UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒

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

FOR THE QUARTERLY PERIOD ENDED ~~JUNE 30~~DECEMBER 31, 2019

☐

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

COMMISSION FILE NUMBER: 001-35608

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

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

12612 West Alameda Parkway

80228

Lakewood, Colorado

(Address of principal executive offices)

(Zip code)

(303) 986-4600

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of ~~July 29, 2019~~February 4, 2020 was ~~22,454,205.~~22,489,902.

Table of Contents

Natural ~~Grocers~~Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended ~~June 30~~December 31, 2019

Table of Contents

		Page Number

	PART I. Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of ~~June 30,~~December 31, 2019 (unaudited) and September 30, ~~2018~~2019	3
	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited)	4
	Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited)	6
	Notes to Unaudited Interim Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1416
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25

	PART II. Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
~~Item 5.~~	~~Other Information~~	26
Item 6.	Exhibits	27

SIGNATURES		28

Table of Contents

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 ~~201~~20920” refers to the year from October 1, 20189 to September 30, ~~201~~20920).

Forward-Looking Statements

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

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018~~2019 (the Form 10-K) and Part II, Item 1A - “Risk Factors” in this Form 10-Q. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

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

Table of Contents

PART~~PART~~ I. Financial Information

Item 1. Financial Statements

~~NATU~~NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	June 30, 2019			September 30, 2018			December 31, 2019			September 30, 2019
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,659			9,398		$	5,157			6,214
Accounts receivable, net		3,956			4,738			4,681			5,059
Merchandise inventory		96,092			94,228			98,145			96,179
Prepaid expenses and other current assets		3,298			2,590			8,071			7,728
Total current assets		115,005			110,954			116,054			115,180
Property and equipment, net		195,499			188,768			155,619			201,635
Other assets:
Operating lease assets								355,167			—
Finance lease assets								32,308			—
Deposits and other assets		1,666			1,682			668			1,638
Goodwill and other intangible assets, net		8,122			5,648			9,476			8,644
Deferred financing costs, net		21			31			40			17
Total other assets		9,809			7,361
Total assets	$	320,313			307,083		$	669,332			327,114

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	61,025			61,104		$	62,220			63,162
Accrued expenses		19,203			17,851			22,032			19,061
Capital and financing lease obligations, current portion		983			736			—			1,045
Operating lease obligations, current portion								31,419			—
Finance lease obligations, current portion								2,374			—
Total current liabilities		81,211			79,691			118,045			83,268
Long-term liabilities:
Capital and financing lease obligations, net of current portion		49,245			40,406			—			51,475
Operating lease obligations, net of current portion								341,715			—
Finance lease obligations, net of current portion								31,078			—
Revolving credit facility		10,092			13,192			8,292			5,692
Deferred income tax liabilities, net		5,047			6,447			11,110			10,420
Deferred compensation		—			688
Deferred rent		11,323			11,038			—			11,393
Leasehold incentives		8,074			8,895			—			7,960
Total long-term liabilities		83,781			80,666			392,195			86,940
Total liabilities		164,992			160,357			510,240			170,208
Commitments (Notes 7 and 13)
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at June 30, 2019 and September 30, 2018 and 22,454,205 and 22,373,382 outstanding at June 30, 2019 and September 30, 2018, respectively		23			23
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at December 31, 2019 and September 30, 2019 and 22,475,718 and 22,463,057 outstanding at December 31, 2019 and September 30, 2019, respectively								23			23
Additional paid-in capital		56,162			56,236			56,454			56,319
Retained earnings		99,562			91,507			102,878			100,923
Common stock in treasury at cost, 56,074 and 136,897 shares, at June 30, 2019 and September 30, 2018, respectively		(426	)		(1,040	)
Common stock in treasury at cost, 34,561 and 47,222 shares, at December 31, 2019 and September 30, 2019, respectively								(263	)		(359	)
Total stockholders’ equity		155,321			146,726			159,092			156,906
Total liabilities and stockholders’ equity	$	320,313			307,083		$	669,332			327,114

See accompanying notes to unaudited interim consolidated financial statements.

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NAT~~NATURAL~~URAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

													Three months ended December 31,
	Three months ended June 30,						Nine months ended June 30,						2019			2018
	2019			2018			2019			2018
Net sales	$	224,411			213,130			676,373			631,521		$	230,030			221,515
Cost of goods sold and occupancy costs		165,986			156,299			496,588			463,250			169,506			162,369
Gross profit		58,425			56,831			179,785			168,271			60,524			59,146
Store expenses		48,424			47,000			147,722			138,646			51,427			49,123
Administrative expenses		5,953			5,630			17,029			16,345			5,819			5,315
Pre-opening and relocation expenses		213			443			1,042			1,683			430			672
Operating income		3,835			3,758			13,992			11,597			2,848			4,036
Interest expense, net		(1,256	)		(1,170	)		(3,791	)		(3,381	)		(536	)		(1,255	)
Income before income taxes		2,579			2,588			10,201			8,216			2,312			2,781
(Provision for) benefit from income taxes		(581	)		(597	)		(2,146	)		2,360
Provision for income taxes														(444	)		(584	)
Net income	$	1,998			1,991			8,055			10,576		$	1,868			2,197

Net income per common share:
Basic	$	0.09			0.09			0.36			0.47		$	0.08			0.10
Diluted	$	0.09			0.09			0.36			0.47		$	0.08			0.10
Weighted average number of shares of common stock outstanding:
Basic		22,438,657			22,364,397			22,412,662			22,359,427			22,471,350			22,386,566
Diluted		22,525,287			22,497,066			22,564,705			22,439,890			22,542,967			22,595,961

See accompanying notes to unaudited interim consolidated financial statements.

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NAT~~NATURAL~~URAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Nine months ended June 30,						Three months ended December 31,
	2019			2018			2019			2018

Operating activities:
Net income	$	8,055			10,576		$	1,868			2,197
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,783			22,169			7,707			7,286
Gain on disposal of property and equipment		(158	)		(23	)
Loss on disposal of property and equipment								1			41
Share-based compensation		920			547			279			399
Deferred income tax benefit		(1,400	)		(3,738	)
Deferred income tax expense (benefit)								424			(264	)
Non-cash interest expense		10			11			3			3
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable, net		782			(30	)		378			(151	)
Merchandise inventory		(1,864	)		(3,635	)		(1,966	)		(969	)
Prepaid expenses and other assets⁽¹⁾		(430	)		(1,186	)
Income tax receivable⁽¹⁾		(298	)		1,082
Increase (decrease) in:
Prepaid expenses and other assets								(371	)		(339	)
Income tax receivable								29			181
Operating lease asset								7,451			—
(Decrease) increase in:
Operating lease liability								(7,625	)		—
Accounts payable		767			759			(669	)		(4,400	)
Accrued expenses		1,352			3,467			2,971			3,740
Deferred compensation		(688	)		(554	)		—			12
Deferred rent and leasehold incentives		(536	)		861			—			(209	)
Net cash provided by operating activities		28,295			30,306			10,480			7,527
Investing activities:
Acquisition of property and equipment⁽¹⁾		(20,817	)		(16,643	)
Acquisition of other intangibles⁽¹⁾		(2,036	)		(30	)
Proceeds from sale of property and equipment		833			34
Acquisition of property and equipment								(10,982	)		(11,511	)
Acquisition of other intangibles								(1,008	)		(68	)
Proceeds from property insurance settlements		32			124			17			19
Net cash used in investing activities		(21,988	)		(16,515	)		(11,973	)		(11,560	)
Financing activities:
Borrowings under credit facility		297,900			279,900			113,000			94,300
Repayments under credit facility		(301,000	)		(292,000	)		(110,400	)		(94,800	)
Capital and financing lease obligations payments		(566	)		(416	)
Repurchases of common stock		—			(581	)
Capital and financing lease obligation payments								—			(175	)
Finance lease obligation payments								(519	)		—
Dividend to shareholders								(1,573	)		—
Loan fees paid								(25	)		—
Payments on withholding tax for restricted stock unit vesting		(380	)		(11	)		(47	)		(154	)
Net cash used in financing activities		(4,046	)		(13,108	)
Net increase in cash and cash equivalents		2,261			683
Net cash provided by (used in) financing activities								436			(829	)
Net decrease in cash and cash equivalents								(1,057	)		(4,862	)
Cash and cash equivalents, beginning of period		9,398			6,521			6,214			9,398
Cash and cash equivalents, end of period	$	11,659			7,204		$	5,157			4,536
Supplemental disclosures of cash flow information:
Cash paid for interest	$	603			654		$	163			224
Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $117 and $105, respectively		3,169			2,670
Cash paid for interest on finance or capital and financing lease obligations, net of capitalized interest of $45 and $43, respectively								373			1,024
Income taxes paid		4,733			508			10			20
Deferred compensation paid		700			700
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	4,408			3,446		$	6,015			2,970
Property acquired through capital and financing lease obligations		9,651			8,204			—			4,688
Property acquired through operating lease obligations								6,378			—
Property acquired through finance lease obligations								1,322			—

