UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒

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

FOR THE QUARTERLY PERIOD ENDED ~~MARCH~~DECEMBER 31, 2021

☐

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

COMMISSION FILE NUMBER: 001-35608

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

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

12612 West Alameda Parkway

80228

Lakewood, Colorado

(Address of principal executive offices)

(Zip code)

(303) 986-4600

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of ~~May 3, 2021~~January 31, 2022 was ~~22,606,670.~~22,656,622.

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, “fiscal year ~~2021~~2022” refers to the year from October 1, ~~2020~~2021 to September 30, ~~2021)~~2022).

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

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020~~2021 (the Form 10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

In addition, our actual results could differ materially from the forward-looking statements in this Form 10-Q due to risks and challenges related to the COVID-19 pandemic and the resulting government mandates, including: the length of time the COVID-19 pandemic continues; the inability of customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-priced or other perceived value offerings; the temporary inability of our employees to work due to illness; temporary store closures due to infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local, state or federal governmental authorities; the extent and duration of the adverse economic conditions resulting from the COVID-19 pandemic and government mandates, including its impact on consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; labor shortages and costs resulting from the COVID-19 pandemic; increased operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state governments. We believe these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

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

	March 31, 2021		September 30, 2020		December 31, 2021		September 30, 2021
Assets
Current assets:
Cash and cash equivalents	$	20,977		28,534	$	25,296		23,678
Accounts receivable, net		8,996		8,519		9,603		8,489
Merchandise inventory		98,456		100,175		101,753		100,546
Prepaid expenses and other current assets		4,073		6,185		3,616		2,914
Total current assets		132,502		143,413		140,268		135,627
Property and equipment, net		146,364		147,929		149,357		151,399
Other assets:
Operating lease assets, net		330,514		339,239		313,473		316,388
Finance lease assets, net		38,344		40,096		38,393		39,367
Deposits and other assets		611		647		534		530
Goodwill and other intangible assets, net		10,988		10,468		12,320		11,768
Total other assets		380,457		390,450		364,720		368,053
Total assets	$	659,323		681,792	$	654,345		655,079

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	64,026		69,163	$	65,119		68,949
Accrued expenses		21,492		24,995		25,797		26,589
Term loan facility, current portion		1,750		0		1,750		1,750
Operating lease obligations, current portion		32,705		32,156		33,536		33,308
Finance lease obligations, current portion		2,996		2,836		3,270		3,176
Total current liabilities		122,969		129,150		129,472		133,772
Long-term liabilities:
Term loan facility, net of current portion		32,813		0		19,938		21,938
Operating lease obligations, net of current portion		316,609		325,641		301,123		301,895
Finance lease obligations, net of current portion		37,987		39,506		38,618		39,450
Deferred income tax liabilities, net		15,518		14,429		15,640		15,293
Total long-term liabilities		402,927		379,576		375,319		378,576
Total liabilities		525,896		508,726		504,791		512,348
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,595,467 and 22,546,765 shares issued and outstanding at March 31, 2021 and September 30, 2020, respectively		23		23
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,643,890 and 22,620,417 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively						23		23
Additional paid-in capital		57,065		56,752		57,460		57,289
Retained earnings		76,339		116,291		92,071		85,419
Total stockholders’ equity		133,427		173,066		149,554		142,731
Total liabilities and stockholders’ equity	$	659,323		681,792	$	654,345		655,079

													Three months ended December 31,
	Three months ended March 31,						Six months ended March 31,						2021			2020
	2021			2020			2021			2020
Net sales	$	259,198			277,524			524,243			507,554		$	277,288			265,045
Cost of goods sold and occupancy costs		187,371			199,701			379,391			369,207			198,551			192,020
Gross profit		71,827			77,823			144,852			138,347			78,737			73,025
Store expenses		58,422			56,878			118,752			108,305			59,336			60,330
Administrative expenses		6,358			7,038			13,662			12,857			7,293			7,304
Pre-opening and relocation expenses		341			650			530			1,080
Pre-opening expenses														84			189
Operating income		6,706			13,257			11,908			16,105			12,024			5,202
Interest expense, net		(603	)		(516	)		(1,113	)		(1,052	)		(544	)		(510	)
Income before income taxes		6,103			12,741			10,795			15,053			11,480			4,692
Provision for income taxes		(1,399	)		(3,023	)		(2,459	)		(3,467	)		(2,565	)		(1,060	)
Net income	$	4,704			9,718			8,336			11,586		$	8,915			3,632

Net income per common share:
Basic	$	0.21			0.43			0.37			0.52		$	0.39			0.16
Diluted	$	0.21			0.43			0.37			0.51		$	0.39			0.16
Weighted average number of shares of common stock outstanding:
Basic		22,581,916			22,493,341			22,570,305			22,482,285			22,639,994			22,558,946
Diluted		22,737,646			22,543,429			22,715,098			22,542,319			22,752,725			22,690,817

							Three months ended December 31,
	Six months ended March 31,						2021			2020
	2021			2020
Operating activities:
Net income	$	8,336			11,586		$	8,915			3,632
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,057			15,595			7,113			7,637
Impairment and store closing costs		105			0			95			0
Gain on disposal of property and equipment								(14	)		0
Lease exit costs								0			105
Share-based compensation		487			552			294			248
Deferred income tax expense		1,089			475			347			1,571
Non-cash interest expense		11			6			7			3
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net		(477	)		(535	)		(1,099	)		1,816
Merchandise inventory		1,719			7,768			(1,207	)		577
Prepaid expenses and other assets		(922	)		(483	)		(762	)		(550	)
Income tax receivable		3,004			4,960			0			3,004
Operating lease asset		15,402			14,973
Operating lease assets								7,873			7,664
(Decrease) increase in:
Operating lease liability		(15,861	)		(15,285	)
Operating lease liabilities								(8,157	)		(7,955	)
Accounts payable		(7,142	)		10,146			(553	)		(3,720	)
Accrued expenses		(3,503	)		3,602			(793	)		(1,689	)
Net cash provided by operating activities		17,305			53,360			12,059			12,343
Investing activities:
Acquisition of property and equipment		(8,673	)		(18,759	)		(4,656	)		(3,273	)
Acquisition of other intangibles		(926	)		(1,399	)		(718	)		(427	)
Proceeds from sale of property and equipment		0			0
Proceeds from property insurance settlements		58			27			58			0
Net cash used in investing activities		(9,541	)		(20,131	)		(5,316	)		(3,700	)
Financing activities:
Borrowings under revolving facility		0			226,000			3,200			0
Repayments under revolving facility		0			(231,692	)		(3,200	)		0
Borrowings under term loan facility		35,000			0			0			35,000
Repayments under term loan facility		(438	)		0			(2,000	)		0
Finance lease obligation payments		(1,369	)		(1,082	)		(739	)		(675	)
Dividend to shareholders		(48,288	)		(3,148	)		(2,263	)		(46,706	)
Loan fees paid		(52	)		(25	)		0			(53	)
Payments on withholding tax for restricted stock unit vesting		(174	)		(122	)		(123	)		(82	)
Net cash used in financing activities		(15,321	)		(10,069	)		(5,125	)		(12,516	)
Net (decrease) increase in cash and cash equivalents		(7,557	)		23,160
Net increase (decrease) in cash and cash equivalents								1,618			(3,873	)
Cash and cash equivalents, beginning of period		28,534			6,214			23,678			28,534
Cash and cash equivalents, end of period	$	20,977			29,374		$	25,296			24,661
Supplemental disclosures of cash flow information:
Cash paid for interest	$	165			328		$	189			8
Cash paid for interest on finance lease obligations, net of capitalized interest of $83 and $68, respectively		910			781
Cash paid for interest on finance lease obligations, net of capitalized interest of $66 and $37, respectively								424			463
Income taxes paid		4,777			10			85			0
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	4,435			3,748		$	1,506			2,778
Acquisition of other intangibles not yet paid		233			179			307			196
Property acquired through operating lease obligations		7,287			8,170			5,052			2,769
Property acquired through finance lease obligations		106			5,232			0			106

