Form 10-Q Natural Grocers by Vitam For: Jun 30

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July 28, 2016 4:12 PM EDT

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016;

☐	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 Number)

12612 West Alameda Parkway

80228

Lakewood, Colorado

(Address of principal executive offices)

(Zip code)

(303) 986-4600

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer ☐		Accelerated filer ☒

Non –accelerated filer ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of July 27, 2016 was 22,503,644.

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Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended June 30, 2016

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		Page Number

	PART I. Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2016 (unaudited) and September 30, 2015	3
	Consolidated Statements of Income for the three and nine months ended June 30, 2016 and 2015 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended June 30, 2016 and 2015 (unaudited)	5
	Notes to Unaudited Interim Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24

	PART II. Other Information
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 6.	Exhibits	25

SIGNATURES		26

EXHIBIT INDEX		27

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Except where the context otherwise requires or where otherwise indicated, all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers,’’ and the ‘‘Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries.

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 and other financial and operating information, are forward-looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-Q.

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those referenced in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (the Form 10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

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 any applicable securities laws. You are advised, however, to consult any further disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). Such reports may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and may also be accessed on the SEC’s website at www.sec.gov. Our filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.

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PART I. Financial Information

Item 1. Financial Statements

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	June 30, 2016			September 30, 2015
Assets
Current assets:
Cash and cash equivalents	$	2,703			2,915
Accounts receivable, net		2,593			2,576
Merchandise inventory		86,368			74,818
Prepaid expenses and other current assets		3,347			1,108
Deferred income tax assets		—			866
Total current assets		95,011			82,283
Property and equipment, net		172,003			145,219
Other assets:
Deposits and other assets		947			778
Goodwill and other intangible assets, net of accumulated amortization of $372 and $683, respectively		5,599			5,623
Deferred financing costs, net		53			21
Total other assets		6,599			6,422
Total assets	$	273,613			233,924

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	56,050			49,896
Accrued expenses		13,293			19,649
Capital and financing lease obligations, current portion		435			333
Total current liabilities		69,778			69,878
Long-term liabilities:
Capital and financing lease obligations, net of current portion		30,509			27,274
Deferred income tax liabilities		10,961			6,073
Revolving credit facility		18,827			—
Deferred compensation		644			314
Deferred rent		8,360			6,922
Leasehold incentives		8,557			7,975
Total long-term liabilities		77,858			48,558
Total liabilities		147,636			118,436
Commitments (Note 6 and 10)
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,503,644 and 22,496,628 shares issued and outstanding, respectively		23			22
Additional paid-in capital		55,604			54,982
Retained earnings		70,489			60,484
Common stock in treasury, at cost, 10,300 and no shares, respectively		(139	)		—
Total stockholders’ equity		125,977			115,488
Total liabilities and stockholders’ equity	$	273,613			233,924

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three months ended June 30,						Nine months ended June 30,
	2016			2015			2016			2015
Net sales	$	179,274			158,650			524,455			462,281
Cost of goods sold and occupancy costs		128,344			112,508			373,627			326,975
Gross profit		50,930			46,142			150,828			135,306
Store expenses		40,095			33,508			114,768			97,018
Administrative expenses		4,813			4,322			14,503			12,705
Pre-opening and relocation expenses		2,007			1,078			4,399			2,525
Operating income		4,015			7,234			17,158			23,058
Interest expense		(768	)		(768	)		(2,154	)		(2,217	)
Income before income taxes		3,247			6,466			15,004			20,841
Provision for income taxes		(567	)		(2,121	)		(4,999	)		(7,529	)
Net income	$	2,680			4,345			10,005			13,312

Net income per common share:
Basic	$	0.12			0.19			0.44			0.59
Diluted	$	0.12			0.19			0.44			0.59
Weighted average number of shares of common stock outstanding:
Basic		22,501,044			22,491,158			22,499,229			22,488,975
Diluted		22,506,098			22,500,454			22,505,220			22,499,732

