Natural Grocers by Vitamin Cottage (NGVC) 10-K/A 2012 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

(Amendment No.1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

 OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2012

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	(I.R.S. Employer
incorporation or organization)	Identification Number)

12612 West Alameda Parkway

Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 986-4600

(Registrants telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer o	Accelerated filer o
Non —accelerated filer x	Smaller Reporting Company o
(Do not check if a smaller reorting company)

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

The aggregate market value of all common stock held by non-affiliates of the registrant as of July 25, 2012 was $127,571,426.  The registrant was a privately held company on March 30, 2012, which is the last business day of its second fiscal quarter.  As a result, the registrant is disclosing this information as of July 25, 2012, which was the initial trading date of the registrant’s common stock on the New York Stock Exchange.  The number of shares of the registrant’s common stock outstanding as of December 12, 2012 was 22,372,184.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant’s definitive Proxy Statement for the 2013 Annual Meeting of the Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2012.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (this “Amendment”) to the Annual Report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc. (the “Company”) for the fiscal year ended September 30, 2012, initially filed with the Securities and Exchange Commission (the “SEC”) on December 13, 2012 (the “Original Filing”), is being filed to correct two administrative errors in the Original Filing. Specifically, the Original Filing inadvertently (i) did not include a conformed signature on the report of independent registered accounting firm from KPMG LLP (“KPMG”) included in Item 8 and (ii) did not include a conformed signature on the consent from KPMG in Exhibit 23.1.

In addition, pursuant to the rules of the SEC, “Item 8. Financial Statements and Supplementary Data” is being filed in its entirety in this Amendment. The only change in Item 8 from the Original Filing has been to add the conformed signature to the report of independent registered accounting firm.

Finally, consistent with the rules of the SEC, the certifications of the Company’s principal executive officers and principal financial and accounting officer as of the date of this Amendment are attached as exhibits to this Amendment. The only change in these certifications is their date.

1

PART II

Item 8.  Financial Statements and Supplementary Data.

Natural Grocers by Vitamin Cottage, Inc.

Index to Consolidated Financial Statements

	Page Number
Report of Independent Registered Public Accounting Firm	3
Consolidated Balance Sheets as of September 30, 2012 and 2011	4
Consolidated Statements of Income for the years ended September 30, 2012, 2011 and 2010	5
Consolidated Statements of Cash Flows for the years ended September 30, 2012, 2011 and 2010	6
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2012, 2011 and 2010	7
Notes to Consolidated Financial Statements	8

2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Natural Grocers by Vitamin Cottage, Inc.:

We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries (the Company) as of September 30, 2012 and 2011, and the related consolidated statements of income, changes in stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries as of September 30, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2012, in conformity with U.S. generally accepted accounting principles.

	/s/ KPMG LLP
Denver, Colorado
December 12, 2012

3

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

	September 30,
	2012			2011
Assets
Current assets:
Cash and cash equivalents	$	17,290,948		377,549
Short term investments — available-for-sale securities	777,445			—
Accounts receivable, net	1,755,142			1,027,141
Accounts receivable—leasehold incentives	100,274			1,111,475
Merchandise inventory	37,543,861			29,820,321
Prepaid expenses	596,090			455,126
Income tax receivable	—			1,701,917
Deferred income tax assets	842,963			583,668
Total current assets	58,906,723			35,077,197
Property and equipment, net	64,602,743			41,737,234
Other assets:
Long-term investments — available-for-sale securities	973,729			—
Deposits and other assets	196,365			167,558
Goodwill	511,029			511,029
Deferred financing costs, net	54,643			88,631
Other intangibles, net	416,464			490,301
Split-dollar life insurance premiums	—			577,861
Notes receivable—related party, long-term	—			265,572
Total other assets	2,152,230			2,100,952
Total assets	$	125,661,696		78,915,383
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	26,031,756		16,087,882
Accrued expenses	7,783,430			5,785,499
Long-term debt, current portion	—			500,000
Revolving credit facility	—			11,036,324
Notes payable—related party, current portion	260,187			562,271
Capital lease finance obligation, current portion	11,884			—
Total current liabilities	34,087,257			33,971,976
Long-term liabilities:
Capital lease finance obligation, net of current portion	4,168,700			—
Capital lease finance obligation for assets under construction	1,345,258			—
Deferred income tax liabilities	4,143,351			4,947,870
Deferred rent	3,618,233			2,845,292
Leasehold incentives	5,327,408			4,879,432
Long-term debt, net of current portion	—			15,700,000
Notes payable—related party, net of current portion	22,312			643,834
Total long-term liabilities	18,625,262			29,016,428
Total liabilities	52,712,519			62,988,404
Commitments (Notes 13 and 21)
Stockholders’ equity:
Common stock, $0.001 par value. Authorized 50,000,000 shares, 22,372,184 issued and outstanding at 2012, none issued and outstanding at 2011	22,372			—
Common stock Vitamin Cottage Natural Food Markets, Inc., Class A, voting, no par value. None issued and outstanding at 2012. Authorized 1,000 shares, issued and outstanding at 2011	—			1,679
Common stock Vitamin Cottage Natural Food Markets, Inc., Class B, nonvoting, no par value. None issued and outstanding at 2012. Authorized 1,000,000 shares, 625,112 shares issued and outstanding at 2011	—			792,676
Additional paid in capital	52,675,925			—
Accumulated other comprehensive loss	(3,696		)	—
Retained earnings	20,254,576			13,605,776
Total Natural Grocers by Vitamin Cottage, Inc. equity	72,949,177			14,400,131
Noncontrolling interest	—			1,526,848
Total stockholders’ equity	72,949,177			15,926,979
Total liabilities and stockholders’ equity	$	125,661,696		78,915,383

See accompanying notes to consolidated financial statements.

4

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

	Year ended September 30,
	2012			2011		2010
Net sales	$	336,385,372		264,544,046		226,910,054
Cost of goods sold and occupancy costs (includes depreciation expense of $435,347, $449,208 and $435,148, respectively, exclusive of additional depreciation and amortization expense listed below)	237,328,764			187,162,252		159,797,435
Gross profit	99,056,608			77,381,794		67,112,619
Store expenses (includes depreciation and amortization expense of $8,710,116, $6,402,417 and $4,292,628, respectively)	72,157,131			57,609,690		47,162,167
Administrative expenses (includes depreciation and amortization expense of $802,780, $839,153 and $782,404, respectively)	12,732,100			10,396,891		9,630,646
Pre-opening and relocation expenses	2,173,181			1,964,186		1,292,965
	87,062,412			69,970,767		58,085,778
Operating income	11,994,196			7,411,027		9,026,841
Other income (expense):
Dividends and interest income	6,096			10,077		6,721
Interest expense	(568,501		)	(669,125	)	(967,551	)
Other income (expense), net	—			24,707		(3,671	)
Total other expense	(562,405		)	(634,341	)	(964,501	)
Income before income taxes	11,431,791			6,776,686		8,062,340
Provision for income taxes	(3,955,219		)	(2,166,800	)	(2,465,772	)
Net income	7,476,572			4,609,886		5,596,568
Net income attributable to noncontrolling interest	(827,772		)	(1,106,075	)	(1,188,605	)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	6,648,800		3,503,811		4,407,963
Net income attributable to Natural Grocers by Vitamin Cottage, Inc. per common share:
Basic	$	0.30		0.16		0.20
Diluted	$	0.30		0.16		0.20
Weighted average common shares outstanding:
Basic	22,372,184			22,372,184		22,372,184
Diluted	22,463,093			22,461,405		22,461,405

See accompanying notes to consolidated financial statements.