For the ~~Six~~Three Months Ended ~~March~~December 31, 2021 and ~~March~~December 31, 2020

	Common stock –$0.001 par
	Value				Additional					Total
	Shares outstanding		Amount		paid-in capital		Retained earnings			stockholders’ equity
Balances September 30, 2021		22,620,417	$	23	$	57,289	$	85,419		$	142,731
Net income		—		0		0		8,915			8,915
Cash dividends		—		0		0		(2,263	)		(2,263	)
Issuance of common stock		23,473		0		0		0			0
Share-based compensation		0		0		171		0			171
Balances December 31, 2021		22,643,890	$	23	$	57,460	$	92,071		$	149,554

Common stock –$0.001 par

value

Shares
outstanding

Amount

Additional
paid-in
capital

Retained
earnings

Treasury
stock

Total
stockholders’
equity

Balances September 30, 2020
22,546,765 $ 23 $ 56,752 $ 116,291 $ 0 $ 173,066
Net income
— 0 0 3,632 0 3,632
Cash dividends
— 0 0 (46,706
)
0 (46,706
)
Share-based compensation
16,884 0 166 0 0 166
Balances December 31, 2020
22,563,649 23 56,918 73,217 0 130,158
Net income
— 0 0 4,704 0 4,704
Cash dividends
— 0 0 (1,582
)
0 (1,582 )
Share-based compensation
31,818 0 147 0 0 147
Balances March 31, 2021
22,595,467 $ 23 $ 57,065 $ 76,339 $ 0 $ 133,427

	Common stock –$0.001 par																Common stock –$0.001 par
	value																Value				Additional					Total
	Shares outstanding		Amount		Additional paid-in capital			Retained earnings			Treasury stock			Total stockholders’ equity			Shares outstanding		Amount		paid-in capital		Retained earnings			stockholders’ equity
Balances September 30, 2019		22,463,057	$	23	$	56,319		$	100,923		$	(359	)	$	156,906
Balances September 30, 2020																		22,546,765	$	23	$	56,752	$	116,291		$	173,066
Net income		—		0		0			1,868			0			1,868			—		0		0		3,632			3,632
Cash dividends		—		0		0			(1,573	)		0			(1,573	)		—		0		0		(46,706	)		(46,706	)
Issuance of common stock																		16,884		0		0		0			0
Share-based compensation		12,661		0		135			0			96			231			0		0		166		0			166
Topic 842 transition impact		—		0		0			1,660			0			1,660
Balances December 31, 2019		22,475,718		23		56,454			102,878			(263	)		159,092
Net income		—		0		0			9,718			0			9,718
Cash dividends		—		0		0			(1,574	)		0			(1,574	)
Share-based compensation		28,092		0		(15	)		0			214			199
Balances March 31, 2020		22,503,810	$	23	$	56,439		$	111,022		$	(49	)	$	167,435
Balances December 31, 2020																		22,563,649	$	23	$	56,918	$	73,217		$	130,158

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of ~~March~~December 31, 2021 and September 30, 2021, the Company operated ~~161~~162 stores in 20 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. ~~The Company had 159 stores in 20 states as of~~ ~~September 30, 2020.~~

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

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including the fair value of assets acquired and liabilities assumed in a business combination), the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to: allowances for self-insurance reserves; valuation of inventories; useful lives of property and equipment for depreciation and amortization; impairment of finite-lived intangible assets, long-lived assets, and goodwill; lease assumptions; ~~accounting for income taxes;~~ 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.

~~The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)~~ ~~2016~~-~~02,~~ ~~“Leases (Topic~~ ~~842~~~~)” in~~ ~~February 2016~~ ~~and subsequently issued related ASUs in~~ ~~2018~~ ~~and~~ ~~2019~~ ~~(collectively, “ASC~~ ~~842”~~~~). ASC~~ ~~842~~ ~~requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms greater than~~ 12 ~~months. Under ASC~~ ~~842,~~ ~~recognition, measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.~~

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

~~The adoption of ASC~~ ~~842~~ ~~resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million and $377.8 million, respectively, as of~~ ~~October 1, 2019.~~ ~~Included in the measurement of the new lease assets is the reclassification of certain balances, including those historically recorded as deferred rent and leasehold incentives.~~

~~Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the year ended~~ ~~September 30, 2020.~~ This adjustment was primarily driven by the derecognition of $41.9 million of lease obligations and $40.2 million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback guidance. These leases were reclassified as operating or finance leases as of ~~October 1, 2019,~~ ~~the transition date.~~

In ~~June 2018,~~December 2019, the FASB issued ASU ~~2018~~2019-~~07,~~12, ~~“Compensation-Stock Compensation,~~“Income Taxes,” Topic ~~718,~~740, ~~“Improvements to Non-employee Share-Based Payment Accounting”~~“Simplifying the Accounting for Income Taxes” (ASU ~~2018~~2019-0712) ~~as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU~~ ~~2018~~-07 ~~expands the scope of Topic~~ ~~718~~ ~~to more closely align share-based payment transactions for acquiring goods and services from non-employees with~~. The new guidance simplified the accounting for ~~share-based payments~~income taxes by removing certain exceptions to ~~employees, with certain exceptions.~~the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enactment of tax laws or rate changes. The provisions of ASU ~~2018~~2019-0712 were effective for the Company’s first quarter of the fiscal year ending September 30, ~~2020,~~2022. ~~with early adoption permitted.~~ The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021.

In ~~January 2017,~~ ~~the FASB issued ASU~~ ~~2017~~-~~04,~~ ~~“Simplifying the Test for Goodwill Impairment,” Topic~~ ~~350,~~ ~~“Intangibles – Goodwill and Other” (ASU~~ ~~2017~~-04~~). The amendments in ASU~~ ~~2017~~-04 ~~simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the~~ ~~first~~ ~~step in the current~~ ~~two~~~~-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should~~ ~~not~~ ~~exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. ASU~~ ~~2019~~-10 ~~delayed the effective date of this ASU to align with the effective date of ASU~~ ~~2016~~-13 ~~(referred to below). Because the Company is a smaller reporting company, the provisions of ASU~~ ~~2017~~-04 ~~will be effective for the Company’s~~ ~~first~~ ~~quarter of the fiscal year ending~~ ~~September 30, 2024.~~ ~~Early adoption is permitted, and the Company early adopted for the year ended~~ ~~September 30, 2020.~~ ~~ASU~~ ~~2017~~-04 ~~did~~ ~~not~~ ~~have an impact on the Company’s consolidated financial statements for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~March 31, 2021.~~

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

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR, but recent amendments provide for a LIBOR successor rate once LIBOR is discontinued. The amendments in this update only apply to modifications made prior to December 31, 2022. The Company does not anticipate that ~~the adoption of these provisions~~this ASU will have a material impact on its consolidated financial statements.