⁽¹⁾~~Certain prior year amounts have been separated for consistency with current year presentation.~~

See accompanying notes to unaudited interim consolidated financial statements.

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NAT~~NATU~~URAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the ~~Nine~~Three Months Ended ~~June 30~~December 31, 2019 and ~~June 30~~December 31, 2018

(Unaudited)

(Dollars in thousands, except per share data)

	Common stock –$0.001 par														Common stock –$0.001 par
	value														value				Additional								Total
	Shares outstanding		Amount		Additional paid-in capital			Retained earnings		Treasury stock			Total stockholders’ equity		Shares outstanding		Amount		paid-in capital		Retained earnings			Treasury stock			stockholders’ equity
Balances September 30, 2018		22,373,382	$	23	$	56,236		$	91,507	$	(1,040	)	$	146,726
Balances September 30, 2019																22,463,057	$	23	$	56,319	$	100,923		$	(359	)	$	156,906
Net income		—		—		—			2,197		—			2,197		—		—		—		1,868			—			1,868
Cash dividends																—		—		—		(1,573	)		—			(1,573	)
Share-based compensation		18,928		—		101			—		144			245		12,661		—		135		—			96			231
Balances December 31, 2018		22,392,310		23		56,337			93,704		(896	)		149,168
Net income		—		—		—			3,860		—			3,860
Share-based compensation		39,243		—		(145	)		—		298			153
Balances March 31, 2019		22,431,553		23		56,192			97,564		(598	)		153,181
Net income		—		—		—			1,998		—			1,998
Share-based compensation		22,652		—		(30	)		—		172			142
Balances June 30, 2019		22,454,205	$	23	$	56,162		$	99,562	$	(426	)	$	155,321
Topic 842 transition impact																—		—		—		1,660			—			1,660
Balances December 31, 2019																22,475,718	$	23	$	56,454	$	102,878		$	(263	)	$	159,092

	Common stock –$0.001 par															Common stock –$0.001 par
	value															value				Additional							Total
	Shares outstanding			Amount		Additional paid-in capital		Retained earnings		Treasury stock			Total stockholders’ equity			Shares outstanding		Amount		paid-in capital		Retained earnings		Treasury stock			stockholders’ equity
Balances September 30, 2017		22,448,056		$	23	$	55,678	$	78,846	$	(664	)	$	133,883
Balances September 30, 2018																	22,373,382	$	23	$	56,236	$	91,507	$	(1,040	)	$	146,726
Net income		—			—		—		5,181		—			5,181			—		—		—		2,197		—			2,197
Share-based compensation		1,226			—		147		—		9			156			18,928		—		101		—		144			245
Repurchase of common stock		(101,573	)		—		—		—		(581	)		(581	)
Balances December 31, 2017		22,347,709			23		55,825		84,027		(1,236	)		138,639
Net income		—			—		—		3,404		—			3,404
Share-based compensation		16,571			—		69		—		127			196
Balances March 31, 2018		22,364,280			23		55,894		87,431		(1,109	)		142,239
Net income		—			—		—		1,991		—			1,991
Share-based compensation		9,102			—		183		—		1			184
Balances June 30, 2018		22,373,382		$	23	$	56,077	$	89,422	$	(1,108	)	$	144,414
Balances December 31, 2018																	22,392,310	$	23	$	56,337	$	93,704	$	(896	)	$	149,168

See accompanying notes to unaudited interim consolidated financial statements.

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NATU~~NATURAL~~RAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Unaudited Interim Consolidated Financial Statements

~~June 30~~December 31, 2019 and 2018

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of ~~June 30,~~December 31, 2019, the Company operated ~~152~~155 stores in 1920 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had ~~148~~153 stores in 19 states as of September 30, ~~2018.~~2019.

2. Basis of Presentation and Summary of Significant Accounting Policies

Consolidated Financial Statements

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

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

The Company has one reporting segment: natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018, as follows:

	Three months ended June 30,					Nine months ended June 30,				Three months ended December 31,
	2019			2018		2019		2018		2019			2018
Grocery		69	%		68		68		67		69	%		68
Dietary supplements		21			21		21		22		21			21
Other		10			11		11		11		10			11
		100	%		100		100		100		100	%		100

Use of Estimates

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

~~Table of Contents~~

~~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 revised the ongoing federal income tax by, among other things, lowering U.S. corporate income tax rates effective January 1, 2018. The Company has a U.S. federal income tax rate of 21.0% for the fiscal year ending September 30, 2019. The Tax Reform Act resulted in a blended U.S. federal income tax rate of approximately 24.3% for the fiscal year ended September 30, 2018. 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 nine months ended June 30, 2018 and the fiscal year ended September 30, 2018.

Recently Adopted Accounting Pronouncements

~~In May 2014, the~~The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) ~~2014-09, “Revenue from Contracts~~2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with ~~Customers,” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue~~terms greater than 12 months. Under ASC 842, recognition, measurement and ~~replaces most existing revenue recognition guidance in GAAP. ASU 2014-09’s core principle~~presentation of lease expenses depend on whether the lease is ~~that~~classified as a ~~company recognizes revenue when it transfers promised goods~~finance or ~~services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer~~operating lease.

Table of ~~those goods or services.~~ Contents

The Company adopted ~~this ASU and related amendments~~ASC 842 on October 1, ~~2018,~~2019, the first day of fiscal year 2020, using the modified retrospective transition approach. ~~Additionally, upon adoption of this ASU,~~In addition, the Company elected the ~~following~~package of practical ~~expedients:~~expedients permitted under the transition guidance within the new standard, which, among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. The Company did not elect the hindsight practical expedient.

ASU 2016-09, pursuant to which the incremental costs of obtaining a contract are recognized as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.

~~ASU 2016-12, pursuant to which sales taxes and other similar taxes collected from customers are presented net of sales.~~

~~ASU 2016-20, pursuant to which the transaction price allocated to performance obligations is not disclosed when the related contract has a duration of one year or less.~~

~~Updated accounting policies and other disclosures are discussed below in~~ ~~Recent Accounting Pronouncements~~ ~~in this Note 2.~~ The adoption of ASC 842 resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million and $377.8 million, respectively, as of October 1, 2019. Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as deferred rent and leasehold incentives.

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

In June 2018, the FASB issued ASU ~~2014-09~~2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Nonemployee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain exceptions. The provisions of ASU 2018-07 are effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. This ASU did not have ~~a material~~an impact on the Company’s consolidated financial statements for the three ~~or nine~~ months ended ~~June 30,~~December 31, 2019.

Recent Accounting Pronouncements ~~Update~~

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

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. ~~Early adoption~~ASU 2019-10 delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to above). Because the Company is ~~permitted for annual and interim goodwill impairment testing dates after January 1, 2017, and~~a smaller reporting company, the provisions of ASU is2017-04 will be effective for the Company’s first quarter of the fiscal year ending September 30, ~~2020.~~2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

In 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, whereby prior periods will continue to be reported in accordance with the historical accounting guidance then in effect, as permitted by ASU 2018-11, “Leases,” Topic 842, “Targeted Improvements,” released in July 2018.