5

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

	Year ended September 30,
	2012			2011		2010
Operating activities:
Net income	$	7,476,572		4,609,886		5,596,568
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,948,243			7,690,778		5,510,180
Loss (gain) on disposal of property and equipment	300,676			(24,707	)	8,021
Stock-based compensation (excluding cash portion of restricted stock award paid of $334,579)	779,979			—		—
Excess tax benefit from stock-based compensation	(620,138		)	—		—
Deferred income tax expense	2,673,248			3,937,798		596,108
Non-cash interest expense	38,036			50,196		136,112
Other amortization	67,837			67,837		66,725
Unrealized loss on available-for-sale securities	(3,696		)	—		—
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net	(728,001		)	(165,987	)	(452,303	)
Accounts receivable—leasehold incentives	1,011,201			221,963		(1,333,438	)
Income tax receivable	1,488,931			(711,764	)	(927,371	)
Merchandise inventory	(7,723,540		)	(4,256,193	)	(3,811,490	)
Prepaid expenses and other assets	(169,771		)	75,979		(189,020	)
Increase (decrease) in:
Accounts payable	6,860,498			2,107,957		(562,718	)
Accrued expenses	2,560,927			849,259		765,350
Deferred rent and lease incentives	1,241,343			2,288,519		2,245,616
Net cash provided by operating activities	25,202,345			16,741,521		7,648,340
Investing activities:
Acquisition of property and equipment	(25,258,595		)	(20,446,122	)	(11,442,985	)
Acquisition of intangibles	—			—		(90,000	)
Proceeds from sale of property and equipment	608,022			35,600		—
Purchase of available-for-sale securities	(1,751,174		)	—		—
Payments received on notes receivable, related party	270,301			—		—
Payments received for premiums paid on split-dollar life insurance	659,852			—		—
Notes receivable, related party—insurance premiums	(4,729		)	(36,163	)	(35,279	)
Increase in split-dollar life insurance premiums	(81,991		)	(65,364	)	(30,238	)
Net cash used in investing activities	(25,558,314		)	(20,512,049	)	(11,598,502	)
Financing activities:
Borrowings under credit facility	—			5,847,041		5,189,283
Repayments under credit facility	(27,236,324		)	(500,000	)	(1,000,000	)
Repayments under notes payable	—			(119,412	)	(345,407	)
Repayments under notes payable, related party	(923,606		)	(533,150	)	(505,537	)
Capital lease finance obligation payments	(485		)	—		—
Distributions to noncontrolling interests	(810,000		)	(990,000	)	(1,080,000	)
Purchase of remaining 45% noncontrolling interest in BVC	(10,050,880		)	—		—
Proceeds from common stock issued in initial public offering, net of commissions	58,134,770			—		—
Excess tax benefit from stock-based compensation	620,138			—		—
Equity issuance costs and BVC transaction costs	(2,460,196		)	—		—
Loan fees paid	(4,049		)	(1,972	)	(2,500	)
Net cash provided by financing activities	17,269,368			3,702,507		2,255,839
Net increase (decrease) in cash and cash equivalents	16,913,399			(68,021	)	(1,694,323	)
Cash and cash equivalents, beginning of year	377,549			445,570		2,139,893
Cash and cash equivalents, end of year	$	17,290,948		377,549		445,570
Supplemental disclosures of cash flow information:
Cash paid for interest, net of capitalized interest of $25,000, $32,000 and $21,000, respectively	$	524,391		615,425		802,901
Cash paid for interest on capital lease finance obligations	39,197			—		—
Income taxes paid	519,231			11,589		2,918,326
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	5,007,169		2,055,213		1,103,969
Property acquired through capital lease financing obligations	5,526,327			—		—
Equity issuance costs not yet paid	256,420			—		—
Tax benefit associated with acquisition of noncontrolling interest in BVC	3,591,931			—		—

See accompanying notes to consolidated financial statements.

6

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income

Fiscal years ended September 30, 2012, 2011 and 2010

	Common Stock – Vitamin Cottage Natural Food Markets, Inc.										Common Stock – NGVC, $0.001 par			Accumulated other			Additional					Natural Grocers by Vitamin						Total
	Class A					Class B					value			comprehensive			paid in			Retained		Cottage, Inc.			Noncontrolling			stockholders’
	Shares		Amount			Shares		Amount			Shares	Amount		loss			capital			earnings		Total equity			Interest			equity
Balances September 30, 2009	1,000		$	1,679		625,112		$	792,676		—	$	—	$	—		$	—		$	5,694,002	$	6,488,357		$	1,302,168		$	7,790,525
Distributions to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			(1,080,000		)	(1,080,000		)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	—		—			—		—			—	—		—			—			4,407,963		4,407,963			—			4,407,963
Net income attributable to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			1,188,605			1,188,605
Balances September 30, 2010	1,000		1,679			625,112		792,676			—	—		—			—			10,101,965		10,896,320			1,410,773			12,307,093
Distributions to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			(990,000		)	(990,000		)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	—		—			—		—			—	—		—			—			3,503,811		3,503,811			—			3,503,811
Net income attributable to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			1,106,075			1,106,075
Balances September 30, 2011	1,000		1,679			625,112		792,676			—	—		—			—			13,605,776		14,400,131			1,526,848			15,926,979
Distributions to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			(810,000		)	(810,000		)
Net income attributable to noncontrolling interest	—		—			—		—			—	—		—			—			—		—			827,772			827,772
Accumulated other comprehensive loss	—		—			—		—			—	—		(3,696		)	—			—		(3,696		)	—			(3,696		)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	—		—			—		—			—	—		—			—			6,648,800		6,648,800			—			6,648,800
Exchange of Vitamin Cottage Natural Food Markets, Inc. stock for common stock of Natural Grocers by Vitamin Cottage, Inc.	(1,000	)	(1,679		)	(625,112	)	(792,676		)	17,378,625	17,379		—			776,976			—		—			—			—
Purchase of noncontrolling interest	—		—			—		—			670,056	670		—			(8,506,930		)	—		(8,506,260		)	(1,544,620		)	(10,050,880		)
Tax benefit of purchase of noncontrolling interest (Note 1)	—		—			—		—			—	—		—			3,591,931			—		3,591,931			—			3,591,931
Shares issued upon consummation of initial public offering, net of $4,375,735 underwriter discounts and commissions (Note 1)	—		—			—		—			4,167,367	4,167		—			58,130,603			—		58,134,770			—			58,134,770
Issuance costs	—		—			—		—			—	—		—			(2,716,616		)	—		(2,716,616		)	—			(2,716,616		)
Stock-based compensation	—		—			—		—			156,136	156		—			779,823			—		779,979			—			779,979
Tax benefit of stock-based compensation	—		—			—		—			—	—		—			620,138			—		620,138			—			620,138
Balances September 30, 2012	—		$	—		—		$	—		22,372,184	$	22,372	$	(3,696	)	$	52,675,925		$	20,254,576	$	72,949,177		$	—		$	72,949,177

See accompanying notes to consolidated financial statements.

7

Natural Grocers by Vitamin Cottage, Inc.

Notes to Consolidated Financial Statements

September 30, 2012 and 2011

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage® with 59 stores as of September 30, 2012, including 31 stores in Colorado, ten in Texas, four in New Mexico, three in Kansas, two in Wyoming, three in Arizona, and one in each of the following states; Utah, Oklahoma, Missouri, Montana, Idaho and Nebraska, as well as a bulk food repackaging facility and distribution center in Colorado. The Company had 49 and 39 stores as of September 30, 2011 and 2010, respectively.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The holding company was incorporated in Delaware on April 9, 2012. The accompanying consolidated financial statements include all the accounts of the Company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company), Vitamin Cottage Two Ltd. Liability Company (VC2), Natural Systems, LLC and Boulder Vitamin Cottage Group, LLC (BVC). The operating company formed the holding company in order to facilitate the purchase of the remaining noncontrolling interest in BVC and consummation of the initial public offering (IPO).  Prior to the Company’s IPO on July 25, 2012, the Company had a majority 55% ownership of BVC.  Prior to the settlement of the IPO, the Company issued 670,056 shares of stock in the holding company and paid $10,050,880 in cash to purchase the remaining 45% noncontrolling interest in BVC.  Effective October 31, 2012, BVC merged with and into the operating company and ceased to exist.  Prior to the merger, BVC owned five Natural Grocers by Vitamin Cottage retail stores, which were managed by the operating company.  All significant intercompany balances and transactions have been eliminated in consolidation.

Initial Public Offering

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

The following table summarizes the shares issued in the IPO.

Shares sold by the Company	4,167,367
Shares sold by the original operating company shareholders	4,046,918
Total shares issued in IPO	8,214,285

The following table details total shares outstanding as of September 30, 2012.

Shares held by institutional and individual owners	8,214,285
Shares issued in connection with purchase of BVC noncontrolling interest	670,056
Shares issued in connection with restricted stock award	156,136
Shares held by the original operating company shareholders	13,331,707
Total shares outstanding as of September 30, 2012	22,372,184

8

Based on the public offering price of $15.00, the Company received gross proceeds from the issuance of 4,167,367 shares issued to the public in the IPO of $62,510,505, and paid underwriting costs of 7%, or $4,375,735, for net proceeds of $58,134,770.  The Company recorded the proceeds received from the IPO as cash and cash equivalents and recorded the issuance of common stock at par value, with the remaining amount being recorded as additional paid in capital.  The Company also incurred issuance costs of approximately $2.7 million.

