 2017. The increase in interest expense is primarily due to an increase in the number
of capital leases, a decrease in capitalized interest and higher interest rates under our Credit Facility during the year ended
September 30, 2018. If our capital and financing lease obligations had qualified as operating leases, interest expense as a
percentage of sales for the years ended September 30, 2018 and 2017 would have been approximately 45 basis points lower
during each period.

Income taxes

Provision for income taxes decreased $5.6 million, or 163.5%, for year ended September 30, 2018 compared to the
year ended September 30, 2017, primarily due to a non-cash benefit of approximately $4.3 million arising from the
remeasurement of certain deferred tax assets and liabilities under the Tax Reform Act. Exclusive of the adjustment to deferred
tax assets and liabilities, the Company’s effective income tax rate for the year ended September 30, 2018 was approximately
20.7% as compared to 33.1% for the year ended September 30, 2017. The decrease in the effective income tax rate for the
year ended September 30, 2018 is primarily the result of the Tax Reform Act.

Net income

Net income in the year ended September 30, 2018 was $12.7 million, or $0.56 in diluted earnings per share compared

to $6.9 million, or $0.31 in diluted earnings per share, in the year ended September 30, 2017.

Year ended September 30, 2017 compared to Year ended September 30, 2016

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

Net sales

Year ended
September 30,

Change in

2017

2016

Dollars

Percent

769,030
556,694
212,336
174,350
20,089
3,799
14,098
(3,793 )
10,305
(3,414 )
6,891

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

63,531
52,967
10,564
18,192
847
(2,194)
(6,281)
(749)
(7,030)
2,450
(4,580)

9.0%
10.5
5.2
11.6
4.4
(36.6)
(30.8)
24.6
(40.6)
(41.8)
(39.9)

Net sales increased $63.5 million, or 9.0%, to $769.0 million for the year ended September 30, 2017 compared to
$705.5 million for the year ended September 30, 2016, primarily due to a $65.1 million increase in new store sales, partially
offset by a $1.6 million, or 0.2%, decrease in comparable store sales. Our 0.2% decrease in comparable store sales in fiscal
year 2017 compared to a 1.7% increase in comparable store sales in fiscal year 2016. The decline in comparable store sales
during the year ended September 30, 2017 was due to the impact of increased competition in the natural and organic sector,
one less selling day due to the occurrence of leap year in fiscal year 2016, internally generated competition due to opening
new stores in our existing markets, general economic uncertainty and the lingering impact of depressed oil and natural gas
prices, although the negative impact of depressed oil and natural gas prices moderated during the fourth quarter of fiscal year
2017.

Daily average comparable store sales increased 0.1% for the year ended September 30, 2017 compared to an increase
of 1.4% for the year ended September 30, 2016. The daily average comparable store sales increase in fiscal year 2017 resulted
from a 0.4% increase in average transaction size, partially offset by a 0.3% decrease in daily average transaction count.
Comparable store average transaction size was $35.38 for the year ended September 30, 2017. Daily average mature store
sales decreased 1.6% for the year ended September 30, 2017 compared to a decrease of 1.0% for the year ended September
30, 2016.

Gross profit

Gross profit increased $10.6 million, or 5.2%, to $212.3 million for the year ended September 30, 2017 compared
to $201.8 million for the year ended September 30, 2016, primarily driven by an increase in the number of comparable stores.
Gross margin decreased to 27.6% for the year ended September 30, 2017 from 28.6% for the year ended September 30, 2016.
Gross margin for the year ended September 30, 2017 was negatively impacted by an increase in occupancy costs as a
percentage of sales, primarily due to the higher average lease expenses experienced at newer format stores opened since fiscal
year 2012 and at relocated stores. The increase in occupancy cost as a percentage of sales also reflects the decrease in average
mature store sales combined with the fixed nature of our rent obligations and related occupancy expenses. Additionally,
product margin as a percentage of sales during fiscal year 2017 decreased slightly due to our promotional pricing campaigns
and, to a lesser extent, a shift to lower margin products.

For the years ended September 30, 2017 and 2016, the Company had 17 and 16 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 for the years ended September 30, 2017 and 2016 would have been approximately 55 basis points higher during each
period.

Store expenses

Store expenses increased $18.2 million, or 11.6%, to $174.4 million in the year ended September 30, 2017 from
$156.2 million in the year ended September 30, 2016. Store expenses as a percentage of sales were 22.7% and 22.1% for the
years ended September 30, 2017 and 2016, respectively. The increase in store expenses as a percentage of sales in fiscal year
2017 was primarily due to increases in labor-related expenses, depreciation, utilities and other store expenses.

Administrative expenses

Administrative expenses increased $0.8 million, or 4.4%, to $20.1 million for the year ended September 30, 2017
compared to $19.2 million for the year ended September 30, 2016. The increase in administrative expenses was due to
increased public company costs related to compliance with the requirements of Sarbanes-Oxley and increased technology
and communication costs. Administrative expenses as a percentage of sales were 2.6% and 2.7% for the years ended
September 30, 2017 and 2016, respectively.

Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased $2.2 million, or 36.6%, to $3.8 million for the year ended September
30, 2017 compared to $6.0 million for the year ended September 30, 2016. The decrease 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 0.5% and 0.8% for the years ended September 30, 2017 and 2016,
respectively. The numbers of stores opened, relocated and remodeled were as follows for the periods presented:

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

Year ended September 30,
2016
2017

14
2
0
16

23
4
1
28

Interest expense, net

Interest expense, net of capitalized interest, increased $0.7 million, or 24.6%, in the year ended September 30, 2017
compared to the year ended September 30, 2016, primarily due to higher average borrowings under our Credit Facility and
an increase in the number of capital leases during the year ended September 30, 2017. If our capital and financing lease
obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 45 and
50 basis points lower than as reported in each of the years ended September 30, 2017 and 2016, respectively.

Income taxes

Provision for income taxes decreased $2.5 million, or 41.8%, in the year ended September 30, 2017 compared to
the year ended September 30, 2016, primarily due to a $7.0 million decrease in income before income taxes and a decrease
in the estimated annual tax rate in the year ended September 30, 2017. Our effective tax rate decreased from 33.9% in the
year ended September 30, 2016 to 33.1% in the year ended September 30, 2017, primarily due to higher federal tax credits
for the year ended September 30, 2017. For the year ended September 30, 2017, the federal tax rate remained at 35.0% for
our deferred tax assets and liabilities.

Net income

Net income was $6.9 million, or $0.31 in diluted earnings per share, in the year ended September 30, 2017 compared

to $11.5 million, or $0.51 in diluted earnings per share, in the year ended September 30, 2016.