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.

Furthermore, the Company plans to elect the package of practical expedients permitted under the transition guidance with the new standard, which among other things, permits companies not to reassess prior conclusions about lease identification, lease classification and initial direct costs.

While the Company is still evaluating all the other effects the adoption of ASU 2016-02 will have on its consolidated financial statements, including implementing process changes required to support the adoption of this standard and implementing new software solutions, the Company expects the adoption of ASU 2016-02 will result in a material increase in lease liabilities and right-of-use assets on the Company’s consolidated balance sheet. In addition, the Company anticipates that the transition of several of its financing leases to operating leases under the new standard will result in an increase in rent expense, partially offset by reductions to depreciation and interest expense. However, the Company does not expect that the adoption of ASU 2016-02 will have an impact on the Company’s cash flows.

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

3. Revenue Recognition

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

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

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

~~As of each June 30, 2019 and September 30, 2018, the~~The balance of contract liabilities related to unredeemed gift cards was $1.3 million and $1.0 ~~million.~~million as of December 31, 2019 and September 30, 2019, respectively. Revenue for the three months ended ~~June 30,~~December 31, 2019 and 2018 includes ~~approximately $0.1~~$0.8 million and $0.3 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, ~~2018. Revenue for the nine months ended June 30,~~ 2019 ~~includes approximately $0.6 million that was included in the contract liability balance of unredeemed gift cards at September 30, 2018.~~and 2018, respectively.

The following table disaggregates ~~our~~the Company’s revenue by product category for the three months ~~and nine months~~ ended ~~June 30,~~December 31, 2019 and 2018, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2019		2018		2019		2018		2019		2018
Grocery	$	154,383		145,215		463,486		425,783	$	157,934		151,301
Dietary supplements		46,240		45,112		141,724		137,508		47,901		45,784
Other		23,788		22,803		71,163		68,230		24,195		24,430
	$	224,411		213,130		676,373		631,521	$	230,030		221,515

4. Earnings Per Share

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

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Presented below are basic and diluted EPS for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018, dollars in thousands, except per share data:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2019		2018		2019		2018		2019		2018
Net income	$	1,998		1,991		8,055		10,576	$	1,868		2,197

Weighted average number of shares of common stock outstanding		22,438,657		22,364,397		22,412,662		22,359,427		22,471,350		22,386,566
Effect of dilutive securities		86,630		132,669		152,043		80,463		71,617		209,395
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,525,287		22,497,066		22,564,705		22,439,890		22,542,967		22,595,961

Basic earnings per share	$	0.09		0.09		0.36		0.47	$	0.08		0.10
Diluted earnings per share	$	0.09		0.09		0.36		0.47	$	0.08		0.10

There were ~~124,102~~160,246 and ~~42,584~~5,126 non-vested RSUs for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 ~~respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 45,819~~ and ~~219,859 non-vested RSUs for the three and nine months ended June 30,~~ 2018, respectively, excluded from the calculation of diluted EPS as they are antidilutive.

On November 13, 2019, the Company's Board of Directors (the Board) authorized a cash dividend of $0.07 per share of common stock. Such dividend was paid on December 17, 2019 to stockholders of record as of the close of business on December 2, 2019. The Company did not declare any dividends during the three ~~or nine~~ months ended ~~June 30, 2019 or~~December 31, 2018.

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5. Debt

Credit Facility

On January 28, 2016, the Company entered into a credit facility (the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations ~~thereunder~~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.~~November 13, 2024. For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread ~~which is~~ 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 ~~which is~~ based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, ~~except when no default or event of default exists. If~~provided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends ~~are allowed for~~to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business ~~including cash dividends to the holding company for the~~and (ii) repurchase of shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $10.0 ~~million.~~million during any fiscal year.

The Company had ~~$10.1~~$8.3 million and ~~$13.2~~$5.7 million outstanding under the Credit Facility as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively. As of each of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, the Company had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. The Company had ~~$38.9~~$40.7 million and ~~$35.8~~$43.3 million available for borrowing under the Credit Facility as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively.

As of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, the Company was in compliance with the financial covenants under the Credit Facility.

~~Capital and Financing~~ Lease Obligations

~~The Company had 22 and 20 leases as~~As of ~~June~~September 30, 2019, ~~and September 30, 2018, respectively, that are included in~~23 leases were classified as capital and financing lease obligations (see Note 7). As a result of the Company’s adoption, effective October 1, 2019, of the new lease standard set out in ASC 842: (i) the Company’s previous capital financing lease obligations were derecognized and reclassified as operating or finance leases and (ii) the Company’s previous capital lease obligations were classified as finance leases. As of December 31, 2019, the Company had 16 leases that were classified as finance leases. No rent expense is recorded for these ~~capitalized real estate~~finance leases ~~but~~(previously classified as capital and financing lease obligations); rather, rental payments under ~~the capital~~such leases are recognized as a reduction of the ~~capital and financing~~ lease obligation and as interest expense. The interest rate on finance lease obligations, and legacy capital and financing lease obligations, is determined at the inception of the lease.

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Interest

The Company incurred gross interest expense of ~~approximately $1.3~~$0.6 million and ~~$1.2~~$1.3 million for the three months ended ~~June 30, 2019 and 2018, respectively, and approximately $3.9 million and $3.5 million for the nine months ended June 30,~~December 31, 2019 and 2018, respectively. Interest expense for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 relates primarily to interest on finance lease obligations (what was referred to prior to the Company’s adoption of ASC 842 as capital and financing lease ~~obligations.~~obligations). The Company capitalized interest of less than $0.1 million ~~and $0.1 million~~ for each of the three months ended ~~June 30,~~December 31, 2019 and 2018, ~~respectively, and $0.1 million for each of the nine months ended June 30, 2019 and 2018.~~respectively.

6.6. Stockholders’ Equity

Share Repurchases

OnIn May 4, 2016, the ~~Company’s~~ Board ~~of Directors (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. OnIn May 2, 2018, the Board authorized a two-year extension of the ~~Company’s~~ 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 ~~promulgated~~ under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which ~~would permit~~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.

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Prior to October 1, 2018, the Company repurchased 199,543 shares under the share repurchase program. The Company did not repurchase any shares ~~during the nine months ended June 30,~~between October 1, 2018 and December 31, 2019. ~~During the nine months ended June 30, 2018, the Company repurchased 101,573 shares under the share repurchase program.~~ The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is ~~approximately~~ $8.3 million.

Prior to October 1, ~~2018,~~2019, the Company reissued ~~62,646~~152,321 treasury shares at a cost of ~~approximately $0.6~~$1.3 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018, the Company reissued ~~22,652~~12,661 treasury shares at a cost of ~~approximately $0.2~~$0.1 million and ~~80,823~~18,928 treasury shares at a cost of approximately $0.6 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three and nine months ended June 30, 2018, the Company reissued 197 and 17,994 treasury shares, respectively, at a cost of less than $0.1 million and at a cost of approximately $0.1 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, the Company held in treasury ~~56,074~~34,561 shares and ~~136,897~~47,222 shares, respectively, totaling ~~approximately~~$0.3 million and $0.4 million, ~~and $1.0 million,~~ respectively.

7. Lease ~~Commitments~~Obligations

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

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

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

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of ~~June 30,~~the lease liability or asset and are expensed as incurred.

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

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

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

The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

The Company has five operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC, each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through February 2027 and include various options to renew. These leases account for $7.6 million of right-of-use assets and $7.8 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for the three months ended December 31, 2019.