The Company accounted for the acquisition of the BVC noncontrolling interest, as described above, as an equity transaction.  Since the transaction is treated as an equity transaction, the transaction costs are also reflected as a reduction of equity and a financing activity in the statement of cash flows.  The Company recorded the issuance of the 670,056 shares in common stock at par value, reduced cash and cash equivalents by approximately $10.1 million, eliminated approximately $1.5 million in noncontrolling interest on the balance sheet in July 2012, and recorded the remaining amount as additional paid in capital.  As a result of the acquisition of the remaining noncontrolling interest, the Company is entitled to tax deductions to the extent of any step up in tax basis on the assets of BVC, limited to the cash consideration paid.  Accordingly, the tax basis in excess of book basis at the date of purchase resulted in deferred tax assets of approximately $3.6 million.

As of September 30, 2012, the Company has used the proceeds from the IPO to pay down all outstanding amounts under the credit facility, pay the cash portion of the BVC purchase, pay expenses associated with the IPO and pay the cash portion of restricted stock awards.  The following table illustrates the use of proceeds received from the IPO as of September 30, 2012:

	As of September 30, 2012
Repayment of term loan and amounts outstanding under revolving credit facility	$	26,397,060
Cash portion of the purchase price paid to acquire BVC noncontrolling interest	10,050,880
Expenses associated with IPO (excluding amounts accrued)	2,460,196
Cash portion of restricted stock award	334,579
Total use of proceeds received from IPO	$	39,242,715

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for self-insurance reserves, valuation of inventories, useful lives for depreciation and amortization of property and equipment, valuation allowances for deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Information

The Company has one reporting segment, natural and organic retail stores. Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 280, Segment Reporting, establishes standards for reporting information about a company’s operating segments.

Cash and Cash Equivalents

Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds and credit and debit card transactions which typically settle within three business days of year end. The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, primarily newsletter advertising, and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. The Company had no allowances for doubtful accounts as of September 30, 2012 and 2011. Accounts receivable—leasehold incentives consist of receivables due from landlords for tenant allowances.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in cash and cash equivalents, accounts receivable and investments in available-for-sale securities. The Company’s cash and cash equivalent account balances did not exceed the Federal Deposit Insurance Corporation’s federally insured limits as of September 30, 2012. The Company records accounts receivable from the sale of newsletter advertising to vendors. If the accounts are not paid timely, the Company has the right to set off the amount of unpaid receivable balance with the amount owed to the other party for vendor product invoices. The Company evaluates the ability to collect the receivables and believes the amounts appearing on the consolidated balance sheets to be fully collectible as of September 30, 2012 and 2011. Accordingly, no allowance for doubtful accounts has been recorded for the years ended September 30, 2012, 2011 and 2010.

Vendor Concentration

For the years ended September 30, 2012, 2011 and 2010, purchases from the Company’s largest vendor and one of its subsidiaries represented approximately 53%, 53% and 52% of all product purchases made during the respective periods. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid disruption to operations.

Merchandise Inventory

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

Property and Equipment

Property and equipment is stated at historical cost less accumulated depreciation. In accordance with FASB ASC Topic 835, Interest, the Company capitalizes interest, if applicable, as part of the historical costs of leasehold improvements. Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets.

	Useful lives (in years)
Land improvements	6 - 15
Leasehold improvements	2 - 20
Capitalized real estate leases	40
Fixtures and equipment	5 - 7
Computer hardware and software	3 - 5

For leasehold and land improvements, depreciation is recorded over the shorter of the useful lives or the lease terms. The estimated useful lives range from two to 20 years. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and primarily relate to store relocations.

The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software costs are included in property and equipment in the consolidated balance sheets and are amortized over the estimated useful lives of the software. Software costs that do not meet capitalization criteria are expensed as incurred.

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The three levels of the fair value hierarchy are as follows:

Level 1—	Quoted market prices in active markets for identical assets or liabilities;
Level 2—	Inputs other than Level 1 inputs such as quoted prices for similar assets or liabilities or model-driven valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3—	Unobservable inputs to the valuation methodology that are significant to the measurement of fair value assets

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and liabilities.

Goodwill and Intangible Assets

In September 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350); Testing Goodwill for Impairment. The objective of the update is to simplify how entities test goodwill for impairment. The update allows for a company to first evaluate qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The Company early adopted the provisions of this update as of September 30, 2011. Goodwill is reviewed for impairment at least annually. In order to test goodwill for impairment, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would perform the two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.

Impairment of Intangible and Long-Lived Assets

Intangible assets primarily consist of goodwill, trademarks, favorable operating leases and covenants-not-to-compete. Goodwill and the Vitamin Cottage trademark have indefinite lives and are not amortized; rather, they are tested for impairment at least annually. The Company’s annual impairment testing is performed as of September 30. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company aggregates long-lived assets at the store level which the Company considers to be the lowest level in the organization for which independent identifiable cash flows are available. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that store to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life of the borrowing or the life of the credit facility using the effective interest method.

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from historical trends.

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts, returns and allowances. Sales taxes are not included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. The Company also ships certain products ordered through its Internet site. Revenue is recognized on Internet sales at the time the products are shipped to the customers. The Company records a deferred revenue liability within accrued expenses when it sells Natural Grocers gift cards or issues gift cards to employees, and records a sale when a customer redeems the gift card. The gift cards do not expire. The Company currently does not record breakage for unused portions of gift cards.

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Cost of Goods Sold and Occupancy Costs

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

Store Expenses

Store expenses consist of store-level expenses such as salaries and benefits, supplies, utilities, depreciation, gain or loss on disposal of assets and other related costs associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.

Administrative Expenses

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

Pre-Opening and Relocation Expenses

Costs associated with the opening of new stores or relocating existing stores are expensed as incurred.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease. The Company accounts for operating leases with rent holidays and escalating payment terms by recognizing the associated expense on a straight-line basis over the lease term. For certain leases, the Company has also received cash from landlords to compensate for costs incurred by the Company in making the store locations ready for operation (leasehold incentives or tenant allowances). Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.

The Company recently entered into lease agreements with a developer for certain build to suit store locations.  Under the terms of the lease agreements, the Company is responsible for contributing certain amounts towards the cost of construction.  As a result of this involvement, the Company was deemed the “owner” for accounting purposes during the construction period, and is required to capitalize the construction costs on its balance sheet.  Upon completion of the project, the Company performs a sale-leaseback analysis pursuant to ASC Topic 840, Leases, to determine if the Company can remove the assets from its balance sheet.  In accordance with the terms of the lease agreements, the Company is not reimbursed for the amounts contributed towards the cost of construction and is therefore deemed to have “continuing involvement” per ASC Topic 840, Leases, which prevents the Company from derecognizing the assets on the balance sheet when construction is complete and requires the Company to account for the leases as assets and related capital lease finance obligations.  As provided by ASC Topic 840, Leases, the Company records the fair market value of the building as an asset on its balance sheet, and records a capital lease finance obligation equal to the fair market value of the building less the amount the Company contributed towards construction.  The Company does not record rent expense for the capital leases, but rather rental payments under the capital leases are recognized as a reduction of the capital lease finance obligation and as interest expense.  The capital lease asset is depreciated on a straight line basis over a 40 year life for buildings and an indefinite life for land. The Company had four stores as of September 30, 2012 that were build to suit store locations where the Company was deemed to be the owner during the construction period.  Two of the stores opened in the fourth quarter of fiscal year 2012 and are reflected as capitalized real estate leases and capital lease finance obligations at September 30, 2012.

Two of the stores were under construction as of September 30, 2012 and are scheduled to open in the first quarter of fiscal year 2013.  Construction costs for the two stores currently under construction are reflected in construction in process and capital lease finance obligations.

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Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening and relocation expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2012, 2011 and 2010 were approximately $5.1 million, $5.4 million and $3.9 million, respectively, net of vendor reimbursements received for newsletter advertising. Advertising expense reimbursements received from vendors totaled approximately $1.3 million, $1.1 million and $651,000 for the years ended September 30, 2012, 2011 and 2010, respectively.

Investments

Available-for-sale investments are recorded at fair value.  Unrealized holding gains and losses on available-for-sale investments are excluded from earnings and are reported as a separate component of stockholders’ equity until realized.  A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary for a period greater than two fiscal quarters results in a reduction of the fair value.  Declines in fair value deemed to be other-than-temporary are charged against net earnings.  Investments that have an original maturity date of less than one year are classified as short-term assets and investments that have an original maturity date greater than one year are classified as long-term assets.

Comprehensive Income

Comprehensive income consists of net income and unrealized gains and losses on available-for-sale securities.  Comprehensive income is reflected in the consolidated statements of changes in stockholders’ equity and comprehensive income.