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Nine months ended June 30,
	2016			2015
Operating activities:
Net income	$	10,005			13,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		18,617			15,532
Loss on disposal of property and equipment		4			53
Share-based compensation		662			398
Deferred income tax expense		5,754			958
Non-cash interest expense		10			12
Changes in operating assets and liabilities
Increase in:
Accounts receivable, net		(17	)		(525	)
Merchandise inventory		(11,550	)		(10,656	)
Prepaid expenses and other assets		(2,409	)		(613	)
Increase (decrease) in:
Accounts payable		3,409			8,028
Accrued expenses		(6,363	)		910
Deferred compensation		330			207
Deferred rent and leasehold incentives		2,280			1,605
Net cash provided by operating activities		20,732			29,221
Investing activities:
Acquisition of property and equipment		(39,302	)		(24,806	)
Proceeds from sale of property and equipment		12			12
Payment for acquisition.		—			(5,601	)
Net cash used in investing activities		(39,290	)		(30,395	)
Financing activities:
Borrowings under credit facility		175,062			115,423
Repayments under credit facility		(156,235	)		(115,423	)
Capital and financing lease obligations payments		(290	)		(169	)
Contingent consideration payments for acquisition		—			(514	)
Loan fees paid		(42	)		—
Repurchases of common stock		(139	)		—
Payments on withholding tax for restricted stock unit vesting		(10	)		(22	)
Net cash provided by (used in) financing activities		18,346			(705	)
Net decrease in cash and cash equivalents		(212	)		(1,879	)
Cash and cash equivalents, beginning of period		2,915			5,113
Cash and cash equivalents, end of period	$	2,703			3,234
Supplemental disclosures of cash flow information:
Cash paid for interest	$	161			35
Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $469 and $207, respectively		1,897			2,109
Income taxes paid		6,362			6,254
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	9,177			6,367
Property acquired through capital and financing lease obligations		3,343			5,827

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Unaudited Interim Consolidated Financial Statements

June 30, 2016 and 2015

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of June 30, 2016, the Company operated 118 stores in 19 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 103 stores in 18 states as of September 30, 2015.

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 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 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 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). Natural Systems, LLC, formerly a wholly owned subsidiary of the operating company, was merged into the operating company on November 13, 2015. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has one reporting segment: natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the three and nine months ended June 30, 2016 and 2015, as follows:

	Three months ended June 30,					Nine months ended June 30,
	2016			2015		2016		2015
Grocery		66.8	%		66.9		66.4		66.5
Dietary supplements		22.0			22.1		22.3		22.5
Other		11.2			11.0		11.3		11.0
		100.0	%		100.0		100.0		100.0

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, valuation allowances for deferred tax assets 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.

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Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” Topic 718, “Compensation-Stock Compensation” (ASU 2016-09). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The main provision requires all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the statement of income. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. The ASU also allows an entity to make an entity-wide election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. Other provisions in ASU 2016-09 permit tax withholding up to the maximum statutory tax rates in the applicable jurisdictions. Under ASU 2016-09 excess tax benefits must be classified along with other income tax cash flows as an operating activity. The provisions of ASU 2016-09 are effective for the Company’s first quarter of the fiscal year ending September 30, 2018. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases,” Topic 842, “Leases” (ASU 2016-02). ASU 2016-02 intends to improve financial reporting about leasing transactions. The ASU will require organizations that lease assets to recognize on the balance sheet assets and liabilities for the rights and obligations created by those leases. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or capital. Operating leases will result in straight-line expense while capital leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The amendments also require certain quantitative and qualitative disclosures. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. The provisions of ASU 2016-02 are effective for the Company’s first quarter of the fiscal year ending September 30, 2020. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements but expects it to have a significant impact on its balance sheet due to the number of operating leases to which the Company is a party.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05 provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The provisions of ASU 2015-05 are effective for the Company’s first quarter of the fiscal year ending September 30, 2017. The Company does not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier adoption is permitted only for annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company is currently evaluating the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.

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3. 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 and nine months ended June 30, 2016 and 2015, dollars in thousands, except per share data:

	Three months ended June 30,				Nine months ended June 30,
	2016		2015		2016		2015
Net income	$	2,680		4,345		10,005		13,312

Weighted average number of shares of common stock outstanding		22,501,044		22,491,158		22,499,229		22,488,975
Effect of dilutive securities		5,054		9,296		5,991		10,757
Weighted average number of shares of common stock outstanding including effect of dilutive securities		22,506,098		22,500,454		22,505,220		22,499,732

Basic earnings per share	$	0.12		0.19		0.44		0.59
Diluted earnings per share	$	0.12		0.19		0.44		0.59

There were 103,795 and 91,828 non-vested RSUs for the three and nine months ended June 30, 2016, respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were zero and 26,796 antidilutive non-vested RSUs for the three and nine months ended June 30, 2015, respectively.

The Company did not declare any dividends in the three or nine months ended June 30, 2016 or 2015.

4. Debt

Credit Facility

On January 28, 2016, the Company entered into a new credit agreement (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.