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

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

Proceeds from the sale of the Company’s gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company.

The balance of contract liabilities related to unredeemed gift cards was ~~$1.5~~$1.8 million and ~~$1.3~~$1.5 million as of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, respectively. Revenue for the three months ended ~~March~~December 31, 2021 and 2020 includes ~~$0.1~~$0.5 million and $0$0.3 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, ~~2020~~ ~~and~~ ~~2019,~~ ~~respectively. Revenue for the~~ ~~six~~ ~~months ended~~ ~~March 31,~~ 2021 and 2020, ~~includes approximately $0.4 million and $0.8 million, respectively, that was included in the contract liability balance of unredeemed gift cards at~~ ~~September 30, 2020~~ ~~and~~ ~~2019,~~ respectively.

The following table disaggregates ~~our~~the Company’s revenue by product category for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020, dollars in thousands and as a percentage of ~~net~~ sales:

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

Presented below are basic and diluted EPS for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020, dollars in thousands, except per share data:

There were ~~4,296~~9,982 and ~~2,973~~14,973 non-vested RSUs for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 ~~respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 142,020 and 181,720 non-vested RSUs for the~~ ~~three~~and ~~six~~2020, ~~months ended~~ ~~March 31, 2020,~~ respectively, excluded from the calculation of diluted EPS as they are antidilutive.

The Company paid a quarterly cash dividend of $0.10 per share of common stock in the first quarter of fiscal year 2022 and a quarterly cash dividend of $0.07 per share of common stock ~~in each of the~~ ~~first~~~~two~~ ~~quarters of fiscal years~~ ~~2021~~and~~2020.~~ ~~The Company paid~~ a special cash dividend of $2.00 per share of common stock in the first quarter of fiscal year 2021.

The Company is party to a ~~credit facility~~Credit Facility, entered into on January 28, 2016 and subsequently amended, consisting of a $50.0 million revolving loan facility (the Revolving Facility) and a ~~fully drawn~~ $35.0 million term loan facility (the Term Loan Facility, and together with the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. ~~As of~~ ~~March 31, 2021,~~ ~~the financing~~The revolving commitment amount under the Revolving Facility ~~was~~is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity ~~date. The Company borrowed $35.0 million under the Term Loan Facility in~~ ~~December 2020~~ ~~to partially fund its previously announced special cash dividend of $2.00 per common share.~~date without premium or penalty. The Credit Facility matures on November 13, 2024. Base rate loans under the Credit Facility bear interest at a fluctuating base rate, as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is ~~also~~ based upon the Company’s consolidated leverage ratio. The Company ~~will~~is required to repay principal amounts outstanding under the Term Loan Facility in equal ~~quarterly~~ installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.

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

On November ~~13, 2019,~~ ~~the Company amended the Credit Facility to extend the maturity date to~~ ~~November 13, 2024~~ and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount ~~not~~ ~~to exceed $10.0 million during any fiscal year. On~~ ~~November~~ 18, 2020, the Company ~~amended~~entered into the Fourth Amendment to the Credit Facility (the Fourth Amendment) to provide for the Term Loan Facility and to permit ~~the~~ payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.

The Company had 0 amounts outstanding under the Revolving Facility as of ~~March~~December 31, 2021 and September 30, ~~2020.~~2021. ~~As of each of~~ ~~March 31, 2021~~ ~~and~~ ~~September 30, 2020,~~ ~~the~~The Company had undrawn, issued and outstanding letters of credit of ~~$1.3~~$1.0 million as of each of December 31, 2021 and September 30, 2021, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had ~~$48.7~~$49.0 million available for borrowing under the Revolving Facility as of each of ~~March~~December 31, 2021 and September 30, ~~2020.~~2021. The Company had ~~$34.6~~$21.7 million outstanding under its fully drawn Term Loan Facility as of ~~March~~December 31, 2021.

As of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, the Company was in compliance with the financial covenants under the Credit Facility.

As of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, the Company had 1920 leases that were classified as finance leases. No rent expense is recorded for these finance leases; rather, rental payments under such leases are recognized as a reduction of the lease obligation and as interest expense. The interest rate on finance lease obligations is determined at the inception of the lease.

The Company incurred gross interest expense of ~~approximately $0.7~~$0.6 million for each of the three months ended December 31, 2021 and ~~$0.5 million~~2020. Interest expense for the three months ended ~~March 31, 2021~~ ~~and~~ ~~2020,~~ ~~respectively, and approximately $1.2 million and $1.1 million for the~~ ~~six~~ ~~months ended~~ ~~March 31, 2021~~ ~~and~~ ~~2020,~~ ~~respectively. Interest expense for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~March~~December 31, 2021 and 2020 relates primarily to interest on finance lease obligations. The Company capitalized interest of less than $0.1 million for each of the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020.

In May 2016, the Board of Directors (the Board) authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program, which will terminate on May 31, 2022. Repurchases under the Company’s share repurchase program may be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

The Company did not repurchase any shares of common stock during the three months ended December 31, 2021 and 2020. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.

~~Prior to~~ ~~October 1, 2020,~~ ~~the Company reissued 199,543 treasury shares at a cost of $1.7 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants.~~ During the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020,the Company reissued 0 treasury shares. ~~During the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~March 31, 2020,~~ the Company reissued 28,092 treasury shares at a cost of approximately $0.2 million and 40,753 treasury shares at a cost of approximately $0.3 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, the Company held 0 treasury shares.

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

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

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

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

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

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

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

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

The Company has 4 operating leases and 1 finance lease with Chalet Properties, LLC (Chalet), 1 operating lease with the Isely Family Land Trust LLC (Land Trust) and 1 operating lease with FTVC, LLC, ~~(FTVC),~~ each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include various options to renew. The terms and rental rates of these leases are similar to leases that would be entered into with nonrelated parties and are at prevailing market rental rates. These leases account for ~~$8.2~~$7.4 million of right-of-use assets and ~~$8.4~~$7.7 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended ~~March 31, 2021~~ ~~and~~ ~~2020,~~ ~~and $0.7 million for each of the~~ ~~six~~ ~~months ended~~ ~~March~~December 31, 2021 and 2020.