Non-GAAP financial measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as
net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA
as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more
difficult to assess the Company’s actual operating performance, including certain items that are generally non-recurring, such
as impairment charges and store closing costs. The adjustments to EBITDA in the year ended September 30, 2018 related to
impairment of long-lived assets charges and store closing costs. There were no adjustments to EBITDA in the years ended
September 30, 2017 and 2016.

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

2018

Year ended September 30,
2017

2016

Net income ............................................................................. $
Interest expense, net ...........................................................
(Benefit from) provision for income taxes..........................
Depreciation and amortization ............................................
EBITDA .................................................................................
Impairment of long-lived assets and store closing costs .....
Adjusted EBITDA .................................................................. $

12,661
4,560
(2,168)
29,430
44,483
585
45,068

6,891
3,793
3,414
29,511
43,609
—
43,609

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

EBITDA increased 2.0% to $44.5 million in the year ended September 30, 2018 compared to $43.6 million in the
year ended September 30, 2017. EBITDA as a percentage of sales was 5.2% and 5.7% for the years ended September 30,
2018 and 2017, 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 for the years ended September 30, 2018 and
2017 by approximately 55 basis points in each period, 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.

Adjusted EBITDA increased 3.3% to $45.1 million in the year ended September 30, 2018 compared to $43.6 million
in the year ended September 30, 2017. Adjusted EBITDA as a percentage of sales was 5.2% and 5.7% for the years ended
September 30, 2018 and 2017, respectively.

EBITDA and Adjusted EBITDA decreased 5.0% to $43.6 million in the year ended September 30, 2017 compared
to $45.9 million in the year ended September 30, 2016. EBITDA and Adjusted EBITDA as a percentage of sales were 5.7%
and 6.5% for the years ended September 30, 2017 and 2016, respectively. The stores with leases that are classified as capital
and financing lease obligations, rather than being reflected as operating leases, increased EBITDA and Adjusted EBITDA as
a percentage of sales by approximately 55 basis points for each of the years ended September 30, 2017 and 2016 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
and Adjusted EBITDA, each of which is a non-GAAP financial measure. We believe EBITDA and Adjusted EBITDA
provide additional information about: (i) our operating performance, because they assist us in comparing the operating
performance of our stores on a consistent basis, as they remove the impact of non-cash depreciation and amortization expense
as well as items not directly resulting from our core operations such as interest expense and income taxes and (ii) our
performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our
financial covenants under the Credit Facility.

results of operations, as well as assisting analysts and investors in evaluating how well we are executing our strategic
initiatives.

Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA
and Adjusted EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA and
Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted
EBITDA are supplemental measures of operating performance that do not represent, and should not be considered in isolation
or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial
statements as indicators of financial performance. EBITDA and Adjusted EBITDA have limitations as 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 Adjusted EBITDA, and some of their 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, 2018, we had $9.4 million in cash and cash equivalents and $35.8 million available for
borrowing under our Credit Facility.

On May 4, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may
expend up to $10.0 million to repurchase shares of the Company’s common stock. On May 2, 2018, our Board of Directors
authorized a two-year extension of the share repurchase program. As a result of such extension, the share repurchase program
will terminate on May 4, 2020. During the year ended September 30, 2018, we repurchased 101,573 shares of our common
stock for approximately $0.6 million (an average price of $5.72 per share) under the share repurchase program. During the
year ended September 30, 2017, we repurchased 30,000 shares of our common stock for approximately $0.3 million (an
average price of $8.71 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:

2018

Year ended September 30,
2017

2016

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

42,863
(23,543)
(16,443)
2,877
6,521
9,398

40,849
(38,499)
154
2,504
4,017
6,521

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

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. Net cash provided by
operating activities increased $2.0 million, or 4.9%, to $42.9 million in the year ended September 30, 2018, from $40.8
million in the year ended September 30, 2017. The increase in cash provided by operating activities was primarily due to an

increase in working capital from net income and accrued expenses and other purchases, partially offset by deferred tax benefit.
Our working capital requirements for inventory will likely increase as we continue to open new stores.

Net cash provided by operating activities increased $12.0 million, or 41.7%, to $40.8 million in the year ended
September 30, 2017, from $28.8 million in the year ended September 30, 2016. The increase in cash provided by operating
activities was primarily due to a change in working capital driven by accrued expenses, and other purchases, partially offset
by 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.

Investing Activities

Net cash used in investing activities consists primarily of capital expenditures. Net cash used in investing activities
decreased $15.0 million, or 38.8%, to $23.5 million in the year ended September 30, 2018 compared to $38.5 million in the
year ended September 30, 2017. Cash paid for capital expenditures decreased $17.5 million in the year ended September 30,
2018 compared to the year ended September 30, 2017, driven by the number and the timing of new store openings and store
relocations.

During the year ended September 30, 2018, we opened eight new stores and relocated three stores, compared to
opening 14 new stores and relocating two stores during the year ended September 30, 2017. We plan to spend approximately
$27 million to $32 million on capital expenditures during fiscal year 2019 in connection with the opening of seven to nine
planned new stores and five to six store relocations. We anticipate that our new stores will require, on average, an upfront
capital investment of approximately $2.1 million per store.

Acquisition of property and equipment not yet paid increased $2.4 million to $5.2 million in fiscal year 2018

compared to $2.8 million in fiscal year 2017 due to the timing of payments related to new store openings and relocations.

Net cash used in investing activities decreased $15.2 million, or 28.4%, to $38.5 million in the year ended September
30, 2017 compared to $53.7 million in the year ended September 30, 2016. Cash paid for capital expenditures decreased
$12.5 million in the year ended September 30, 2017 compared to the year ended September 30, 2016, driven by the number
and the timing of new store openings, relocations and remodels.

Financing Activities

Net cash (used in) provided by financing activities consists primarily of borrowings and repayments under our Credit
Facility and payments of capital and financing lease obligations. Net cash used in financing activities was $16.4 million for
the year ended September 30, 2018, compared to cash provided by financing activities of $0.2 million for the year ended
September 30, 2017. The decrease in cash provided by financing activities for the year ended September 30, 2018 was
primarily due to net incremental repayments of $15.2 million under our Credit Facility during the year ended September 30,
2018 compared to net incremental borrowings of $1.0 million during the year ended September 30, 2017.

Net cash provided by financing activities was $0.2 million for the year ended September 30, 2017, compared to cash
provided by financing activities of $26.0 million for the year ended September 30, 2016. The decrease in cash provided by
financing activities for the year ended September 30, 2017 was primarily due to lower net incremental borrowings of $1.0
million under our Credit Facility during the year ended September 30, 2017 compared to net incremental borrowings of $27.4
million during the year ended September 30, 2016.