On May 10, 2016, the operating company entered into an amendment to the Credit Facility, pursuant to which the amount available for borrowing under the Credit Facility was increased from $30.0 million to $45.0 million (including a $5.0 million sublimit for standby letters of credit). The Company has the ability to increase the amount available for borrowing by an additional amount that may not exceed $5.0 million if the existing lenders or other eligible lenders agree to provide an additional commitment or commitments. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on January 31, 2021.

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, including with respect to its ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance expenses and for other reasonable expenses incurred in the ordinary course of business, including cash dividends to the holding company for the repurchase of shares of common stock in an amount not to exceed $10.0 million.

At the same time it entered into the Credit Facility, the Company terminated its prior credit agreement (the Prior Credit Facility).

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The Company had $18.8 million outstanding under the Credit Facility as of June 30, 2016 and zero outstanding under the Prior Credit Facility as of September 30, 2015. As of June 30, 2016, 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. As of September 30, 2015, 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 Prior Credit Facility. The Company had $25.2 million available for borrowing under the Credit Facility as of June 30, 2016 and $14.0 million available for borrowing under the Prior Credit Facility as of September 30, 2015.

As of June 30, 2016, the Company was in compliance with the debt covenants under the Credit Facility. As of September 30, 2015, the Company was in compliance with the debt covenants under the Prior Credit Facility.

Capital and Financing Lease Obligations

The Company had 15 leases as of June 30, 2016 and 13 leases as of September 30, 2015 that are included in capital and financing lease obligations (see Note 6). The Company does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligation and as interest expense. The interest rate on capital and financing lease obligations is determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $0.8 million for each of the three months ended June 30, 2016 and 2015 and approximately $2.2 million for each of the nine months ended June 30, 2016 and 2015. Interest expense for the three and nine months ended June 30, 2016 and 2015 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of $0.2 million and $0.1 million for the three months ended June 30, 2016 and 2015, respectively and $0.5 million and $0.2 million for the nine months ended June 30, 2016 and 2015, respectively.

5. Shareholders’ Equity

Share Repurchases

On May 5, 2016, the Company’s Board of Directors (the “Board”) authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. 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 would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

The following table summarizes share repurchase activity for the periods indicated (in thousands, except number of shares acquired and average per share cost):

	Three months ended June 30,				Nine months ended June 30,
	2016		2015		2016		2015
Number of common shares acquired		10,300		—		10,300		—
Average price per common share acquired (including commissions)	$	13.46		—		13.46		—
Total cost of common shares acquired	$	139		—		139		—

At June 30, 2016 and September 30, 2015, the Company held in treasury 10,300 shares and zero shares, respectively, totaling approximately $0.1 million and zero, respectively.

Between July 1and July 25,2016 (the latest practicable date for making the determination), the Company has not repurchased any additional shares of the Company’s common stock.

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6. Lease Commitments

Capital and financing lease obligations as of June 30, 2016 and September 30, 2015, were as follows, dollars in thousands:

	As of
	June 30, 2016			September 30, 2015
Capital lease finance obligations, due in monthly installments through fiscal year 2031	$	25,680			22,096
Capital lease obligations, due in monthly installments through fiscal year 2041		5,264			4,539
Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2041		—			972
Total capital and financing lease obligations		30,944			27,607
Less current portion		(435	)		(333	)
Total capital and financing lease obligations, net of current portion	$	30,509			27,274

7. Property and Equipment

The Company had the following property and equipment balances as of June 30, 2016 and September 30, 2015, dollars in thousands:

					As of
	Useful lives (in years)				June 30, 2016			September 30, 2015
Construction in process			n/a		$	9,440			10,150
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively			40			28,473			24,774
Capitalized real estate leases			15			5,735			4,866
Land			n/a			192			192
Buildings			40			12,018			4,980
Land improvements		5	-	15		1,022			1,015
Leasehold and building improvements		1	-	25		109,846			91,865
Fixtures and equipment		5	-	7		97,498			83,932
Computer hardware and software		3	-	5		15,600			13,834
						279,824			235,608
Less accumulated depreciation and amortization						(107,821	)		(90,389	)
Property and equipment, net					$	172,003			145,219

Capitalized real estate leases for build-to-suit stores includes the assets for the Company’s buildings under capital lease finance obligations, and capitalized real estate leases includes assets for the Company’s buildings under capital lease obligations (see Note 6).

Construction in process as of June 30, 2016 includes zero related to construction costs for leases in process for which the Company was deemed the owner during the construction period during which such properties were not in service. Construction in process as of September 30, 2015, includes approximately $0.9 million related to one building under a capital lease obligation that was not yet in service.

