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 31, ~~2022~~2023

☐	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 ~~2, 2022~~1, 2023 was ~~22,676,827.~~22,734,497.

Table of Contents

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, ~~2022~~2023

Table of Contents

		Page Number

	PART I. Financial Information

Item 1.	Financial Statements	4
	Consolidated Balance Sheets as of March 31, ~~2022~~2023 and September 30, ~~2021~~2022 (unaudited)	4
	Consolidated Statements of Income for the three and six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited)	5
	Consolidated Statements of Cash Flows for the six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited)	6
	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited)	7
	Notes to Unaudited Interim Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2928
Item 4.	Controls and Procedures	2928

	PART II. Other Information

Item 1.	Legal Proceedings	3029
Item 1A.	Risk Factors	3029
Item 5.5	Other Information	3029
Item 6.	Exhibits	3130

SIGNATURES		3231

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Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, “fiscal year ~~2022~~2023” refers to the year from October 1, ~~2021~~2022 to September 30, ~~2022)~~2023).

Forward-Looking Statements

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

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political, economic, inflationary, deflationary, recessionary, business, interest rates, labor market, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that 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, ~~2021~~2022 (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; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; 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 adverse economic conditions resulting, directly or indirectly, from the COVID-19 pandemic and government mandates, including levels of consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; 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.

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PART I. Financial Information

Item 1. Financial Statements

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	March 31, 2022		September 30, 2021		March 31, 2023		September 30, 2022
Assets
Current assets:
Cash and cash equivalents	$	28,889		23,678	$	18,965		12,039
Accounts receivable, net		6,207		8,489		6,923		10,496
Merchandise inventory		106,650		100,546		116,053		113,756
Prepaid expenses and other current assets		3,462		2,914		3,837		4,369
Total current assets		145,208		135,627		145,778		140,660
Property and equipment, net		147,786		151,399		157,707		157,179
Other assets:
Operating lease assets, net		307,078		316,388		290,611		307,132
Finance lease assets, net		41,508		39,367		43,191		43,554
Deposits and other assets		475		530		422		452
Goodwill and other intangible assets, net		13,045		11,768		14,337		14,131
Total other assets		362,106		368,053		348,561		365,269
Total assets	$	655,100		655,079	$	652,046		663,108

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	68,028		68,949	$	75,714		71,283
Accrued expenses		24,903		26,589		25,006		26,737
Term loan facility, current portion		1,750		1,750		1,750		1,750
Operating lease obligations, current portion		33,836		33,308		34,917		34,735
Finance lease obligations, current portion		3,313		3,176		3,365		3,223
Total current liabilities		131,830		133,772		140,752		137,728
Long-term liabilities:
Term loan facility, net of current portion		17,938		21,938		9,938		13,938
Operating lease obligations, net of current portion		294,146		301,895		278,482		295,064
Finance lease obligations, net of current portion		41,940		39,450		44,816		44,664
Deferred income tax liabilities, net		15,401		15,293		16,051		15,902
Total long-term liabilities		369,425		378,576		349,287		369,568
Total liabilities		501,255		512,348		490,039		507,296
Commitments (Note 13)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,669,038 and 22,620,417 shares issued and outstanding at March 31, 2022 and September 30, 2021, respectively		23		23
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,726,979 and 22,690,188 shares issued and outstanding at March 31, 2023 and September 30, 2022, respectively						23		23
Additional paid-in capital		57,661		57,289		58,519		58,072
Retained earnings		96,161		85,419		103,465		97,717
Total stockholders’ equity		153,845		142,731		162,007		155,812
Total liabilities and stockholders’ equity	$	655,100		655,079	$	652,046		663,108

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three months ended March 31,						Six months ended March 31,						Three months ended March 31,						Six months ended March 31,
	2022			2021			2022			2021			2023			2022			2023			2022
Net sales	$	271,822			259,198			549,110			524,243		$	283,245			271,822			563,702			549,110
Cost of goods sold and occupancy costs		195,040			187,371			393,591			379,391			200,768			195,040			402,506			393,591
Gross profit		76,782			71,827			155,519			144,852			82,477			76,782			161,196			155,519
Store expenses		59,605			58,422			118,941			118,752			65,192			59,605			128,788			118,941
Administrative expenses		8,172			6,358			15,465			13,662			8,605			8,172			16,858			15,465
Pre-opening expenses		141			341			225			530			249			141			702			225
Operating income		8,864			6,706			20,888			11,908			8,431			8,864			14,848			20,888
Interest expense, net		(545	)		(603	)		(1,089	)		(1,113	)		(834	)		(545	)		(1,630	)		(1,089	)
Income before income taxes		8,319			6,103			19,799			10,795			7,597			8,319			13,218			19,799
Provision for income taxes		(1,962	)		(1,399	)		(4,527	)		(2,459	)		(1,713	)		(1,962	)		(2,927	)		(4,527	)
Net income	$	6,357			4,704			15,272			8,336		$	5,884			6,357			10,291			15,272

Net income per share of common stock:
Basic	$	0.28			0.21			0.67			0.37		$	0.26			0.28			0.45			0.67
Diluted	$	0.28			0.21			0.67			0.37		$	0.26			0.28			0.45			0.67
Weighted average number of shares of common stock outstanding:
Basic		22,660,477			22,581,916			22,650,123			22,570,305			22,725,462			22,660,477			22,716,880			22,650,123
Diluted		22,819,526			22,737,646			22,790,114			22,715,098			22,824,673			22,819,526			22,809,189			22,790,114

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six months ended March 31,						Six months ended March 31,
	2022			2021			2023			2022
Operating activities:
Net income	$	15,272			8,336		$	10,291			15,272
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,020			15,057			14,216			14,020
Impairment of long-lived assets and store closing costs		95			105
Impairment of long-lived assets								871			95
Loss on disposal of property and equipment		85			0			3			85
Share-based compensation		590			487			713			590
Deferred income tax expense		107			1,089			149			107
Non-cash interest expense		12			11			9			12
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable, net		1,062			(477	)		3,358			1,062
Merchandise inventory		(6,104	)		1,719			(2,297	)		(6,104	)
Prepaid expenses and other assets		(623	)		(922	)		373			(623	)
Income tax receivable		0			3,004			166			—
Operating lease assets		15,787			15,402			16,406			15,787
(Decrease) increase in:
Operating lease liabilities		(12,748	)		(15,861	)		(16,940	)		(12,748	)
Accounts payable		1,712			(7,142	)		9,270			1,712
Accrued expenses		(1,686	)		(3,503	)		(1,731	)		(1,686	)
Net cash provided by operating activities		27,581			17,305			34,857			27,581
Investing activities:
Acquisition of property and equipment		(10,855	)		(8,673	)		(16,978	)		(10,855	)
Acquisition of other intangibles		(1,586	)		(926	)		(859	)		(1,586	)
Proceeds from sale of property and equipment		16			0			72			16
Proceeds from property insurance settlements		130			58			—			130
Net cash used in investing activities		(12,295	)		(9,541	)		(17,765	)		(12,295	)
Financing activities:
Borrowings under revolving facility		4,000			0			246,500			4,000
Repayments under revolving facility		(4,000	)		0			(246,500	)		(4,000	)
Borrowings under term loan facility		0			35,000
Repayments under term loan facility		(4,000	)		(438	)		(4,000	)		(4,000	)
Finance lease obligation payments		(1,327	)		(1,369	)		(1,357	)		(1,327	)
Dividends to shareholders		(4,530	)		(48,288	)		(4,543	)		(4,530	)
Loan fees paid		0			(52	)
Repurchase of common stock								(86	)		—
Payments on withholding tax for restricted stock unit vesting		(218	)		(174	)		(180	)		(218	)
Net cash used in financing activities		(10,075	)		(15,321	)		(10,166	)		(10,075	)
Net increase (decrease) in cash and cash equivalents		5,211			(7,557	)
Net increase in cash and cash equivalents								6,926			5,211
Cash and cash equivalents, beginning of period		23,678			28,534			12,039			23,678
Cash and cash equivalents, end of period	$	28,889			20,977		$	18,965			28,889
Supplemental disclosures of cash flow information:
Cash paid for interest	$	290			165		$	639			290
Cash paid for interest on finance lease obligations, net of capitalized interest of $146 and $83, respectively		865			910
Cash paid for interest on finance lease obligations, net of capitalized interest of $122 and $146, respectively								1,005			865
Income taxes paid		3,721			4,777			2,625			3,721
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	2,103			4,435		$	2,033			2,103
Acquisition of other intangibles not yet paid		354			233			103			354
Property acquired through operating lease obligations		6,571			7,287			756			6,571
Property acquired through finance lease obligations		4,129			106			1,652			4,129

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended March 31, ~~2022~~2023 and ~~March 31, 2021~~2022