Credit Facility

The amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for
standby letters of credit. The operating company is the borrower under the Credit Facility and its obligations under the Credit
Facility are guaranteed by the holding company and Vitamin Cottage Two Ltd. Liability Company (VC2). The Credit Facility
is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow
amounts under the 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.

We had $13.2 and $28.4 million outstanding under the Credit Facility as of September 30, 2018 and September 30,
2017, respectively. As of each of September 30, 2018 and September 30, 2017, we had undrawn, issued and outstanding
letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit
Facility. We had $35.8 and $20.6 million available for borrowing under the Credit Facility as of September 30, 2018 and
September 30, 2017, respectively.

As of each of September 30, 2018 and September 30, 2017, the Company was in compliance with the debt covenants

under the Credit Facility.

Off-Balance Sheet Arrangements

As of September 30, 2018, 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 six of our stores are located; those buildings are located on land that is leased pursuant to a ground
lease. As of September 30, 2018, 20 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 July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Company adopted the amendments of ASU 2015-11 effective October 1, 2017.
The adoption of this standard did not have a material impact on our consolidated financial statements for the year ended
September 30, 2018.

In March 2016, the FASB issued 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 Company’s financial statements,
including income tax consequences, forfeitures and classification on the statement of cash flows. Under previous guidance,
excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards
vested or were settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in income tax
expense, rather than paid-in-capital. The Company adopted the amendments of ASU 2016-09 effective October 1, 2017. The
adoption of this standard did not have a material impact on the Company’s consolidated statements of income for the year
ended September 30, 2018.

In addition, under ASU 2016-09, excess tax income tax benefits from share-based compensation arrangements are
classified as cash flow from operations, rather than as cash flow from financing activities. For the year ended September 30,
2018, there were no excess income tax benefits.

The Company has elected to continue to estimate the number of share-based awards expected to vest, as permitted

by ASU 2016-09, rather than electing to account for forfeitures as they occur.

ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future
proceeds in the calculation of diluted shares, resulting in an immaterial decrease in diluted weighted average shares
outstanding for the year ended September 30, 2018.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350,
“Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill
impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment
test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be
recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The
amendments should be applied on a prospective basis. Early adoption is permitted for annual and interim goodwill impairment
testing dates after January 1, 2017, and the ASU is effective for the Company’s first quarter of the fiscal year ending
September 30, 2020. The Company is currently evaluating the impact that the adoption of these provisions will have on its
consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases,” Topic 842, “Leases” (ASU 2016-02). ASU No. 2016-
02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than
12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating
lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of ASU 2016-02 are
effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. The
Company will apply the transition provisions of ASU 2016-02 at its adoption date, rather than the earliest comparative period
presented in the financial statements, as permitted by ASU 2018-11, “Leases,” Topic 842, “Targeted Improvements,” released
in July 2018.

The adoption of ASU 2016-02 will result in a material increase to the Company’s consolidated balance sheets for
lease liabilities and right-of-use assets. The Company is also performing a comprehensive review of its current processes to
determine and implement changes required to support the adoption of this standard. As part of this review process, the
Company is implementing new software solutions to support the lease reporting upon adoption. The Company is currently
evaluating the other effects the adoption of ASU 2016-02 will have on its consolidated financial statements.

In January 2018, the FASB issued ASU 2018-01, “Leases,” Topic 842, “Land Easement Practical Expedient for
Transition to Topic 842” (ASU 2018-01). ASU 2018-01 permits an entity to elect a transition practical expedient to not
assess, under Accounting Standards Codification (ASC) 842, land easements that exist or expired before the standard’s
effective date that were not previously accounted for as leases under ASC 840. The Company plans to elect this practical
expedient in implementing ASU 2016-02.

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. Additionally, the amendments in this ASU provide
a practical expedient for entities to recognize the incremental costs of obtaining a contract as an expense when incurred if the
amortization period of the asset that the entity otherwise would have recognized is one year or less, The Company plans to
elect this practical expedient upon adoption.

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. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of
the fiscal year ending September 30, 2019.

Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU 2016-08, “Revenue from Contracts with
Customers,” Topic 606, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (ASU 2016-08) in
March 2016, ASU 2016-12, “Revenue from Contracts with Customers,” Topic 606, “Narrow-Scope Improvements and
Practical Expedients” (ASU 2016-12) in May 2016 and ASU 2016-20, “Revenue from Contracts with Customers,” Topic
606, “Technical Corrections and Improvements” (ASU 2016-20) in December 2016. The amendments in ASU 2016-08
clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in
determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-12 addresses
narrow-scope improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition.
Additionally, the amendments in this ASU provide a practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The
Company plans to make such election. The Company also plans to elect the practical expedient in ASU 2016-20 that provides
entities do not need to disclose the transaction price allocated to performance obligations when the related contracts have a
52

duration of one year or less. This includes loyalty rewards, which can be redeemed in the month subsequent to the quarter
earned, and marketing promotions that cross accounting periods. Both of these classes of transactions are currently immaterial
to the Company. The effective date and transition requirements for ASU 2016-08, ASU 2016-12 and ASU 2016-20 are the
same as for ASU 2014-09.

The Company does not plan to early adopt the new revenue recognition guidance; adoption will be on the modified
retrospective basis beginning in fiscal year 2019. The Company has substantially concluded its assessment of the impact of
the adoption of this standard on its consolidated financial statements. Most of the Company’s revenue is expected to continue
to be generated from point-of-sale transactions, which ASU 2014-09 treats generally consistent with current accounting
standards. The Company does not expect this standard will have a material impact on the accounting for point-of-sale
transactions or related areas including the right of return, gift card breakage, and customer incentives. Although the impact
on the consolidated financial statements is not expected to be material, additional disclosures will be required.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to
Nonemployee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity
when accounting for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely
align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-
based payments to employees, with certain exceptions. The provisions of ASU 2018-07 are effective for the Company’s first
quarter of the fiscal year ending September 30, 2020, with early adoption permitted.

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 July
1. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant
events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. 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 and Store Closing Costs

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.

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

Leases

We lease retail stores, a bulk food repackaging facility and distribution center, land and administrative offices under
long-term operating leases, 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, 2018, $13.2 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, 2018, a hypothetical 100 basis point change in interest rates
would change our annual interest expense by $0.3 million in the year ended September 30, 2018.