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The components of total lease cost for the three months ended December 31, 2019 ~~and September 30, 2018,~~ were as follows, dollars in thousands:

As of

June 30,
2019

September 30,
2018

Capital lease finance obligations, due in monthly installments through fiscal year 2034
$ 39,538 32,523
Capital lease obligations, due in monthly installments through fiscal year 2041
6,050 4,763
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2034
— 2,350
Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2039
4,640 1,506
Total capital and financing lease obligations
50,228 41,142
Less current portion
(983
)
(736
)
Total capital and financing lease obligations, net of current portion
$ 49,245 40,406

Lease cost	Classification	Three months ended December 31, 2019
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,666
	Store expenses		80
	Administrative expenses		82
Finance lease cost:
Depreciation of right-of-use assets	Store expenses		761
Interest on lease liabilities	Interest expense, net		418
Short-term lease cost	Store expenses		85
Variable lease cost	Cost of goods sold and occupancy costs⁽¹⁾		1,238
Sublease income	Store expenses		(93	)
Total lease cost			13,237

¹ Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the three months ended December 31, 2019 was as follows, dollars in thousands:

	Three months ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,001
Operating cash flows from finance leases		418
Financing cash flows from finance leases		518
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		5,438
Finance leases		1,322

Weighted-average remaining lease term (in years):
Operating leases		12.2
Finance leases		11.8
Weighted-average discount rate:
Operating leases		3.6	%
Finance leases		5.5	%

In addition, during the three months ended December 31, 2019, the Company purchased one store building that had previously been leased. This resulted in: (i) a $2.5 million reduction in operating lease liability and (ii) the reclassification of $2.4 million of corresponding operating right-of-use asset to property and equipment.

Future lease payments under non-cancellable leases as of December 31, 2019 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2020	$	33,226			2,993			36,219
2021		43,985			4,007			47,992
2022		43,278			4,029			47,307
2023		42,395			4,073			46,468
2024		40,292			4,139			44,431
Thereafter		263,902			26,604			290,506
Total future undiscounted lease payments		467,078			45,845			512,923
Less tenant improvement allowance receivable from landlord		(695	)		(217	)		(912	)
Less imputed interest		(93,249	)		(12,176	)		(105,425	)
Total reported lease liability		373,134			33,452			406,586
Less current portion		(31,419	)		(2,374	)		(33,793	)
Noncurrent lease liability		341,715			31,078			372,793

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The table above excludes $17.9 million of legally binding minimum lease payments for leases that had been executed as of December 31, 2019 but whose terms had not yet commenced.

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

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

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

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

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

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

Fiscal Year	Interest expense on capital lease finance obligations for assets under construction		Principal payments on capital lease finance obligations for assets under construction		Interest expense on capital lease obligations for assets under construction		Principal payments on capital lease obligations for assets under construction
2020	$	118		18		237		123
2021		161		26		236		132
2022		160		28		228		139
2023		158		30		221		147
2024		155		33		213		155
Thereafter		1,368		756		1,827		3,944
Non-cash derecognition of capital lease finance obligations at end of lease term		—		1,459		—		—
Total future payments	$	2,120		2,350		2,926		4,640

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8.8. Property and Equipment

The Company had the following property and equipment balances as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, dollars in thousands:

				As of										As of
	Useful lives (in years)			June 30, 2019			September 30, 2018			Useful lives (in years)				December 31, 2019			September 30, 2019
Construction in process		n/a		$	7,921			15,879				n/a		$	6,428			15,145
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively		40			42,320			35,700
Capitalized real estate leases for build-to-suit stores, including unamortized land of $0 and $617, respectively												40			—			42,320
Capitalized real estate leases		15			7,241			5,735				15			—			7,241
Land		n/a			1,230			192				n/a			1,390			1,230
Buildings		40			23,565			19,262				40			26,735			23,571
Land improvements	5	–	24		1,392			1,016			5	–	24		1,560			1,498
Leasehold and building improvements	1	–	25		142,216			131,474			1	–	25		150,001			144,318
Fixtures and equipment	5	–	7		129,511			122,984			5	–	7		134,234			131,491
Computer hardware and software	3	–	5		21,485			21,181			3	–	5		22,349			21,672
					376,881			353,423							342,697			388,486
Less accumulated depreciation and amortization					(181,382	)		(164,655	)						(187,078	)		(186,851	)
Property and equipment, net				$	195,499			188,768						$	155,619			201,635

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

Depreciation and amortization expense for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 is summarized as follows, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2019		2018		2019		2018		2019		2018
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	184		193		551		585	$	189		182
Depreciation and amortization expense included in store expenses		6,626		6,789		20,316		20,474		7,240		6,842
Depreciation and amortization expense included in administrative expenses		397		362		916		1,110		278		262
Total depreciation and amortization expense	$	7,207		7,344		21,783		22,169	$	7,707		7,286

9. Goodwill and Other Intangible Assets

The Company had the following goodwill and other intangible asset balances as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, dollars in thousands:

	Useful lives			As of										As of
	(in years)			June 30, 2019			September 30, 2018			Useful lives (in years)				December 31, 2019			September 30, 2019
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	2,540			138			0.5	-	3	$	3,486			2,677
Amortizable intangible assets					2,540			138							3,486			2,677
Less accumulated amortization					(1,446	)		(77	)						(1,768	)		(1,592	)
Amortizable intangible assets, net					1,094			61							1,718			1,085
Other intangibles in process					1,441			—							2,171			1,972
Trademark		Indefinite			389			389			Indefinite				389			389
Total other intangibles, net					2,924			450							4,278			3,446
Goodwill		Indefinite			5,198			5,198			Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	8,122			5,648						$	9,476			8,644

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10. Accrued Expenses

The composition of accrued expenses as of ~~June 30,~~December 31, 2019 and September 30, ~~2018~~2019 is summarized as follows, dollars in thousands:

	As of				As of
	June 30,		September 30,		December 31,		September 30,
	2019		2018		2019		2019
Payroll and employee-related expenses					$	11,189		8,447
Accrued property, sales and use tax payable	$	6,127		7,043		7,656		7,761
Income tax payable		—		903
Payroll and employee-related expenses		10,376		6,992
Accrued marketing expenses		331		335		713		477
Deferred revenue related to gift card sales		1,143		1,453		1,612		1,410
Other		1,226		1,125		862		966
Total accrued expenses	$	19,203		17,851	$	22,032		19,061

11. Income Taxes

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

~~Remeasurement of the Company’s deferred tax balance as a result of the Tax Reform Act resulted in a non-cash tax benefit of approximately $4.3 million for the nine months ended June 30, 2018.~~

12. Related Party Transactions

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

Chalet Properties, LLC: The Company has five operating leases ~~and one capital~~ lease with Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was ~~approximately~~$0.2 million and $0.3 million for ~~each of~~ the three months ended ~~June 30,~~December 31, 2019 and ~~2018. Rent paid to Chalet was approximately $0.9 million for each of the nine months ended June 30, 2019 and 2018.~~2018, respectively.

Isely Family Land Trust LLC: The Company has one operating lease with the Isely Family Land Trust LLC (the Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was ~~approximately~~ $0.1 million for each of the three months ended ~~June 30, 2019 and 2018. Rent paid to the Land Trust was approximately $0.2 million for each of the nine months ended June 30,~~December 31, 2019 and 2018.

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended ~~June 30,~~December 31, 2019 and 2018. ~~Rent paid to FTVC LLC was less than $0.1 million for each of the nine months ended June 30, 2019 and 2018.~~

13. Commitments and Contingencies

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

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

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

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of ~~June 30,~~December 31, 2019, we operated ~~152~~155 stores in 1920 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. ~~The size of our~~Our stores ~~varies~~range from approximately 5,000 to 16,000 selling square ~~feet. During the twelve months ended June 30, 2019, our new stores averaged~~feet, and average approximately ~~10,000~~11,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, ~~2018,~~2019, we increased our store count at a compound annual growth rate of ~~15.5%~~12%. In fiscal year ~~2018,~~2019, we opened ~~eight~~six new stores. We ~~currently~~ plan to open ~~seven~~five to six new stores in fiscal year ~~2019, five~~2020, two of which opened during the ~~nine~~three months ended ~~June 30,~~December 31, 2019. ~~We have not~~Between December 31, 2019 and the date of this Form 10-Q, we opened ~~any~~one new ~~stores since June 30, 2019.~~store. As of the date of this report, we have signed leases for ~~six~~an additional four new stores that we plan to open in fiscal years ~~2019~~2020 and beyond. ~~During the three months ended June 30, 2019, we~~We have also purchased the ~~land and building at which we plan to open~~property for one ~~new store. In addition, since June 30, 2019, we have purchased the land and building for another~~additional new store. We plan to relocate ~~five~~one to two stores in fiscal year ~~2019, four of which were~~2020. We have not relocated ~~during the nine months ended June 30, 2019. Since June 30, 2019, we have relocated one store.~~any stores so far in fiscal year 2020.