The components of total lease cost for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020 were as follows, dollars in thousands:

		Three months ended March 31,						Six months ended March 31,
Lease cost	Classification	2021			2020			2021			2020			Classification	Three months ended December 31, 2021			Three months ended December 31, 2020
Operating lease cost:
	Cost of goods sold and occupancy costs	$	10,603			10,586			21,239			21,252		Cost of goods sold and occupancy costs	$	10,730			10,636
	Store expenses		79			79			159			159		Store expenses		80			80
	Administrative expenses		76			77			152			159		Administrative expenses		76			76
	Pre-opening and relocation expenses		128			122			154			122		Pre-opening expense		0			26
Finance lease cost:
Depreciation of right-of-use assets	Store expenses⁽¹⁾		926			726			1,831			1,487		Store expenses		974			905
Interest on lease liabilities	Interest expense, net ⁽¹⁾		506			385			993			803		Interest expense, net		490			487
Short-term lease cost	Store expenses		621			443			1,158			528		Store expenses		609			537
Variable lease cost	Cost of goods sold and occupancy costs⁽²⁾		891			1,367			2,707			2,605		Cost of goods sold and occupancy costs⁽¹⁾		1,398			1,816
Sublease income	Store expenses		(70	)		(92	)		(163	)		(185	)	Store expenses		(108	)		(93	)
Total lease cost	Total lease cost	$	13,760			13,693			28,230			26,930		Total lease cost	$	14,249			14,470

⁽¹⁾ ~~Immaterial balances related to stores~~ ~~not~~ ~~yet open are included in pre-opening and relocation expenses.~~

² Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

Additional information related to the Company’s leases for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020 were as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,
	2021		2020		2021		2020		Three months ended December 31, 2021			Three months ended December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11,052		11,003		22,189		22,004	$	11,159			11,137
Operating cash flows from finance leases		493		431		993		849		490			500
Financing cash flows from finance leases		694		564		1,369		1,082		739			675
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		4,518		1,792		7,287		7,230		5,052			2,769
Finance leases		0		3,910		106		5,232		0			106
Weighted-average remaining lease term (in years):
Operating leases										10.9			11.5
Finance leases										11.7			12.2
Weighted-average discount rate:
Operating leases										3.6	%		3.6
Finance leases										5.0	%		5.1

In the ~~six~~three months ended ~~March~~December 31, 2021,the Company incurred a charge of $0.1 million related to operating right-of-use assets associated with an early store relocation. In the three months ended December 31, 2020, the Company paid $0.3 million in lease termination costs to terminate the lease associated with one store that closed in the first quarter of fiscal year 2019. In association with the lease termination, the Company wrote off $0.6 million in operating right-of-use assets and $0.8 million in operating lease liabilities and recorded a $0.2 million gain in store expenses.

~~In addition, during the~~ ~~six~~ ~~months ended~~ ~~March 31, 2020,~~ ~~the Company purchased~~ ~~one~~ store building that had previously been leased. This resulted in: (i) a $2.5 million reduction in operating lease liability and (ii) the reclassification of $2.4 million of corresponding operating right-of-use asset to property and equipment.

Future lease payments under non-cancellable leases as of ~~March~~December 31, 2021 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total			Operating leases			Finance leases			Total
Remainder of 2021	$	22,299			2,437			24,736
2022		44,589			4,893			49,482
Remainder of 2022										$	33,777			3,851			37,628
2023		43,789			4,937			48,726			44,474			5,176			49,650
2024		41,964			5,002			46,966			42,877			5,242			48,119
2025		40,261			5,012			45,273			41,225			5,252			46,477
2026											38,016			5,295			43,311
Thereafter		236,959			32,453			269,412			208,535			30,157			238,692
Total future undiscounted lease payments		429,861			54,734			484,595			408,904			54,973			463,877
Less imputed interest		(80,547	)		(13,751	)		(94,298	)		(74,245	)		(13,085	)		(87,330	)
Total reported lease liability		349,314			40,983			390,297			334,659			41,888			376,547
Less current portion		(32,705	)		(2,996	)		(35,701	)		(33,536	)		(3,270	)		(36,806	)
Noncurrent lease liability	$	316,609			37,987			354,596		$	301,123			38,618			339,741

The table above excludes ~~$30.8~~$34.1 million of legally binding minimum lease payments for leases that had been executed as of ~~March~~December 31, 2021 but whose terms had not yet commenced.

The Company had the following property and equipment balances as of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, dollars in thousands:

Depreciation and amortization expense for the three ~~and~~ ~~six~~months ended ~~March~~December 31, 2021 and 2020 is summarized as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,				Three months ended December 31,
	2021		2020		2021		2020		2021		2020
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	213		194		428		383	$	239		215
Depreciation and amortization expense included in store expenses		6,913		7,393		14,041		14,633		6,527		7,128
Depreciation and amortization expense included in administrative expenses		294		301		588		579		347		294
Total depreciation and amortization expense	$	7,420		7,888		15,057		15,595	$	7,113		7,637

The Company had the following goodwill and other intangible asset balances as of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, dollars in thousands:

The composition of accrued expenses as of ~~March~~December 31, 2021 and September 30, ~~2020~~2021 is summarized as follows, dollars in thousands:

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

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

Chalet Properties, LLC: The Company has four operating leases and one finance lease with ~~Chalet.~~Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was ~~approximately~~ $0.2 million for each of the three months ended ~~March 31, 2021~~ ~~and~~ ~~2020.~~ ~~Rent paid to Chalet was approximately $0.5 million for each of the~~ ~~six~~ ~~months ended~~ ~~March~~December 31, 2021 and 2020.

Isely Family Land Trust LLC: The Company has one operating lease with the ~~the~~Isely Family Land ~~Trust.~~Trust LLC (the Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was ~~approximately~~ $0.1 million for each of the three months ended ~~March 31, 2021~~ ~~and~~ ~~2020.~~ ~~Rent paid to the Land Trust was approximately $0.2 million for each of the~~ ~~six~~ ~~months ended~~ ~~March~~December 31, 2021 and 2020.

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended ~~March~~December 31, 2021 and 2020. ~~Rent paid to FTVC was less than $0.1 million for each of the~~ ~~six~~ ~~months ended~~ ~~March 31, 2021~~ ~~and~~ ~~2020.~~

In January 2020, a former assistant store manager filed a purported class action lawsuit in the United States District Court for the District of Colorado on behalf of current and former assistant store managers alleging that the Company violated the Fair Labor Standards Act (“FLSA”) and Colorado labor laws by misclassifying the assistant store managers as exempt. The alleged violations relate to failure to pay for overtime work. In November 2020, the court granted plaintiffs’ motion for conditional certification with regard to the FLSA claim. In September 2021, the court ordered 56 opt-in plaintiffs to individual arbitration, leaving 101 FLSA plaintiffs in the FLSA collective action. The litigation is currently in the discovery stage. The plaintiffs did not quantify any alleged damages in its complaint. The Company believes these claims are without merit and intends to defend the matter vigorously. Given the preliminary stage of the case and the legal standards that must be met for, among other things, class certification, the Company is unable to reasonably estimate at this time the possible range of loss, if any, that may result from this action.

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

On ~~May 5, 2021,~~February 2, 2022, the Board approved the payment of a quarterly cash dividend of ~~$0.07~~$0.10 per share of common stock to be paid on ~~June~~March 16, ~~2021~~2022 to stockholders of record as of the close of business on ~~June 1, 2021~~February 28, 2022.

