Table of Contents



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 DECEMBER 31, 2019

 

OR

 

 

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 February 4, 2020 was 22,489,902.

 

 

 

 

 

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended December 31, 2019

 

Table of Contents

 

   

Page

Number

     
 

PART I. Financial Information

 
     

Item 1.

Financial Statements

 
 

Consolidated Balance Sheets as of December 31, 2019 (unaudited) and September 30, 2019

3
 

Consolidated Statements of Income for the three months ended December 31, 2019 and 2018 (unaudited)

4
 

Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018 (unaudited)

5
 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2019 and 2018 (unaudited)

6
 

Notes to Unaudited Interim Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25
     
 

PART II. Other Information

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 6.

Exhibits

27
     

SIGNATURES

28

 

1

Table of Contents

 

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and theCompany’’ 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 2020” refers to the year from October 1, 2019 to September 30, 2020).

 

Forward-Looking Statements

 

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

 

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

 

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

 

2

Table of Contents

 

PART I. Financial Information

Item 1. Financial Statements

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

 

   

December 31,

2019

   

September 30,

2019

 

 

 

(unaudited)

         
Assets                

Current assets:

               

Cash and cash equivalents

  $ 5,157       6,214  

Accounts receivable, net

    4,681       5,059  

Merchandise inventory

    98,145       96,179  

Prepaid expenses and other current assets

    8,071       7,728  

Total current assets

    116,054       115,180  

Property and equipment, net

    155,619       201,635  

Operating lease assets

    355,167        

Finance lease assets

    32,308        

Deposits and other assets

    668       1,638  

Goodwill and other intangible assets, net

    9,476       8,644  

Deferred financing costs, net

    40       17  

Total assets

  $ 669,332       327,114  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 62,220       63,162  

Accrued expenses

    22,032       19,061  

Capital and financing lease obligations, current portion

          1,045  

Operating lease obligations, current portion

    31,419        

Finance lease obligations, current portion

    2,374        

Total current liabilities

    118,045       83,268  

Long-term liabilities:

               

Capital and financing lease obligations, net of current portion

          51,475  

Operating lease obligations, net of current portion

    341,715        

Finance lease obligations, net of current portion

    31,078        

Revolving credit facility

    8,292       5,692  

Deferred income tax liabilities, net

    11,110       10,420  

Deferred rent

          11,393  

Leasehold incentives

          7,960  

Total long-term liabilities

    392,195       86,940  

Total liabilities

    510,240       170,208  

Commitments (Note 13)

               

Stockholders’ equity:

               

Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at December 31, 2019 and September 30, 2019 and 22,475,718 and 22,463,057 outstanding at December 31, 2019 and September 30, 2019, respectively

    23       23  

Additional paid-in capital

    56,454       56,319  

Retained earnings

    102,878       100,923  

Common stock in treasury at cost, 34,561 and 47,222 shares, at December 31, 2019 and September 30, 2019, respectively

    (263

)

    (359

)

Total stockholders’ equity

    159,092       156,906  

Total liabilities and stockholders’ equity

  $ 669,332       327,114  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

3

Table of Contents

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

 

   

Three months ended
December 31,

 
   

2019

   

2018

 
                 

Net sales

  $ 230,030       221,515  

Cost of goods sold and occupancy costs

    169,506       162,369  

Gross profit

    60,524       59,146  

Store expenses

    51,427       49,123  

Administrative expenses

    5,819       5,315  

Pre-opening and relocation expenses

    430       672  

Operating income

    2,848       4,036  

Interest expense, net

    (536

)

    (1,255

)

Income before income taxes

    2,312       2,781  

Provision for income taxes

    (444

)

    (584

)

Net income

  $ 1,868       2,197  
                 

Net income per common share:

               

Basic

  $ 0.08       0.10  

Diluted

  $ 0.08       0.10  

Weighted average number of shares of common stock outstanding:

               

Basic

    22,471,350       22,386,566  

Diluted

    22,542,967       22,595,961  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

4

Table of Contents

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   

Three months ended

December 31,

 
   

2019

   

2018

 
                 

Operating activities:

               

Net income

  $ 1,868       2,197  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    7,707       7,286  

Loss on disposal of property and equipment

    1       41  

Share-based compensation

    279       399  

Deferred income tax expense (benefit)

    424       (264

)

Non-cash interest expense

    3       3  

Changes in operating assets and liabilities

               

Decrease (increase) in:

               

Accounts receivable, net

    378       (151

)

Merchandise inventory

    (1,966

)

    (969

)

Prepaid expenses and other assets

    (371

)

    (339

)

Income tax receivable

    29       181  

Operating lease asset

    7,451        

(Decrease) increase in:

               

Operating lease liability

    (7,625

)

     

Accounts payable

    (669

)

    (4,400

)

Accrued expenses

    2,971       3,740  

Deferred compensation

          12  

Deferred rent and leasehold incentives

          (209

)