Performance Highlights

Key highlights of our performance for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.

●

Net sales. Net sales were ~~$224.4~~$230.0 million for the three months ended ~~June 30,~~December 31, 2019, an increase of ~~$11.3~~$8.5 million, or ~~5.3%~~3.8%, compared to net sales of ~~$213.1~~$221.5 million for the three months ended ~~June 30, 2018. Net sales were $676.4 million for the nine months ended June 30, 2019, an increase of $44.9 million, or 7.1%, compared to net sales of $631.5 million for the nine months ended June 30,~~December 31, 2018.

●

Comparable store sales and daily average comparable store sales. Comparable store sales and daily average comparable store sales for the three months ended ~~June 30,~~December 31, 2019 each increased ~~2.4%~~1.9% compared to the three months ended ~~June 30, 2018. Comparable store sales and daily average comparable store sales for the nine months ended June 30, 2019 each increased 3.6% compared to the nine months ended June 30, 2018.~~December 31, 2018

●

Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales for the three months ended ~~June 30,~~December 31, 2019 each increased ~~1.7%~~0.8% compared to the three months ended ~~June 30, 2018. Mature store sales and daily average mature store sales for the nine months ended June 30, 2019 each increased 2.4% compared to the nine months ended June 30,~~December 31, 2018.

●

Net income. Net income was ~~$2.0~~$1.9 million for ~~each of~~ the three months ended ~~June 30,~~December 31, 2019 ~~and 2018. Net income was $8.1 million for the nine months ended June 30, 2019, a decrease of $2.5 million, or 23.8%,~~ compared to net income of ~~$10.6~~$2.2 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018.

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●

EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was ~~$11.0~~$10.6 million for the three months ended ~~June 30,~~December 31, 2019, a decrease of ~~less than $0.1~~$0.8 million, or ~~0.5%~~6.8%, compared to ~~$11.1~~$11.3 million for the three months ended ~~June 30, 2018. EBITDA was $35.8 million for the nine months ended June 30, 2019, an increase of $2.0 million, or 5.9%, compared to $33.8 million for the nine months ended June 30,~~December 31, 2018. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

●

Liquidity. As of ~~June 30,~~December 31, 2019, cash and cash equivalents was ~~$11.7~~$5.2 million, and there was ~~$38.9~~$40.7 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million.

●

New store growth. We opened notwo new stores during the three months ended ~~June 30, 2019 and five new stores during the nine months ended June 30,~~December 31, 2019. We operated a total of ~~152~~155 stores as of ~~June 30,~~December 31, 2019. We plan to open a total of ~~seven~~five to six new stores in fiscal year ~~2019,~~2020, which would result in an annual new store growth rate of ~~4.7%~~between 3.3% and 3.9% for fiscal year ~~2019.~~2020.

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●

Store Relocations and Remodels.We ~~relocated four~~did not relocate any stores during the ~~nine~~three months ended ~~June 30,~~December 31, 2019. ~~Since June 30, 2019, we have relocated one store, which is the last store we plan to relocate in fiscal year 2019.~~

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 three and nine months ended June 30, 2019 reflected relative 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 defined as stores that have been open for any part of five fiscal years or longer.

As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue into the foreseeable future. Our financial results for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 reflect the effects of these factors, and we anticipate future periods will be similarly impacted.

Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.

●

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

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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~~convenient shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.

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We plan for the foreseeable future to continue opening new stores and entering new markets. The rate of new store unit growth ~~will depend~~in the foreseeable future is expected to be comparable to recent years, depending on economic and business conditions and other factors. ~~We continue to enhance~~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 ~~profitability and~~ 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 the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.

Key Financial Metrics in Our Business

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

Net sales

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

●

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

●

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).

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●

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 ~~2019~~2020 are stores that opened during or before fiscal year ~~2014)~~2015). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.

●

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

●

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

●

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

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Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of sales typically decrease as new stores mature and increase sales. Rent payments for leases classified as finance lease obligations (previously classified as capital and financing lease ~~obligations~~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. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, ~~primarily~~generally related to store relocations. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of sales typically decrease.

Administrative expenses

Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with ~~being a public company,~~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.

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Pre-opening and relocation expenses

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

Interest expense, net

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

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Results of Operations

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

Three months ended
June 30,

Nine months ended
June 30,

2019

2018

2019

2018

Statements of Income Data:*

Net sales
100.0
%
100.0 100.0 100.0
Cost of goods sold and occupancy costs
74.0 73.3 73.4 73.4
Gross profit
26.0 26.7 26.6 26.6
Store expenses
21.6 22.1 21.8 22.0
Administrative expenses
2.7 2.6 2.5 2.6
Pre-opening and relocation expenses
0.1 0.2 0.2 0.3
Operating income
1.7 1.8 2.1 1.8
Interest expense, net
(0.6
)
(0.5
)
(0.6
)
(0.5
)
Income before income taxes
1.1 1.2 1.5 1.3
(Provision for) benefit from income taxes
(0.3
)
(0.3
)
(0.3
)
0.4
Net income
0.9
%
0.9 1.2 1.7
__________________________

*Figures may not sum due to rounding.

Number of stores at end of period
152 147 152 147
Number of stores opened during the period
0 2 5 7
Number of stores relocated and remodeled during the period
2 1 4 2
Total store unit count increase over prior 12 months
3.4
%
5.0 3.4 5.0
Change in comparable store sales
2.4 5.2 3.6 5.7
Change in daily average comparable store sales
2.4 5.2 3.6 5.7
Change in mature store sales
1.7 2.3 2.4 2.7
Change in daily average mature store sales
1.7 2.3 2.4 2.7

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	Three months ended December 31,
	2019			2018
Statements of Income Data:*
Net sales		100.0	%		100.0
Cost of goods sold and occupancy costs		73.7			73.3
Gross profit		26.3			26.7
Store expenses		22.4			22.2
Administrative expenses		2.5			2.4
Pre-opening and relocation expenses		0.2			0.3
Operating income		1.2			1.8
Interest expense, net		(0.2	)		(0.6	)
Income before income taxes		1.0			1.3
Provision for income taxes		(0.2	)		(0.3	)
Net income		0.8	%		1.0
__________________________
*Figures may not sum due to rounding.

Number of stores at end of period		155			151
Number of stores opened during the period		2			4
Number of stores relocated and remodeled during the period		0			1
Number of stores closed during the period		0			1

Total store unit count increase period over period		2.6	%		6.3
Change in comparable store sales		1.9			5.5
Change in daily average comparable store sales		1.9			5.5
Change in mature store sales		0.8			3.6
Change in daily average mature store sales		0.8			3.6

Three months ended ~~June 30~~December 31, 2019 compared to the three months ended ~~June 30~~December 31, 2018

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

	Three months ended June 30,						Change In						Three months ended December 31,						Change In
	2019			2018			Dollars			Percent			2019			2018			Dollars			Percent
Statements of Income Data:
Net sales	$	224,411			213,130			11,281			5.3	%	$	230,030			221,515			8,515			3.8	%
Cost of goods sold and occupancy costs		165,986			156,299			9,687			6.2			169,506			162,369			7,137			4.4
Gross profit		58,425			56,831			1,594			2.8			60,524			59,146			1,378			2.3
Store expenses		48,424			47,000			1,424			3.0			51,427			49,123			2,304			4.7
Administrative expenses		5,953			5,630			323			5.7			5,819			5,315			504			9.5
Pre-opening and relocation expenses		213			443			(230	)		(51.9	)		430			672			(242	)		(36.0	)
Operating income		3,835			3,758			77			2.0			2,848			4,036			(1,188	)		(29.4	)
Interest expense, net		(1,256	)		(1,170	)		(86	)		7.4			(536	)		(1,255	)		719			(57.3	)
Income before income taxes		2,579			2,588			(9	)		(0.3	)		2,312			2,781			(469	)		(16.9	)
Provision for income taxes		(581	)		(597	)		16			(2.7	)		(444	)		(584	)		140			(24.0	)
Net income	$	1,998			1,991			7			0.4		$	1,868			2,197			(329	)		(15.0	)