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

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

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of ~~March~~December 31, 2021, we operated ~~161~~162 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

~~We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines.~~ Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, ~~2020,~~2021, we increased our store count at a compound annual growth rate of ~~9.1%~~5.2%. In fiscal year ~~2020,~~2021, we opened ~~six~~three new stores and relocated/remodeled five existing stores. We plan to open four to six new stores and relocate/remodel three to four ~~new~~ stores in fiscal year ~~2021, two of which opened during the six months ended March 31, 2021.~~2022. As of the date of this report, we have signed leases or acquired property for an additional ~~five~~six new stores that we plan to open in fiscal years ~~2021~~2022 and beyond. ~~We plan to relocate/remodel four to five stores in fiscal year 2021, one of which opened in~~During the ~~six~~three months ended ~~March~~December 31, ~~2021.~~2021, we did not open any new stores and we relocated/remodeled one store. Between ~~April~~January 1, ~~2021~~2022 and the date of this Form 10-Q, we did not open any new stores ~~and we relocated one store.~~or relocate/remodel any stores.

Key highlights of our performance for the three ~~and six~~ months ended ~~March~~December 31, 2021 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics including, but not limited to, daily average comparable store sales, are defined ~~under~~in the ~~caption~~section “Key Financial Metrics in Our Business,” presented later in this MD&A.

We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:

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

We expect the rate of new store unit growth in the foreseeable future to be ~~comparable to recent years, depending on~~dependent upon economic and business conditions and other factors, including the impact of the COVID-19 pandemic and ~~related government mandates.~~the availability of construction materials and equipment. Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. In the future, we believe there are opportunities for increased leverage of costs and increased ~~economics~~economies of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our ability to leverage costs may be limited.

Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form ~~10-K.~~10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.

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

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

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and ~~increase sales.~~sales increase. Rent payments for leases classified as finance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.

Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and ~~computer hardware and software.~~technology. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, ~~generally~~primarily related to store relocations, as well as store closure and lease termination costs. Store expenses also include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.

Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.

Pre-opening expenses for new stores and ~~relocation expenses~~relocations/remodels may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening interest expense. Other pre-opening ~~and relocation~~ expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening ~~and relocation~~ costs are expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.

Interest expense consists of the interest associated with finance lease obligations net of capitalized interest, and our Credit Facility.

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

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

	Three months ended March 31,						Six months ended March 31,						Three months ended December 31,
	2021			2020			2021			2020			2021			2020
Statements of Income Data:*
Net sales		100.0	%		100.0			100.0			100.0			100.0	%		100.0
Cost of goods sold and occupancy costs		72.3			72.0			72.4			72.7			71.6			72.4
Gross profit		27.7			28.0			27.6			27.3			28.4			27.6
Store expenses		22.5			20.5			22.7			21.3			21.4			22.8
Administrative expenses		2.5			2.5			2.6			2.5			2.6			2.8
Pre-opening and relocation expenses		0.1			0.2			0.1			0.2
Pre-opening expenses														0.0			0.1
Operating income		2.6			4.8			2.3			3.2			4.3			2.0
Interest expense, net		(0.2	)		(0.2	)		(0.2	)		(0.2	)		(0.2	)		(0.2	)
Income before income taxes		2.4			4.6			2.1			3.0			4.1			1.8
Provision for income taxes		(0.5	)		(1.1	)		(0.5	)		(0.7	)		(0.9	)		(0.4	)
Net income		1.8	%		3.5			1.6			2.3			3.2	%		1.4
__________________________
*Figures may not sum due to rounding.

Number of stores at end of period		161			157			161			157			162			160
Number of new stores opened during the period		1			2			2			4			0			1

Number of stores relocated/remodeled during the period		1			0			1			0
Number of stores relocated or remodeled during the period														1			0
Number of stores closed during the period		0			0			0			0			0			0
Twelve-month store unit growth rate		2.5	%		3.3			2.5			3.3			1.3	%		3.2
Change in daily average comparable store sales		(7.0	) %		17.0			2.0			9.7			3.8	%		12.7

Three months ended ~~March~~December 31, 2021 compared to the three months ended ~~March~~December 31, 2020

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

Net sales decreased $18.3 million, or 6.6%, to $259.2 million for the three months ended March 31, 2021 compared to $277.5 million for the three months ended March 31, 2020, primarily due to a $22.1 million decrease in comparable store sales and a $3.8 million increase in new store sales. Daily average comparable store sales decreased 7.0% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The daily average comparable store sales decrease resulted from an 8.0% increase in daily average transaction size, offset by a 13.9% decrease in daily average transaction count. In the three months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $44.81 for the three months ended March 31, 2021. The decrease in net sales during the three months ended March 31, 2021 was primarily driven by the unprecedented level of net sales we experienced during the three months ended March 31, 2020, as our customers stockpiled groceries during the initial phase of the COVID-19 pandemic. While our net sales during the three months ended March 31, 2021 benefited from customers’ response to the COVID-19 pandemic and related government mandates, this trend moderated from the unprecedented levels experienced during the prior year period. Also contributing to the decrease in net sales during the three months ended March 31, 2021 was the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states.

Gross profit decreased $6.0 million, or 7.7%, to $71.8 million for the three months ended March 31, 2021 compared to $77.8 million for the three months ended March 31, 2020, primarily driven by the decreased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin decreased to 27.7% for the three months ended March 31, 2021 compared to 28.0% for the three months ended March 31, 2020. The decrease in gross margin during the three months ended March 31, 2021 was primarily driven by an increase in store occupancy expenses, as a percentage of net sales, partially offset by a modest improvement in product margin.

Store expenses increased $1.5 million, or 2.7%, to $58.4 million for the three months ended March 31, 2021 compared to $56.9 million for the three months ended March 31, 2020. Store expenses as a percentage of net sales were 22.5% and 20.5% for the three months ended March 31, 2021 and 2020, respectively. The increase in store expenses as a percentage of net sales is attributed to the deleverage associated with the decrease in sales volume and increased labor related expenses.

Administrative expenses decreased $0.7 million, or 9.7%, to $6.4 million for the three months ended March 31, 2021 compared to $7.0 million for the three months ended March 31, 2020. Administrative expenses as a percentage of net sales were 2.5% for each of the three months ended March 31, 2021 and 2020.

Pre-opening and relocation expenses decreased $0.3 million, or 47.5%, to $0.3 million for the three months ended March 31, 2021 compared to $0.7 million for the three months ended March 31, 2020, due to the impact of the number and timing of new store openings and relocations. We opened one new store during the three months ended March 31, 2021 compared to opening two new stores during the three months ended March 31, 2020. We did not relocate any stores during each of the three months ended March 31, 2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for the three months ended March 31, 2021 and 2020, respectively.

~~Interest expense, net of capitalized interest, was $0.6 million in the three months ended March 31, 2021 compared to $0.5 million in the three months ended March 31, 2020.~~

Income tax expense decreased $1.6 million for the three months ended March 31, 2021 to $1.4 million compared to $3.0 million for the three months ended March 31, 2020. The Company’s effective income tax rate was approximately 22.9% and 23.7% for the three months ended March 31, 2021 and 2020, respectively.