Net cash provided by operating activities

    10,480       7,527  

Investing activities:

               

Acquisition of property and equipment

    (10,982

)

    (11,511

)

Acquisition of other intangibles

    (1,008

)

    (68

)

Proceeds from property insurance settlements

    17       19  

Net cash used in investing activities

    (11,973

)

    (11,560

)

Financing activities:

               

Borrowings under credit facility

    113,000       94,300  

Repayments under credit facility

    (110,400

)

    (94,800

)

Capital and financing lease obligation payments

          (175

)

Finance lease obligation payments

    (519

)

     

Dividend to shareholders

    (1,573

)

     

Loan fees paid

    (25

)

     

Payments on withholding tax for restricted stock unit vesting

    (47

)

    (154

)

Net cash provided by (used in) financing activities

    436       (829

)

Net decrease in cash and cash equivalents

    (1,057

)

    (4,862

)

Cash and cash equivalents, beginning of period

    6,214       9,398  

Cash and cash equivalents, end of period

  $ 5,157       4,536  

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 163       224  

Cash paid for interest on finance or capital and financing lease obligations, net of capitalized interest of $45 and $43, respectively

    373       1,024  

Income taxes paid

    10       20  

Supplemental disclosures of non-cash investing and financing activities:

               

Acquisition of property and equipment not yet paid

  $ 6,015       2,970  

Property acquired through capital and financing lease obligations

          4,688  

Property acquired through operating lease obligations

    6,378        

Property acquired through finance lease obligations

    1,322        

 

See accompanying notes to unaudited interim consolidated financial statements.

 

5

Table of Contents

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended December 31, 2019 and December 31, 2018

(Unaudited)

(Dollars in thousands, except per share data)

 

 

   

Common stock –$0.001 par

                                 
   

value

   

Additional

                   

Total

 
   

Shares

outstanding

   

Amount

   

paid-in

capital

   

Retained

earnings

   

Treasury

stock

   

stockholders’

equity

 

Balances September 30, 2019

    22,463,057     $ 23     $ 56,319     $ 100,923     $ (359

)

  $ 156,906  

Net income

                      1,868             1,868  

Cash dividends

                      (1,573

)

          (1,573

)

Share-based compensation

    12,661             135             96       231  

Topic 842 transition impact

                      1,660             1,660  

Balances December 31, 2019

    22,475,718     $ 23     $ 56,454     $ 102,878     $ (263

)

  $ 159,092  

 

 

   

Common stock –$0.001 par

                                 
   

value

   

Additional

                   

Total

 
   

Shares

outstanding

   

Amount

   

paid-in

capital

   

Retained

earnings

   

Treasury

stock

   

stockholders’

equity

 

Balances September 30, 2018

    22,373,382     $ 23     $ 56,236     $ 91,507     $ (1,040

)

  $ 146,726  

Net income

                      2,197             2,197  

Share-based compensation

    18,928             101             144       245  

Balances December 31, 2018

    22,392,310     $ 23     $ 56,337     $ 93,704     $ (896

)

  $ 149,168  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

6

Table of Contents

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

 

December 31, 2019 and 2018

 

 

1. Organization

 

Nature of Business

 

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of December 31, 2019, the Company operated 155 stores in 20 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 153 stores in 19 states as of September 30, 2019.

 

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Consolidated Financial Statements

 

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

 

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

 

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

 

   

Three months ended

December 31,

 
   

2019

   

2018

 

Grocery

    69

%

    68  

Dietary supplements

    21       21  

Other

    10       11  
      100

%

    100  

 

Use of Estimates

 

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

 

Recently Adopted Accounting Pronouncements 

 

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

 

7

 

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

 

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

 

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

 

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

 

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 currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

 

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

 

8

 

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

 

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

 

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

 

   

Three months ended

December 31,

 
   

2019

   

2018

 

Grocery

  $ 157,934       151,301  

Dietary supplements

    47,901       45,784  

Other

    24,195       24,430  
    $ 230,030       221,515  

 

 

4. Earnings Per Share

 

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

 

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

 

   

Three months ended
December 31,

 
   

2019

   

2018

 

Net income

  $ 1,868       2,197  
                 

Weighted average number of shares of common stock outstanding

    22,471,350       22,386,566  

Effect of dilutive securities

    71,617       209,395  

Weighted average number of shares of common stock outstanding including effect of dilutive securities

    22,542,967       22,595,961  
                 

Basic earnings per share

  $ 0.08       0.10  

Diluted earnings per share

  $ 0.08       0.10  

 

There were 160,246 and 5,126 non-vested RSUs for the three months ended December 31, 2019 and 2018, respectively, excluded from the calculation of diluted EPS as they are antidilutive.

 

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

 

9

 

 

 

5. Debt

 

Credit Facility 

 

On January 28, 2016, the Company entered into a credit facility (the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on November 13, 2024. For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

 

The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends 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 million during any fiscal year.