Depreciation and amortization expense for the three and nine months ended June 30, 2016 and 2015 is summarized as follows, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,
	2016		2015		2016		2015
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	220		200		639		597
Depreciation and amortization expense included in store expenses		5,851		4,968		17,084		14,316
Depreciation and amortization expense included in administrative expenses		309		234		894		619
Total depreciation and amortization expense	$	6,380		5,402		18,617		15,532

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8. Accrued Expenses

The composition of accrued expenses as of June 30, 2016 and September 30, 2015 is summarized as follows, dollars in thousands:

	As of
	June 30, 2016		September 30, 2015
Payroll and employee-related expenses	$	6,251		7,795
Accrued income taxes payable		—		5,540
Accrued property, sales and use tax payable		4,473		4,365
Accrued marketing expenses		875		532
Deferred revenue related to gift card sales		947		864
Other		747		553
Total accrued expenses	$	13,293		19,649

9. Related Party Transactions

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

Chalet Properties, LLC: The Company has five operating leases and one capital lease with Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.3 million for each of the three months ended June 30, 2016 and 2015. Rent paid to Chalet was approximately $0.9 million for each of the nine months ended June 30, 2016 and 2015.

Isely Family Land Trust LLC: The Company has one operating lease with the Isely Family Land Trust LLC (Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.1 million for each of the three months ended June 30, 2016 and 2015. Rent paid to the Land Trust was approximately $0.2 million for each of the nine months ended June 30, 2016 and 2015.

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended June 30, 2016 and 2015. Rent paid to FTVC LLC was less than $0.1 million for each of the nine months ended June 30, 2016 and 2015.

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

In Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc., filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint purports to state an action on behalf of a class of customers who used debit or credit cards at the Company’s stores. The Company believes the plaintiff's claims are without merit and intends to vigorously defend itself in this proceeding. On June 20, 2016, a Magistrate Judge of the United States District Court for the District of Colorado issued a Recommendation and Order dismissing the plaintiff’s complaint without prejudice. At this time, we cannot predict: (i) whether the Court will affirm the Magistrate Judge’s Recommendation and Order; (ii) whether, if the Court affirms the Magistrate Judge’s Recommendation and Order, the plaintiff will appeal such ruling; or (iii) the scope of the potential loss in the event of an adverse outcome. As a result, the Company has not accrued any liability with respect to this matter.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. 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 2016” refers to the fiscal year from October 1, 2015 to September 30, 2016). 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 and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of June 30, 2016, we operated 118 stores in 19 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, 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. The size of our stores varies from 5,000 to 16,000 selling square feet. During the twelve months ended June 30, 2016, our new stores averaged 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, 2015, we increased our store count at a compound annual growth rate of 21.4%. In fiscal year 2015, we opened 16 new stores, and we currently plan to open 23 new stores in fiscal year 2016, 15 of which opened during the nine months ended June 30, 2016. Since June 30, 2016, we have opened two new stores in Arizona and have signed a total of 19 leases for new stores that we plan to open in fiscal years 2016 and 2017 in Arizona, Colorado, Idaho, Iowa, Missouri, Nevada, North Dakota, Oregon, Texas, Utah, and Washington. We have relocated four existing stores and remodeled one store in fiscal year 2016.

Performance Highlights

Key highlights of our performance for the three and nine month periods ended June 30, 2016 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 under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.

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Net sales. Net sales were $179.3 million for the three months ended June 30, 2016, which is an increase of $20.6 million, or 13.0%, compared to net sales of $158.7 million for the three months ended June 30, 2015. Net sales were $524.5 million for the nine months ended June 30, 2016, which is an increase of $62.2 million, or 13.4%, compared to net sales of $462.3 million for the nine months ended June 30, 2015.

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Comparable store sales. Comparable store sales for the three months ended June 30, 2016 and 2015, increased 1.8% and 5.8%, respectively. Comparable store sales for the nine months ended June 30, 2016 and 2015 increased 2.1% and 5.8%, respectively.

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Daily average comparable store sales. Daily average comparable store sales, which removes the effect of one more selling day in the three months ended June 30, 2016, as a result of the occurrence of Easter in March 2016 (as compared to April 2015), increased 0.7% and 5.8% for the three months ended June 30, 2016 and 2015, respectively. Daily average comparable store sales, which removes the effect of one more selling day in the nine months ended June 30, 2016 as a result of the occurrence of leap year in fiscal 2016, increased 1.8% and 5.8%, for the nine months ended June 30, 2016 and 2015, respectively.