(Unaudited)

(Dollars in thousands, except per share data)

	Common stock – $0.001 par value												Common stock –
	Shares outstanding		Amount		Additional paid-in capital		Retained earnings			Total stockholders’ equity			$0.001 par value					Additional								Total
Balances September 30, 2021		22,620,417	$	23	$	57,289	$	85,419		$	142,731
													Shares outstanding			Amount		paid-in capital		Retained earnings			Treasury stock			stockholders’ equity
Balances September 30, 2022														22,690,188		$	23	$	58,072	$	97,717		$	—		$	155,812
Net income		—		0		0		8,915			8,915			—			—		—		4,407			—			4,407
Cash dividends		—		0		0		(2,263	)		(2,263	)
Share-based compensation														—			—		239		—			—			239
Issuance of common stock		23,473		0		0		0			0			22,261			—		—		—			—			—
Cash dividend														—			—		—		(2,272	)		—			(2,272	)
Balances December 31, 2022														22,712,449			23		58,311		99,852			—			158,186
Net income														—			—		—		5,884			—			5,884
Share-based compensation		0		0		171		0			171			—			—		208		—			86			294
Balances December 31, 2021		22,643,890		23		57,460		92,071			149,554
Net income		—		0		0		6,357			6,357
Cash dividends		—		0		0		(2,267	)		(2,267	)
Issuance of common stock		25,148		0		0		0			0			23,076			—		—		—			—			—
Share-based compensation		0		0		201		0			201
Balances March 31, 2022		22,669,038	$	23	$	57,661	$	96,161		$	153,845
Repurchase of common stock														(8,546	)		—		—		—			(86	)		(86	)
Cash dividend														—			—		—		(2,271	)		—			(2,271	)
Balances March 31, 2023														22,726,979		$	23	$	58,519	$	103,465		$	—		$	162,007

	Common stock – $0.001 par value												Common stock –
	Shares outstanding		Amount		Additional paid-in capital		Retained earnings			Total stockholders’ equity			$0.001 par value				Additional					Total
Balances September 30, 2020		22,546,765	$	23	$	56,752	$	116,291		$	173,066
													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		3,632			3,632			—		—		—		8,915			8,915
Cash dividends		—		0		0		(46,706	)		(46,706	)
Share-based compensation														—		—		171		—			171
Issuance of common stock		16,884		0		0		0			0			23,473		—		—		—			—
Cash dividend														—		—		—		(2,263	)		(2,263	)
Balances December 31, 2021														22,643,890		23		57,460		92,071			149,554
Net income														—		—		—		6,357			6,357
Share-based compensation		—		0		166		0			166			—		—		201		—			201
Balances December 31, 2020		22,563,649		23		56,918		73,217			130,158
Net income		—		0		0		4,704			4,704
Cash dividends		—		0		0		(1,582	)		(1,582	)
Issuance of common stock		31,818		0		0		0			0			25,148		—		—		—			—
Share-based compensation		—		0		147		0			147
Balances March 31, 2021		22,595,467	$	23	$	57,065	$	76,339		$	133,427
Cash dividend														—		—		—		(2,267	)		(2,267	)
Balances March 31, 2022														22,669,038	$	23	$	57,661	$	96,161		$	153,845

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Unaudited Interim Consolidated Financial Statements

March 31, ~~2022~~2023 and ~~2021~~2022

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, dietary supplements and body care ~~products and dietary supplements. The Company operates its retail stores under its trademark~~ ~~Natural Grocers by Vitamin Cottage~~®.products. The Company operated ~~162~~166 and 164 stores ~~in 20 states~~ as of ~~each of~~ March 31, ~~2022~~ 2023 and September 30, ~~2021.~~ 2022, respectively, in 21 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado.

2. Basis of Presentation and Summary of Significant Accounting Policies

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by Article 10 of Regulation S-X.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-Q10-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.~~10-K. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending September 30.

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

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

Use of Estimates

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

Recently Adopted Accounting Pronouncements

In December 2019, the ~~FASB~~Financial Accounting Standards Board (FASB) issued ~~ASU~~ ~~2019~~-~~12,~~Accounting Standards Update (ASU) 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes” (ASU ~~2019~~-12)2019-12). The new guidance simplified the accounting for income taxes by removing certain exceptions to the general principles and also ~~simplifies~~simplified 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 ~~2019~~-122019-12 were effective for the Company’s first quarter of the fiscal year ending September 30, 2022. 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 31, 2023 and 2022.

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~~Recent Accounting Pronouncements~~

In ~~June 2016,~~ March 2020, 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, but does~~ ~~not~~ ~~anticipate that these provisions will have material impacts on its consolidated financial statements.~~

In ~~March 2020,~~ ~~the FASB issued ASU~~ ~~2020~~-~~04,~~2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU ~~2020~~-04).2020-04), which was subsequently amended by a standard update in December 2022. 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~~the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. ~~The interest rate currently payable under~~As amended, the ~~Company’s Credit Facility is based on LIBOR; however, the terms of our Credit Facility provide for a LIBOR successor rate once LIBOR is discontinued. The~~ guidance only applies to modifications made prior to December 31, ~~2022.~~ 2024. On December 15, 2022, the Company amended the Credit Facility to, among other things, remove and replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on the Secured Overnight Financing Rate (SOFR). The Company ~~does~~ ~~not~~ ~~anticipate that~~elected to apply ASU 2020-04’s amendments for contract modifications during the first quarter of the fiscal year ending September 30, 2023. The adoption of this ASU ~~will~~did not have a material impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2023.

Recent Accounting Pronouncements

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 evaluating the impact that the adoption of these provisions will have on its consolidated financial statements, but does not anticipate that these provisions will have material impacts on its consolidated financial statements.

3. Revenue Recognition

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

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

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 million and $1.3 million as of ~~each of~~ March 31, ~~2022~~ 2023 and September 30, ~~2021.~~ 2022, respectively. Revenue for the three months ended March 31, 2023 and 2022 ~~and~~ ~~2021~~includes ~~$0.2~~$0.1 million and ~~$0.1~~$0.2 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, ~~2021~~ 2022 and ~~2020,~~2021, respectively. Revenue for the six months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 includes approximately ~~$0.7~~$0.4 million and ~~$0.4~~$0.7 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2022 and 2021, ~~and~~ ~~2020,~~respectively.

Loyalty program points are accrued as deferred revenue at the retail value per point, net of estimated breakage based on historical redemption rates experienced within the loyalty program. Loyalty points are forfeited at the end of each calendar year.

The following table disaggregates ~~our~~the Company’s revenue by product category for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021,~~2022, dollars in thousands and as a percentage of net sales:

	Three months ended March 31,							Six months ended March 31,						Three months ended March 31,							Six months ended March 31,
	2022				2021			2022			2021			2023				2022			2023			2022
Grocery	$	188,814	70	%		180,457	70		380,843	69		366,072	70	$	197,130	70	%		188,814	70		394,488	70		380,843	69
Dietary supplements		58,135	21			53,901	21		116,207	21		107,125	20		60,094	21			58,135	21		116,677	21		116,207	21
Other		24,873	9			24,840	9		52,060	10		51,046	10
Body care, pet care and other															26,021	9			24,873	9		52,537	9		52,060	10
	$	271,822	100	%		259,198	100		549,110	100		524,243	100	$	283,245	100	%		271,822	100		563,702	100		549,110	100

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4. Earnings Per Share

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

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Presented below are basic and diluted EPS for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021,~~2022, dollars in thousands, except per share data:

	Three months ended March 31,				Six months ended March 31,				Three months ended March 31,				Six months ended March 31,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	6,357		4,704		15,272		8,336	$	5,884		6,357		10,291		15,272

Weighted average number of shares of common stock outstanding		22,660,477		22,581,916		22,650,123		22,570,305		22,725,462		22,660,477		22,716,880		22,650,123
Effect of dilutive securities		159,049		155,730		139,991		144,793		99,211		159,049		92,309		139,991
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,819,526		22,737,646		22,790,114		22,715,098		22,824,673		22,819,526		22,809,189		22,790,114

Basic earnings per share	$	0.28		0.21		0.67		0.37	$	0.26		0.28		0.45		0.67
Diluted earnings per share	$	0.28		0.21		0.67		0.37	$	0.26		0.28		0.45		0.67

There were ~~11,466~~145,805 and ~~11,866~~146,005 non-vested RSUs for the three and six months ended March 31, ~~2022,~~ 2023, respectively, excluded from the calculation of diluted EPS as they were antidilutive. There were ~~4,296~~11,466 and ~~2,973~~11,866 non-vested RSUs for the three and six months ended March 31, ~~2021,~~ 2022, respectively, excluded from the calculation of diluted EPS as they were antidilutive.