 

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

 

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

 

Lease Obligations 

 

As of September 30, 2019, 23 leases were classified as capital and financing lease obligations (see Note 7). As a result of the Company’s adoption, effective October 1, 2019, of the new lease standard set out in ASC 842: (i) the Company’s previous capital financing lease obligations were derecognized and reclassified as operating or finance leases and (ii) the Company’s previous capital lease obligations were classified as finance leases. As of December 31, 2019, the Company had 16 leases that were classified as finance leases. No rent expense is recorded for these finance leases (previously classified as capital and financing lease obligations); 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, and legacy capital and financing lease obligations, is determined at the inception of the lease.

 

Interest

 

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

 

 

6. Stockholders’ Equity

 

Share Repurchases

 

In May 2016, the Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. In May 2018, the Board authorized a two-year extension of the share repurchase program. As a result of such extension, the share repurchase program will terminate on May 4, 2020. Repurchases under the Company’s share repurchase program are made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

 

10

 

Prior to October 1, 2018, the Company repurchased 199,543 shares under the share repurchase program. The Company did not repurchase any shares between October 1, 2018 and December 31, 2019. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.

 

Prior to October 1, 2019, the Company reissued 152,321 treasury shares at a cost of $1.3 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three months ended December 31, 2019 and 2018, the Company reissued 12,661 treasury shares at a cost of $0.1 million and 18,928 treasury shares at a cost of $0.1 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At December 31, 2019 and September 30, 2019, the Company held in treasury 34,561 shares and 47,222 shares, respectively, totaling $0.3 million and $0.4 million, respectively.

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

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

 

Lease cost

Classification

 

Three months

ended December

31, 2019

 

Operating lease cost:

         
 

Cost of goods sold and occupancy costs

  $ 10,666  
 

Store expenses

    80  
 

Administrative expenses

    82  

Finance lease cost:

         

Depreciation of right-of-use assets

Store expenses

    761  

Interest on lease liabilities

Interest expense, net

    418  

Short-term lease cost

Store expenses

    85  

Variable lease cost

Cost of goods sold and occupancy costs(1)

    1,238  

Sublease income

Store expenses

    (93

)

Total lease cost

    13,237  

 

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

 

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

 

   

Three months ended

December 31,

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

Operating cash flows from operating leases

  $ 11,001  

Operating cash flows from finance leases

    418  

Financing cash flows from finance leases

    518  

Right-of-use assets obtained in exchange for new lease liabilities:

       

Operating leases

    5,438  

Finance leases

    1,322  
         

Weighted-average remaining lease term (in years):

       

Operating leases

    12.2  

Finance leases

    11.8  

Weighted-average discount rate:

       

Operating leases

    3.6

%

Finance leases

    5.5

%

 

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

 

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

 

Fiscal Year

 

Operating

leases

   

Finance

leases

   

Total

 

Remainder of 2020

  $ 33,226       2,993       36,219  

2021

    43,985       4,007       47,992  

2022

    43,278       4,029       47,307  

2023

    42,395       4,073       46,468  

2024

    40,292       4,139       44,431  

Thereafter

    263,902       26,604       290,506  

Total future undiscounted lease payments

    467,078       45,845       512,923  

Less tenant improvement allowance receivable from landlord

    (695

)

    (217

)

    (912

)

Less imputed interest

    (93,249

)

    (12,176

)

    (105,425

)

Total reported lease liability

    373,134       33,452       406,586  

Less current portion

    (31,419

)

    (2,374

)

    (33,793

)

Noncurrent lease liability

    341,715       31,078       372,793  

 

12

 

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

 

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

 

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

 

 

Fiscal Year

 

Third
parties

   

Related
parties

   

Sublease rental income

   

Total operating
leases

 

2020

  $ 41,646       1,081       (422

)

    42,305  

2021

    41,484       1,058       (418

)

    42,124  

2022

    41,081       1,056       (424

)

    41,713  

2023

    40,175       1,056       (413

)

    40,818  

2024

    38,012       1,056       (257

)

    38,811  

Thereafter

    262,086       2,062       (772

)

    263,376  

Total payments

  $ 464,484       7,369       (2,706

)

    469,147  

 

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

 

Fiscal Year

 

Interest
expense on
capital lease
finance
obligations

   

Principal
payments on
capital lease
finance
obligations

   

 

 

 

Interest
expense on
capital lease
obligations

   

 

 

 

Principal payments on
capital lease
obligations

   

Total future
payments on capital lease finance and capital lease obligations

 

2020

  $ 3,871       569       605       333       5,378  

2021

    3,816       656       570       368       5,410  

2022

    3,751       747       532       407       5,437  

2023

    3,675       880       488       460       5,503  

2024

    3,578       1,095       439       515       5,627  

Thereafter

    15,088       8,244       2,142       3,889       29,363  

Non-cash derecognition of capital lease finance obligations at end of lease term

          27,367                   27,367  

Total future payments

  $ 33,779       39,558       4,776       5,972       84,085  

 