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Mature store sales. Mature store sales for the three months ended June 30, 2016 decreased 0.2% and for the three months ended June 30, 2015 increased 2.3%. Mature store sales for the nine months ended June 30, 2016 decreased 0.4% and for the nine months ended June 30, 2015 increased 2.6%.

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Daily average mature store sales. Daily average mature store sales, which removes the effect of one more selling day in the three months ended June 30, 2016, decreased 1.3% for the three months ended June 30, 2016 and increased 2.3% for the three months ended June 30, 2015. Daily average mature store sales, which removes the effect of one more selling day in the nine months ended June 30, 2016, decreased 0.8% for the nine months ended June 30, 2016 and increased 2.6% for the nine months ended June 30, 2015.

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Net income. Net income was $2.7 million for the three months ended June 30, 2016, a decrease of $1.7 million, or 38.3%, compared to net income of $4.3 million for the three months ended June 30, 2015. Net income was $10.0 million for the nine months ended June 30, 2016, a decrease of $3.3 million, or 24.8%, compared to net income of $13.3 million for the nine months ended June 30, 2015.

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EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $10.4 million for the three months ended June 30, 2016, a decrease of $2.2 million, or 17.7%, from $12.6 million for the three months ended June 30, 2015. We generated EBITDA of $35.8 million for the nine months ended June 30, 2016, a decrease of $2.8 million, or 7.3%, from $38.6 million for the nine months ended June 30, 2015. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

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Liquidity. As of June 30, 2016, cash and cash equivalents was $2.7 million, and there was $25.2 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million.

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New store growth. We opened six new stores during the three months ended June 30, 2016 and 15 new stores during the nine months ended June 30, 2016. We operated a total of 118 stores as of June 30, 2016. We plan to open a total of 23 new stores in fiscal year 2016, which would result in an annual new store growth rate of 22.3% for fiscal year 2016.

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Store Relocations and Remodels. We have relocated four stores and remodeled one store in fiscal year 2016.

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, economic conditions, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence. In this regard, we believe our financial results for the three and nine months ended June 30, 2016 continue to reflect economic pressures in several of the markets we serve due to lower oil and natural gas prices (although we believe those pressures have begun to moderate).

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Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. 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 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 for the foreseeable future. Our financial results for the three and nine months ended June 30, 2016 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. Our store offerings consist of natural and organic products and dietary supplements. 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 our products and could result in lower consumer traffic, sales and results of operations.

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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, specialty food retailers such as Sprouts and Trader Joe’s, warehouse clubs such as Sam’s Club and Costco, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us on the basis of price, selection, quality, customer service, shopping experience 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 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. In addition, we face internally generated competition as a result of our opening of new stores in markets we already serve.

Outlook

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

We plan for the foreseeable future to continue opening new stores and entering new markets. The rate of new store growth in the foreseeable future is expected to moderate somewhat compared to recent years, depending on economic and business conditions and other factors. During the past few years, we have expanded our infrastructure to enable us to support our continued growth. This has included implementing our enterprise resource planning system, hiring key personnel, developing efficient new store opening construction and operations processes and relocating and expanding our bulk food repackaging facility and distribution center. During fiscal year 2015, we redesigned our website (www.naturalgrocers.com) to enhance functionality, create a more engaging user experience and increase its reach and effectiveness. In addition, in fiscal year 2015 we introduced the {N}power^S^M customer appreciation program at all of our stores, which we believe will enhance customer loyalty and increase customer engagement levels.

We believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. In this regard, during the three and nine months ended June 30, 2016, the rate of growth in our comparable store sales moderated compared to the prior year periods in part due to the impact of increased competition in the natural and organic retail sector and internally generated competition due to opening new stores in our existing markets. To a lesser extent, we experienced economic pressures in several of the markets we serve due to lower oil and natural gas prices (which pressures we believe have begun to moderate).

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 repacking 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 the section “Risk Factors” contained in our Form 10-K.

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:

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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.

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

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Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2016 are stores that opened during or before fiscal year 2011). 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.

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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).

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

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

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense 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 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. We do not record in costs of goods sold and occupancy costs rent payments for leases classified as capital and financing lease obligations. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense. Additionally, depreciation expense related to the capitalized asset is recorded in store expenses.

Gross profit and gross margin

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

Store expenses

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

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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 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.