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Net sales

Net sales increased ~~$11.3~~$8.5 million, or ~~5.3%~~3.8%, to ~~$224.4~~$230.0 million for the three months ended ~~June 30,~~December 31, 2019 compared to ~~$213.1~~$221.5 million for the three months ended ~~June 30,~~December 31, 2018, primarily due to a ~~$5.1~~$4.1 million increase in comparable store sales and a ~~$6.9~~$4.6 million increase in new store sales, partially offset by a ~~$0.6~~$0.2 million decrease in sales from one store that closed during the first quarter of fiscal year 2019. Daily average comparable store sales increased ~~2.4%~~1.9% for the three months ended ~~June 30,~~December 31, 2019 compared to the three months ended ~~June 30,~~December 31, 2018. The daily average comparable store sales increase resulted from a ~~3.0%~~2.5% increase in daily average transaction size, partially offset by a 0.6% decrease in average transaction count. Comparable store average transaction size was ~~$35.90~~$37.22 for the three months ended ~~June 30,~~December 31, 2019. Daily average mature store sales increased ~~1.7%~~0.8% for the three months ended ~~June 30,~~December 31, 2019 compared to the three months ended ~~June 30,~~December 31, 2018. The increase in comparable store sales during the three months ended ~~June 30,~~December 31, 2019 was primarily driven by ~~several~~ marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program. In addition, we believe the increase in comparable store sales during the three months ended June 30, 2019 reflected enhanced focus on leadership, training and improved operating processes in our stores.

Gross profit

Gross profit increased ~~$1.6~~$1.4 million, or ~~2.8%~~2.3%, to ~~$58.4~~$60.5 million for the three months ended ~~June 30,~~December 31, 2019 compared to ~~$56.8~~$59.1 million for the three months ended ~~June 30,~~December 31, 2018, primarily driven by an increase in the number of comparable stores. Gross margin decreased to ~~26.0%~~26.3% for the three months ended ~~June 30,~~December 31, 2019 compared to 26.7% for the three months ended ~~June 30,~~December 31, 2018. ~~The~~Approximately one-half of the decrease in gross margin for the three months ended ~~June 30,~~December 31, 2019 was driven by an increase in occupancy expenses attributable to our adoption of ASC 842. The remainder of the decrease in gross margin for the three months ended December 31, 2019 reflected a decrease in product margins due to a shift in sales mix to lower margin ~~products and an increase in occupancy expenses as a percentage of sales.~~products.

We had ~~22 and 20~~21 store leases that were classified as capital and financing lease obligations for the three months ended ~~June~~December 31, 2018. As of September 30, 2019, 23 leases were classified as capital and 2018, respectively. 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 duringfinancing lease obligations. During the three months ended ~~June 30,~~December 31, 2019, as a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and ~~2018 would have been approximately 65~~reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and ~~55 basis points higher, respectively,~~(iii) six previous capital lease obligations were classified as finance leases. As of December 31, 2019, the Company had 16 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as ~~reported for each period.~~interest expense.

Store expenses

Store expenses increased ~~$1.4~~$2.3 million, or ~~3.0%~~4.7%, to ~~$48.4~~$51.4 million for the three months ended ~~June 30,~~December 31, 2019 compared to ~~$47.0~~$49.1 million for the three months ended ~~June 30,~~December 31, 2018. Store expenses as a percentage of sales were ~~21.6%~~22.4% and ~~22.1%~~22.2% for the three months ended ~~June 30,~~December 31, 2019 and 2018, respectively. The ~~decrease~~increase in store expenses as a percentage of sales was ~~primarily due~~solely attributable to ~~a decrease in labor-related expenses and depreciation, both as a percentage~~our adoption of ~~sales.~~ASC 842.

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Administrative expenses

Administrative expenses increased ~~$0.3~~$0.5 million, or ~~5.7%~~9.5%, to ~~$6.0~~$5.8 million for the three months ended ~~June 30,~~December 31, 2019 compared to ~~$5.6~~$5.3 million for the three months ended ~~June 30,~~December 31, 2018. Administrative expenses as a percentage of sales were ~~2.7%~~2.5% and ~~2.6%~~2.4% for the three months ended ~~June 30,~~December 31, 2019 and 2018, respectively.

Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased $0.2 million, or ~~51.9%~~36.0%, ~~to $0.2 million for the three months ended June 30, 2019 compared~~ to $0.4 million for the three months ended ~~June 30,~~December 31, 2019 compared to $0.7 million for the three months ended December 31, 2018, due to the impact of the number and timing of new store openings and relocations. We opened notwo new stores and relocated ~~two~~no stores during the three months ended ~~June 30,~~December 31, 2019 compared to opening ~~two~~four new stores and relocating one store during the three months ended ~~June 30, 2018. Pre-opening and relocation expenses as a percentage of sales were 0.1% and 0.2% for the three months ended June 30, 2019 and 2018, respectively.~~

~~Interest expense~~

Interest expense, net of capitalized interest, increased $0.1 million, or 7.4%, for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in interest expense is primarily due to an increase in the number of capital leases during the three months ended June 30, 2019. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percentage of sales would have been approximately 50 and 45 basis points lower than as reported for the three months ended June 30, 2019 and 2018, respectively.

~~Income taxes~~

Income tax expense remained unchanged at $0.6 million for the three months ended June 30, 2019 and 2018. The Company’s effective income tax rate for the three months ended June 30, 2019 was approximately 22.5% compared to 23.1% for the three months ended June 30, 2018. The decrease in the effective income tax rate for the three months ended June 30, 2019 is primarily due to the decrease in the federal corporate tax rate as a result of the Tax Reform Act.

~~Net income~~

~~Net income was $2.0 million, or $0.09 diluted earnings per share, for each of the three months ended June 30, 2019 and 2018.~~

~~Nine months~~ ~~ended~~ ~~June 30~~, ~~2019~~ ~~compared to the~~ ~~nine months~~ ~~ended~~ ~~June 30~~, ~~2018~~

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

Nine months ended
June 30,

Change In

2019

2018

Dollars

Percent

Statements of Income Data:

Net sales
$ 676,373 631,521 44,852 7.1
%
Cost of goods sold and occupancy costs
496,588 463,250 33,338 7.2
Gross profit
179,785 168,271 11,514 6.8
Store expenses
147,722 138,646 9,076 6.5
Administrative expenses
17,029 16,345 684 4.2
Pre-opening and relocation expenses
1,042 1,683 (641
)
(38.1
)
Operating income
13,992 11,597 2,395 20.7
Interest expense, net
(3,791
)
(3,381
)
(410
)
12.1
Income before income taxes
10,201 8,216 1,985 24.2
(Provision for) benefit from income taxes
(2,146
)
2,360 (4,506
)
190.9

Net income
$ 8,055 10,576 (2,521
)
(23.8
)

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~~Net sales~~

Net sales increased $44.9 million, or 7.1%, to $676.4 million for the nine months ended June 30, 2019 compared to $631.5 million for the nine months ended June 30, 2018, primarily due to a $22.4 million increase in comparable store sales and a $24.3 million increase in new store sales, partially offset by a $1.8 million decrease in sales from one store that closed during the first quarter of fiscal 2019. Daily average comparable store sales increased 3.6% for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. The daily average comparable store sales increase resulted from a 3.2% increase in average transaction size and a 0.3% increase in daily average transaction count. Comparable store average transaction size was $36.42 for the nine months ended June 30, 2019. Daily average mature store sales increased 2.4% for the nine months ended June 30, 2019 compared to the nine months ended June 30, 2018. The increase in comparable store sales during the nine months ended June 30, 2019 was primarily driven by several marketing initiatives, promotional pricing campaigns and increased membership in and usage of the ~~{N}power~~ customer loyalty program. In addition, we believe the increase in comparable store sales during the nine months ended June 30, 2019 reflected enhanced focus on leadership, training and improved operating processes in our stores.