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

 

Fiscal Year  

Interest expense on

capital lease finance

obligations for assets

under construction

   

Principal payments

on capital lease

finance obligations

for assets under

construction

   

Interest

expense on

capital lease

obligations for assets

under construction

   

Principal payments

on capital lease

obligations for

assets under

construction

 

2020

  $ 118       18       237       123  

2021

    161       26       236       132  

2022

    160       28       228       139  

2023

    158       30       221       147  

2024

    155       33       213       155  

Thereafter

    1,368       756       1,827       3,944  

Non-cash derecognition of capital lease finance obligations at end of lease term

          1,459              

Total future payments

  $ 2,120       2,350       2,926       4,640  

 

 

13

 

 

 

8. Property and Equipment 

 

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

 

               

As of

 
   

Useful lives

(in years)

   

December 31,

2019

   

September 30,

2019

 

Construction in process

      n/a       $ 6,428       15,145  

Capitalized real estate leases for build-to-suit stores, including unamortized land of $0 and $617, respectively

      40               42,320  

Capitalized real estate leases

      15               7,241  

Land

      n/a         1,390       1,230  

Buildings

      40         26,735       23,571  

Land improvements

    5 24       1,560       1,498  

Leasehold and building improvements

    1 25       150,001       144,318  

Fixtures and equipment

    5 7       134,234       131,491  

Computer hardware and software

    3 5       22,349       21,672  
                  342,697       388,486  

Less accumulated depreciation and amortization

                (187,078

)

    (186,851

)

Property and equipment, net

              $ 155,619       201,635  

 

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

 

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

 

   

Three months ended
December 31,

 
   

2019

   

2018

 

Depreciation and amortization expense included in cost of goods sold and occupancy costs

  $ 189       182  

Depreciation and amortization expense included in store expenses

    7,240       6,842  

Depreciation and amortization expense included in administrative expenses

    278       262  

Total depreciation and amortization expense

  $ 7,707       7,286  

 

 

 

9. Goodwill and Other Intangible Assets

 

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

 

   

 

   

As of

 
   

Useful lives

(in years)

   

December 31,

2019

   

September 30,

2019

 

Amortizable intangible assets:

                           

Other intangibles

    0.5 - 3     $ 3,486       2,677  

Amortizable intangible assets

                3,486       2,677  

Less accumulated amortization

                (1,768

)

    (1,592

)

Amortizable intangible assets, net

                1,718       1,085  

Other intangibles in process

                2,171       1,972  

Trademark

 

 

Indefinite       389       389  

Total other intangibles, net

                4,278       3,446  

Goodwill

 

 

Indefinite       5,198       5,198  

Total goodwill and other intangibles, net

              $ 9,476       8,644  

 

14

 

 

 

10. Accrued Expenses

 

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

 

   

As of

 
   

December 31,

   

September 30,

 
   

2019

   

2019

 

Payroll and employee-related expenses

  $ 11,189       8,447  

Accrued property, sales and use tax payable

    7,656       7,761  

Accrued marketing expenses

    713       477  

Deferred revenue related to gift card sales

    1,612       1,410  

Other

    862       966  

Total accrued expenses

  $ 22,032       19,061  

 

 

11. Income Taxes

 

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

 

 

12. Related Party Transactions

 

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

 

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

 

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

 

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

 

 

13. Commitments and Contingencies

 

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

 

15

 

 

 

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, 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 December 31, 2019, we operated 155 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

 

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

 

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

 

Performance Highlights

 

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

 

 

Net sales. Net sales were $230.0 million for the three months ended December 31, 2019, an increase of $8.5 million, or 3.8%, compared to net sales of $221.5 million for the three months ended December 31, 2018.

 

 

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

 

 

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

 

 

Net income. Net income was $1.9 million for the three months ended December 31, 2019 compared to net income of $2.2 million for the three months ended December 31, 2018.

 

 

EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $10.6 million for the three months ended December 31, 2019, a decrease of $0.8 million, or 6.8%, compared to $11.3 million for the three months ended December 31, 2018. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

 

 

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

 

 

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

 

16

Table of Contents

 

  Store Relocations and Remodels. We did not relocate any stores during the three months ended December 31, 2019.

 

Industry Trends and Economics

 

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

 

 

Impact of broader economic trends. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence.

 

 

Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. As we open new stores, our results of operations have been and may continue to be materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management and general economic conditions. Once a new store is open, it typically grows at a faster rate than mature stores for several years. Mature stores are defined as stores that have been open for any part of five fiscal years or longer.