5. Debt

Credit Facility

The Company is party to a 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 $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. The revolving commitment amount under the Revolving Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity 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),~~SOFR for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is based upon the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal 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 leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, 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~~$12.5 million during any fiscal year.

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On November 18, 2020, the Company ~~entered into the Fourth Amendment to~~amended the Credit Facility ~~(the Fourth Amendment)~~ to provide for the Term Loan Facility and to permit payment of a ~~one~~~~-time~~one-time dividend of up to $50.0 million no later than December 31, 2020. On December 15, 2022, the Company further amended the Credit Facility to (i) remove and replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on SOFR and (ii) increase the Company’s restricted payment capacity, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $12.5 million during any fiscal year.

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The Company had 0no amounts outstanding under the Revolving Facility as of ~~each of~~ March 31, ~~2022~~ 2023 and September 30, ~~2021.~~ 2022. The Company had undrawn, issued and outstanding letters of credit of ~~$1.0~~$1.1 million as of ~~each of~~ March 31, ~~2022~~ 2023 and September 30, ~~2021,~~ 2022, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had ~~$49.0~~$48.9 million available for borrowing under the Revolving Facility as of ~~each of~~ March 31, ~~2022~~ 2023 and September 30, ~~2021.~~ 2022. The Company had ~~$19.7~~$11.7 million outstanding under its fully drawn Term Loan Facility as of March 31, ~~2022.~~2023.

As of March 31, ~~2022~~ 2023 and September 30, ~~2021,~~ 2022, the Company was in compliance with ~~the financial~~all covenants under the Credit Facility.

Lease Obligations

As of March 31, ~~2022~~ 2023 and September 30, ~~2021,~~ 2022, the Company had 2122 and 2021 leases that were classified as finance leases, respectively. 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~~commencement of the lease.

Interest

The Company incurred gross interest expense of ~~approximately $0.6~~$0.9 million and ~~$0.7~~$0.6 million for the three months ended March 31, ~~2022~~ 2023 and ~~2021,~~2022, respectively, and ~~approximately~~$1.8 million and $1.2 million for ~~each of~~ the six months ended March 31, 2023 and 2022, ~~and~~ ~~2021.~~respectively. Interest expense for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 relates primarily to interest on finance lease obligations and the Credit Facility. The Company capitalized interest of less than $0.1 million for each of the three months ended March 31, 2023 and 2022, and ~~2021,~~ ~~and~~ ~~$0.1~~$0.1 million for each of the six months ended March 31, ~~2022~~ 2023 and ~~2021.~~2022.

6. Stockholders’ Equity

Share Repurchases

In May 2016, the Board of Directors (the Board) authorized a ~~two~~two-year~~-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 ~~including~~– most recently in May 2022 – and the program will terminate on May 31, 2024. 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~~-1810b-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~~-110b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

The following table summarizes share repurchase activity for the three and six months ended March 31, 2023 and 2022 (in thousands, except number of shares acquired and average per share cost):

	Three months ended				Six months ended
	March 31,				March 31,
	2023		2022		2023		2022
Number of common shares acquired		8,546		—		8,546		—
Average price per common share acquired (including commissions)	$	10.02		—		10.02		—
Total cost of common shares acquired	$	86		—		86		—

During the three months ended March 31, 2023, the Company ~~did~~ ~~not~~ ~~repurchase any~~reissued 8,546 treasury shares at a cost of $0.1 million to partially satisfy the issuance of common stock ~~during~~pursuant to the ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ vesting of certain restricted stock unit awards. At March 31, 2023 and September 30, 2022, the Company held no treasury shares.

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Between April 1, 2023 and ~~2021.~~May 1, 2023 (the latest practical date for making the determination), the Company has not repurchased any additional shares of the Company’s common stock. 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~~$8.2 million.

~~During the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~March 31, 2022~~ ~~and~~ ~~2021,~~ ~~the Company reissued 0 treasury shares. As of each of~~ ~~March 31, 2022~~ ~~and~~ ~~September 30, 2021,~~ ~~the Company held 0 treasury shares.~~

Dividends

The Company paid quarterly cash dividends of $0.10 ~~and $0.07~~ per share of common stock in each of the firsttwo quarters of fiscal years ~~2022~~2023 and ~~2021,~~ ~~respectively, and a special cash dividend of $2.00 per share of common stock in the~~ ~~first~~ ~~quarter of fiscal year~~ ~~2021.~~2022.

7. Lease Obligations

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

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Most leases include one or more options to renew, with renewal terms normally expressed in periods of five ~~year~~- to ten-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~~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 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 4four operating leases ~~and 1 finance lease~~ with Chalet Properties, LLC (Chalet), 1one operating lease with the Isely Family Land Trust LLC (Land Trust) and 1one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12)12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through ~~July 2040~~ May 2042 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. As of March 31, ~~2022,~~ 2023, these leases accounted for ~~$7.1~~$6.5 million of right-of-use assets and ~~$7.4~~$6.6 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, 2023 and 2022 and ~~2021~~$0.6 million and $0.7 million for ~~each of~~ the six months ended March 31, 2023 and 2022, ~~and~~ ~~2021.~~respectively.

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The components of total lease cost for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 were as follows, dollars in thousands:

																Three months ended						Six months ended
			Three months ended March 31,						Six months ended March 31,							March 31,						March 31,
Lease cost		Classification	2022			2021			2022			2021			Classification	2023			2022			2023			2022
Operating lease cost:
		Cost of goods sold and occupancy costs	$	10,720			10,603			21,450			21,239		Cost of goods sold and occupancy costs	$	10,968			10,720			21,871			21,450
		Store expenses		98			79			178			159		Store expenses		80			98			178			178
		Administrative expenses		71			76			147			152		Administrative expenses		82			71			159			147
		Pre-opening expenses		0			128			0			154		Pre-opening expenses		14			—			94			—
Finance lease cost:
Depreciation of right-of-use assets		Store expenses		973			926			1,947			1,809
Depreciation of right-of-use asset															Store expenses		945			973			1,852			1,947
		Pre-opening expenses ⁽²⁾		40			0			40			22		Pre-opening expenses		73			40			186			40
Interest on lease liabilities		Store expenses		482			506			972			993		Interest expense, net		473			482			916			972
		Pre-opening expenses ⁽²⁾		39			0			39			0		Pre-opening expenses		86			39			210			39
Short-term lease cost		Store expenses		601			621			1,210			1,158		Store expenses		770			601			1,441			1,210
Variable lease cost		Cost of goods sold and occupancy costs ⁽¹⁾		1,470			891			2,868			2,707		Cost of goods sold and occupancy costs ⁽¹⁾		1,601			1,470			3,105			2,868
Sublease income		Store expenses		(46	)		(70	)		(154	)		(163	)	Store expenses		(72	)		(46	)		(146	)		(154	)
Total lease cost	Total lease cost		$	14,448			13,760			28,697			28,230		Total lease cost	$	15,020			14,448			29,866			28,697

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

² ~~Pre-opening expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.~~

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Additional information related to the Company’s leases for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 were as follows, dollars in thousands:

									Three months ended					Six months ended
	Three months ended March 31,				Six months ended March 31,				March 31,					March 31,
	2022		2021		2022		2021		2023			2022		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	7,576		11,052		18,735		22,189	$	11,569			7,576		22,836		18,735
Operating cash flows from finance leases		521		493		1,011		993		559			521		1,127		1,011
Financing cash flows from finance leases		588		694		1,327		1,369		715			588		1,357		1,327
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases		1,519		4,518		6,571		7,287		—			1,519		756		6,571
Finance leases		4,129		0		4,129		106		(42	)		4,129		1,652		4,129

Additional information related to the Company’s leases as of March 31, ~~2022~~ 2023 and ~~2021~~2022 was as follows:

						March 31,
	March 31, 2022			March 31, 2021		2023			2022
Weighted-average remaining lease term (in years):
Operating leases		10.8			11.4		10.4			10.8
Finance leases		12.8			12.0		14.2			12.8
Weighted-average discount rate:
Operating leases		3.6	%		3.6		3.7	%		3.6
Finance leases		4.9	%		5.1		4.8	%		4.9

In the three and six months ended March 31, 2023, the Company incurred an impairment charge of $0.9 million related to an operating lease asset associated with a planned store closure in June 2023. In the six months ended March 31, 2022, the Company incurred aan impairment charge of $0.1 million related to an operating ~~right-of-use assets~~lease asset associated with an early store relocation. ~~In the~~ ~~six~~ ~~months ended~~ ~~March 31, 2021,~~ ~~the Company paid $0.3 million in lease termination costs to terminate the lease associated with~~ ~~one~~ ~~store that closed in the~~ ~~first~~ ~~quarter~~

Table 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.