~~Gross profit~~

Gross profit increased $11.5 million, or 6.8%, to $179.8 million for the nine months ended June 30, 2019 compared to $168.3 million for the nine months ended June 30, 2018, primarily driven by an increase in the number of comparable stores. Gross margin was 26.6% for each of the nine months ended June 30, 2019 and 2018. Gross margin during the nine months ended June 30, 2019 reflected slightly lower product margins due to a shift in sales mix to lower margin products, offset by a decrease in occupancy expense as a percentage of sales.

We had 22 and 20 store leases that were classified as capital and financing lease obligations for the nine months ended June 30, 2019 and 2018, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the nine months ended June 30, 2019 and 2018 would have been approximately 60 and 55 basis points higher, respectively, than as reported for each period.

~~Store expenses~~

Store expenses increased $9.1 million, or 6.5%, to $147.7 million for the nine months ended June 30, 2019 compared to $138.6 million for the nine months ended June 30, 2018. Store expenses as a percentage of sales were 21.8% and 22.0% for the nine months ended June 30, 2019 and 2018, respectively. The decrease in store expenses as a percentage of sales was primarily due to a decrease in labor-related expenses and depreciation, both as a percentage of sales.

~~Administrative expenses~~

Administrative expenses increased $0.7 million, or 4.2%, to $17.0 million for the nine months ended June 30, 2019 compared to $16.3 million for the nine months ended June 30, 2018. Administrative expenses as a percentage of sales were 2.5% and 2.6% the nine months ended June 30, 2019 and 2018, respectively.

~~Pre-opening and relocation expenses~~

Pre-opening and relocation expenses decreased $0.6 million, or 38.1%, to $1.0 million for the nine months ended June 30, 2019 compared to $1.7 million for the nine months ended June 30, 2018, due to the impact of the number and timing of new store openings and relocations. We opened five new stores and relocated four stores during the nine months ended June 30, 2019 compared to opening seven new stores and relocating two stores during the nine months ended June 30,December 31, 2018. Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.3% for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018, respectively.

Interest expense, net

Interest expense, net of capitalized interest, ~~increased $0.4~~decreased $0.7 million, or ~~12.1%~~57.3%, to $0.5 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 compared to $1.3 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The ~~increase~~decrease in interest expense is primarily due to ~~an increase~~a decrease in the number of ~~capital~~finance leases ~~during the nine months ended June 30, 2019. If the~~(formerly classified as capital and financing ~~lease obligations had qualified~~leases) during the three months ended December 31, 2019. This is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases ~~interest~~and that now generate straight-line rent expense ~~as a percentage of sales would have been approximately 50 and 45 basis points lower~~rather than ~~as reported for the nine months ended June 30, 2019 and 2018, respectively.~~

~~Income taxes~~

Income tax expense increased $4.5 million for the nine months ended June 30, 2019 to $2.1 million compared to a $2.4 million benefit for the nine months ended June 30, 2018. Income taxes for the nine months ended June 30, 2018 reflected the favorable impact of a $4.3 million non-cash remeasurement of our deferred tax assets and liabilities as a resultreduction of the ~~enactment of the Tax Reform Act. The Company’s effective income tax rate for the nine months ended June 30, 2019 was approximately 21.0%. Exclusive of the adjustment to deferred income tax assets~~lease obligation and liabilities, the Company’s effective income tax rate for the nine months ended June 30, 2018 was approximately 24.0%. The decrease in the effective income tax rate for the nine months ended June 30, 2019 is primarily due to the decrease in the federal corporate tax rate as a result of the Tax Reform Act.interest expense.

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Income taxes

Income tax expense decreased $0.1 million for the three months ended December 31, 2019 to $0.4 million compared to $0.6 million for the three months ended December 31, 2018. The Company’s effective income tax rate was approximately 19.2% and 21.0% for the three months ended December 31, 2019 and 2018, respectively.

Net income

Net income was ~~$8.1~~$1.9 million, or ~~$0.36~~$0.08 diluted earnings per share, for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 compared to ~~$10.6~~$2.2 million, or ~~$0.47~~$0.10 diluted earnings per share, for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. Excluding the favorable impact of the remeasurement of our deferred tax assets and liabilities as a result of the enactment of the Tax Reform Act, net income for the nine months ended June 30, 2018 was $6.2 million, or $0.28 diluted earnings per share.

Non-GAAP financial measures

EBITDA

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

	Three months ended June 30,				Nine months ended June 30,					Three months ended December 31,
	2019		2018		2019		2018			2019		2018
Net income	$	1,998		1,991		8,055		10,576		$	1,868		2,197
Interest expense, net		1,256		1,170		3,791		3,381			536		1,255
Provision for (benefit from) income taxes		581		597		2,146		(2,360	)
Provision for income taxes											444		584
Depreciation and amortization		7,207		7,344		21,783		22,169			7,707		7,286
EBITDA	$	11,042		11,102		35,775		33,766		$	10,555		11,322

EBITDA decreased ~~0.5%~~6.8% to ~~$11.0~~$10.6 million in the three months ended ~~June 30,~~December 31, 2019 compared to ~~$11.1~~$11.3 million for the three months ended ~~June 30, 2018. EBITDA increased 5.9% to $35.8 million in the nine months ended June 30, 2019 compared to $33.8 million for the nine months ended June 30,~~December 31, 2018. EBITDA as a percentage of sales was ~~4.9%~~4.6% and ~~5.2%~~5.1% in the three months ended ~~June 30,~~December 31, 2019 and 2018, respectively. ~~EBITDA as a percentage~~The number of ~~sales was 5.3% for each of the nine months ended June 30, 2019 and 2018. Stores~~stores with finance leases ~~that are~~(previously classified as capital and financing lease ~~obligations, rather than being reflected~~obligations) decreased from 21 as of December 31, 2018 to 16 as of December 31, 2019 as a result of our adoption of ASC 842 effective October 1, 2019. Finance leases have a positive impact on EBITDA because, as discussed above, they result in lower cost of goods sold and occupancy costs. Conversely, the greater number of stores with operating leases ~~increased EBITDA as a percentage of sales by approximately 65 and 55 basis points for~~during the three months ended ~~June 30,~~December 31, 2019, ~~and 2018, respectively, and by approximately 60 and 55 basis points for the nine months ended June 30, 2019 and 2018, respectively, due~~led to ~~the impact on~~higher cost of goods sold and occupancy costs, which impacted both EBITDA and EBITDA as ~~discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening dates if these leases had been accounted for as operating leases.~~a percentage of sales.

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

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

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

●

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

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●

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

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●

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

●

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

●

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

●

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

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

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, ~~interest and principal payments for outstanding indebtedness~~debt service and corporate taxes. As of ~~June 30,~~December 31, 2019, we had ~~$11.7~~$5.2 million in cash and cash equivalents, as well as ~~$38.9~~$40.7 million available for borrowing under our Credit Facility.

OnIn 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. OnIn May 2, 2018, our Board of Directors authorized a two-year extension of the ~~Company’s~~ share repurchase program. As a result of such extension, the share repurchase program will terminate on May 4, 2020. We did not repurchase any shares during the ~~nine~~three months ended ~~June 30,~~December 31, 2019. Between ~~July~~January 1, ~~2019~~2020 and ~~July 29,2019~~February 3, 2020 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common stock. The dollar value of the shares of the Company’s common stock that may yet be ~~purchased~~repurchased under the share repurchase program is ~~approximately~~ $8.3 million. We expect funding ~~for any future~~of share repurchases will come from operating cash flow, excess cash and/or borrowings under ~~our~~the Credit Facility. The timing and ~~amount~~the number of shares ~~repurchased~~purchased will be dictated by our capital needs and stock market conditions.