 

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

 

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

 

 

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

 

Outlook

 

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

 

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We plan for the foreseeable future to continue opening new stores and entering new markets. The rate of new store unit growth in the foreseeable future is expected to be comparable to recent years, depending on economic and business conditions and other factors. During the past few years, we have enhanced our infrastructure to enable us to support our continued growth. In addition, in recent years we believe we have enhanced customer loyalty and increased customer engagement by expanding our digital and social media presence and further developing the {N}power® customer loyalty program.

 

We believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. As we continue to expand our store base, we believe there are opportunities for increased leverage in costs, such as administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to providing high-quality products at affordable prices and increased competition, such sourcing economies and efficiencies at our bulk food repackaging facility and distribution center may not be reflected in our gross margin in the near term. In addition, our ability to leverage costs may be limited due to the fixed nature of our rent obligations and related occupancy expenses.

 

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

 

Key Financial Metrics in Our Business

 

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

 

Net sales

 

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

 

 

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

 

 

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

 

 

Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2020 are stores that opened during or before fiscal year 2015). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.

 

 

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

 

 

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

 

 

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

 

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Cost of goods sold and occupancy costs

 

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

 

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 computer hardware and software. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, generally related to store relocations. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of sales typically decrease.

 

Administrative expenses

 

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

 

Pre-opening and relocation expenses

 

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

 

Interest expense, net

 

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

 

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Results of Operations

 

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

 

   

Three months ended
December 31,

 
   

2019

   

2018

 

Statements of Income Data:*

               

Net sales

    100.0

%

    100.0  

Cost of goods sold and occupancy costs

    73.7       73.3  

Gross profit

    26.3       26.7  

Store expenses

    22.4       22.2  

Administrative expenses

    2.5       2.4  

Pre-opening and relocation expenses

    0.2       0.3  

Operating income

    1.2       1.8  

Interest expense, net

    (0.2

)

    (0.6

)

Income before income taxes

    1.0       1.3  

Provision for income taxes

    (0.2

)

    (0.3

)

Net income

    0.8

%

    1.0  

__________________________

               

*Figures may not sum due to rounding.

               
                 

Number of stores at end of period

    155       151  

Number of stores opened during the period

    2       4  

Number of stores relocated and remodeled during the period

    0       1  

Number of stores closed during the period

    0       1  
                 

Total store unit count increase period over period

    2.6

%

    6.3  

Change in comparable store sales

    1.9       5.5  

Change in daily average comparable store sales

    1.9       5.5  

Change in mature store sales

    0.8       3.6  

Change in daily average mature store sales

    0.8       3.6  

 

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

 

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

 

   

Three months ended

December 31,

   

Change In

 
   

2019

   

2018

   

Dollars

   

Percent

 

Statements of Income Data:

                               

Net sales

  $ 230,030       221,515       8,515       3.8

%

Cost of goods sold and occupancy costs

    169,506       162,369       7,137       4.4  

Gross profit

    60,524       59,146       1,378       2.3  

Store expenses

    51,427       49,123       2,304       4.7  

Administrative expenses

    5,819       5,315       504       9.5  

Pre-opening and relocation expenses

    430       672       (242

)

    (36.0

)

Operating income

    2,848       4,036       (1,188

)

    (29.4

)

Interest expense, net

    (536

)

    (1,255

)

    719       (57.3

)

Income before income taxes

    2,312       2,781       (469

)

    (16.9

)

Provision for income taxes

    (444

)

    (584

)

    140       (24.0

)

Net income

  $ 1,868       2,197       (329

)

    (15.0

)

 

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Net sales

 

Net sales increased $8.5 million, or 3.8%, to $230.0 million for the three months ended December 31, 2019 compared to $221.5 million for the three months ended December 31, 2018, primarily due to a $4.1 million increase in comparable store sales and a $4.6 million increase in new store sales, partially offset by a $0.2 million decrease in sales from one store that closed during the first quarter of fiscal year 2019. Daily average comparable store sales increased 1.9% for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The daily average comparable store sales increase resulted from a 2.5% increase in daily average transaction size, partially offset by a 0.6% decrease in average transaction count. Comparable store average transaction size was $37.22 for the three months ended December 31, 2019. Daily average mature store sales increased 0.8% for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase in comparable store sales during the three months ended December 31, 2019 was primarily driven by marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.

 

Gross profit

 

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

 

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

 

Store expenses

 

Store expenses increased $2.3 million, or 4.7%, to $51.4 million for the three months ended December 31, 2019 compared to $49.1 million for the three months ended December 31, 2018. Store expenses as a percentage of sales were 22.4% and 22.2% for the three months ended December 31, 2019 and 2018, respectively. The increase in store expenses as a percentage of sales was solely attributable to our adoption of ASC 842.

 

Administrative expenses

 

Administrative expenses increased $0.5 million, or 9.5%, to $5.8 million for the three months ended December 31, 2019 compared to $5.3 million for the three months ended December 31, 2018. Administrative expenses as a percentage of sales were 2.5% and 2.4% for the three months ended December 31, 2019 and 2018, respectively.