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Future lease payments under non-cancellable leases as of March 31, ~~2022~~ 2023 were as follows, dollars in thousands:

Fiscal Year	Operating leases			Finance leases			Total
Remainder of 2022	$	22,629			2,579			25,208
2023		44,655			5,423			50,078
Fiscal year										Operating leases			Finance leases			Total
Remainder of 2023										$	23,166			2,597			25,763
2024		43,057			5,489			48,546			44,949			5,678			50,627
2025		41,406			5,499			46,905			43,307			5,688			48,995
2026		38,197			5,542			43,739			40,246			5,731			45,977
2027											37,934			5,775			43,709
Thereafter		209,633			35,789			245,422			191,391			40,942			232,333
Total future undiscounted lease payments		399,577			60,321			459,898			380,993			66,411			447,404
Less imputed interest		(71,595	)		(15,068	)		(86,663	)		(67,594	)		(18,230	)		(85,824	)
Total reported lease liability		327,982			45,253			373,235			313,399			48,181			361,580
Less current portion		(33,836	)		(3,313	)		(37,149	)		(34,917	)		(3,365	)		(38,282	)
Noncurrent lease liability	$	294,146			41,940			336,086		$	278,482			44,816			323,298

The table above excludes ~~$29.9~~$19.0 million of legally binding minimum lease payments for leases that had been executed as of March 31, ~~2022~~ 2023 but whose terms had not yet commenced.

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8. Property and Equipment

The Company had the following property and equipment balances as of March 31, ~~2022~~ 2023 and September 30, ~~2021,~~ 2022, dollars in thousands:

					As of										As of
	Useful lives (in years)				March 31, 2022			September 30, 2021			Useful lives (in years)				March 31, 2023			September 30, 2022
Construction in process			n/a		$	6,009			2,268				n/a		$	5,587			8,651
Land			n/a			6,272			6,062				n/a			6,746			6,746
Buildings		16	–	40		34,481			34,531			16	–	40		46,412			43,010
Land improvements		1	–	24		1,792			1,782			1	–	24		1,901			1,822
Leasehold and building improvements		1	–	25		160,199			159,800			1	–	25		168,963			163,721
Fixtures and equipment		5	–	7		147,695			145,754			5	–	7		155,839			151,242
Computer hardware and software		3	–	5		25,297			25,068			3	–	5		27,217			25,545
						381,745			375,265							412,665			400,737
Less accumulated depreciation and amortization						(233,959	)		(223,866	)						(254,958	)		(243,558	)
Property and equipment, net					$	147,786			151,399						$	157,707			157,179

Depreciation and amortization expense for the three and six months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 is summarized as follows, dollars in thousands:

	Three months ended March 31,				Six months ended March 31,				Three months ended March 31,				Six months ended March 31,
	2022		2021		2022		2021		2023		2022		2023		2022
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	242		213		481		428	$	266		242		524		481
Depreciation and amortization expense included in store expenses		6,278		6,913		12,805		14,019		6,410		6,278		12,713		12,805
Depreciation and amortization expense included in administrative expenses		347		294		694		588		405		347		793		694
Depreciation and amortization expense included in pre-opening expenses ⁽¹⁾		40		0		40		22		73		40		186		40
Total depreciation and amortization expense	$	6,907		7,420		14,020		15,057	$	7,154		6,907		14,216		14,020

¹ ~~Pre-opening depreciation and amortization expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.~~

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9. Goodwill and Other Intangible Assets

The Company had the following goodwill and other intangible asset balances as of March 31, ~~2022~~ 2023 and September 30, ~~2021,~~ 2022, dollars in thousands:

					As of									As of
	Useful lives (in years)				March 31, 2022			September 30, 2021			Useful lives (in years)			March 31, 2023			September 30, 2022
Amortizable intangible assets:
Other intangibles		0.5	–	3	$	4,200			3,754		0.5	–	7	$	12,624			11,965
Less accumulated amortization						(3,446	)		(3,139	)					(4,562	)		(3,827	)
Amortizable intangible assets, net						754			615						8,062			8,138
Other intangibles in process						6,657			5,507						660			369
Trademark		Indefinite				389			389
Trademarks											Indefinite				389			389
Deferred financing costs, net						47			59		3	–	5		28			37
Total other intangibles, net						7,847			6,570						9,139			8,933
Goodwill		Indefinite				5,198			5,198		Indefinite				5,198			5,198
Total goodwill and other intangibles, net					$	13,045			11,768					$	14,337			14,131

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10. Accrued Expenses

The composition of accrued expenses as of March 31, ~~2022~~ 2023 and September 30, ~~2021~~ 2022 is summarized as follows, dollars in thousands:

	As of				As of
	March 31,		September 30,		March 31,		September 30,
	2022		2021		2023		2022
Payroll and employee-related expenses	$	12,323		13,243	$	12,785		14,527
Accrued property, sales, and use tax payable		6,949		8,322		7,591		8,450
Accrued marketing expenses		746		713		737		153
Deferred revenue related to gift card sales		1,772		2,157
Deferred revenue						1,786		1,757
Other		3,113		2,154		2,107		1,850
Total accrued expenses	$	24,903		26,589	$	25,006		26,737

11. Income Taxes

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

12. Related Party Transactions

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

Chalet Properties, LLC: The Company has four operating leases ~~and~~ ~~one~~ ~~finance lease~~(see Note 7) with 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 $0.3~~$0.2 million and ~~$0.2~~$0.3 million for the three months ended March 31, 2023 and 2022, respectively, and ~~2021,~~ ~~respectively,~~$0.4 million and $0.5 million for ~~each of~~ the six months ended March 31, 2023 and 2022, ~~and~~ ~~2021.~~respectively.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 7) with 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, ~~2022~~ 2023 and ~~2021~~2022 and was ~~approximately~~ $0.2 million for each of the six months ended March 31, ~~2022~~ 2023 and ~~2021.~~2022.

FTVC LLC: The Company has one operating lease ~~for a store location~~(see Note 7) with FTVC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC was less than $0.1 million for each of the three months ended March 31, ~~2022~~ 2023 and ~~2021~~2022 and was less than $0.1 million for each of the six months ended March 31, ~~2022~~ 2023 and ~~2021.~~2022.

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13. Commitments and Contingencies

In January 2020, a former assistant store manager filed a ~~purported~~putative 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~~Currently, there are 100 opt-in ~~plaintiffs to individual arbitration, leaving 101 FLSA~~ plaintiffs in the FLSA collective action. In December 2022, pre-trial motions were filed by both parties, including a motion filed by the Company to decertify the FLSA collective action. In February 2023, the plaintiffs filed a motion seeking certification of a putative class with regard to alleged violations of Colorado labor laws, which the Company has opposed. These pre-trial motions are before the court. The ~~litigation is~~court has scheduled a jury trial for December 2023. Following the court’s decision to compel certain opt-in plaintiffs to arbitrate their claims, 38 individuals have brought arbitration claims alleging violations of the FLSA and Colorado labor laws for failure to pay for overtime work. These arbitrations are currently in the ~~discovery stage. The Company believes these claims are without merit and intends to defend the matter vigorously.~~preliminary stages. Given the ~~preliminary~~current stage of ~~the case~~these matters 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 believes these claims are without merit and intends to defend the matters vigorously.

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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 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 financial statements.

14. Subsequent ~~Events~~Event

On May ~~4, 2022,~~ ~~the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on~~ ~~May 31, 2024.~~

On ~~May 4, 2022,~~ 3, 2023, the Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June ~~15, 2022~~14, 2023 to stockholders of record as of the close of business on May ~~31, 2022~~.30, 2023.

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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.

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, dietary supplements and 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 31, ~~2022,~~2023, we operated ~~162~~166 stores in 2021 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

Our stores range from approximately ~~5,000~~7,000 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, ~~2021,~~2022, we increased our store count at a compound annual growth rate of ~~5.2%~~3.2%. In fiscal year ~~2021,~~2022, we opened three new stores, ~~and~~ relocated/remodeled ~~five existing stores.~~two stores and closed one store. We plan to open four to ~~five~~six new stores and relocate/remodel two to three stores in fiscal year ~~2022.~~2023. We plan to close two stores in June 2023. As of the date of this report, we have signed leases ~~or acquired property~~ for an additional ~~six~~five new stores that we plan to open in fiscal years ~~2022~~2023 and beyond. During the six months ended March 31, ~~2022,~~2023, we ~~relocated/remodeled one store.~~opened two new stores and did not relocate/remodel any stores. Between April 1, ~~2022~~2023 and the date of this Form 10-Q, we ~~opened one~~did not open any new ~~store and closed one store.~~stores or relocate/remodel any stores.

Performance Highlights

Key highlights of our performance for the three and six months ended March 31, ~~2022~~2023 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 in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.