Operating income

Operating income consists of gross profit less store expenses, administrative expenses and pre-opening and relocation expenses. Operating income can be impacted by a number of factors, including the timing of new store openings and store relocations, whether or not a store lease is classified as an operating, capital or financing lease, as well as fluctuations in store expenses and administrative expenses. The amount of time it takes for new stores to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market and the strength of store management.

Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations and interest we incur on outstanding indebtedness, including under our Credit Facility, all net of capitalized interest.

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Results of Operations

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

	Three months ended June 30,						Nine months ended June 30,
	2016			2015			2016			2015
Statements of Income Data:*
Net sales		100.0	%		100.0			100.0			100.0
Cost of goods sold and occupancy costs		71.6			70.9			71.2			70.7
Gross profit		28.4			29.1			28.8			29.3
Store expenses		22.4			21.1			21.9			21.0
Administrative expenses		2.7			2.7			2.8			2.7
Pre-opening and relocation expenses		1.1			0.7			0.8			0.5
Operating income		2.2			4.6			3.3			5.0
Interest expense		(0.4	)		(0.5	)		(0.4	)		(0.5	)
Income before income taxes		1.8			4.1			2.9			4.5
Provision for income taxes		(0.3	)		(1.3	)		(1.0	)		(1.6	)
Net income		1.5	%		2.7			1.9			2.9

*Figures may not sum due to rounding.

Number of stores at end of period	118		99	118		99
Number of stores opened during the period	6		4	15		12

Total store unit count increase period over period	19.2	%	17.9	19.2		17.9
Change in comparable store sales	1.8		5.8	2.1		5.8
Change in daily average comparable store sales	0.7		5.8	1.8		5.8
Change in mature store sales	(0.2	)	2.3	(0.4	)	2.6
Change in daily average mature store sales	(1.3	)	2.3	(0.8	)	2.6

Three months ended June 30, 2016 compared to the three months ended June 30, 2015

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

	Three months ended June 30,						Change In
	2016			2015			Dollars			Percent
Statements of Income Data:
Net sales	$	179,274			158,650			20,624			13.0	%
Cost of goods sold and occupancy costs		128,344			112,508			15,836			14.1
Gross profit		50,930			46,142			4,788			10.4
Store expenses		40,095			33,508			6,587			19.7
Administrative expenses		4,813			4,322			491			11.4
Pre-opening and relocation expenses		2,007			1,078			929			86.3
Operating income		4,015			7,234			(3,219	)		(44.5	)
Interest expense		(768	)		(768	)		—			(0.1	)
Income before income taxes		3,247			6,466			(3,219	)		(49.8	)
Provision for income taxes		(567	)		(2,121	)		1,554			(73.3	)
Net income	$	2,680			4,345			(1,665	)		(38.3	)

Net sales

Net sales increased $20.6 million, or 13.0%, to $179.3 million for the three months ended June 30, 2016 compared to $158.7 million for the three months ended June 30, 2015, primarily due to a $17.7 million increase in sales from new stores and a $2.9 million, or 1.8%, increase in comparable store sales. Daily average comparable store sales increased 0.7% for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The daily average comparable store sales increase resulted from a 0.7% increase in average transaction size; daily average transaction count remained flat quarter over quarter. Comparable store average transaction size was $35.39 for the three months ended June 30, 2016. Daily average mature store sales decreased 1.3% for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The rate of growth in our comparable store sales has moderated in part due to the impact of increased competition in the natural and organic sector and internally generated competition due to opening new stores in our existing markets. To a lesser extent, we experienced economic pressures in several of the markets we serve due to lower oil and natural gas prices (which pressures we believe have begun to moderate).

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Gross profit

Gross profit increased $4.8 million, or 10.4%, to $50.9 million for the three months ended June 30, 2016 compared to $46.1 million for the three months ended June 30, 2015, primarily driven by an increase in the number of comparable stores. Gross profit was positively impacted in the three months ended June 30, 2016 by one more selling day compared to the same period in 2015 due to the occurrence of Easter in March 2016 as compared to April 2015. Gross margin decreased to 28.4% for the three months ended June 30, 2016 from 29.1% for the three months ended June 30, 2015. Gross margin was negatively impacted by an increase in occupancy costs as a percentage of sales, primarily due to higher average lease expenses at newer and relocated stores. The increase in occupancy cost as a percentage of sales also reflects the decrease in mature store sales combined with the fixed nature of our rent obligations and related occupancy expenses. Additionally, gross margin was negatively impacted by increased shrink expense, partially offset by product margin improvements across most categories, all as a percentage of sales.