 

Pre-opening and relocation expenses

 

Pre-opening and relocation expenses decreased $0.2 million, or 36.0%, to $0.4 million for the three months ended December 31, 2019 compared to $0.7 million for the three months ended December 31, 2018, due to the impact of the number and timing of new store openings and relocations. We opened two new stores and relocated no stores during the three months ended December 31, 2019 compared to opening four new stores and relocating one store during the three months ended December 31, 2018. Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.3% for the three months ended December 31, 2019 and 2018, respectively.

 

Interest expense, net

 

Interest expense, net of capitalized interest, decreased $0.7 million, or 57.3%, to $0.5 million for the three months ended December 31, 2019 compared to $1.3 million for the three months ended December 31, 2018. The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the three months ended December 31, 2019. This is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.

 

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Income taxes

 

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

 

Net income

 

Net income was $1.9 million, or $0.08 diluted earnings per share, for the three months ended December 31, 2019 compared to $2.2 million, or $0.10 diluted earnings per share, for the three months ended December 31, 2018.

 

Non-GAAP financial measures 

 

EBITDA

 

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

 

   

Three months ended
December 31,

 
   

2019

   

2018

 

Net income

  $ 1,868       2,197  

Interest expense, net

    536       1,255  

Provision for income taxes

    444       584  

Depreciation and amortization

    7,707       7,286  

EBITDA

  $ 10,555       11,322  

 

EBITDA decreased 6.8% to $10.6 million in the three months ended December 31, 2019 compared to $11.3 million for the three months ended December 31, 2018. EBITDA as a percentage of sales was 4.6% and 5.1% in the three months ended December 31, 2019 and 2018, respectively. The number of stores with finance leases (previously classified as capital and financing lease obligations) decreased from 21 as of December 31, 2018 to 16 as of December 31, 2019 as a result of our adoption of ASC 842 effective October 1, 2019. Finance leases have a positive impact on EBITDA because, as discussed above, they result in lower cost of goods sold and occupancy costs. Conversely, the greater number of stores with operating leases during the three months ended December 31, 2019, led to higher cost of goods sold and occupancy costs, which impacted both EBITDA and EBITDA as a percentage of sales.

 

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

 

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

 

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

 

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

Liquidity and Capital Resources

 

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

 

In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expend up to $10.0 million to repurchase shares of the Company’s common stock. In May 2018, our Board of Directors authorized a two-year extension of the share repurchase program. As a result of such extension, the share repurchase program will terminate on May 4, 2020. We did not repurchase any shares during the three months ended December 31, 2019. Between January 1, 2020 and February 3, 2020 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common stock. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. We expect funding of share repurchases will come from operating cash flow, excess cash and/or borrowings under the Credit Facility. The timing and the number of shares purchased will be dictated by our capital needs and stock market conditions.

 

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

 

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

 

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

 

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

 

   

Three months ended

December 31,

 
   

2019

   

2018

 

Net cash provided by operating activities

  $ 10,480       7,527  

Net cash used in investing activities

    (11,973

)

    (11,560

)

Net cash provided by (used in) financing activities

    436       (829

)

Net decrease in cash and cash equivalents

    (1,057

)

    (4,862

)

Cash and cash equivalents, beginning of period

    6,214       9,398  

Cash and cash equivalents, end of period

  $ 5,157       4,536  

 

Operating Activities

 

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

 

Investing Activities

 

Net cash used in investing activities increased $0.4 million, or 3.6%, to $12.0 million for the three months ended December 31, 2019 compared to $11.6 million for the three months ended December 31, 2018. This increase was primarily due to a $0.9 million increase in software investments for internal use, partially offset by $0.5 million decrease in property and equipment acquisitions during the three months ended December 31, 2019 compared to the three months ended December 31, 2018.

 

Financing Activities

 

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

 

Credit Facility

 

The amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. The operating company is the borrower under the Credit Facility and its obligations thereunder are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on November 13, 2024.

 

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

 

The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.

 

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

 

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

 

Share Repurchases

 

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

 

Off-Balance Sheet Arrangements 

 

As of December 31, 2019, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of December 31, 2019, the Company had signed five leases whose terms have not yet commenced; such leases are for four new stores and one relocated store in fiscal year 2020 and beyond. The contractual obligation related to these leases is $17.9 million (see Note 7). We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

 

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

 

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

 

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 as of December 31, 2019.

 

Changes in Internal Control over Financial Reporting

 

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

 

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

 

25

Table of Contents

 

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

 

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

 

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

 

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

 

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

 

26

Table of Contents

 

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 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)

3.2

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)

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 December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2019 (unaudited) and September 30, 2019, (ii) Consolidated Statements of Income for the three months ended December 31, 2019 and 2018 (unaudited), (iii) Consolidated Statements of Cash Flows for the three months ended December 31, 2019 and 2018 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2019 and 2018 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements. 