Stock-Based Compensation

The Company adopted an Omnibus Incentive Plan in connection with the IPO on July 25, 2012.  As of September 30, 2012, the Company had issued restricted stock units to its Chief Financial Officer and a member of the Board of Directors.  Restricted common stock is granted at the market price of the stock on the day of grant and is expensed over the applicable vesting period.

The benefits of tax deductions in excess of recognized compensation costs are reported as a credit to additional-paid-in capital and as operating cash flows, but only when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

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

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the Company believes are more likely than not to be recovered.

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

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax purposes.

Noncontrolling Interest in Consolidated Financial Statements

Prior to the Company’s IPO on July 25, 2012, the Company had a majority 55% ownership of BVC which owned five Natural Grocers by Vitamin Cottage retail stores managed by the operating company.  Subsequent to the IPO the Company purchased the remaining 45% noncontrolling interest in BVC.  Noncontrolling interest in the Company’s consolidated financial statements relates to the noncontrolling 45% ownership in BVC prior to the purchase. Net income attributable to noncontrolling interest and net income attributable to the Company are reported separately in the consolidated statements of income. Additionally, noncontrolling interest in the consolidated subsidiaries of the Company is reported as a separate component of equity in the consolidated balance sheet, apart from the Company’s equity.

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Reclassifications

Where appropriate, we have reclassified prior years’ financial statements to conform to current year presentation.

Recent Accounting Pronouncements

In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amends ASC 350, Intangibles — Goodwill and Other.  The amended guidance simplifies how entities test for impairment of indefinite-lived intangible assets.  The amendments permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount as a basis for determining if performing a quantitative test is necessary.  The amendments do not change the impairment losses.  The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  The provisions are effective for the Company’s first quarter of fiscal year 2013.  The Company does not expect the adoption of these provisions to have a significant effect on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentations of Comprehensive Income, which amends ASC 220, Comprehensive Income. The update eliminates the option of presenting the components of other comprehensive income as part of the statement of stockholders’ equity. Instead, comprehensive income must be reported either in a single continuous statement of comprehensive income, which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the implementation requirement in ASU No. 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. The amended guidance specifies that entities should continue to report reclassifications out of accumulated other comprehensive income consistent with presentation requirements in effect before ASU No. 2011-05. The guidance provided in ASU No. 2011-05 and ASU No. 2011-12 is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. The provisions are effective for the Company’s first quarter of fiscal year 2013. The Company does not expect the adoption of these provisions to have a significant effect on the Company’s consolidated financial statements.

Immaterial Adjustments to Previously Reported Consolidated Statements of Cash Flows

The Company has recorded immaterial adjustments of approximately $1,104,000 and $340,000 to increase previously reported net cash provided by operating activities and to increase previously reported net cash used in investing activities to properly reflect cash paid for the acquisition of property and equipment for the years ended September 30, 2011 and 2010, respectively. These adjustments had no impact on the net change in cash and cash equivalents for the respective periods.

3. Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income attributable to Natural Grocers by Vitamin Cottage, Inc. stockholders by the weighted average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of common stock that would then share in the earnings of the Company. Presented below is basic and diluted EPS for the years ended September 30, 2012, 2011 and 2010:

	Year ended September 30,
	2012		2011	2010
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	6,648,800	3,503,811	4,407,963
Weighted average common shares outstanding	22,372,184		22,372,184	22,372,184
Effect of dilutive securities	90,909		89,221	89,221
Weighted average common shares outstanding including effect of dilutive securities	22,463,093		22,461,405	22,461,405
Basic earnings per share	$	0.30	0.16	0.20
Diluted earnings per share	$	0.30	0.16	0.20

The Company did not declare any dividends in the years ended September 30, 2012, 2011 and 2010.

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As of September 30, 2012, the Company had 50,000,000 shares of common stock authorized and 22,372,184 shares outstanding as well as 10,000,000 shares of preferred common stock authorized with none outstanding.

4.  Investments

The Company had money market fund investments that are classified as cash and cash equivalents of approximately $246,000 as of September 30, 2012.  The Company also had available-for-sale securities, generally consisting of certificates of deposit, corporate bonds and municipal bonds, totaling approximately $1.8 million, of which approximately $777,000 were classified as short-term. At September 30, 2012, the average effective maturities of the Company’s short-term and long-term investments were approximately 8 and 17 months, respectively.  During the year ended September 30, 2012, the Company recorded interest income of approximately $2,400 and recorded expense relating to amortized premiums paid of approximately $1,800.  The Company had no money market fund investments or available-for-sale investments as of September 30, 2011.

As of September 30, 2012, available-for-sale securities totaling approximately $1.8 million were in unrealized loss positions with $3,696 recorded in accumulated other comprehensive income for temporary declines in fair value, consisting of three securities in gain positions and nine securities in loss positions due to the amortization of premiums paid to acquire the securities.

The Company established an investment policy with the objective to achieve maximum yields on invested funds while protecting principal, as well as ensuring that funds will be available to meet operating cash flow requirements.  The investment policy establishes the type of investments that are acceptable, requires that each investment have a certain high level of rating as established by Standard and Poor’s and/or Moody’s and limits the amount of any one investment that may be held based on the market value of the total funds at the time of investment purchase. As of September 30, 2012, the Company’s investments in available-for-sale securities were in compliance with the Company’s investment policy.

5. Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs).

As of September 30, 2012 and 2011, the Company had the following financial assets and liabilities that were subject to fair value measurements according to the fair value hierarchy:

		As of September 30,
		2012			2011
	Input Level	Carrying Amount		Fair Value	Carrying Amount	Fair Value
Cash and cash equivalents:
Money market fund	1	$	245,741	245,741	—	—
Investments — available-for-sale securities:
Certificates of deposit	2	978,515		978,515	—	—
Corporate bonds	2	484,715		484,715	—	—
Municipal bonds	2	287,944		287,944	—	—
Liabilities:
Long-term debt—term loan	2	—		—	16,200,000	16,200,000
Revolving credit facility	2	—		—	11,036,324	11,036,324

The carrying amounts of the money market fund and available-for-sale securities are carried at fair value. The carrying amounts of the term loan and revolving credit facility approximate fair value for the year ended September 30, 2011.

Management believes that the carrying values approximate fair values of notes payable—related party because stated interest rates approximate market rates. The carrying amounts of other financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other accrued expenses approximate fair value because of the short maturity of those instruments.

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6. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2012 and 2011.

	Useful lives	As of September 30,
	(in years)	2012			2011
Land	n/a	$	—		604,855
Construction in process	n/a	3,642,150			1,618,661
Capitalized real estate leases, including unamortized land of $600,000	40	5,204,414			—
Land improvements	6 - 15	832,239			811,304
Leasehold improvements	2 - 20	45,437,972			33,573,855
Fixtures and equipment	5 - 7	41,830,033			30,666,013
Computer hardware and software	3 - 5	6,697,106			5,362,468
		103,643,914			72,637,156
Less accumulated depreciation and amortization		(39,041,171		)	(30,899,922	)
Property and equipment, net		$	64,602,743		41,737,234

Capitalized real estate leases include the assets for two build to suit stores that were open as of September 30, 2012 (see Note 2 and Note 13).

Construction in process includes $1.9 million as of September 30, 2012 related to construction costs for build to suit leases in process for which the Company was deemed the owner during the construction period.  These two stores are scheduled to open in the first quarter of fiscal year 2013.

Costs capitalized for computer software development for the years ended September 30, 2012 and 2011 were approximately $55,000 and $122,000, respectively, including approximately $42,000 and $110,000, respectively, related to internal staff compensation. Amortization expense related to capitalized computer software development was approximately $487,000 and $530,000 for the years ended September 30, 2012 and 2011, respectively.

Total costs capitalized for leasehold improvements and fixtures and equipment include approximately $322,000 and $337,000 related to internal staff compensation, and approximately $19,000 and $32,000 in interest costs for the years ended September 30, 2012 and 2011, respectively.

Depreciation and amortization expense for the years ended September 30, 2012, 2011 and 2010 was approximately $9.9 million, $7.6 million and $5.5 million, respectively.

7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets are summarized as follows as of September 30, 2012 and 2011:

	Useful lives	As of September 30,
	(in years)	2012			2011
Amortizable intangible assets:
Covenants-not-to-compete	5.0	$	292,500		292,500
Favorable operating lease	5.0	339,187			339,187
Other intangibles	0.5	22,500			22,500
Amortized intangible assets		654,187			654,187
Less accumulated amortization		(626,609		)	(552,772	)
Amortized intangible assets, net		27,578			101,415
Trademark	Indefinite	388,886			388,886
Total other intangibles, net		416,464			490,301
Goodwill	Indefinite	511,029			511,029
Total goodwill and other intangibles, net		$	927,493		1,001,330

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Amortization expense was approximately $74,000, $149,000 and $88,000 for the years ended September 30, 2012, 2011 and 2010, respectively. Amortization expense is expected to be approximately $28,000 in the year ended September 30, 2013. Amortization expense is expected to be zero for the years thereafter.