We had 15 and 13 store leases that were classified as capital and financing lease obligations for the three months ended June 30, 2016 and 2015, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the three months ended June 30, 2016 and 2015, would have each been approximately 55 basis points higher, respectively, than as reported.

Store expenses

Store expenses increased $6.6 million, or 19.7%, to $40.1 million for the three months ended June 30, 2016 compared to $33.5 million for the three months ended June 30, 2015. Store expenses as a percentage of sales were 22.4% and 21.1% for the three months ended June 30, 2016 and 2015, respectively. The increase in store expenses as a percentage of sales was primarily due to increases in salary-related expenses, depreciation and other store expenses.

Administrative expenses

Administrative expenses increased $0.5 million, or 11.4%, to $4.8 million for the three months ended June 30, 2016 compared to $4.3 million for the three months ended June 30, 2015. The increase in administrative expenses was primarily due to the addition of senior management positions to support our growth, together with legal and public company costs. Administrative expenses as a percentage of sales was 2.7% for each of the three months ended June 30, 2016 and 2015.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $0.9 million, or 86.3%, for the three months ended June 30, 2016 to $2.0 million compared to $1.1 million for the three months ended June 30, 2015, due to the impact of the number and timing of new store openings and relocations. We opened six new stores and relocated one existing store during the three months ended June 30, 2016 and opened four new stores during the three months ended June 30, 2015. Additionally, we incurred heightened pre-opening expenses as we prepared to open eight new stores during the fourth quarter of fiscal 2016. Pre-opening and relocation expenses as a percentage of sales were 1.1% and 0.7% for the three months ended June 30, 2016 and 2015, respectively.

Interest expense

Interest expense, net of capitalized interest, decreased less than $0.1 million, or 0.1%, for the three months ended June 30, 2016 compared to the three months ended June 30, 2015, primarily due to an increase in capitalized interest, offset by higher average borrowings under our Credit Facility during the three months ended June 30, 2016. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 35 and 50 basis points lower than as reported for the three months ended June 30, 2016 and 2015, respectively.

Income taxes

Our effective income tax rate for the three months ended June 30, 2016 and 2015 was 17.5% and 32.8%, respectively. The decrease in the effective income tax rate was driven by a revision in our estimated annual federal tax rate from 35% to 34% and federal and state tax credits in our fiscal 2015 tax return that were higher than previously estimated in the provision for the three months ended June 30, 2016.

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Net income

Net income was $2.7 million, or $0.12 diluted earnings per share, for the three months ended June 30, 2016 compared to $4.3 million, or $0.19 diluted earnings per share, for the three months ended June 30, 2015.

Nine months ended June 30, 2016 compared to the nine months ended June 30, 2015

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

	Nine months ended June 30,						Change In
	2016			2015			Dollars			Percent
Statements of Income Data:
Net sales	$	524,455			462,281			62,174			13.4	%
Cost of goods sold and occupancy costs		373,627			326,975			46,652			14.3
Gross profit		150,828			135,306			15,522			11.5
Store expenses		114,768			97,018			17,750			18.3
Administrative expenses		14,503			12,705			1,798			14.2
Pre-opening and relocation expenses		4,399			2,525			1,874			74.2
Operating income		17,158			23,058			(5,900	)		(25.6	)
Interest expense		(2,154	)		(2,217	)		63			(2.9	)
Income before income taxes		15,004			20,841			(5,837	)		(28.0	)
Provision for income taxes		(4,999	)		(7,529	)		2,530			(33.6	)
Net income	$	10,005			13,312			(3,307	)		(24.8	)

Net sales

Net sales increased $62.2 million, or 13.4%, to $524.5 million for the nine months ended June 30, 2016 compared to $462.3 million for the nine months ended June 30, 2015, primarily due to a $52.4 million increase in sales from new stores and a $9.8 million, or 2.1%, increase in comparable store sales. Daily average comparable store sales increased 1.8% for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015. The daily average comparable store sales increase was primarily driven by a 1.1% increase in average transaction size and a 0.7% increase in daily average transaction count. Comparable store average transaction size was $36.11 for the nine months ended June 30, 2016. Daily average mature store sales decreased 0.8% for the nine months ended June 30, 2016 as compared to the nine months ended June 30, 2015. The rate of growth in our comparable store sales has moderated in part due to the impact of increased competition in the natural and organic sector and internally generated competition due to opening new stores in our existing markets. To a lesser extent, we experienced economic pressures in several of the markets we serve due to lower oil and natural gas prices (which pressures we believe have begun to moderate).