 


 

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

 

27

Table of Contents

 

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 February 6, 2020.

 

 

 

Natural Grocers by Vitamin Cottage, Inc.

     
     
 

By:

/s/ KEMPER ISELY

   

Kemper Isely, Co-President

   

(Principal Executive Officer)

     
     
 

By:

/s/ TODD DISSINGER

   

Todd Dissinger, Chief Financial Officer

   

(Principal Financial and Accounting Officer)

 

28

ex_171064.htm

Exhibit 31.1

 

CERTIFICATION

 

I, Kemper Isely, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 6, 2020

 

 

 

 

/s/  Kemper Isely

 

Kemper Isely

 

Co-President and a Principal Executive Officer

 

 

 

 

 

 

 

ex_171065.htm

Exhibit 31.2

 

CERTIFICATION

 

I, Zephyr Isely, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

 

Date: February 6, 2020

 

 

 

 

 

 

/s/ Zephyr Isely 

 

 

Zephyr Isely 

 

 

Co-President and a Principal Executive Officer

 

 

 

 

 

 

ex_171066.htm

Exhibit 31.3

 

CERTIFICATION

 

I, Todd Dissinger, certify that:

 

1.

I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: February 6, 2020

 

 

 

 

 

 

/s/ Todd Dissinger

 

Todd Dissinger 

 

Chief Financial Officer and Principal Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

ex_171067.htm

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350, as adopted pursuant to

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc. (the “Company”) for the fiscal quarter ended December 31, 2019, Kemper Isely, Co-President and a Principal Executive Officer of the Company, Zephyr Isely, Co-President and a Principal Executive Officer of the Company, and Todd Dissinger, Chief Financial Officer and Principal Financial Officer of the Company, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

 

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: February 6, 2020 

 

 

 

 

/s/ Kemper Isely 

 

Kemper Isely 

 

Co-President and a Principal Executive Officer 

 

 

 

 

/s/ Zephyr Isely 

 

Zephyr Isely 

 

Co-President and a Principal Executive Officer 

 

 

 

 

/s/ Todd Dissinger 

 

Todd Dissinger 

 

Chief Financial Officer and Principal Financial Officer 

 

 

 

 

 

 

 

 

 

 

 

v3.19.3.a.u2
Note 12 - Related Party Transactions (Details Textual)
$ in Millions
3 Months Ended
Dec. 31, 2019
USD ($)
Dec. 31, 2018
USD ($)
Chalet [Member]    
Number of Operating Leases 5  
Related Party Transaction Number of Owners That Are Non-Independent Board Members of the Entity 4  
Related Party Transaction, Expenses from Transactions with Related Party $ 0.2 $ 0.3
Isely Family Land Trust LLC [Member]    
Number of Operating Leases 1  
Related Party Transaction, Expenses from Transactions with Related Party $ 0.1 0.1
FTVC, LLC [Member]    
Number of Operating Leases 1  
Related Party Transaction Number of Owners That Are Non-Independent Board Members of the Entity 4  
FTVC, LLC [Member] | Maximum [Member]    
Related Party Transaction, Expenses from Transactions with Related Party $ 0.1 $ 0.1
v3.19.3.a.u2
Note 7 - Lease Obligations - Lease Cost (Details)
$ in Thousands
3 Months Ended
Dec. 31, 2019
USD ($)
Operating lease cost $ 82
Total lease cost 13,237
Cost of Sales [Member]  
Operating lease cost 10,666
Variable lease cost 1,238 [1]
Store Expenses [Member]  
Operating lease cost 80
Depreciation of right-of-use assets 761
Short-term lease cost 85
Sublease income (93)
Interest Expense [Member]  
Interest on lease liabilities $ 418
[1] Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.
v3.19.3.a.u2
Note 4 - Earnings Per Share - Basic and Diluted Earnings Per Share (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Net income $ 1,868 $ 2,197
Weighted average number of shares of common stock outstanding (in shares) 22,471,350 22,386,566
Effect of dilutive securities (in shares) 71,617 209,395
Weighted average number of shares of common stock outstanding including effect of dilutive securities (in shares) 22,542,967 22,595,961
Basic earnings per share (in dollars per share) $ 0.08 $ 0.10
Diluted earnings per share (in dollars per share) $ 0.08 $ 0.10
v3.19.3.a.u2
Consolidated Balance Sheets (Current Period Unaudited) - USD ($)
$ in Thousands
Dec. 31, 2019
Sep. 30, 2019
Current assets:    
Cash and cash equivalents $ 5,157 $ 6,214
Accounts receivable, net 4,681 5,059
Merchandise inventory 98,145 96,179
Prepaid expenses and other current assets 8,071 7,728
Total current assets 116,054 115,180
Property and equipment, net 155,619 201,635
Operating lease assets 355,167
Finance lease assets 32,308
Deposits and other assets 668 1,638
Goodwill and other intangible assets, net 9,476 8,644
Deferred financing costs, net 40 17
Total assets 669,332 327,114
Current liabilities:    
Accounts payable 62,220 63,162
Accrued expenses 22,032 19,061
Capital and financing lease obligations, current portion 1,045
Operating lease obligations, current portion 31,419
Finance lease obligations, current portion 2,374
Total current liabilities 118,045 83,268
Long-term liabilities:    
Capital and financing lease obligations, net of current portion 51,475
Operating lease obligations, net of current portion 341,715
Finance lease obligations, net of current portion 31,078
Revolving credit facility 8,292 5,692
Deferred income tax liabilities, net 11,110 10,420
Deferred rent 11,393
Leasehold incentives 7,960
Total long-term liabilities 392,195 86,940
Total liabilities 510,240 170,208
Commitments (Note 13)
Stockholders’ equity:    
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at December 31, 2019 and September 30, 2019 and 22,475,718 and 22,463,057 outstanding at December 31, 2019 and September 30, 2019, respectively 23 23
Additional paid-in capital 56,454 56,319
Retained earnings 102,878 100,923
Common stock in treasury at cost, 34,561 and 47,222 shares, at December 31, 2019 and September 30, 2019, respectively (263) (359)
Total stockholders’ equity 159,092 156,906
Total liabilities and stockholders’ equity $ 669,332 $ 327,114
v3.19.3.a.u2
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies - Sales From Natural and Organic Retail Stores (Details)
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Sales percentage 100.00% 100.00%
Grocery [Member]    
Sales percentage 69.00% 68.00%
Dietary Supplements [Member]    
Sales percentage 21.00% 21.00%
Other [Member]    
Sales percentage 10.00% 11.00%
v3.19.3.a.u2
Consolidated Statements of Cash Flows (Unaudited) (Parentheticals) - USD ($)
$ in Thousands
3 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Capitalized interest $ 45 $ 43
v3.19.3.a.u2
Note 5 - Debt
3 Months Ended
Dec. 31, 2019
Notes to Financial Statements  
Debt and Capital Leases Disclosures [Text Block]
5
. Debt
 