On November 13, 2019, our Board approved the initiation of a quarterly cash dividend per share of common stock. The initial quarterly cash dividend of $0.07 per share of common stock was paid on December 17, 2019 to stockholders of record as of the close of business on December 2, 2019. On February 5, 2020, our Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on March 17, 2020 to stockholders of record as of the close of business on March 2, 2020.

We plan to continue to open new stores, which may require us to borrow additional amounts under the Credit Facility. We plan to spend approximately ~~$5.0~~$16 million to ~~$8.0~~$21 million on capital expenditures during the ~~fourth quarter~~remainder of fiscal year ~~2019~~2020 in connection with ~~two~~three to four new store openings and one to two store ~~relocation.~~relocations. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Credit Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs for at least the next twelve months. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

Typically, our new stores require an upfront capital investment of approximately ~~$2.2~~$2.1 million per store consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately ~~$0.3~~$0.2 million.

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~~Following~~

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

Nine months ended
June 30,

2019

2018

Net cash provided by operating activities
$ 28,295 30,306
Net cash used in investing activities
(21,988
)
(16,515
)
Net cash used in financing activities
(4,046
)
(13,108
)
Net increase in cash and cash equivalents
2,261 683
Cash and cash equivalents, beginning of period
9,398 6,521
Cash and cash equivalents, end of period
$ 11,659 7,204

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	Three months ended December 31,
	2019			2018
Net cash provided by operating activities	$	10,480			7,527
Net cash used in investing activities		(11,973	)		(11,560	)
Net cash provided by (used in) financing activities		436			(829	)
Net decrease in cash and cash equivalents		(1,057	)		(4,862	)
Cash and cash equivalents, beginning of period		6,214			9,398
Cash and cash equivalents, end of period	$	5,157			4,536

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities ~~decreased $2.0~~increased $3.0 million, or ~~6.6%~~39.2%, to ~~$28.3~~$10.5 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 compared to ~~$30.3~~$7.5 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. The ~~decrease~~increase in cash provided by operating activities was primarily due to ~~a decrease~~an increase in cash provided by working capital, ~~and to a lesser extent, a decrease~~as well as an increase in net income adjusted for non-cash items. Our working capital requirements for inventory will likely increase as we continue to open new stores.

Investing Activities

Net cash used in investing activities increased ~~$5.5~~$0.4 million, or ~~33.1%~~3.6%, to ~~$22.0~~$12.0 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 compared to ~~$16.5~~$11.6 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. This increase was primarily due to a ~~$4.2~~$0.9 million increase in ~~cash paid~~software investments for internal use, partially offset by $0.5 million decrease in property and equipment ~~which was primarily due~~acquisitions during the three months ended December 31, 2019 compared to the ~~timing of payments related to new store openings and relocations, and to a $2.0 million increase in cash paid for internal use software.~~three months ended December 31, 2018.

Financing Activities

~~Cash used in~~Net cash provided by (used in) financing activities consists primarily of borrowings and repayments under our Credit ~~Facility and payments~~Facility. Cash provided by financing activities was $0.4 million for the three months ended December 31, 2019 compared to $0.8 million of ~~capital and financing lease obligations. Cash~~cash used in financing activities ~~was $4.0 million and $13.1 million~~ for the ~~nine~~three months ended ~~June 30,~~December 31, 2018. During the three months ended December 31, 2019, ~~and 2018, respectively.~~the Company had net borrowings under the Credit Facility which were used, among other things, to fund a dividend to the Company’s stockholders.

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 thereunder are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on ~~January 31, 2021.~~November 13, 2024.

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread ~~which is~~ 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 ~~which is~~ 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~~to the holding company from the operating company, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company ~~for~~in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and ~~for repurchases of~~(ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 ~~million.~~million during any fiscal year.

We had ~~$10.1~~$8.3 million and ~~$13.2~~$5.7 million outstanding under the Credit Facility as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively. As of each of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. We had ~~$38.9~~$40.7 million and ~~$35.8~~$43.3 million available for borrowing under the Credit Facility as of ~~June 30,~~December 31, 2019 and September 30, ~~2018,~~2019, respectively.

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As of ~~June 30,~~each of December 31, 2019 and September 30, ~~2018,~~2019, the Company was in compliance with the debt covenants under the Credit Facility.

Share Repurchases

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

Off-Balance Sheet Arrangements

As of ~~June 30,~~December 31, 2019, our off-balance sheet arrangements consisted ~~of operating leases and~~of: (i) the undrawn portion of our Credit ~~Facility. The majority~~Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of ~~our~~December 31, 2019, the Company had signed five leases whose terms have not yet commenced; such leases are for four new stores and ~~facilities are leased, with varying terms~~one relocated store in fiscal year 2020 and ~~renewal options. As of June 30, 2019, we owned seven buildings, in which six of our stores are located; of those buildings, five are located on land that~~beyond. The contractual obligation related to these leases is leased pursuant to a ground lease. As of June 30, 2019, 22 store leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements.$17.9 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

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Recent Accounting Pronouncements

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

Critical Accounting Policies

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

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

It~~Item~~em 3. Quantitative and Qualitative Disclosures About Market Risk

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

Ite~~Item~~m 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of ~~June 30,~~December 31, 2019.

Changes in Internal Control over Financial Reporting

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

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

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PA~~PART~~RT II. Other Information

Ite~~Item~~m 1. Legal Proceedings

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

Ite~~Item~~m 1A. Risk Factors

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

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

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

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

Certain of the produce and other products that we sell at our stores are purchased, or contain ingredients sourced, from suppliers in Mexico and Canada. Since President Trump took office, tensions with Mexico and Canada over trade, immigration and other issues have increased. Such tensions could lead to executive, legislative, or regulatory action to restrict or close access to the United States market from Mexico or Canada. If action were taken to restrict or close access to the United States market from Mexico or Canada, the produce and other products that we source from those countries may no longer be available or may not be available at commercially attractive prices, which in turn could have a material adverse effect on our business, financial condition and results of operations.

~~Item 5. Other Information~~

On July 31, 2019, the Company and Chalet, a related party, entered into an amendment to the lease (the Austin Lease) pursuant to which the Company leases one of its store locations in Austin, Texas (the Austin Property). Pursuant to the amendment to the Austin Lease: (i) effective August 1, 2019, fixed rent payable by the Company under the Austin Lease will decrease to zero; (ii) the Company will be required to continue paying all operating expenses under the Austin Lease through the remainder of its term; (iii) the Austin Lease will automatically terminate concurrently with the closing of any sale of the Austin Property; (iv) the Company will, within fifteen (15) days following the closing of any sale of the Austin Property, reimburse Chalet for any and all real estate taxes relating to the Austin Property that are paid by Chalet at such closing; and (v) all lease extension options under the Austin Lease have been eliminated.

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Ite~~Item~~m 6. Exhibits

EXHIBIT INDEX

Exhibit Number	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
~~10.49~~	~~First Amendment to Lease dated as of July 31, 2019 by and between Chalet Properties, Austin, LLC and Vitamin Cottage Natural Food Markets, Inc.~~
31.1	Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3	Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†	Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30,~~December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~June 30,~~December 31, 2019 (unaudited) and September 30, ~~2018,~~2019, (ii) Consolidated Statements of Income for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited), (iii) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the ~~nine~~three months ended ~~June 30,~~December 31, 2019 and 2018 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements.

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

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SIGN~~SIGNATURES~~ATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on ~~August 1, 2019.~~February 6, 2020.

	Natural Grocers by Vitamin Cottage, Inc.


	By:	/s/ KEMPER ISELY
		Kemper Isely, Co-President
		(Principal Executive Officer)


	By:	/s/ TODD DISSINGER
		Todd Dissinger, Chief Financial Officer
		(Principal Financial and Accounting Officer)