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, 2018 and 2017 .........................................................................
Consolidated Statements of Income for the years ended September 30, 2018, 2017 and 2016 ..............................
Consolidated Statements of Cash Flows for the years ended September 30, 2018, 2017 and 2016 ........................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2018, 2017

Page
Number
56
58
59
60

and 2016 ...............................................................................................................................................................
Notes to Consolidated Financial Statements ...........................................................................................................

61
62

Report of Independent Registered Public Accounting Firm

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

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries
(the Company) as of September 30, 2018 and 2017, 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, 2018, and the related notes
(collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its
operations and its cash flows for each of the years in the three-year period ended September 30, 2018, in conformity with
U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated December 6, 2018, expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.

Basis for Opinion

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

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

/s/ KPMG LLP

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

Denver, Colorado
December 6, 2018

Report of Independent Registered Public Accounting Firm

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

Opinion on Internal Control Over Financial Reporting

We have audited Natural Grocers by Vitamin Cottage, Inc. and subsidiaries' (the Company) internal control over financial
reporting as of September 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated December
6, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

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

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

Definition and Limitations of Internal Control Over Financial Reporting

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

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

/s/ KPMG LLP

Denver, Colorado
December 6, 2018

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 ....................................................................
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, net ...............................................................................
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 shares
issued at 2018 and 2017, and 22,373,382 and 22,448,056 outstanding at 2018 and
2017, respectively ......................................................................................................
Additional paid-in capital .............................................................................................
Retained earnings .........................................................................................................
Common stock in treasury at cost, 136,897 and 62,223 shares at 2018 and 2017,

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

See accompanying notes to consolidated financial statements.

September 30,

2018

2017

9,398
4,738
94,228
2,590
110,954
188,768

1,682
5,648
31
7,361
307,083

61,104
17,851
736
79,691

40,406
13,192
6,447
688
11,038
8,895
80,666
160,357

23
56,236
91,507

(1,040)
146,726
307,083

6,521
4,860
93,612
3,222
108,215
184,417

1,642
5,655
62
7,359
299,991

56,849
14,164
548
71,561

32,880
28,392
12,419
1,231
10,465
9,160
94,547
166,108

23
55,678
78,846

(664)
133,883
299,991

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

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

Year ended September 30,
2017

2018

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, net ...........................................................................
Income before income taxes ...........................................................
Benefit from (provision for) income taxes .........................................
Net income ...................................................................................... $

849,042
623,469
225,573
186,741
21,506
2,273
15,053
(4,560)
10,493
2,168
12,661

769,030
556,694
212,336
174,350
20,089
3,799
14,098
(3,793 )
10,305
(3,414 )
6,891

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

Net income per share of common stock:

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

0.57
0.56

0.31
0.31

0.51
0.51

22,361,898
22,413,038

22,453,409
22,463,675

22,492,986
22,507,152

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 ...............................................................
Impairment of long-lived assets and store closing costs .........................
Gain on disposal of property and equipment ..........................................
Share-based compensation .....................................................................
Deferred income tax (benefit) expense ..................................................
Non-cash interest expense ......................................................................
Changes in operating assets and liabilities

Decrease (increase) 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 ..........................................
Proceeds from property insurance settlements ...........................................
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 ......................................
Payments on withholding tax for restricted stock unit vesting ...................
Loan fees paid ............................................................................................
Net cash (used in) provided by financing activities ....................
Net increase in cash and cash equivalents ..................................
Cash and cash equivalents, beginning of year ................................................
Cash and cash equivalents, end of year .......................................................... $
Supplemental disclosures of cash flow information:

Cash paid for interest ................................................................................. $
Cash paid for interest on capital and financing lease obligations, net of

capitalized interest of $187, $482 and $538, respectively ......................
Income taxes paid ......................................................................................
Deferred compensation paid ......................................................................

Supplemental disclosures of non-cash investing and financing activities:

Acquisition of property and equipment not yet paid .................................. $
Proceeds from sale of property and equipment not yet received ................
Property acquired through capital and capital financing lease obligations .
Direct bank to bank payment for a change in credit facility provider ........

Year ended September 30,
2017

2018

2016

12,661

6,891

11,471

29,430
585
—
810
(5,972)
12

145
943
(615)
(390)

1,845
3,644
(543)
308
42,863

(23,717)
34
140
(23,543)

376,000
(391,200)
(581)
(573)
(89)
—
(16,443)
2,877
6,521
9,398

29,511
—
(21 )
758
241
12

(1,100 )
732
(7,282 )
(1,049 )

7,224
1,521
474
2,937
40,849

(41,231 )
2,732
—
(38,499 )

291,765
(290,800 )
(261 )
(479 )
(71 )
—
154
2,504
4,017
6,521

878

739

3,611
1,958
700

5,254
23
8,285
—

2,972
2,656
—

2,843
12
1,499
—

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

331

2,637
6,370
—

6,837
—
4,438
18,858

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, 2018, 2017 and 2016
(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

Balances September 30, 2015 .......
Net income .................................
Share-based compensation .........
Tax shortfall related to share-

based compensation ...............
Repurchase of common stock ....
Balances September 30, 2016 .......
Net income .................................
Share-based compensation .........
Tax shortfall related to share-

based compensation ...............
Repurchase of common stock ....
Balances September 30, 2017 .......
Net income .................................
Share-based compensation .........
Tax benefit related to share-

based compensation ...............
Repurchase of common stock ....
Balances September 30, 2018 .......

22,496,628 $
—
23,951

22 $
—
1

54,982 $ 60,484 $
— 11,471
—
609

— $
—
139

—
(67,970)
22,452,609
—
25,447

—
(30,000)
22,448,056
—
26,899

—
—
23
—
—

(154 )
—

—
—
55,437 71,955
6,891
—

399

(158 )
—

—
—
55,678 78,846
— 12,661
—
516

—
(829)
(690)
—
288

—
(262)
(664)
—
205

—
(101,573)
22,373,382 $

—
—
23 $

42
—

—
—
56,236 $ 91,507 $

—
(581)
(1,040) $

115,488
11,471
749

(154)
(829)
126,725
6,891
687

(158)
(262)
133,883
12,661
721

42
(581)
146,726

See accompanying notes to consolidated financial statements.