Credit Facility
 
 
On
January 28, 2016,
the Company entered into a credit facility (the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and
VC2.
The Credit Facility is secured by a lien on substantially all of the Company’s assets. The amount available for borrowing under the Credit Facility is
$50.0
million, including a
$5.0
million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on
November 13, 2024.
For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.
 
The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends 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
million during any fiscal year.
 
The Company had
$8.3
million and
$5.7
million outstanding under the Credit Facility as of
December 31, 2019
and
September 30, 2019,
respectively. As of each of
December 31, 2019
and
September 30, 2019,
the Company had undrawn, issued and outstanding letters of credit of
$1.0
million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. The Company had
$40.7
million and
$43.3
million available for borrowing under the Credit Facility as of
December 31, 2019
and
September 30, 2019,
respectively.
 
As of
December 31, 2019
and
September 30, 2019,
the Company was in compliance with the financial covenants under the Credit Facility.
 
Lease Obligations
 
 
As of
September 30, 2019,
23
leases were classified as capital and financing lease obligations (see Note
7
). As a result of the Company’s adoption, effective
October 1, 2019,
of the new lease standard set out in ASC
842:
(i) the Company’s previous capital financing lease obligations were derecognized and reclassified as operating or finance leases and (ii) the Company’s previous capital lease obligations were classified as finance leases. As of
December 31, 2019,
the Company had
16
leases that were classified as finance leases.
No
rent expense is recorded for these finance leases (previously classified as capital and financing lease obligations); 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, and legacy capital and financing lease obligations, is determined at the inception of the lease.
 
Interest
 
The Company incurred gross interest expense of
$0.6
million and
$1.3
million for the
three
months ended
December 31, 2019
and
2018,
respectively. Interest expense for the
three
months ended
December 31, 2019
and
2018
relates primarily to interest on finance lease obligations (what was referred to prior to the Company’s adoption of ASC
842
as capital and financing lease obligations). The Company capitalized interest of less than
$0.1
million for each of the
three
months ended
December 31, 2019
and
2018,
respectively.
v3.19.3.a.u2
Note 9 - Goodwill and Other Intangible Assets
3 Months Ended
Dec. 31, 2019
Notes to Financial Statements  
Goodwill and Intangible Assets Disclosure [Text Block]
9
. Goodwill and Other Intangible Assets
 
The Company had the following goodwill and other intangible asset balances as of
December 31, 2019
and
September 30, 2019,
dollars in thousands:
 
   
 
   
As of
 
   
Useful
lives
(in years)
   
December 31
,
2019
   
September 30,
201
9
 
Amortizable intangible assets:
                           
Other intangibles
   
0.5
-
3
    $
3,486
     
2,677
 
Amortizable intangible assets