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Net sales. Net sales were $283.2 million for the three months ended March 31, 2023, an increase of $11.4 million, or 4.2%, compared to net sales of $271.8 million for the three months ended March 31, ~~2022,~~2022. Net sales were $563.7 million for the six months ended March 31, 2023, an increase of ~~$12.6~~$14.6 million, or ~~4.9%~~2.7%, compared to net sales of ~~$259.2 million for the three months ended March 31, 2021. Net sales were~~ $549.1 million for the six months ended March 31, ~~2022, an increase of $24.9 million, or 4.7%, compared to net sales of $524.2 million for the six months ended March 31, 2021.~~2022.

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Daily average comparable store sales. Daily average comparable store sales for the three months ended March 31, ~~2022~~2023 increased ~~4.3%~~2.7% compared to the three months ended March 31, ~~2021.~~2022. Daily average comparable store sales for the six months ended March 31, ~~2022~~2023 increased ~~4.1%~~1.6% compared to the six months ended March 31, ~~2021.~~2022.

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Net income. Net income was $5.9 million for the three months ended March 31, 2023, a decrease of $0.5 million, or 7.4%, compared to net income of $6.4 million for the three months ended March 31, ~~2022, an increase~~2022. Net income was $10.3 million for the six months ended March 31, 2023, a decrease of ~~$1.7~~$5.0 million, or ~~35.1%~~32.6%, compared to net income of ~~$4.7 million for the three months ended March 31, 2021. Net income was~~ $15.3 million for the six months ended March 31, ~~2022, an increase of $6.9 million, or 83.2%, compared to net income of $8.3 million for the six months ended March 31, 2021.~~2022.

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EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $15.6 million for the three months ended March 31, 2023, a decrease of $0.2 million, or 1.2%, compared to $15.8 million for the three months ended March 31, ~~2022, an increase of $1.6 million, or 11.6%, compared to $14.1~~2022. EBITDA was $29.1 million for the ~~three~~six months ended March 31, ~~2021. EBITDA was~~2023, a decrease of $5.8 million, or 16.7%, compared to $34.9 million for the six months ended March 31, ~~2022, an increase of $7.9 million, or 29.5%, compared to $27.0 million for the six months ended March 31, 2021.~~2022. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

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Adjusted EBITDA. Adjusted EBITDA was $16.8 million for the three months ended March 31, 2023, an increase of $0.7 million, or 4.6%, compared to $16.1 million for the three months ended March 31, ~~2022, an increase of $1.7 million, or 11.8%, compared to $14.4~~2022. Adjusted EBITDA was $30.6 million for the ~~three~~six months ended March 31, ~~2021. Adjusted EBITDA was~~2023, a decrease of $4.9 million, or 13.9%, compared to $35.6 million for the six months ended March 31, ~~2022, an increase of $7.7 million, or 27.8%, compared to $27.9 million for the six months ended March 31, 2021.~~2022. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.

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Liquidity. As of March 31, ~~2022,~~2023, cash and cash equivalents was ~~$28.9~~$19.0 million, and there was ~~$49.0~~$48.9 million available for borrowing under our Revolving Facility, net of undrawn, issued and outstanding letters of credit of ~~$1.0~~$1.1 million.

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New store growth. We opened notwo new stores during the six months ended March 31, ~~2022.~~2023. We operated a total of ~~162~~166 stores as of March 31, ~~2022.~~2023. We plan to open a total of four to ~~five~~six new stores in fiscal year ~~2022,~~2023, which would result in an annual new store growth rate of between ~~2.5%~~2.4% and ~~3.1%~~3.7% for fiscal year ~~2022.~~2023.

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Store Relocations/Remodels. We ~~relocated/remodeled one store~~did not relocate/remodel any stores during the six months ended March 31, ~~2022.~~2023. We plan to relocate/remodel two to three stores in fiscal year 2023.

Industry Trends and Economics

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

●

~~COVID-19 pandemic.~~Impact of broader economic trends and political environment. ~~On March 11, 2020,~~The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, levels of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the ~~World Health Organization announced that COVID-19 infections had become~~price of commodities, the political environment and consumer confidence. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. During the course of the COVID-19 pandemic, federal, state and local authorities have imposed, from time to time, asufficient number of ~~public~~qualified persons in the workforce in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health ~~mandates intended~~and other insurance costs and changes in employment legislation, including unemployment benefits. A number of macroeconomic and global trends have impacted our business. The current labor market has impacted our ability to ~~prevent~~retain and attract store Crew members, and we continue to be challenged by labor shortages broadly impacting the ~~spread of the virus, including vaccination mandates, social distancing, quarantine, wearing face coverings,~~retail industry. We have invested in increased wages for our store Crew members and “stay-at-home” measures and certain of these public health mandates have had an adverse impact on the U.S. economy. Additional negative financial markets and industry-specific impacts could result from future case surges, outbreaks, COVID-19 virus variants, the potential that current vaccines may be ~~less effective or ineffective against future COVID-19 virus variants, and~~required to do so in the ~~risk that large groups of the population may not receive vaccinations against COVID-19. The long-term economic impact of the COVID-19 pandemic is unknown at this time.~~

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~~Impact of the COVID-19 pandemic on our operations.~~ We believe we have acted proactively in response to the COVID-19 pandemic and the resulting government mandates. To date, all of our stores have continued operating since the start of the COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health measures have been implemented across our footprint from time to time and customers have adjusted to these new circumstances by consuming more food at home. The COVID-19 pandemic and government mandates have also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party.future. As a result of current global supply chain issues, partially attributable to the COVID-19 pandemic and the war in Ukraine, we have on occasion experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products ~~remain~~may be in relatively short supply or ~~are~~ unavailable from time to time.

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~~Future impact of the COVID-19 pandemic.~~ We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in particular, when the COVID-19 pandemic subsides. We expect the impact of the COVID-19 pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the COVID-19 pandemic, the governmental and public actions taken in response, including economic stabilization efforts,During fiscal year 2022 and the long-term effect the COVID-19 pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and government mandates make it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.- Risk Factors” in our Form 10-K. Additional information regarding the impact of the COVID-19 pandemic and government mandates on our business and results of operations is provided below in this MD&A.

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~~Impact of broader economic trends and political environment.~~ The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, the political environment and consumer confidence. During the second quarter and first half of fiscal ~~2022,~~year 2023, the costs of certain goods we sell were impacted by levels of inflation ~~that are~~ higher than we have experienced in recent ~~years.~~years, resulting in part from supply disruptions, the military conflict between Ukraine and Russia, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, monetary policy actions, disruptions caused by the COVID‐19 pandemic and the uncertain economic environment. In the aggregate, management estimates that the Company experienced annualized cost inflation of approximately 8% in the second quarter of fiscal year 2023. Cost inflation estimates are based on individual like items sold during the periods being compared. The impact of inflation on our sales and profitability is influenced in part by our ability to adjust our retail prices accordingly. While we have been able to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current inflationary environment will continue or the impact of inflationary trends on consumer behavior and our sales and profitability in the future. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation, including unemployment benefits. Since the onset of the COVID-19 pandemic, our ability to retain and attract store Crew members has been challenged by labor shortages broadly impacting the retail industry.

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Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including ~~the impact of the COVID-19 pandemic~~construction permitting and the availability of construction materials and equipment.

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Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up, and delivery options. In particular, the proposed merger of The Kroger Co. and Albertsons Companies, Inc., if consummated, would create a larger conventional supermarket retailer that could alter the competitive landscape of the grocery industry and adversely impact our ability to compete. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutrition education, differentiate us in the industry and provide a competitive advantage.

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

Outlook

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

We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including ~~the impact of the COVID-19 pandemic~~construction permitting and the availability of construction materials and equipment. ~~Over the long term, we~~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 body care products industries and regional and general economic conditions, including inflationary or recessionary trends. ~~In the future, we~~We believe there are opportunities for increased leverage of costs and increased 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.

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

Key Financial Metrics in Our Business

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

Net sales

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

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Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior fiscal year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).

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

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

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, 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 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 and gross margin

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

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Store expenses

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and 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, primarily related to store relocations, as well as store ~~closure and lease termination~~closing 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

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.

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Pre-opening expenses

Pre-opening expenses for new stores and 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 and depreciation expense. Other pre-opening 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 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, net

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

Income tax expense

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.