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Consolidated Financial Statements
September 30, 2018 and 2017

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 148 stores as of September
30, 2018, including 37 stores in Colorado, 24 in Texas, 12 each in Arizona and Oregon, eight each in Kansas and Utah, seven
in Oklahoma, five each in Iowa, Missouri and New Mexico, four each in Idaho and Montana, three each in Arkansas,
Nebraska, Nevada and Washington, two each in North Dakota and Wyoming, and one in Minnesota. The Company also has
a bulk food repackaging facility and distribution center in Colorado. The Company had 140 and 126 stores as of September
30, 2017 and 2016, 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 valuation of inventories, useful lives of long-lived assets for depreciation and amortization,
impairment of finite-lived intangible, long-lived assets, and goodwill, lease assumptions, allowances for self-insurance
reserves, deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and
circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Information

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

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, magazine
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 approximately $0.1 million and $0.2 million as of September 30, 2018 and 2017, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of
investments in cash and cash equivalents. The Company’s cash and cash equivalent account balances, which are held in major
62

financial institutions, exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $8.8
million as of September 30, 2018.

Vendor Concentration

For the years ended September 30, 2018, 2017 and 2016, purchases from the Company’s largest vendor and its
subsidiaries represented approximately 64%, 62% and 59%, 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 net realizable value. Cost is determined using the weighted average cost method.

Long-Lived Assets

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

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.

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. The Company
recorded impairment charges related to long-lived assets of $0.5 million in fiscal year 2018, and no impairment charges in
fiscal years 2017 and 2016.

Goodwill and Intangible Assets

Intangible assets primarily consist of goodwill and trademarks. 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 July 1. In performing the Company’s
analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. 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
63

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, 2018, the Company has recorded no
impairment charges related to goodwill.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized

over the life of the credit facility using the straight-line method.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices
under long-term operating or 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). 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 should remove the assets from its
balance sheet. If the asset should not 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 a reduction in the cost of the
product. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not
include any rent amounts for the store leases classified as 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, long-lived asset impairment charges, store closing costs and other
related expenses associated with operations support. Store expenses also include purchasing support services and advertising
and marketing costs.

Administrative Expenses

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

Pre-Opening 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, 2018, 2017 and 2016 were approximately $8.2 million, $10.7 million and $10.8 million, respectively, net of
vendor reimbursements received for magazine advertising of approximately $4.1 million, $3.2 million and $3.2 million for
the years ended September 30, 2018, 2017 and 2016, 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 income tax expense and as

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

Income Taxes

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

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

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

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

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

differences for tax purposes.

U.S. Tax Reform

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the
Tax Cuts and Jobs Act (the Tax Reform Act). The Tax Reform Act significantly revises the future ongoing federal income
tax by, among other things, lowering U.S. corporate income tax rates effective January 1, 2018. The Company has calculated
a blended U.S. federal income tax rate of approximately 24.3% for the fiscal year ending September 30, 2018 and 21.0% for
subsequent fiscal years. Remeasurement of the Company’s deferred tax balance under the Tax Reform Act resulted in a non-
cash tax benefit of approximately $4.3 million for the year ended September 30, 2018.

The changes included in the Tax Reform Act are broad and complex. The final transition impacts of the Tax Reform
Act may differ from the above estimate due to, among other things, changes in interpretations of the Tax Reform Act, any
legislative action to address questions that arise because of the Tax Reform Act and any changes in accounting standards for
income taxes or related interpretations in response to the Tax Reform Act.

Recent Accounting Pronouncements

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 Company adopted the amendments of ASU 2015-11 effective October 1, 2017.
The adoption of this standard did not have a material impact on the Company’s consolidated financial statements for the year
ended September 30, 2018.

In March 2016, the FASB issued 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 Company’s financial statements,
including income tax consequences, forfeitures and classification on the statement of cash flows. Under previous guidance,
excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards
vested or were settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in income tax
expense, rather than paid-in-capital. The Company adopted the amendments of ASU 2016-09 effective October 1, 2017.The
adoption of this standard did not have a material impact on the Company’s consolidated statements of income for the year
ended September 30, 2018.

The Company has elected to continue to estimate the number of share-based awards expected to vest, as permitted

by ASU 2016-09, rather than electing to account for forfeitures as they occur.

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, 2018, 2017 and 2016, dollars in thousands, except per share data:

Net income ......................................................................................... $
Weighted average number of shares of common stock outstanding ..
Effect of dilutive securities ................................................................
Weighted average number of shares of common stock outstanding

Year ended September 30,
2017

2018

12,661
22,361,898
51,140

6,891
22,453,409
10,266

2016

11,471
22,492,986
14,166

including the effect of dilutive securities ........................................

22,413,038

22,463,675

22,507,152

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

0.57
0.56

0.31
0.31

0.51
0.51

There were 207,805, 52,974 and 61,115 non-vested restricted stock units (RSUs) for the years ended September 30,

2018, 2017 and 2016, respectively, excluded from the calculation as they are antidilutive.

The Company did not declare or pay any dividends in the years ended September 30, 2018, 2017 or 2016.

As of September 30, 2018, the Company had 50,000,000 shares of common stock authorized, of which 22,510,279
shares were issued and 22,373,382 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.

During fiscal year 2018, long-lived assets with a carrying value of $1.2 million were written down to their fair value
of $0.7 million, resulting in asset impairment charges of $0.5 million. The Company did not have any financial assets or
68

liabilities that were subject to fair value measurements as of September 30, 2017. The carrying amounts of the Company’s
financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable and other accrued
expenses, approximate fair value because of the short maturity of those assets and liabilities.

5. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2018 and 2017, dollars in

thousands:

Useful lives As of September 30,
2017

2018

(in years)
n/a

15,879

5,286

Construction in process ......................................................................................
Capitalized real estate leases for build-to-suit stores, including 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
40
5 - 24
1 - 25
5 - 7
3 - 5

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

35,700
5,735
192
19,262
1,016
131,474
122,984
21,181
353,423
(164,655)
188,768

29,548
5,735
192
19,259
1,159
131,679
115,888
19,108
327,854
(143,437)
184,417

Capitalized costs for computer software development were approximately $0.6 million and $0.2 million for the years
ended September 30, 2018 and 2017, respectively, primarily due to capitalization of expenses related to external consultants.
Total costs capitalized for qualifying construction projects on leasehold and building improvements and fixtures and
equipment included approximately $0.5 million and $0.7 million, for the years ended September 30, 2018 and 2017,
respectively, related to internal staff compensation. Interest costs of approximately $0.2 million, $0.5 million and $0.5 million
were capitalized for the years ended September 30, 2018, 2017 and 2016, respectively. Depreciation expense related to
capitalized internal staff compensation was approximately $0.5 million for each of the years ended September 30, 2018,
2017, and 2016.