8. Supplementary Balance Sheet Information

The composition of accrued expenses is summarized as follows as of September 30, 2012 and 2011:

	As of September 30,
	2012		2011
Payroll and employee-related expenses	$	4,412,741	3,270,900
Accrued income, property, sales and use tax payable	2,197,419		1,557,046
Deferred revenue related to gift card sales	555,757		495,459
Other	617,513		462,094
Total accrued expenses	$	7,783,430	5,785,499

9. Deferred Financing Costs

The Company has capitalized costs incurred in securing its long-term debt (see Note 10). Deferred financing costs, net of accumulated amortization were approximately $55,000 and $89,000 as of September 30, 2012 and 2011, respectively. Accumulated amortization was approximately $832,000 and $794,000 as of September 30, 2012 and 2011, respectively.

Total amortization expense for deferred financing costs was approximately $38,000, $50,000 and $136,000 for the years ended September 30, 2012, 2011 and 2010, respectively. Scheduled amortization expenses for the years ending September 30, 2013 and 2014 are approximately $31,000 and $24,000, respectively.

10. Long-Term Debt

Credit Facility

The Company has a credit facility consisting of a revolving credit facility and a term loan that was fully repaid in fiscal year 2012.  The operating company is the borrower under the credit facility and its obligations under the credit facility are guaranteed by the holding company.

The credit facility requires compliance with certain operational and financial covenants (including a leverage ratio, a fixed charge coverage ratio and a revenue ratio). The credit facility also contains certain other limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the credit facility agreement. Additionally, the revolving credit facility prohibits the payment of cash dividends to the holding company from the operating company, without the bank’s consent except when no default or event of default exists.

If no default or event of default exists dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business.  The Company does not expect such restrictions to impact its ability to meet cash obligations.  The terms and conditions of the agreement for the revolving credit facility and associated documents are customary and include, among other things, guarantees, pledges and subordinations.  At September 30, 2012 and 2011, the Company was in compliance with the debt covenants.

Revolving Credit Facility

On October 31, 2012, the Company amended the agreement governing the revolving credit facility to decrease the credit facility limit from $21.0 million to $15.0 million and to lower the unused commitment fee to 0.20% from 0.375%.  The reduction in the unused commitment fee was retroactive to August 1, 2012. The reduction in the amount available for borrowing is effective October 31, 2012.  As amended during fiscal year 2012, the credit facility matures on June 30, 2014. The Company may borrow, prepay and re-borrow amounts under this revolving credit facility at any time prior to the maturity date.

The Company had no amounts outstanding on its revolving credit facility as of September 30, 2012 and approximately $11.0 million outstanding on its revolving credit facility as of September 30, 2011. Proceeds from the Company’s IPO on July 25, 2012 were used to pay off outstanding amounts under the revolving credit facility of $10.6 million.  The commitment fee is 0.20% for any amounts not borrowed under the revolving credit facility as amended in October 2012. Interest is determined by the lender’s administrative agent and is stated at the adjusted LIBOR rate for the interest period plus the lender spread. The lender spread will be reduced by the lender subject to the Company meeting certain financial measures. The average annual interest rates for the years ended September 30, 2012, 2011 and 2010 were 2.54%, 2.38% and 3.88%, respectively.

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Term Loan

The Company had no amounts outstanding as of September 30, 2012 and $16.2 million outstanding as of September 30, 2011. Proceeds from the Company’s IPO on July 25, 2012 were used to prepay the outstanding amounts under the term loan of $15.8 million.  The Company cannot borrow additional amounts on the term loan.  Interest was determined by the lender’s administrative agent and was stated at the alternate base rate for the interest period plus the applicable lender spread. The interest rate at September 30, 2011 was approximately 2.03%. The average interest rate for the years ended September 30, 2012, 2011 and 2010 was approximately 2.02%, 2.19% and 3.46%, respectively.

Notes Payable

The Company entered into a three-year promissory installment note for $1.0 million at 5.50% per annum, which matured January 31, 2011.

The revolving credit facility, long-term debt balances and capital lease finance obligations as of September 30, 2012 and 2011 were as follows:

	As of September 30,
	2012			2011
Revolving credit facility	$	—		11,036,324
Long-term debt—term loan	$	—		16,200,000
Capital lease finance obligations, due in monthly installments through fiscal year 2027	4,180,584			—
Capital lease finance obligations for assets under construction	1,345,258			—
Total long-term debt and capital lease finance obligations	5,525,842			16,200,000
Less current portion	(11,884		)	(500,000	)
Long-term debt and capital lease finance obligations, net of current portion	$	5,513,958		15,700,000

The Company has four leases that are included in capital lease finance obligations which include two stores that were open as of September 30, 2012, and two stores that were under construction and are scheduled to open in the first quarter of fiscal year 2013 (see Note 2).  The Company does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital lease finance obligation and as interest expense (see Note 13).

11. Notes Payable—Related Party

The Company has two unsecured notes payable, which bear interest at 5.33% annually and mature in October 2013.  In July 2012, the Company prepaid the outstanding balance of the note payable to Philip Isely.

Notes payable, related party consists of the following:

	As of September 30,
	2012			2011
Margaret A. Isely Spouse’s Trust	$	282,499		529,210
Philip Isely	—			676,895
	282,499			1,206,105
Less current maturities	(260,187		)	(562,271	)
Notes payable—related party, net of current portion	$	22,312		643,834

Principal maturities of $22,312 will be repaid during fiscal year 2013.

12. Split-Dollar Life Insurance Premiums and Note Receivable—Related Party

The Company had an agreement with a related party trust that owned a split-dollar life insurance policy dated January 1, 1994, on Philip Isely. One of the semiannual policy premium payments was paid by the Company each year. Split-dollar life insurance

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premiums are reflected in long-term assets and represent the lesser of: (1) the cash surrender value of the policy; or (2) an amount equal to the total premiums paid by the Company. Split-dollar life insurance premiums were approximately $578,000 as of September 30, 2011, which represented premiums paid to date.

Additionally, the Company entered into a note receivable on August 16, 2004, with the co-trustees of the related party trust whereby the Company had agreed to pay the other semiannual policy premium due each policy year. The agreement stated that when the policy was paid, the Company would be repaid the premiums paid plus interest at 2.5% per annum. Amounts owed to the Company under this arrangement were approximately $266,000 at September 30, 2011.  The Company entered into a collateral assignment with the related party trust whereby the split-dollar life insurance policy is held as collateral security for its advances for premiums paid to date.

Section 402 of the Sarbanes-Oxley Act of 2002 was enacted to prohibit publicly traded companies from providing personal loans to directors and executive officers. As part of the Company’s process to initiate the IPO, it evaluated its arrangement with the related party trust that owns the life insurance policy and determined that it would be appropriate to extinguish the amounts receivable from the trust for the premiums paid by the Company on behalf of the trust. On June 14, 2012, the Company entered into an agreement with Zephyr Isely, Kemper Isely and Heather C. Isely, as co-trustees of The Philip and Margaret A. Isely Joint Trust Number One to terminate and cancel the split-dollar life insurance agreement, the collateral assignment, the loan agreement and related promissory note effective with the payment by the co-trustees/trust of all outstanding sums payable to the Company. As of June 14, 2012, the outstanding amounts were $659,852 for the premiums paid under the split-dollar life insurance agreement and $270,301 for the premiums paid and interest accrued per the loan agreement for a total receivable to the Company of $930,153. On June 15, 2012, the trust repaid this amount in full, and consistent with the original terms of the agreement, the Company has no further arrangements with the employee or the trust and no further obligations to pay the split-dollar life insurance policy premiums or any death benefit.

13. Lease Commitments

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating leases through 2028. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. Deferred rent as of September 30, 2012 and 2011 was approximately $3.6 million and $2.8 million, respectively. Tenant improvement allowances received from landlords (leasehold incentives) are recorded as liabilities and recognized evenly as a reduction to rent expense over the lease term. Leasehold incentives at September 30, 2012 and 2011 were approximately $5.3 million and $4.9 million, respectively.

The Company has seven leases with Chalet Properties, LLC (Chalet), one lease with the Isely Family Land Trust LLC and one lease with 3801 East Second Avenue LLC, all related parties (see Note 16). The terms and rental rates of these related party leases are similar to leases with nonrelated parties and are at market rental rates. The leases began at various times with the earliest occurring in November 1999, continue for various terms through February 2027 and include various options to renew. Present monthly lease payments range from $4,000 to $38,000 per lease.