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Results of Operations

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

	Three months ended March 31,						Six months ended March 31,						Three months ended March 31,						Six months ended March 31,
	2022			2021			2022			2021			2023			2022			2023			2022
Statements of Income Data: *											��
Net sales		100.0	%		100.0			100.0			100.0			100.0	%		100.0			100.0			100.0
Cost of goods sold and occupancy costs		71.8			72.3			71.7			72.4			70.9			71.8			71.4			71.7
Gross profit		28.2			27.7			28.3			27.6			29.1			28.2			28.6			28.3
Store expenses		21.9			22.5			21.7			22.7			23.0			21.9			22.8			21.7
Administrative expenses		3.0			2.5			2.8			2.6			3.0			3.0			3.0			2.8
Pre-opening expenses		0.1			0.1			0.0			0.1			0.1			0.1			0.1			0.0
Operating income		3.3			2.6			3.8			2.3			3.0			3.3			2.6			3.8
Interest expense, net		(0.2	)		(0.2	)		(0.2	)		(0.2	)		(0.3	)		(0.2	)		(0.3	)		(0.2	)
Income before income taxes		3.1			2.4			3.6			2.1			2.7			3.1			2.3			3.6
Provision for income taxes		(0.7	)		(0.5	)		(0.8	)		(0.5	)		(0.6	)		(0.7	)		(0.5	)		(0.8	)
Net income		2.3	%		1.8			2.8			1.6			2.1	%		2.3			1.8			2.8
__________________________
*Figures may not sum due to rounding.

Number of stores at end of period		162			161			162			161			166			162			166			162
Number of new stores opened during the period		0			1			0			2			1			—			2			—
Number of stores relocated/remodeled during the period		0			1			1			1			—			—			—			1
Number of stores closed during the period		0			0			0			0
Twelve-month store unit growth rate		0.6	%		2.5			0.6			2.5			2.5	%		0.6			2.5			0.6
Change in daily average comparable store sales		4.3	%		(7.0	)		4.1			2.0			2.7	%		4.3			1.6			4.1

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Three months ended March 31, ~~2022~~2023 compared to the three months ended March 31, ~~2021~~2022

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

Three months ended
March 31,

Change In

2022

2021

Dollars

Percent

Statements of Income Data:

Net sales
$ 271,822 259,198 12,624 4.9
%
Cost of goods sold and occupancy costs
195,040 187,371 7,669 4.1
Gross profit
76,782 71,827 4,955 6.9
Store expenses
59,605 58,422 1,183 2.0
Administrative expenses
8,172 6,358 1,814 28.5
Pre-opening expenses
141 341 (200
)
(58.7
)
Operating income
8,864 6,706 2,158 32.2
Interest expense, net
(545
)
(603
)
58 (9.6
)
Income before income taxes
8,319 6,103 2,216 36.3
Provision for income taxes
(1,962
)
(1,399
)
(563
)
40.2
Net income
$ 6,357 4,704 1,653 35.1
%

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	Three months ended March 31,						Change In
	2023			2022			Dollars			Percent
Statements of Income Data:
Net sales	$	283,245			271,822			11,423			4.2	%
Cost of goods sold and occupancy costs		200,768			195,040			5,728			2.9
Gross profit		82,477			76,782			5,695			7.4
Store expenses		65,192			59,605			5,587			9.4
Administrative expenses		8,605			8,172			433			5.3
Pre-opening expenses		249			141			108			76.6
Operating income		8,431			8,864			(433	)		(4.9	)
Interest expense, net		(834	)		(545	)		(289	)		53.0
Income before income taxes		7,597			8,319			(722	)		(8.7	)
Provision for income taxes		(1,713	)		(1,962	)		249			(12.7	)
Net income	$	5,884			6,357			(473	)		(7.4	)%

Net sales

Net sales increased ~~$12.6~~$11.4 million, or ~~4.9%~~4.2%, to $283.2 million for the three months ended March 31, 2023 compared to $271.8 million for the three months ended March 31, 2022, ~~compared to $259.2 million for the three months ended March 31, 2021,~~ due to ~~an $11.1~~a $7.4 million increase in comparable store sales and a ~~$1.5~~$4.9 million increase in new store ~~sales.~~sales, partially offset by a $0.9 million decrease in net sales related to one store that closed in fiscal year 2022. Daily average comparable store sales increased ~~4.3%~~2.7% for the three months ended March 31, ~~2022~~2023 compared to the three months ended March 31, ~~2021.~~2022. The daily average comparable store sales increase resulted from a ~~2.5%~~2.7% increase in daily average transaction ~~size~~count and ~~a 1.8% increase~~no change in daily average transaction ~~count.~~size. Comparable store average transaction size was ~~$45.80~~$45.79 for the three months ended March 31, ~~2022.~~2023. The increase in net sales during the three months ended March 31, ~~2022~~2023 was primarily driven by ~~our customers’ response to COVID-19~~transaction count, new store sales and marketing initiatives, partially offset by a moderation of the pandemic trends ~~early~~we experienced in the second quarter ~~retail price inflation, marketing initiatives, promotional campaigns and increased engagement in our {N}power® customer loyalty program.~~of fiscal year 2022.

Gross profit

Gross profit increased ~~$5.0~~$5.7 million, or ~~6.9%~~7.4%, to $82.5 million for the three months ended March 31, 2023 compared to $76.8 million for the three months ended March 31, ~~2022 compared to $71.8 million for the three months ended March 31, 2021, primarily driven by increased sales volume.~~2022. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 29.1% for the three months ended March 31, 2023 compared to 28.2% for the three months ended March 31, ~~2022 compared to 27.7% for the three months ended March 31, 2021.~~2022. The increase in gross margin during the three months ended March 31, ~~2022~~2023 was ~~primarily~~ driven by ~~improved~~higher product ~~margin and store occupancy leverage.~~margin.

Store expenses

Store expenses increased ~~$1.2~~$5.6 million, or ~~2.0%~~9.4%, to $65.2 million for the three months ended March 31, 2023 compared to $59.6 million for the three months ended March 31, ~~2022 compared to $58.4~~2022. Store expenses included an impairment charge of $0.9 million ~~for~~in the three months ended March 31, ~~2021.~~2023 related to a planned store closure in June 2023. Store expenses as a percentage of net sales were ~~21.9%~~23.0% and ~~22.5%~~21.9% for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~reduction~~increase in store expenses as a percentage of net sales ~~reflects leverage created~~was primarily driven by higher ~~sales~~labor expense as a result of increased wage rates, and ~~a more normalized operating environment compared to~~ the ~~prior fiscal year period.~~impairment charge.

Administrative expenses

Administrative expenses increased ~~$1.8~~$0.4 million, or 5.3%, to $8.6 million for the three months ended March 31, 2023 compared to $8.2 million for the three months ended March 31, ~~2022 compared to $6.4 million for the three months ended March 31, 2021.~~2022. The increase in administrative expenses was primarily driven by higher compensation expense. Administrative expenses as a percentage of net sales were 3.0% ~~and 2.5%~~ for each of the three months ended March 31, ~~2022~~2023 and ~~2021, respectively.~~2022.

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Pre-opening expenses

Pre-opening expenses were $0.2 million for the three months ended March 31, 2023 compared to $0.1 million for the three months ended March 31, ~~2022 compared to $0.3 million for the three months ended March 31, 2021.~~2022.

Interest expense, net

Interest expense, net of capitalized interest, was ~~$0.5~~$0.8 million infor the three months ended March 31, ~~2022~~2023 compared to ~~$0.6~~$0.5 million infor the three months ended March 31, ~~2021.~~2022.

Income taxes

Income tax expense ~~increased $0.6~~decreased $0.2 million for the three months ended March 31, ~~2022~~2023 to ~~$2.0~~$1.7 million compared to ~~$1.4~~$2.0 million for the three months ended March 31, ~~2021.~~2022. The Company’s effective income tax rate was ~~approximately~~22.5% and 23.6% ~~and 22.9%~~ for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Net income

Net income was $5.9 million, or $0.26 diluted earnings per share, for the three months ended March 31, 2023 compared to $6.4 million, or $0.28 diluted earnings per share, for the three months ended March 31, ~~2022 compared to $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021.~~2022.