Depreciation and amortization expense for the years ended September 30, 2018, 2017 and 2016 is summarized as

follows, dollars in thousands:

Year ended September 30,
2017

2018

2016

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 expenses ....................................... $

768
27,174

1,488
29,430

1,063
27,022

1,426
29,511

868
23,428

1,237
25,533

6. Impairment of Long-Lived Assets and Store Closing Costs

In determining whether long-lived assets are recoverable, the Company’s estimates of undiscounted future cash
flows over the estimated life or lease term of a store is based upon experience, historical results of the store, an estimate of
future store profitability and economic conditions. As the Company forecasts future undiscounted cash flows for the
remaining useful life of the asset group, estimates are subject to variability as future results can be difficult to predict. If a
long-lived asset is found to be non-recoverable, an impairment charge is recorded equal to the difference between the asset’s
carrying value and fair value. The Company estimates the fair value of the asset using a valuation method such as discounted
cash flow or a relative, market-based approach.

In the fourth quarter of fiscal year 2018, the Company concluded, as a result of its review of potential long-lived

asset impairment, that certain of its long-lived assets were impaired. The Company recorded a $0.5 million impairment for
69

the year ended September 30, 2018. Such charge is reflected within store expenses on the consolidated statement of income
for the year ended September 30, 2018.

Additionally, other store closing costs for the Tulsa-Central store related to one-time severance benefit payouts of
less than $0.1 million were recorded as accrued liabilities at September 30, 2018 (see Note 19). No impairment charges or
other store closing costs were recorded in fiscal year 2017.

7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2018 and 2017, are summarized as follows, dollars in

thousands:

Amortizable intangible assets:

Useful lives As of September 30,
2017

(in years)

2018

Covenants-not-to-compete ...............................................................................
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
0.5 - 3

Indefinite

—
138
138
(77)
61
389
450
5,198
5,648

353
109
462
(394)
68
389
457
5,198
5,655

Amortization expense was less than $0.1 million for each of the years ended September 30, 2018, 2017 and 2016.

8. Accrued Expenses

The composition of accrued expenses as of September 30, 2018 and 2017, is summarized as follows, dollars in

thousands:

As of September 30,

2018

2017

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

6,992
7,043
335
1,453
2,028
17,851

5,391
6,399
648
906
820
14,164

9. Long-Term Debt

Credit Facility

On January 28, 2016, the Company entered into a credit facility (the Credit Facility). The operating company is the
borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and
VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The amount available for borrowing
under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has
the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit
Facility matures on 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.

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.

The Company had $13.2 million and $28.4 million outstanding under the Credit Facility as of September 30, 2018
and September 30, 2017, respectively. As of each of September 30, 2018 and September 30, 2017, the Company had undrawn,
issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under
the terms of the Credit Facility. The Company had $35.8 million and $20.6 million available for borrowing under the Credit
Facility as of September 30, 2018 and September 30, 2017, respectively.

Capital and Financing Lease Obligations

The Company had 20 and 17 leases as of September 30, 2018 and 2017, respectively, that are included in capital
and financing lease obligations (see Notes 2 and 10). No rent expense is recorded 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 $4.7 million, $4.3 million and $3.5 million in the
years ended September 30, 2018, 2017 and 2016, respectively. Interest expense for the years ended September 30, 2018,
2017 and 2016 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of
approximately $0.2 million, $0.5 million and $0.5 million for the years ended September 30, 2018, 2017 and 2016,
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, 2018 and 2017 was approximately $11.0
million and $10.5 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, 2018 and 2017 were approximately $8.9 million and $9.2 million, respectively. Sublease rental income was
approximately $0.4 million for the year ended September 30, 2018, approximately $0.3 million for the year ended September
30, 2017 and less than $0.1 million for the year ended September 30, 2016.

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
2019 .............................................................. $
2020 ..............................................................
2021 ..............................................................
2022 ..............................................................
2023 ..............................................................
Thereafter ......................................................
Total payments .............................................. $

Third
parties

Related
parties

40,847
40,974
39,764
38,958
38,356
289,728
488,627

1,329
1,333
1,310
1,308
1,308
3,979
10,567

Sublease

rental income
(415)
(379)
(366)
(372)
(361)
(764)
(2,657)

Total operating
leases

41,761
41,928
40,708
39,894
39,303
292,943
496,537

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2018,
2017, and 2016 totaled approximately $48.8 million, $43.8 million and $34.6 million, respectively, which is included in cost
of goods sold and occupancy costs and administrative expenses in the consolidated statements of income. In addition,
approximately $0.6 million, $1.4 million and $1.4 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, 2018, 2017 and 2016, respectively.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of September 30, 2018 and 2017, were as follows, dollars in thousands:

Capital lease finance obligations, due in monthly installments through fiscal year 2033 . $
Capital lease obligations due in monthly installments through fiscal year 2041 ...............
Capital lease finance obligations for assets under construction, due in monthly

As of September 30,
2017
2018

32,523
4,763

26,930
4,999

installments through fiscal year 2033 ............................................................................

2,350

1,499

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

through fiscal year 2034 ................................................................................................
Total capital and financing lease obligations .................................................................
Less current portion ...........................................................................................................
Total capital and financing lease obligations, net of current portion ............................. $

1,506
41,142
(736)
40,406

—
33,428
(548)
32,880

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 should remove the asset from its
balance sheet. If the asset should not 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 $32.5 million and $26.9 million as of September 30, 2018 and 2017, respectively. The leases that created the
obligations expire or become subject to renewal clauses at various dates through fiscal year 2033. The Company does not
record rent expense for capital lease finance obligations; 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.

Capital lease obligations

The Company had capital lease obligations totaling approximately $4.8 million and $5.0 million as of September
30, 2018 and 2017, 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; 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

The Company had $2.4 million and $1.5 million in construction in process related to capital lease finance obligations
as of September 30, 2018 and 2017, respectively. No rent expense is recorded for these leases; 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 $1.5 million and zero in construction in process related to capital lease obligations as of
September 30, 2018 and 2017, respectively. No rent expense is recorded for these leases; 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.