The minimum annual commitments under the terms of these operating leases as of September 30, 2012 are as follows:

	Third parties		Related parties	Total Operating Leases
2013	$	11,024,540	1,458,000	12,482,540
2014	11,122,627		1,458,000	12,580,627
2015	10,911,503		1,458,000	12,369,503
2016	10,691,308		1,435,250	12,126,558
2017	10,246,325		1,437,000	11,683,325
Thereafter	65,510,218		12,476,250	77,986,468
	$	119,506,521	19,722,500	139,229,021

The Company recently entered into lease agreements with a developer for four build to suit store locations, two of which were new stores that were open as of September 30, 2012 and two of which were under construction as of September 30, 2012.  These leases expire or become subject to renewal clauses at various dates in fiscal years 2027 and 2028.  Under the terms of the lease agreements, the Company is responsible for contributing certain amounts towards the cost of construction.  As a result of this involvement, the Company was deemed the “owner” for accounting purposes during the construction period, and is required to capitalize the construction costs on its balance sheet.  Upon completion of the project, the Company performs a sale-leaseback analysis pursuant to ASC Topic 840, Leases, to determine if the Company can remove the assets from its balance sheet.  In accordance with the terms of the lease agreements, the Company is not reimbursed for the amounts contributed towards the cost of construction

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and is therefore deemed to have “continuing involvement” per ASC Topic 840, Leases, which prevents the Company from derecognizing the assets on the balance sheet when construction is complete and requires the Company to account for the leases as capitalized real estate leases and related capital lease finance obligations.  As provided by ASC Topic 840, Leases, the Company records the fair market value of the building as an asset on its balance sheet, and records a capital lease finance obligation equal to the fair market value of the building less the amount the Company contributed towards construction.  The Company does not record rent expense for these leases, but rather rental payments per the lease agreements are recognized as a reduction of the capital lease finance obligation and as interest expense.

Two of the leases were for new stores that were open as of September 30, 2012.  The Company performed a sale-leaseback analysis upon completion of construction and was deemed to have continuing involvement which precluded the Company from removing the assets from its balance sheet.  Accordingly, the Company recorded approximately $5.2 million in assets and $4.2 million in capital lease finance obligations.

Future payments to the developer under the terms of the agreements for these two stores that were open as of September 30, 2012 are as follows at September 30, 2012:

	Interest  expense on  capital lease  finance  obligations		Principal  payments on  capital lease  finance  obligations	Future  payments to  developer over  the term of the  agreement
2013	$	652,847	11,884	664,732
2014	651,018		13,713	664,731
2015	648,891		15,840	664,731
2016	646,417		18,314	664,731
2017	643,534		21,197	664,731
Thereafter	6,060,484		627,905	6,688,388
	$	9,303,191	708,853	10,012,044

These two capital lease finance obligations have 15 year terms.  During the life of these leases, the Company will record approximately $9.3 million in interest expense and reduce the capital lease finance obligations by approximately $709,000.  At the end of these lease agreements, the Company will have assets of approximately $3.5 million, net of depreciation, and a capital lease finance obligation of approximately $3.5 million, both of which will be de-recognized at the end of the lease term.

The remaining two leases were for new stores that are scheduled to open in the first quarter of fiscal year 2013, for which the Company recorded approximately $1.9 million for construction in process and approximately $1.3 million in capital lease finance obligations.  Once construction is complete, the Company expects to be deemed to have continuing involvement and will capitalize the final costs of construction.  The Company will not record rent expense for these leases, but rather rental payments under the capital leases will be recognized as a reduction of the capital lease finance obligation and as interest expense, these amounts will be determinable upon completion of construction.  Future payments to the developer under the terms of these two locations that are in process where we are deemed to be the accounting owner during the construction period are as follows at September 30, 2012, based on the expected store opening date in the first quarter of fiscal 2013:

	Future  payments to  developer over  the term of the  agreement
2013	$	593,869
2014	680,585
2015	680,585
2016	680,585
2017	680,585
Thereafter	6,960,623
	$	10,276,832

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2012, 2011 and 2010 totaled approximately $12.1 million, $9.9 million and $8.2 million, respectively, including approximately $519,000, $388,000 and $340,000 in pre-opening and relocation expenses associated with rent expense for stores that had not yet opened for the years ended September 30, 2012, 2011 and 2010, respectively.

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14. Stockholders’ Equity

Dividends per Common Share

The Company did not pay dividends during the years ended September 30, 2012, 2011 or 2010.

Comprehensive Income

Comprehensive income is comprised of net income and unrealized gains and losses on investments.  Comprehensive income included the following items for the periods presented:

	Year ended September 30,
	2012			2011
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	6,648,800		3,503,811
Unrealized loss on available-for-sale securities	(3,696		)	—
Comprehensive income	$	6,645,104		3,503,811

As of September 30, 2012, available-for-sale securities totaling approximately $1.8 million were in unrealized loss positions.

15.  Stock-Based Compensation

The Company adopted an Omnibus Incentive Plan (the Plan) on July 17, 2012. Stock awards granted pursuant to the Plan will be settled in new shares of the Company upon vesting. As of September 30, 2012, the Company had issued restricted stock unit awards to its Chief Financial Officer and a member of the Board of Directors which will be settled in shares of the Company’s common stock issued under the Plan once the awards are vested. The restricted stock grant to the Chief Financial Officer (CFO Award) was in accordance with the terms of her employment agreement that was signed in June 2008 which stated she was entitled to receive a grant of restricted stock units equal to 1.2% of the fully diluted shares of the Company in connection with an IPO.  Two thirds of the CFO Award vested immediately upon completion of the IPO and was settled in a combination of common stock and cash.  The remaining one third will be settled 100% in shares of common stock and vests in three equal parts over a six, 12 and 18 month period following the IPO.  Per ASC Topic 718, Stock Compensation, the occurrence of the IPO was deemed a performance condition, and therefore no expense was recorded until the performance condition was deemed probable (i.e. the closing of the IPO).  Upon completion of the IPO, the Company recorded the entire expense associated with the two thirds of the CFO Award that vested immediately, the portion that was settled in common shares was equity classified and expensed at the grant date fair value and the portion that was settled in cash was liability classified and expensed at the market value on the date of the IPO.  The grant date fair value was determined by a fair market value analysis of the Company performed by a third-party valuation specialist in fiscal year 2008.  The remaining one third of the CFO Award is valued at the grant date fair value, once the performance condition was deemed probable (occurrence of the IPO) a portion of the expense relating to the vesting period that had already expired (June 2008 to July 25, 2012) was expensed, and the remaining amount will be expensed ratably over the six, 12 and 18 month vesting period.

Each independent member of the Company’s Board of Directors is granted a number of restricted stock units under the Plan equal to the number of shares of common stock having a value of $50,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant), which is granted each year on the date of the Company’s annual meeting of stockholders, or a pro rata portion in the case of a mid-year appointment.  In July 2012, the Company appointed its first independent Board of Director member who received a restricted stock unit grant of 1,688 shares on August 1, 2012 with a grant date fair value of $19.74 which vests over a twelve month period.  Restricted common stock is granted at the market price of the stock on the day of grant, and is expensed over the applicable vesting period.

Total stock-based compensation expense before income taxes recognized in the year ended September 30, 2012 was approximately $1.1 million.  No stock-based compensation expense was recorded in the years ended September 30, 2011 or 2010. Stock-based compensation expense was included in the administrative expenses line item of the consolidated statements of income for the year ended September 30, 2012.

As of September 30, 2012, there was approximately $43,000 of unrecognized stock-based compensation expense related to nonvested restricted stock units related to approximately 90,909 shares with a weighted average grant date fair value of $1.66.  The Company anticipates that this expense will be recognized over a weighted average period of approximately one year.

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16. Related Party Transactions

The Company has ongoing relationships with several related entities:

3801 East Second Avenue, LLC:  The Company has one operating lease (see Note 13) for one of its store locations with 3801 East Second Avenue LLC, an entity owned by the estate of Philip Isely and the Margaret A. Isely Family Trust, with each holding a 50% interest in the entity.  The trust is controlled by Kemper Isely, Zephyr Isely and Heather Isely, who act as its trustees.  Rent paid to 3801 East Second Avenue LLC was approximately $48,000, $48,000 and $81,000 for the years ended September 30, 2012, 2011 and 2010, respectively.

Isely Family Land Trust LLC:  The Company has a lease for one of its store locations with the Isely Family Land Trust LLC (Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $306,000 for each of the years ended September 30, 2012, 2011 and 2010, respectively.