Net income was $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021 compared to $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 primarily driven by the decrease in sales volumes and increase in store expenses.

~~Six months ended March 31, 2021 compared to the six months ended March 31, 2020~~

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

	Six months ended March 31,						Change In						Three months ended December 31,						Change In
	2021			2020			Dollars			Percent			2021			2020			Dollars			Percent
Statements of Income Data:
Net sales	$	524,243			507,554			16,689			3.3	%	$	277,288			265,045			12,243			4.6	%
Cost of goods sold and occupancy costs		379,391			369,207			10,184			2.8			198,551			192,020			6,531			3.4
Gross profit		144,852			138,347			6,505			4.7			78,737			73,025			5,712			7.8
Store expenses		118,752			108,305			10,447			9.6			59,336			60,330			(994	)		(1.6	)
Administrative expenses		13,662			12,857			805			6.3			7,293			7,304			(11	)		(0.2	)
Pre-opening and relocation expenses		530			1,080			(550	)		(50.9	)
Pre-opening expenses														84			189			(105	)		(55.6	)
Operating income		11,908			16,105			(4,197	)		(26.1	)		12,024			5,202			6,822			131.1
Interest expense, net		(1,113	)		(1,052	)		(61	)		5.8			(544	)		(510	)		(34	)		6.7
Income before income taxes		10,795			15,053			(4,258	)		(28.3	)		11,480			4,692			6,788			144.7
Provision for income taxes		(2,459	)		(3,467	)		1,008			(29.1	)		(2,565	)		(1,060	)		(1,505	)		142.0
Net income	$	8,336			11,586			(3,250	)		(28.1	)	$	8,915			3,632			5,283			145.5

Net sales increased ~~$16.7~~$12.2 million, or ~~3.3%~~4.6%, to ~~$524.2~~$277.3 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$507.6~~$265.0 million for the ~~six~~three months ended ~~March~~December 31, 2020, ~~primarily~~ due to a ~~$7.1~~$10.1 million increase in comparable store sales and a ~~$9.6~~$2.1 million increase in new store sales. Daily average comparable store sales increased ~~2.0%~~3.8% for the ~~six~~three months ended ~~March~~December 31, 2021 compared to the ~~six~~three months ended ~~March~~December 31, 2020. The daily average comparable store sales increase resulted from a ~~14.1%~~3.0% increase in daily average transaction ~~size, partially offset by~~count and a ~~10.6% decrease~~0.8% increase in daily average transaction count. In the six months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip.size. Comparable store average transaction size was ~~$44.98~~$45.34 for the ~~six~~three months ended ~~March~~December 31, 2021. The increase in net sales during the ~~six~~three months ended ~~March~~December 31, 2021 was primarily driven by our customers’ response to recent trends associated with the COVID-19 pandemic, and related government mandates, partially offset by the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states. Also contributing to the increase in net sales during the six months ended March 31, 2021 were marketing initiatives, promotional campaigns and increased ~~membership~~engagement in ~~and usage of the~~our {N}power customer loyalty program.

Gross profit increased ~~$6.5~~$5.7 million, or ~~4.7%~~7.8%, to ~~$144.9~~$78.7 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$138.3~~$73.0 million for the ~~six~~three months ended ~~March~~December 31, 2020, primarily driven by the increased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to ~~27.6%~~28.4% for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~27.3%~~27.6% for the ~~six~~three months ended ~~March~~December 31, 2020. The increase in gross margin during the ~~six~~three months ended ~~March~~December 31, 2021 was primarily driven by an improved product margin and ~~a decrease in~~ store occupancy ~~and shrink expenses, as a percentage of net sales.~~leverage.

Store expenses ~~increased $10.4~~decreased $1.0 million, or ~~9.6%~~1.6%, to ~~$118.8~~$59.3 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$108.3~~$60.3 million for the ~~six~~three months ended ~~March~~December 31, 2020. In the ~~six~~three months ended ~~March~~December 31, 2021, we recorded $0.1 million in operating lease asset impairment charges as a result of an early store relocation. In the three months ended December 31, 2020, we recorded $0.4 million in lease exit costs, primarily related to a lease termination fee, associated with one store that closed in the first quarter of fiscal year 2019. Store expenses as a percentage of net sales were ~~22.7%~~21.4% and ~~21.3%~~22.8% for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020, respectively. The ~~increase~~reduction in store expenses as a percentage of net sales ~~is primarily attributed~~reflects leverage created by higher sales and a more normalized operating environment compared to ~~increased labor related expenses.~~the prior year period.

Administrative expenses ~~increased $0.8 million, or 6.3%, to $13.7~~remained flat at $7.3 million for each of the ~~six~~three months ended ~~March~~December 31, 2021 ~~compared to $12.9 million for the six months ended March~~and December 31, 2020. Administrative expenses as a percentage of net sales were 2.6% and ~~2.5%~~2.8% for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020, respectively.

Pre-opening ~~and relocation~~ expenses decreased ~~$0.6~~$0.1 million, or ~~50.9%~~55.6%, to ~~$0.5~~$0.1 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$1.1~~$0.2 million for the ~~six~~three months ended ~~March~~December 31, 2020, due to the impact of the number and timing of new store openings and ~~relocations.~~relocations/remodels. We opened ~~two~~no new stores during the ~~six~~three months ended ~~March~~December 31, 2021 compared to opening ~~four~~one new store during the three months ended December 31, 2020. We relocated/remodeled one store during the three months ended December 31, 2021 and we did not relocate/remodel any stores during the ~~six~~three months ended ~~March~~December 31, 2020. We did not relocate any stores during each of the six months ended March 31, 2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for the six months ended March 31, 2021 and 2020, respectively.

Interest expense, net of capitalized interest, remained flat at ~~$1.1~~$0.5 million for each of the ~~six~~three months ended ~~March~~December 31, 2021 and ~~March~~December 31, 2020.

Income tax expense ~~decreased $1.0~~increased $1.5 million for the ~~six~~three months ended ~~March~~December 31, 2021 to ~~$2.5~~$2.6 million compared to ~~$3.5~~$1.1 million for the ~~six~~three months ended ~~March~~December 31, 2020. The Company’s effective income tax rate was approximately ~~22.8%~~22.3% and ~~23.0%~~22.6% for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020, respectively.

Net income was ~~$8.3~~$8.9 million, or ~~$0.37~~$0.39 diluted earnings per share, for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$11.6~~$3.6 million, or ~~$0.51~~$0.16 diluted earnings per share, for the ~~six~~three months ended ~~March~~December 31, 2020.

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing ~~and~~costs, lease exit costs and share-based compensation expense and non-recurring items. The ~~adjustment~~adjustments to EBITDA for the ~~six~~three months ended ~~March~~December 31, 2021 ~~related~~included $0.1 million in operating lease asset impairment charges as a result of an early store relocation. The adjustments to EBITDA for the three months ended December 31, 2020 included $0.4 million in lease exit costs associated with one store that closed in the first quarter of fiscal year 2019.