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, 2018 are as follows, dollars in thousands:

Interest
expense on
capital lease
finance
obligations
3,503
3,461
3,412
3,354
3,286
15,380

Principal
payments on
capital lease
finance
obligations
417
461
542
625
750
6,504

Interest
expense on
capital lease
obligations
481
453
423
390
353
1,768

Principal
payments on
capital lease
obligations
261
288
319
352
398
3,144

Total future
payments on
capital lease
finance and
capital lease
obligations
4,662
4,663
4,696
4,721
4,787
26,796

2019 ............................................................. $
2020 .............................................................
2021 .............................................................
2022 .............................................................
2023 .............................................................
Thereafter ....................................................
Non-cash derecognition of capital lease

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

—
32,396

23,225
32,524

—
3,868

—
4,762

23,225
73,550

Future payments under the terms of the lease for the store location at which construction was in progress as of
September 30, 2018, based on the store opening date in the first quarter of fiscal year 2019, 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

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

186
184
182
180
178
1,514

—
2,424

20
21
23
25
27
810

1,423
2,349

206
205
205
205
205
2,324

1,423
4,773

Interest expense on
capital lease
obligations for assets
under construction

Total future payments
on capital lease
obligations for assets
under construction

Principal payments
on capital lease
obligations for assets
under construction
36
45
49
55
61
1,260
1,506

174
197
196
197
197
2,073
3,034

138
152
147
142
136
813
1,528

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 186,179 remain available for grants as of September 30, 2018. 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, 2018, 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, 2018 were as follows:

Weighted average
grant date fair
value

Non-vested as of September 30, 2016 ..............................................................
Granted .............................................................................................................
Forfeited ...........................................................................................................
Vested ..............................................................................................................
Non-vested as of September 30, 2017 ..............................................................
Granted .............................................................................................................
Forfeited ...........................................................................................................
Vested ..............................................................................................................
Non-vested as of September 30, 2018 ..............................................................

92,586 $
16,662
(4,249 )
(34,653 )
70,346
396,949
(15,626 )
(32,687 )
418,982

24.52
12.09
27.28
19.02
21.56
8.88
12.01
17.97
10.19

During the year ended September 30, 2018, the Company awarded stock grants totaling 1,300 shares of the
Company’s common stock to 13 employees who were not named executive officers. Such shares were fully vested on the
grant date.

Share-based compensation expense for restricted stock unit awards to certain employees who are not named
executive officers was approximately $0.5 million, $0.6 million and $0.7 million for the years ended September 30, 2018,
2017 and 2016, respectively. Share-based compensation expense for restricted stock unit awards to one named executive
officer was approximately $0.1 million for the year ended September 30, 2018. There was no share-based compensation
expense for named executive officers for the years ended September 30, 2017 and 2016.

Each independent member of the Board receives an annual grant of restricted stock units equal to $60,000 (based
on the closing price of common stock on the New York Stock Exchange on the date of grant). Such grants are made each
year on the date of the Company’s annual meeting of stockholders, or on a pro rata basis in the case of a mid-year appointment.
Share-based compensation expense for the Company’s awards to its Board members was approximately $0.2 million for each
of the years ended September 30, 2018, 2017 and 2016.

The Company recorded total share-based compensation expense before income taxes of approximately $0.8 million,
$0.8 million and $0.9 million in the years ended September 30, 2018, 2017 and 2016, 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, 2018, 2017 and 2016.

As of September 30, 2018, there was approximately $3.1 million of unrecognized share-based compensation
expense related to non-vested restricted stock units, net of estimated forfeitures, which the Company anticipates will be
recognized over a weighted average period of approximately two years.

12. Stockholders’ Equity

Share Repurchases

On May 4, 2017, 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. On May 2, 2018, the Board authorized a two-year
extension of the share repurchase program. As a result of such extension, the share repurchase program will terminate on
May 4, 2020. Repurchases under the Company’s share repurchase program are made from time to time at management’s
discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements
and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common
stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The
share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be
suspended, modified or discontinued by the Company without prior notice.

The following table summarizes share repurchase activity for the periods:

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

101,573
5.72
581

30,000
8.71
262

During fiscal years 2018 and 2017, the Company reissued 26,899 and 25,447 treasury shares at a cost of $0.2 million
and $0.3 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain restricted stock unit
awards and the award of stock grants. At September 30, 2018 and September 30, 2017, the Company held in treasury 136,897
and 62,223 shares, respectively, totaling approximately $1.0 million and $0.7 million, respectively.

Year ended September 30,

2018

2017

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 family members. Rent paid to Chalet was approximately
$1.2 million for each of the years ended September 30, 2018, 2017 and 2016.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 11) 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, 2018, 2017 and 2016.

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, 2018, 2017 and 2016.

14. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2018, 2017 and 2016,

respectively, dollars in thousands:

2018

Year ended September 30,
2017

2016

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

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

3,083
721
3,804

(5,760)
(212)
(5,972)

2,837
336
3,173

206
35
241

Total (benefit from) provision for income taxes ........... $

(2,168)

3,414

(853)
(254)
(1,107)

6,103
868
6,971

5,864

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

are as follows:

2018

Year ended September 30,
2017

2016

Statutory tax rate ..............................................................
State income taxes, net of federal income tax expense ....
Remeasurement ................................................................
Enhanced food deduction .................................................
Deferred tax liability adjustment ......................................
Other, net ..........................................................................
Effective tax rate...........................................................

24.3%

3.3
(41.3)
(1.8)
(6.3)
1.1
(20.7)%

34.0
2.7
—
(2.7)
—
(0.9)
33.1

34.0
2.9
—
(1.6)
—
(1.4)
33.9

The Company’s effective tax rate decreased from 33.1% in the year ended September 30, 2017 to (20.7)% in the

year ended September 30, 2018 primarily due to the enactment of the Tax Reform Act.

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

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

—
(6,447)
(6,447)

—
(12,419)
(12,419)

As of September 30,

2018

2017

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 ..............................................................................
Deferred compensation .....................................................................................
Other .................................................................................................................
Gross deferred tax assets ...............................................................................

Deferred tax liabilities

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

As of September 30,

2018

2017

10,022
955
2,180
2,706
658
642
169
339
17,671

(21,489)
(2,407)
(214)
(8)
(24,118)
(6,447)

12,670
1,853
3,484
3,980
1,021
910
468
439
24,825

(33,127)
(3,774)
(343)
—
(37,244)
(12,419)

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 less than $0.1 million in tax effected state income tax carryforwards in the each of the years

ended September 30, 2018 and 2017.

The Company did not have any uncertain tax positions as of September 30, 2018 and 2017.

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 2015 and prior and is no longer subject to
state and local income tax examinations for fiscal years 2013 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 up to 25% of participant
contributions up to a maximum annual employer match of $2,500. During the year ended September 30, 2018, the Company
accrued $0.6 million for matching contributions to be paid out during the year ending September 30, 2019. During the year
ended September 30, 2017, the Company funded contributions of $0.1 million through plan forfeitures.