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Six months ended March 31, ~~2022~~2023 compared to the six months ended March 31, ~~2021~~2022

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						Six months ended March 31,						Change In
	2022			2021			Dollars			Percent			2023			2022			Dollars			Percent
Statements of Income Data:
Net sales	$	549,110			524,243			24,867			4.7	%	$	563,702			549,110			14,592			2.7	%
Cost of goods sold and occupancy costs		393,591			379,391			14,200			3.7			402,506			393,591			8,915			2.3
Gross profit		155,519			144,852			10,667			7.4			161,196			155,519			5,677			3.7
Store expenses		118,941			118,752			189			0.2			128,788			118,941			9,847			8.3
Administrative expenses		15,465			13,662			1,803			13.2			16,858			15,465			1,393			9.0
Pre-opening expenses		225			530			(305	)		(57.5	)		702			225			477			212.0
Operating income		20,888			11,908			8,980			75.4			14,848			20,888			(6,040	)		(28.9	)
Interest expense, net		(1,089	)		(1,113	)		24			(2.2	)		(1,630	)		(1,089	)		(541	)		49.7
Income before income taxes		19,799			10,795			9,004			83.4			13,218			19,799			(6,581	)		(33.2	)
Provision for income taxes		(4,527	)		(2,459	)		(2,068	)		84.1			(2,927	)		(4,527	)		1,600			(35.3	)
Net income	$	15,272			8,336			6,936			83.2	%	$	10,291			15,272			(4,981	)		(32.6	)%

Net sales

Net sales increased ~~$24.9~~$14.6 million, or ~~4.7%~~2.7%, to $563.7 million for the six months ended March 31, 2023 compared to $549.1 million for the six months ended March 31, 2022, ~~compared to $524.2 million for the six months ended March 31, 2021,~~ due to ~~a $21.3~~an $8.7 million increase in comparable store sales and a ~~$3.6~~$7.7 million increase in new store ~~sales.~~sales, partially offset by a $1.8 million decrease in net sales related to one store that closed in fiscal year 2022. Daily average comparable store sales increased ~~4.1%~~1.6% for the six months ended March 31, ~~2022~~2023 compared to the six months ended March 31, ~~2021.~~2022. The daily average comparable store sales increase resulted from a ~~2.4%~~0.9% increase in daily average transaction ~~count~~size and a ~~1.6%~~0.7% increase in daily average transaction ~~size.~~count. Comparable store average transaction size was ~~$45.57~~$45.94 for the six months ended March 31, ~~2022.~~2023. The increase in net sales during the six months ended March 31, ~~2022~~2023 was primarily driven by ~~our customers’ response to COVID-19 pandemic trends,~~ retail price inflation, new store sales and marketing initiatives, ~~promotional campaigns and increased engagement~~partially offset by a moderation of the pandemic trends we experienced in ~~our {N}power® customer loyalty program.~~the first half of fiscal year 2022.

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Gross profit

Gross profit increased ~~$10.7~~$5.7 million, or ~~7.4%~~3.7%, to $161.2 million for the six months ended March 31, 2023 compared to $155.5 million for the six months ended March 31, ~~2022 compared to $144.9 million for the six months ended March 31, 2021, primarily driven by increased sales volumes.~~2022. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 28.6% for the six months ended March 31, 2023 compared to 28.3% for the six months ended March 31, ~~2022 compared to 27.6% for the six months ended March 31, 2021.~~2022. The increase in gross margin during the six months ended March 31, ~~2022~~2023 was ~~primarily~~ driven by ~~improved~~higher product ~~margin and store occupancy leverage.~~margin.

Store expenses

Store expenses increased ~~$0.2~~$9.8 million, or ~~0.2%~~8.3%, to $128.8 million for the six months ended March 31, 2023 compared to $118.9 million for the six months ended March 31, ~~2022 compared to $118.8~~2022. Store expenses included an impairment charge of $0.9 million ~~for~~in the six months ended March 31, 2021. In the six months ended March 31, 2022, we recorded $0.1 million in operating lease asset impairment charges as a result of an early store relocation. In the six months ended March 31, 2021, we recorded $0.4 million in lease exit costs, primarily2023 related to a ~~lease termination fee associated with one~~planned store ~~that closed~~closure in ~~fiscal year 2019.~~June 2023. Store expenses as a percentage of net sales were ~~21.7%~~22.8% and ~~22.7%~~21.7% for the six months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The ~~reduction~~increase in store expenses as a percentage of net sales ~~reflects leverage created~~was primarily driven by higher ~~sales and~~labor expense as a ~~more normalized operating environment compared to the prior fiscal year period.~~result of increased wage rates.

Administrative expenses

Administrative expenses increased ~~$1.8~~$1.4 million, or 9.0%, to $16.9 million for the six months ended March 31, 2023 compared to $15.5 million for the six months ended March 31, ~~2022 compared to $13.7 million for the six months ended March 31, 2021.~~2022. The increase in administrative expenses was primarily driven by higher technology amortization, legal expense, and compensation expense. Administrative expenses as a percentage of net sales were ~~2.8%~~3.0% and ~~2.6%~~2.8% for the six months ended March 31, 2023 and 2022, ~~and 2021,~~ respectively.

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Pre-opening expenses

Pre-opening expenses were $0.7 million for the six months ended March 31, 2023 compared to $0.2 million for the six months ended March 31, ~~2022 compared to $0.5 million for the six months ended March 31, 2021.~~2022.

Interest expense

Interest expense, net of capitalized interest, ~~remained flat at $1.1~~was $1.6 million for ~~each of~~ the six months ended March 31, ~~2022 and 2021.~~2023 compared to $1.1 million for the six months ended March 31, 2022.

Income taxes

Income tax expense ~~increased $2.1~~decreased $1.6 million for the six months ended March 31, ~~2022~~2023 to ~~$4.5~~$2.9 million compared to ~~$2.5~~$4.5 million for the six months ended March 31, ~~2021.~~2022. The Company’s effective income tax rate was ~~approximately~~22.1% and 22.9% ~~and 22.8%~~ for the six months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Net income

Net income was $10.3 million, or $0.45 diluted earnings per share, for the six months ended March 31, 2023 compared to $15.3 million, or $0.67 diluted earnings per share, for the six months ended March 31, ~~2022 compared to $8.3 million, or $0.37 diluted earnings per share, for the six months ended March 31, 2021.~~2022.

Non-GAAP financial measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing costs, ~~lease exit costs,~~ share-based compensation and non-recurring items. ~~The adjustments to EBITDA for the six months ended March 31, 2022 included $0.1 million in operating lease asset impairment charges as a result~~

Table of ~~an early store relocation. The adjustments to EBITDA for the six months ended March 31, 2021 included $0.4 million in lease exit costs associated with one store that closed in fiscal year 2019.~~

Contents

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 March 31,				Six months ended March 31,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	6,357		4,704		15,272		8,336	$	5,884		6,357		10,291		15,272
Interest expense, net		545		603		1,089		1,113		834		545		1,630		1,089
Provision for income taxes		1,962		1,399		4,527		2,459		1,713		1,962		2,927		4,527
Depreciation and amortization		6,907		7,420		14,020		15,057		7,154		6,907		14,216		14,020
EBITDA		15,771		14,126		34,908		26,965		15,585		15,771		29,064		34,908
Impairment of long-lived assets and store closing costs		—		—		95		405
Impairment of long-lived assets										871		—		871		95
Share-based compensation		296		239		590		487		356		296		713		590
Adjusted EBITDA ⁽¹⁾	$	16,067		14,365		35,593		27,857	$	16,812		16,067		30,648		35,593

⁽¹⁾ ~~Adjusted~~ EBITDA decreased 1.2% to $15.6 million for the three ~~and six~~ months ended March 31, ~~2021, as presented, has been recast to exclude share-based compensation to enhance the comparability of this measure between fiscal periods.~~

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~~EBITDA increased 11.6%~~2023 compared to $15.8 million for the three months ended March 31, ~~2022 compared~~2022. EBITDA decreased 16.7% to ~~$14.1~~$29.1 million for the ~~three~~six months ended March 31, ~~2021. EBITDA increased 29.5%~~2023 compared to $34.9 million for the six months ended March 31, ~~2022 compared to $27.0 million for the six months ended March 31, 2021.~~2022. EBITDA as a percentage of net sales was ~~5.8%~~5.5% and ~~5.4%~~5.8% for the three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. EBITDA as a percentage of net sales was ~~6.4%~~5.2% and ~~5.1%~~6.4% for the six months ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Adjusted EBITDA increased ~~11.8%~~4.6% to $16.8 million for the three months ended March 31, 2023 compared to $16.1 million for the three months ended March 31, ~~2022 compared~~2022. Adjusted EBITDA decreased 13.9% to ~~$14.4~~$30.6 million for the ~~three~~six months ended March 31, ~~2021. Adjusted EBITDA increased 27.8%~~2023 compared to $35.6 million for the six months ended March 31, ~~2022 compared to $27.9 million for the six months ended March 31, 2021.~~2022. Adjusted EBITDA as a percentage of net sales was 5.9% ~~and 5.5%~~ for each of the three months ended March 31, ~~2022~~2023 and ~~2021, respectively.~~2022. Adjusted EBITDA as a percentage of net sales was ~~6.5%~~5.4% and ~~5.3%~~6.5% for the six months ended March 31, ~~2022~~2023 and ~~2021,~~2022, 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 they assist us in comparing the operating performance of our stores on a consistent basis, as they remove the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations, such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.

Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Commencing with its financial reporting for fiscal year 2021, the Company revised its definition of Adjusted EBITDA to exclude share-based compensation. The Company’s historical presentation of Adjusted EBITDA, including for the three and six months ended March 31, 2021, did not exclude share-based compensation. However, Adjusted EBITDA for the three and six months ended March 31, 2021, as presented in this report, has been recast to exclude share-based compensation to enhance the comparability of this measure between fiscal periods. Management believes that excluding share-based compensation 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~~measures of EBITDA and Adjusted EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

●

EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

●

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

●

EBITDA and Adjusted EBITDA do not reflect any depreciation or interest expense for leases classified as finance leases;

●

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

●

Adjusted EBITDA does not reflect share-based compensation, impairment charges, and store closing costs;

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●

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

●

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

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Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as 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.

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under our 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, share repurchases and corporate taxes. As of March 31, ~~2022,~~2023, we had ~~$28.9~~$19.0 million in cash and cash equivalents and ~~$49.0~~$48.9 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 ~~including~~– most recently in May 2022 – and the program will terminate on May 31, 2024. We ~~did not repurchase any~~repurchased 8,546 shares at a cost of $0.1 million during the ~~six~~three months ended March 31, ~~2022.~~2023. 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~~$8.2 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.

On May ~~4, 2022,~~3, 2023, our Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June ~~15, 2022~~14, 2023 to stockholders of record as of the close of business on May ~~31, 2022.~~30, 2023. We paid quarterly cash dividends of $0.10 per share of common stock in each of the first two quarters of fiscal year ~~2022.~~2023.

We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the Revolving 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 the next 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,						Six months ended March 31,
	2022			2021			2023			2022
Net cash provided by operating activities	$	27,581			17,305		$	34,857			27,581
Net cash used in investing activities		(12,295	)		(9,541	)		(17,765	)		(12,295	)
Net cash used in financing activities		(10,075	)		(15,321	)		(10,166	)		(10,075	)
Net increase (decrease) in cash and cash equivalents		5,211			(7,557	)
Net increase in cash and cash equivalents								6,926			5,211
Cash and cash equivalents, beginning of period		23,678			28,534			12,039			23,678
Cash and cash equivalents, end of period	$	28,889			20,977		$	18,965			28,889

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, impairment of long-lived assets, share-based compensation, and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased ~~$10.3~~$7.3 million, or ~~59.4%~~26.4%, to $34.9 million for the six months ended March 31, 2023 compared to $27.6 million for the six months ended March 31, ~~2022 compared to $17.3 million for the six months ended March 31, 2021.~~2022. The increase in cash provided by operating activities was primarily due to an increase in cash provided by working capital, partially offset by a decrease in cash provided by net income as adjusted for non-cash ~~items as well as a reduction in the amount of cash used for working capital requirements, as compared to the amount of cash used for working capital in the prior fiscal year.~~items.

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Investing Activities

Net cash used in investing activities increased ~~$2.8~~$5.5 million, or ~~28.9%~~44.5%, to $17.8 million for the six months ended March 31, 2023 compared to $12.3 million for the six months ended March 31, ~~2022 compared to $9.5 million for the six months ended March 31, 2021.~~2022. This increase was primarily the result of ~~increases of $2.2 million and $0.7 million~~an increase in property and equipment ~~and~~acquisitions of $6.1 million, partially offset by a decrease in other intangibles acquisitions of $0.7 million during the six months ended March 31, ~~2022~~2023 compared to the six months ended March 31, ~~2021, respectively,~~2022, primarily due to the impact of the timing of new store ~~relocation/remodel,~~openings, relocations/remodels, and software projects under development.

We plan to spend approximately ~~$15.7~~$10.2 million to ~~$22.7~~$17.2 million on capital expenditures during the remainder of fiscal year ~~2022~~2023 primarily in connection with ~~four~~two to ~~five~~four new store openings and two to three store relocations/remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately ~~$2.2~~$2.4 million per store.

Acquisition of property and equipment not yet paid decreased ~~$2.3~~$0.1 million to $2.0 million for the six months ended March 31, 2023 compared to $2.1 million for the six months ended March 31, 2022 ~~compared to $4.4 million for the six months ended March 31, 2021~~primarily due to the timing of payments related to new store openings and relocations/remodels.

Financing Activities

Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and dividends paid to stockholders. Net cash used in financing activities was $10.2 million for the six months ended March 31, 2023 compared to $10.1 million for the six months ended March 31, ~~2022 compared to $15.3 million for the six months ended March 31, 2021~~2022.

Credit Facility

The 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. 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 without premium or penalty. On November 18, 2020, we ~~entered into~~amended the ~~Fourth Amendment~~Credit Facility 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. On December 15, 2022, we further amended the Credit Facility to (i) remove and replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on SOFR and (ii) increase the Company’s restricted payment capacity, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $12.5 million during any fiscal year.

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),~~SOFR 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 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, commencing on March 31, 2021 and ending on September 30, 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~~$12.5 million during any fiscal year.

We had no amounts outstanding under the Revolving Facility as of ~~each~~March 31, 2023 and September 30, 2022. As of March 31, ~~2022~~2023 and September 30, ~~2021. As of each of March 31,~~ 2022, ~~and September 30, 2021,~~ we had undrawn, issued and outstanding letters of credit of ~~$1.0~~$1.1 million, which were reserved against the amount available for borrowing under the Revolving Facility. We had ~~$49.0~~$48.9 million available for borrowing under the Revolving Facility as of each of March 31, ~~2022~~2023 and September 30, ~~2021.~~2022. We had ~~$19.7~~$11.7 million of outstanding borrowings under the fully drawn Term Loan Facility as of March 31, ~~2022.~~

~~As of each of March 31, 2022 and September 30, 2021, the Company was in compliance with the financial covenants under the Credit Facility.~~2023.

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As of March 31, 2023 and September 30, 2022, the Company was in compliance with all covenants under the Credit Facility.

Share Repurchases

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

Recent Accounting Pronouncements

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

Critical Accounting Policies

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As disclosed above, on December 15, 2022, the Company amended the Credit Facility to, among other things, remove and replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on SOFR. The transition from LIBOR to SOFR as the reference rate under the Credit Facility has not had, and is not expected to have in the future, a material effect on the Company’s liquidity or access to credit. There have been no other 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, ~~2022.~~2023.

Changes in Internal Control over Financial Reporting

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

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PART II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

Item 5. Other Information

~~Related Party Lease~~

On May ~~4, 2022,~~3, 2023, the Company and Chalet, a related party owned by members of the Isely family, entered into ~~a ground lease for~~ the ~~Company’s store location and store support center in Lakewood, Colorado~~First Amendment to Lease (the ~~“Lease”) and terminated~~Amended Lafayette Lease) modifying the terms of the previously disclosed ~~Sublease,~~Lease dated July 1, 2011, between the Company and Chalet, pursuant to which the Company leases real property in Lafayette, Colorado. The Amended Lafayette Lease extends the lease term for an additional 84 months and provides for three renewal options of five years each. The Company will pay annual rent of approximately $0.2 million pursuant to the Amended Lafayette Lease. On May 3, 2023, the Company and Chalet also entered into the Amendment to Commercial Lease (the Amended Arvada Lease) modifying the terms of the previously disclosed Commercial Lease dated June 1, 2006, between the Company and ~~Chalet~~Chalet. The Amended Arvada Lease extends the lease term for ~~the same location. The Lease permits the Company to construct a new building on the property to replace its existing store~~an additional 85 months and provides for ~~an initial term~~three renewal options of 20five years ~~subject to additional extensions.~~each. The Company will pay annual rent of approximately $0.3 million ~~with a 5% increase every five years.~~pursuant to the Amended Arvada Lease. As required under the Company’s ~~Related Party Transaction~~related party transaction policy, the Company’s ~~Audit Committee~~audit committee approved the terms of ~~the transaction. This disclosure is responsive to Items 1.01 and 1.02 of Form 8-K.~~

~~Extension of Share Repurchase Program~~

On May 4, 2022, our Board authorized an extension of the Company’s previously announced share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2024. The dollar value of the shares of common stock that may yet be repurchased under the share repurchase program is approximately $8.3 million. Repurchases 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 promulgated under the Securities Exchange Act of 1934, as amended, 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. 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.these transactions. This disclosure is responsive to Item ~~8.01~~1.01 of Form 8-K.

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Item 6. Exhibits

EXHIBIT INDEX

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form ~~S-1~~S-1/A 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~~S-1/A filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
10.1		First Amendment to Lease, dated May ~~4, 2022~~3, 2023, by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc.
10.2		Amendment to Commercial Lease, dated May 3, 2023, by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc.
31.1		Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3		Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†		Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2022,~~2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, ~~2022~~2023 and September 30, ~~2021~~2022 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, ~~2022~~2023 and ~~2021~~2022 (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)

† 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.

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SIGNATURES

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 ~~5, 2022.~~4, 2023.

	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)

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