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

	Three months ended March 31,				Six months ended March 31,				Three months ended December 31,
	2021		2020		2021		2020		2021		2020
Net income	$	4,704		9,718		8,336		11,586	$	8,915		3,632
Interest expense, net		603		516		1,113		1,052		544		510
Provision for income taxes		1,399		3,023		2,459		3,467		2,565		1,060
Depreciation and amortization		7,420		7,888		15,057		15,595		7,113		7,637
EBITDA		14,126		21,145		26,965		31,700		19,137		12,839
Lease exit costs		—		—		405		—
Adjusted EBITDA	$	14,126		21,145		27,370		31,700
Impairment of long-lived assets and store closing costs										95		405
Share-based compensation										294		248
Adjusted EBITDA⁽¹⁾									$	19,526		13,492

⁽¹⁾ Adjusted EBITDA ~~decreased 33.2% to $14.1 million in~~for the three months ended ~~March~~December 31, ~~2021 compared~~2020, as presented, has been recast to ~~$21.1~~exclude share-based compensation expense to enhance the comparability of this measure between fiscal periods.

EBITDA increased 49.1% to $19.1 million for the three months ended ~~March 31, 2020. EBITDA decreased 14.9% to $27.0 million in the six months ended March~~December 31, 2021 compared to ~~$31.7~~$12.8 million for the ~~six~~three months ended ~~March~~December 31, 2020. EBITDA as a percentage of net sales was ~~5.4%~~6.9% and ~~7.6% in~~4.8% for the three months ended ~~March 31, 2021 and 2020, respectively. EBITDA as a percentage of net sales was 5.1% and 6.2% in the six months ended March~~December 31, 2021 and 2020, respectively.

Adjusted EBITDA ~~decreased 33.2%~~increased 44.7% to ~~$14.1 million in the three months ended March 31, 2021 compared to $21.1~~$19.5 million for the three months ended ~~March 31, 2020. Adjusted EBITDA decreased 13.7% to $27.4 million in the six months ended March~~December 31, 2021 compared to ~~$31.7~~$13.5 million for the ~~six~~three months ended ~~March~~December 31, 2020. Adjusted EBITDA as a percentage of net sales was ~~5.4%~~7.0% and ~~7.6% in~~5.1% for the three months ended ~~March 31, 2021 and 2020, respectively. Adjusted EBITDA as a percentage of net sales was 5.2% and 6.2% in the six months ended March~~December 31, 2021 and 2020, respectively.

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

Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing ~~analysts’ and~~ investors’ understanding of our business and our results of operations, as well as assisting ~~analysts and~~ investors in evaluating how well we are executing our strategic initiatives. Commencing with its financial reporting for fiscal year 2021, the Company revised its definition of Adjusted EBITDA to exclude share-based compensation expense. The Company’s historical presentation of Adjusted EBITDA, including for the three months ended December 31, 2020, did not exclude share-based compensation expense. However, Adjusted EBITDA for the three months ended December 31, 2020, as presented in this report, has been recast to exclude share-based compensation expense to enhance the comparability of this measure between fiscal periods. Management believes that excluding share-based compensation expense from Adjusted EBITDA will enhance investors’ ability to assess period-to-period comparisons of the Company’s operating performance and make more meaningful comparisons between our operating performance and the operating performance of our competitors.

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

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

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under ~~the Credit~~our Revolving Facility. Our Credit Facility consists of the $50.0 million Revolving Facility and the fully drawn $35.0 million Term Loan Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service, cash dividends, and corporate ~~taxes and cash dividends.~~taxes. As of ~~March~~December 31, 2021, we had ~~$21.0~~$25.3 million in cash and cash equivalents ~~as well as $48.7~~and $49.0 million available for borrowing under our Revolving Facility. On November 18, 2020, we entered into the $35.0 million Term Loan Facility maturing November 13, 2024.

In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. Our Board subsequently extended the share repurchase program, which will terminate on May 31, 2022. We did not repurchase any shares during the ~~six~~three months ended ~~March~~December 31, 2021. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash balances or borrowings under our Revolving Facility. The timing and the number of shares repurchased, if any, will be dictated by our capital needs and stock market conditions.

~~We paid a special cash dividend of $2.00 per share and~~ a quarterly cash dividend of ~~$0.07~~$0.10 per share of common stock to be paid on March 16, 2022 to stockholders of record as of the close of business on February 28, 2022. We paid a a quarterly cash dividend of $0.10 per share of common stock in the three months ended December 31, 2020. We paid a quarterly cash dividend of $0.07 per share of common stock in the three months ended March 31, 2021. On May 5, 2021, our Board approved the payment of a quarterly cash dividend of $0.07 per share of common stock to be paid on June 16, 2021 to stockholders of record as of the close of business on June 1, 2021.

We plan to continue to open new stores in the future, which may require us to borrow additional amounts under ~~the~~our Revolving ~~Facility.~~Facility from time to time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Revolving Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for ~~at least~~ the next ~~twelve months.~~12 months and the foreseeable future. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

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

	Six months ended March 31,						Three months ended December 31,
	2021			2020			2021			2020
Net cash provided by operating activities	$	17,305			53,360		$	12,059			12,343
Net cash used in investing activities		(9,541	)		(20,131	)		(5,316	)		(3,700	)
Net cash used in financing activities		(15,321	)		(10,069	)		(5,125	)		(12,516	)
Net (decrease) increase in cash and cash equivalents		(7,557	)		23,160
Net increase (decrease) in cash and cash equivalents								1,618			(3,873	)
Cash and cash equivalents, beginning of period		28,534			6,214			23,678			28,534
Cash and cash equivalents, end of period	$	20,977			29,374		$	25,296			24,661

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities decreased ~~$36.1~~$0.3 million, or ~~67.6%~~2.3%, to ~~$17.3~~$12.1 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$53.4~~$12.3 million for the ~~six~~three months ended ~~March~~December 31, 2020. The decrease in cash provided by operating activities was primarily due to ~~a decrease~~an increase in cash used for working capital requirements, partially offset by an increase in net income adjusted for non-cash ~~items as well as cash used for working capital requirements, as compared to cash provided from working capital in the prior year.~~items.

Net cash used in investing activities ~~decreased $10.6~~increased $1.6 million, or ~~52.6%~~43.7%, to ~~$9.5~~$5.3 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$20.1~~$3.7 million for the ~~six~~three months ended ~~March~~December 31, 2020. This ~~decrease~~increase was primarily due to a ~~$10.0~~$1.4 million ~~decrease~~increase in property and equipment acquisitions during the ~~six~~three months ended ~~March~~December 31, 2021 compared to the ~~six~~three months ended ~~March~~December 31, 2020 due to the impact of the number and timing of new store openings and relocations/remodels.

We plan to spend approximately $22.7 million to $29.7 million on capital expenditures during the remainder of fiscal year 2022 in connection with four to six new store openings and three to four store relocations/remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store.

Acquisition of property and equipment not yet paid decreased $1.3 million to $1.5 million in fiscal year 2022 compared to $2.8 million in fiscal year 2021 due to the timing of payments related to new store openings and relocations/remodels.

Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and dividends paid to stockholders. Cash used in financing activities was ~~$15.3~~$5.1 million for the ~~six~~three months ended ~~March~~December 31, 2021 compared to ~~$10.1~~$12.5 million for the ~~six~~three months ended ~~March~~December 31, 2020. ~~During the six months ended March 31, 2021, the Company borrowed $35.0 million under the Term Loan Facility which was used to partially fund the $48.3 million of dividends paid to stockholders.~~

The ~~financing~~revolving commitment amount under the Revolving Facility is $50.0 million, including a $5.0 million sub-limit for standby letters of credit. We borrowed $35.0 million under the Term Loan Facility in December ~~2020 to partially fund the previously announced special cash dividend of $2.00 per common share.~~2020. The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and Vitamin Cottage Two Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity ~~date. On November 13, 2019, the Company amended the Credit Facility to extend the maturity~~ date to November 13, 2024 and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.without premium or penalty. On November 18, 2020, we entered into the ~~Company amended the Credit Facility~~Fourth Amendment to provide for the Term Loan Facility and permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.

Base rate borrowings under the Credit Facility bear interest at a fluctuating base rate as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor rate (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio. The Company ~~will~~is required to repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million commencing on the last day of each fiscal quarter ~~beginning~~commencing on March 31, 2021 and ending on September 30, ~~2024, with the remaining principal amount payable on the maturity date.~~2024. Amounts repaid on the Term Loan Facility may not be reborrowed.

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

We had no amounts outstanding under the Revolving Facility as of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, respectively. As of ~~March~~each of December 31, 2021 and September 30, ~~2020,~~2021, we had undrawn, issued and outstanding letters of credit of ~~$1.3~~$1.0 million, which were reserved against the amount available for borrowing under the Revolving Facility. We had ~~$48.7~~$49.0 million available for borrowing under the Revolving Facility as of ~~March~~each of December 31, 2021 and September 30, ~~2020.~~2021. We had ~~$34.6~~$21.7 million of outstanding borrowings under the fully drawn Term Loan Facility as of ~~March~~December 31, 2021.

As of each of ~~March~~December 31, 2021 and September 30, ~~2020,~~2021, the Company was in compliance with the financial covenants under the Credit Facility.

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

As of March 31, 2021, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Revolving Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of March 31, 2021, the Company had signed seven leases whose terms have not yet commenced; such leases are for five new stores, one store relocation and one store remodel in fiscal year 2021 and beyond. The contractual obligation related to these leases is $30.8 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

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

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

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

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

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of ~~March~~December 31, 2021.

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

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

There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Form 10-K.

# Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. This exhibit was subject to a confidential treatment request previously granted by the Securities and Exchange Commission (SEC), which is effective through May 31, 2021. The Company is filing this exhibit to transition to the new confidential treatment rules promulgated by the SEC in Item 601(b) of Regulation S-K.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on ~~May 6, 2021.~~

		Page Number

	PART I. Financial Information

Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of ~~March~~December 31, 2021 and September 30, ~~2020~~2021 (unaudited)	4
	Consolidated Statements of Income for the three ~~and six~~ months ended ~~March~~December 31, 2021 and 2020 (unaudited)	5
	Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020 (unaudited)	6
	Consolidated Statements of Changes in Stockholders’ Equity for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020 (unaudited)	7
	Notes to Unaudited Interim Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1716
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2926
Item 4.	Controls and Procedures	2926

	PART II. Other Information
Item 1.	Legal Proceedings	3027
Item 1A.	Risk Factors	3027
Item 6.	Exhibits	3128

SIGNATURES		3229

				As of
	Useful lives (in years)			December 31, 2021			September 30, 2021
Construction in process		n/a		$	2,888			2,268
Land		n/a			6,272			6,062
Buildings	16	–	40		34,482			34,531
Land improvements	1	–	24		1,782			1,782
Leasehold and building improvements	1	–	25		160,811			159,800
Fixtures and equipment	5	–	7		147,308			145,754
Computer hardware and software	3	–	5		25,172			25,068
					378,715			375,265
Less accumulated depreciation and amortization					(229,358	)		(223,866	)
Property and equipment, net				$	149,357			151,399

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Construction in process		n/a		$	3,942			6,717
Land		n/a			2,445			1,390
Buildings	16	-	40		31,433			26,732
Land improvements	1	–	24		1,738			1,575
Leasehold and building improvements	1	–	25		156,269			153,438
Fixtures and equipment	5	–	7		142,897			139,965
Computer hardware and software	3	–	5		24,196			23,628
					362,920			353,445
Less accumulated depreciation and amortization					(216,556	)		(205,516	)
Property and equipment, net				$	146,364			147,929

				As of
	Useful lives (in years)			March 31, 2021			September 30, 2020
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,693			3,634
Less accumulated amortization					(2,764	)		(2,378	)
Amortizable intangible assets, net					929			1,256
Other intangibles in process					4,472			3,625
Trademark	Indefinite				389			389
Total other intangibles, net					5,790			5,270
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	10,988			10,468

				As of
	Useful Lives (in years)			December 31, 2021			September 30, 2021
Amortizable intangible assets:
Other intangibles	0.5	-	3	$	3,945			3,754
Less accumulated amortization					(3,287	)		(3,139	)
Amortizable intangible assets, net					658			615
Other intangibles in process					6,022			5,507
Trademark	Indefinite				389			389
Deferred financing costs, net					53			59
Total other intangibles, net					7,122			6,570
Goodwill	Indefinite				5,198			5,198
Total goodwill and other intangibles, net				$	12,320			11,768

	March 31, 2021			March 31, 2020
Weighted-average remaining lease term (in years):
Operating leases		11.4			12.0
Finance leases		12.0			12.0
Weighted-average discount rate:
Operating leases		3.6	%		3.6
Finance leases		5.1	%		4.9

	As of
	March 31,		September 30,
	2021		2020
Payroll and employee-related expenses	$	10,736		13,569
Accrued property, sales and use tax payable		6,793		7,912
Accrued marketing expenses		608		407
Deferred revenue related to gift card sales		2,012		1,819
Income tax payable (1)		17		210
Other (1)		1,326		1,078
Total accrued expenses	$	21,492		24,995

	As of
	December 31,		September 30,
	2021		2021
Payroll and employee-related expenses	$	10,222		13,243
Accrued property, sales and use tax payable		8,201		8,322
Accrued marketing expenses		759		713
Deferred revenue related to gift card sales		2,197		2,157
Other		4,418		2,154
Total accrued expenses	$	25,797		26,589

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
3.2		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
~~10.1#~~		~~Customer Distribution Agreement by and among United Natural Foods, Inc., Tony’s Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food Markets, Inc. dated as of June 21, 2016~~
31.1		Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3		Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†		Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~March~~December 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~March~~December 31, 2021 (unaudited) and September 30, ~~2020 (unaudited),~~2021, (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~March~~December 31, 2021 and 2020 (unaudited), (iii) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the ~~six~~three months ended ~~March~~December 31, 2021 and 2020 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

	Natural Grocers by Vitamin Cottage, Inc.


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


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