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, 2018, 2017 and 2016 as follows:

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

17. Commitments and Contingencies

Self-Insurance

2018

As of September 30,
2017

2016

68%
21
11
100.0%

67
22
11
100.0

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

Legal

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

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, 2018

Three months ended

December 31,
2017

March 31,
2018

June 30,
2018

September 30,
2018

Net sales ................................................................. $
Cost of goods sold and occupancy costs ................
Gross profit .....................................................
Store expenses ........................................................
Administrative expenses ........................................
Pre-opening and relocation expenses .....................
Operating income ............................................
Interest expense, net ...............................................
Income before income taxes ............................
Benefit from (provision for) income taxes .............
Net income ...................................................... $

202,480
149,321
53,159
45,166
5,257
543
2,193
(1,089)
1,104
4,077
5,181

215,911
157,630
58,281
46,480
5,458
697
5,646
(1,122)
4,524
(1,120)
3,404

213,130
156,299
56,831
47,000
5,630
443
3,758
(1,170)
2,588
(597)
1,991

217,521
160,219
57,302
48,095
5,161
590
3,456
(1,179)
2,277
(192)
2,085

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

0.23
0.23

0.15
0.15

0.09
0.09

0.10
0.09

Fiscal Year Ended September 30, 2017

Three months ended

December 31,
2016

March 31,
2017

June 30,
2017

September 30,
2017

Net sales ................................................................. $
Cost of goods sold and occupancy costs ................
Gross profit .....................................................
Store expenses ........................................................
Administrative expenses ........................................
Pre-opening and relocation expenses .....................
Operating income ............................................
Interest expense, net ...............................................
Income before income taxes ............................
Provision for income taxes .....................................
Net income ...................................................... $

183,577
131,424
52,153
41,843
4,883
1,261
4,166
(983)
3,183
(1,122)
2,061

192,203
138,045
54,158
42,400
4,959
1,284
5,515
(879)
4,636
(1,640)
2,996

194,709
141,928
52,781
45,028
5,105
970
1,678
(876)
802
(204)
598

198,541
145,297
53,244
45,079
5,142
284
2,739
(1,055)
1,684
(448)
1,236

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

0.09
0.09

0.13
0.13

0.03
0.03

0.06
0.06

19. Subsequent Events

On November 9, 2018, the Company closed its Tulsa-Central store, one of two Company stores located in Tulsa,

Oklahoma. See Note 6 for further information.

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, 2018 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, 2018, we maintained effective internal control
over financial reporting.

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2018

that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officers and principal financial and accounting
officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange
Act as of the end of the period covered by this Form 10-K. 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 at a reasonable assurance level as of September 30, 2018.

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 2019 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of September 30, 2018 (the “2019 Proxy Statement”). We have adopted a Code of Ethics that
establishes the standards of ethical conduct applicable to all of our directors, officers, including our principal executive,
financial and accounting officers, employees, consultants and contractors. Our Code of Ethics is publicly available on our
website at www.naturalgrocers.com and we will post any amendments to, or waivers from, a provision of this Code of Ethics
by posting such information on our website, at the address and location specified above.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information in the 2019 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
2019 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 2019 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 2019 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

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

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.

Exhibits:

Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
10.1

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

EXHIBIT INDEX

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*

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

Form
Form S-1
Form S-1

File No.
333-182186 3.1
333-182186 3.2

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

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

333-182186 4.2
333-182886 4.2
333-182186 4.3

Form 10-Q

001-35608

10.1

Form S-1
Form S-1

333-182186 10.16
10.17

333-182186

Form S-1

333-182186

10.18

Form S-1

333-182186

10.19

Form S-1

333-182186

10.20

Form S-1

333-182186

10.21

Form S-1

333-182186

10.22

Form S-1

333-182186

10.23

Form S-1

333-182186

10.24

Form S-1

333-182186

10.25

Form S-1

333-182186

10.26

Form S-1

333-182186

10.27

Form S-1

333-182186

10.28

Form S-1

333-182186

10.29

Form S-1

333-182186

10.30

Form S-1

333-182186

10.31

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

July 5, 2012

June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012
June 29,
2012

June 29,
2012
June 29,
2012

June 29,
2012

Form S-1

333-182186

10.32

July 12, 2012

10.39

10.40

10.41

10.42

10.43

10.44

10.45

10.46

10.47

10.48

21.1

23.1
31.1

31.2

31.3

32.1

101

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
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
Incentive Compensation Program*

Second Amendment to Credit Agreement dated as of September 6,
2017, 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, L/C Issuer and Swing
Line Lender
Autoborrow Agreement dated as of September 6, 2017, by and
between Vitamin Cottage Natural Food Markets, Inc. and Bank of
America, N.A.
Employment offer letter to Todd Dissinger dated December 5, 2017

Notice of Grant of Stock Unit Award to Todd Dissinger dated
January 2, 2018
Amendment dated as of May 25, 2018 to Customer Distribution
Agreement dated as of June 21, 2016 by and among United Natural
Foods, Inc., Tony’s Fine Foods, Albert’s Organics and Vitamin
Cottage Natural Food Markets, Inc.#
Code of Ethics

List of subsidiaries

Consent of KPMG LLP

Certification of Kemper Isely, a Principal Executive Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
Certification of Zephyr Isely, a Principal Executive Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
Certification of Todd Dissinger, Principal Financial Officer
Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officers and Principal Financial
Officer Required Under 18 U.S.C. §1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002†

—
—

—

Form 10-Q

001-35608

10.39

Form 10-Q

001-35608

10.40

January 28,
2016

Form 10-Q

001-35608

10.41

July 28, 2016

Form 10-Q

001-35608

10.42

July 28, 2016

Form 10-Q

001-35608

10.43

Form 10-K

001-35608

10.44

Form 10-K

001-35608

10.45

Form 10-Q

001-35608

10.46

Form 10-Q

001-35608

10.47

Form 10-Q

001-35608

10.48

Form 10-K

001-35608

Form 10-K

001-35608

21.1

February 2,
2017
December 7,
2017

December 7,
2017

February 1,
2018
February 1,
2018
August 2,
2018

December
13, 2012
December
13, 2012

—
—

—

—
—

—

—
—

—

The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended
September 30, 2018, 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.

* 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.

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 6, 2018.

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 6, 2018

/s/ ZEPHYR ISELY
Zephyr Isely

(Principal Executive Officer, Co-President,
Director)

December 6, 2018

/s/ TODD DISSINGER
Todd Dissinger

(Principal Financial and Accounting Officer,
Chief Financial Officer)

December 6, 2018

/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

December 6, 2018

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WE ONLY SELL

100%

ORGANIC
PRODUCE

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

TODD DISSINGER Chief Financial Officer

ORDERING FINANCIAL STATEMENTS

A copy of our 2018 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 6, 2019
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).

INDUSTRY-LEADING QUALITY STANDARDS

NUTRITIONAL EDUCATION
ALWAYS AFFORDABLESM PRICING