Chalet:  The Company has seven store operating lease agreements with Chalet, a related party (see Note 13). Chalet is owned by four of the Company’s non-independent board members; Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $1.5 million, $1.2 million and $1.1 million for the years ended September 30, 2012, 2011 and 2010, respectively.

17. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2012, 2011 and 2010, respectively:

	Year ended September 30,
	2012		2011		2010
Current federal income tax expense (benefit)	$	1,102,280	(1,547,238	)	1,657,441
Current state income tax expense (benefit)	179,691		(223,760	)	212,223
	1,281,971		(1,770,998	)	1,869,664
Deferred federal income tax	2,339,151		3,425,149		521,273
Deferred state income tax	334,097		512,649		74,835
	2,673,248		3,937,798		596,108
Total provision for income taxes	$	3,955,219	2,166,800		2,465,772

The differences between the U.S. federal statutory income tax rate and the Company’s effective tax rate are as follows:

	Year ended September 30,
	2012		2011		2010
Statutory tax rate	34.0	%	34.0		34.0
Nontaxable income attributable to noncontrolling interest	(2.7	)	(6.2	)	(5.3	)
State income taxes, net of federal income tax expense	3.0		3.4		2.5
Other, net	0.3		0.8		(0.6	)
Effective tax rate	34.6	%	32.0		30.6

Deferred taxes have been classified on the consolidated balance sheets as follows:

	As of September 30,
	2012			2011
Current assets	$	842,963		583,668
Long-term liabilities	(4,143,351		)	(4,947,870	)
Net deferred tax liabilities	$	(3,300,388	)	(4,364,202	)

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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:

	As of September 30,
	2012			2011
Deferred tax assets
Trademarks	$	998,270		999,871
Deferred rent	1,343,691			975,748
Leasehold incentives	1,978,421			1,736,643
Capital lease finance obligation	2,052,113			—
Accrued employee benefits	515,192			414,800
Intangible assets—other	87,782			96,265
Goodwill and BVC related intangibles	3,377,416			11,662
Charitable contribution	—			46,818
Other	328,628			122,050
Gross deferred tax assets	10,681,513			4,403,857
Deferred tax liabilities
Property and equipment	(11,960,271		)	(6,727,381	)
Leasehold improvements	(2,012,131		)	(1,763,365	)
Favorable operating lease	(9,499		)	(34,737	)
Investment in BVC	—			(242,576	)
Gross deferred tax liabilities	(13,981,901		)	(8,768,059	)
Net deferred tax liabilities	$	(3,300,388	)	(4,364,202	)

Prior to the purchase of the noncontrolling interest in BVC in connection with the IPO, BVC was treated as a partnership under the Internal Revenue Code and similar state statutes; therefore, no provision or liability for federal or state income taxes related to the noncontrolling interest in BVC was included in the consolidated financial statements for the years ended September 30, 2011 and prior. The deferred tax amounts for the Company’s book versus tax basis in its 55% interest of BVC was reflected in the consolidated tax provision as outside basis in BVC for the years ended September 30, 2011 and prior.  Following the purchase of the noncontrolling interest in BVC, income from BVC is treated as taxable income to the Company and included in the provision for federal and state income taxes.  As a result of the acquisition of the remaining noncontrolling interest, the Company is entitled to tax deductions to the extent of any step up in tax basis on the assets of BVC, limited to the cash consideration paid.  Additionally, for tax purposes the Company recorded the noncontrolling interest purchase by stepping up acquired fixed asset balances by approximately $827,000 to reflect fair market value and recorded additional intangibles of approximately $9.2 million.  Accordingly, the tax basis in excess of book basis at the date of purchase resulted in deferred tax assets of approximately $3.6 million.

The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future deductions based on the nature of the deductible temporary differences and expected future taxable income.

As of September 30, 2012, the Company had $145,131 in operating loss carryforwards related to state income taxes.  The Company utilized $73,941 in state income tax carryforwards in the year ended September 30, 2012.

The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years 2008 and prior and is no longer subject to state and local income tax examinations for fiscal years 2007 and prior.

The increase in deferred federal income taxes in fiscal year 2011 is the result of the 100% bonus depreciation legislation passed in fiscal year 2011, which provides that the Company may take a 100% bonus depreciation deduction for qualified property acquired or constructed and placed into service from September 8, 2010 through December 31, 2011.  Bonus depreciation was reduced to 50% for the period of January 1, 2012 through December 31, 2012.

18. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of Section 401(k) of the Internal Revenue Code. Employees may defer up to the annual maximum limit prescribed by the Internal Revenue Code. The Company, on a discretionary basis, matches 25% of participant contributions up to a maximum annual employer match of $2,500. The Company’s matching contribution included in expense was approximately $322,000, $260,000 and $232,000 for the years ended September 30, 2012, 2011 and 2010, respectively.

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19. Segment Reporting

The Company has one reporting segment, natural and organic retail stores. The Company’s revenues are derived from the sale of natural and organic products at its stores. All existing operations are domestic.

Sales from the Company’s natural and organic retail stores are derived from sales of the following products which are presented as a percentage of sales for the years ended September 30, 2012, 2011 and 2010 as follows:

	As of September 30,
	2012		2011	2010
Grocery	62.7	%	59.8	57.6
Dietary supplements	27.0		29.3	31.3
Other	10.3		10.9	11.1
	100.0	%	100.0	100.0

20. Selected Quarterly Financial Data (Unaudited)

The summarized quarterly financial data presented below reflect all adjustments, which in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

Summarized unaudited quarterly financial data for fiscal year 2012 is as follows:

	Three months ended
	December 31, 2011			March 31,2012		June 30,2012		September 30, 2012
Net sales	$	74,838,619		84,907,259		86,706,603		89,932,891
Cost of goods sold and occupancy costs	53,239,410			59,223,589		61,306,972		63,558,793
Gross profit	21,599,209			25,683,670		25,399,631		26,374,098
Store expenses	16,439,859			18,028,062		18,198,873		19,490,337
Administrative expenses	2,712,670			2,812,256		2,760,154		4,447,020
Pre-opening and relocation expenses	426,903			426,728		457,536		862,014
	19,579,432			21,267,046		21,416,563		24,799,371
Operating income	2,019,777			4,416,624		3,983,068		1,574,727
Other income (expense):
Dividends and interest income	1,682			2,329		1,427		658
Interest expense	(175,199		)	(154,928	)	(144,403	)	(93,971	)
Total other expense	(173,517		)	(152,599	)	(142,976	)	(93,313	)
Income before income taxes	1,846,260			4,264,025		3,840,092		1,481,414
Provision for income taxes	(586,262		)	(1,486,443	)	(1,300,121	)	(582,393	)
Net income	1,259,998			2,777,582		2,539,971		899,021
Net (income) loss attributable to noncontrolling interest	(269,686		)	(292,503	)	(339,178	)	73,595
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	990,312		2,485,079		2,200,793		972,616

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Summarized unaudited quarterly financial data for fiscal year 2011 is as follows:

	Three months ended
	December 31, 2010			March 31, 2011		June 30,2011		September 30, 2011
Net sales	$	60,618,292		66,211,085		67,578,181		70,136,488
Cost of goods sold and occupancy costs	42,961,018			46,685,239		47,828,295		49,687,700
Gross profit	17,657,274			19,525,846		19,749,886		20,448,788
Store expenses	13,221,010			14,362,484		14,635,023		15,391,173
Administrative expenses	2,489,345			2,602,642		2,574,890		2,730,014
Pre-opening and relocation expenses	337,185			685,422		446,930		494,649
	16,047,540			17,650,548		17,656,843		18,615,836
Operating income	1,609,734			1,875,298		2,093,043		1,832,952
Other income (expense):
Dividends and interest income	5,257			1,450		1,630		1,740
Interest expense	(197,631		)	(195,177	)	(181,470	)	(94,847	)
Other income, net	—			16,069		1,837		6,801
Total other expense	(192,374		)	(177,658	)	(178,003	)	(86,306	)
Income before income taxes	1,417,360			1,697,640		1,915,040		1,746,646
Provision for income taxes	(431,630		)	(516,926	)	(674,782	)	(543,462	)
Net income	985,730			1,180,714		1,240,258		1,203,184
Net income attributable to noncontrolling interest	(259,354		)	(307,306	)	(254,197	)	(285,218	)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	726,376		873,408		986,061		917,966

21. Commitments and Contingencies

Self-Insurance

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

Legal

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

22. Subsequent Events

On October 17, 2012, the Board of Directors (Board) of the Company elected Richard Hallé as a new member of the Board.  As an independent director, Mr. Hallé will receive a base annual retainer of $30,000 in cash, and he will receive an additional annual retainer of $5,000 in cash as a member of the Audit Committee.  Mr. Hallé was granted 1,136 restricted stock units under the Company’s Omnibus Incentive Plan equal to the number of shares of the Company’s common stock having a value of $50,000 based on the closing price of the Company’s common stock on the day of the grant, October 17, 2012, on a pro-rata basis for Mr. Hallé’s service prior to the 2013 annual meeting.  The restricted stock units will fully vest on the date that is one year after the date of grant.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 17, 2012.

Natural Grocers by Vitamin Cottage, Inc.
By:	/s/ Kemper Isely
	Kemper Isely,
	Its Co-President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

Name	Title	Date
/s/ KEMPER ISELY	(Principal Executive Officer, Co-President,
Kemper Isely	Director)	December 17, 2012
/s/ ZEPHYR ISELY	(Principal Executive Officer, Co-President,
Zephyr Isely	Director)	December 17, 2012
/s/ SANDRA BUFFA	(Principal Financial and Accounting Officer)
Sandra Buffa		December 17, 2012
/s/ HEATHER ISELY	Director
Heather Isely		December 17, 2012
/s/ ELIZABETH ISELY	Director
Elizabeth Isely		December 17, 2012
/s/ MICHAEL CAMPBELL	Director
Michael Campbell		December 17, 2012
/s/ RICHARD HALLE	Director
Richard Halle		December 17, 2012

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EXHIBIT INDEX

Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
2.1	Limited Liability Company Interest Purchase and Contribution Agreement between Vitamins, Inc., Howard & Forey, Inc., Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc. dated June 14, 2012	Form S-1	333-182186	2.1	June 29, 2012
2.2	Form of Agreement and Plan of Merger by and among Vitamin Cottage Natural Food Markets, Inc., Vitamin Merger, Inc. and Natural Grocers by Vitamin Cottage, Inc.	Form S-1	333-182186	2.2	July 12, 2012
3.1	Amended and Restated Certificate of Incorporation	Form S-1	333-182186	3.1	July 5, 2012
3.2	Amended and Restated Bylaws	Form S-1	333-182186	3.2	July 5, 2012
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Specimen Common Stock Certificate	Form S-1	333-182186	4.2.	July 20, 2012
4.3	Form of Notice of Grant of Stock Unit Award	Form S-8	333-182886	4.2.	July 27, 2012
4.4	Form of Registration Rights Agreement	Form S-1	333-182186	4.3	July 5, 2012
10.1	Amended and Restated Employment Agreement by and between Vitamin Cottage Natural Food Markets, Inc., Natural Grocers by Vitamin Cottage, Inc. and Sandra M. Buffa, dated June 26, 2012*	Form S-1	333-182186	10.1	June 29, 2012
10.2	Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders Party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, dated September 29, 2006	Form S-1	333-182186	10.2	June 29, 2012
10.3	First Amendment to Credit Agreement by and among Vitamin Cottage Natural Food Markets, Inc. and JPMorgan Chase Bank, N.A., dated November 2, 2006	Form S-1	333-182186	10.3	June 29, 2012
10.4	Second Amendment to Credit Agreement by and among Vitamin Cottage Natural Food Markets, Inc. and JPMorgan Chase Bank, N.A., dated December 13, 2006	Form S-1	333-182186	10.4	June 29, 2012
10.5	Third Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc. the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated June 26, 2007	Form S-1	333-182186	10.5	June 29, 2012
10.6	Fourth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated November 30, 2008	Form S-1	333-182186	10.6	June 29, 2012
10.7	Fifth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent,	Form S-1	333-182186	10.7	June 29, 2012

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Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
	dated June 30, 2009
10.8	Sixth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated June 30, 2010	Form S-1	333-182186	10.8	June 29, 2012
10.9	Seventh Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated December 21, 2010	Form S-1	333-182186	10.9	June 29, 2012
10.10	Eighth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated May 13, 2011	Form S-1	333-182186	10.10	June 29, 2012
10.11	Ninth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated July 11, 2011	Form S-1	333-182186	10.11	June 29, 2012
10.12	Tenth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated January 26, 2012	Form S-1	333-182186	10.12	June 29, 2012
10.13	Subordination Agreement by and among Vitamin Cottage Two Ltd. Liability Company, and Vitamin Cottage Natural Food Markets, Inc., in favor of JPMorgan Chase Bank, N.A., as administrative agent, dated September 29, 2006	Form S-1	333-182186	10.13	June 29, 2012
10.14	First Amendment to Subordination Agreement by and between Vitamin Cottage Two Ltd. Liability Company, and Vitamin Cottage Natural Food Markets, Inc., in favor of JPMorganChase Bank, N.A., as administrative agent, dated June 26, 2007	Form S-1	333-182186	10.14	June 29, 2012
10.15	Amended and Restated Promissory Note by Vitamin Cottage Natural Food Markets, Inc., for the benefit of JPMorgan Chase Bank, N.A., as Lender, dated December 21, 2010	Form S-1	333-182186	10.15	June 29, 2012
10.16	Form of Omnibus Incentive Plan*	Form S-1	333-182186	10.16	July 5, 2012
10.17	Summary of Compensation Arrangements for Non-Employee Directors*	Form S-1	333-182186	10.17	June 29, 2012
10.18	Form of Indemnification Agreement*	Form S-1	333-182186	10.18	June 29, 2012
10.19	Shopping Center Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated	Form S-1	333-182186	10.19	June 29, 2012

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Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
	January 1, 2010
10.20	Ground lease by and between 3801 East Second Avenue, LLC and Vitamin Cottage Natural Food Markets, Inc., dated March 1, 2001	Form S-1	333-182186	10.20	June 29, 2012
10.21	Commercial Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated June 1, 2006	Form S-1	333-182186	10.21	July 5, 2012
10.22	Sublease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated June 1, 2006	Form S-1	333-182186	10.22	June 29, 2012
10.23	Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated September 1, 2011	Form S-1	333-182186	10.23	June 29, 2012
10.24	Lease by and between Chalet Properties, LLC and Boulder Vitamin Cottage Group, LLC, dated July 1, 2011	Form S-1	333-182186	10.24	June 29, 2012
10.25	Lease by and between Isely Family Land Trust, LLC and Vitamin Cottage Natural Food Markets, Inc., dated February 29, 2012	Form S-1	333-182186	10.25	June 29, 2012
10.26	Lease by and between Chalet Properties, Austin, LLC and Vitamin Cottage Natural Food Markets, Inc., dated February 29, 2012	Form S-1	333-182186	10.26	June 29, 2012
10.27	Building Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated December 8, 2010	Form S-1	333-182186	10.27	June 29, 2012
10.28	Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated May 20, 2008#	Form S-1	333-182186	10.28	June 29, 2012
10.29	Addendum A to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated February 27, 2009#	Form S-1	333-182186	10.29	June 29, 2012
10.30	Agreement Addendum to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated March 10, 2012#	Form S-1	333-182186	10.30	June 29, 2012
10.31	Third Amendment to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated June 3, 2012#	Form S-1	333-182186	10.31	June 29, 2012
10.32	Form of Stockholders Agreement, by, between and among Natural Grocers by Vitamin Cottage, Inc. and the stockholders to be named therein	Form S-1	333-182186	10.32	July 12, 2012

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Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
10.33	Eleventh Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated October 31, 2012	Form 10-K	001-35608	10.33	December 13, 2012
10.34	Third Amended and Restated Promissory Note by Vitamin Cottage Natural Food Markets, Inc., for the benefit of JPMorgan Chase Bank, N.A., as Lender, dated October 31, 2012.	Form 10-K	001-35608	10.34	December 13, 2012
10.35	Pledge and Security Agreement by and between Natural Grocers by Vitamin Cottage, Inc. and JP Morgan Chase Bank, N.A., as Administrative Agent, for the ratable benefit of the Secured Parties, dated October 31, 2012	Form 10-K	001-35608	10.35	December 13, 2012
10.36	Guaranty made by Natural Grocers by Vitamin Cottage, Inc. in favor of JP Morgan Chase Bank, N.A., as Administrative Agent, for the ratable benefit of the Secured Parties, dated October 31, 2012	Form 10-K	001-35608	10.36	December 13, 2012
14	Code of Ethics	Form 10-K	001-35608	14	December 13, 2012
21.1	List of subsidiaries	Form 10-K	001-35608	21.1	December 13, 2012
23.1	Consent of KPMG LLP	—	—	—	—
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 Sandra Buffa, 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	—	—	—	—

*Indicates a management contract or compensatory plan or arrangement

# Confidential portions have been omitted pursuant to a request for confidential treatment.

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

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