Gross profit

Gross profit increased $15.5 million, or 11.5%, to $150.8 million for the nine months ended June 30, 2016 compared to $135.3 million for the nine months ended June 30, 2015, primarily driven by positive comparable store sales and an increase in the number of comparable stores. Gross profit was positively impacted in the nine months ended June 30, 2016 by one more selling day compared to the same period in 2015 due to the occurrence of leap year in fiscal 2016. Gross margin decreased to 28.8% for the nine months ended June 30, 2016 from 29.3% for the nine months ended June 30, 2015. Gross margin for the nine months ended June 30, 2016 was negatively impacted by an increase in occupancy costs as a percentage of sales. The increase in occupancy costs as a percentage of sales was primarily due to higher average lease expenses at newer and relocated stores, and also reflects the decrease in mature store sales and the fixed nature of our rent obligations and related occupancy expenses. Additionally, product margin improved across most categories, offset by increased shrink expense, all as a percentage of sales.

We had 15 and 13 leases for stores that were classified as capital and financing lease obligations for the nine months ended June 30, 2016 and 2015, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales would have been approximately 55 basis points higher for each of the nine months ended June 30, 2016 and 2015, respectively, rather than as reported.

Store expenses

Store expenses increased $17.8 million, or 18.3%, to $114.8 million for the nine months ended June 30, 2016 from $97.0 million for the nine months ended June 30, 2015. Store expenses as a percentage of sales were 21.9% and 21.0% for the nine months ended June 30, 2016 and 2015, respectively. The increase in store expenses as a percentage of sales was primarily due to increases in salary-related expenses, depreciation and other store expenses.

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Administrative expenses

Administrative expenses increased $1.8 million, or 14.2%, to $14.5 million for the nine months ended June 30, 2016 compared to $12.7 million for the nine months ended June 30, 2015, primarily due to the addition of senior management positions to support our growth, together with legal and public company costs. Administrative expenses as a percentage of sales was 2.8% and 2.7% for the nine months ended June 30, 2016 and 2015, respectively.

Pre-opening and relocation expenses

Pre-opening and relocation expenses increased $1.9 million, or 74.2%, to $4.4 million for the nine months ended June 30, 2016 compared to $2.5 million for the nine months ended June 30, 2015, due to the impact of the number and timing of new store openings and relocations. We opened 15 new stores, relocated three stores and remodeled one store during the nine months ended June 30, 2016 and opened 12 new stores during the nine months ended June 30, 2015. Additionally, we incurred heightened pre-opening expenses as we prepared to open eight new stores during the fourth quarter of fiscal 2016. Pre-opening and relocation expenses as a percentage of sales were 0.8% and 0.5% for the nine months ended June 30, 2016 and 2015, respectively.

Interest expense

Interest expense, net of capitalized interest, decreased less than $0.1 million, or 2.9%, for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015, primarily due to an increase in capitalized interest, partially offset by an increase in interest expense associated with our Credit Facility due to higher average borrowings during the nine months ended June 30, 2016. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percentage of sales would have been approximately 35 and 50 basis points lower than as reported for the nine months ended June 30, 2016 and 2015, respectively.

Income taxes

Our effective income tax rate for the nine months ended June 30, 2016 and 2015 was 33.3% and 36.1%, respectively. The decrease in the effective income tax rate was driven by a revision in our estimated annual federal tax rate from 35% to 34% and federal and state tax credits in our fiscal 2015 tax return that were higher than previously estimated in the provision for the nine months ended June 30, 2016.

Net income

Net income was $10.0 million, or $0.44 diluted earnings per share, for the nine months ended June 30, 2016 compared to $13.3 million, or $0.59 diluted earnings per share, for the nine months ended June 30, 2015.

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.

EBITDA decreased 17.7% to $10.4 million in the three months ended June 30, 2016 compared to $12.6 million for the three months ended June 30, 2015. EBITDA decreased 7.3% to $35.8 million in the nine months ended June 30, 2016 compared to $38.6 million for the nine months ended June 30, 2015. EBITDA as a percent of sales was 5.8% and 8.0% in the three months ended June 30, 2016 and 2015, respectively. EBITDA as a percent of sales was 6.8% and 8.3% in the nine months ended June 30, 2016 and 2015, respectively. Stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 55 basis points in each of the three months ended June 30, 2016 and 2015, respectively, and by approximately 55 basis points in each of the nine months ended June 30, 2016 and 2015, respectively, due to the impact on cost of goods sold and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening dates if these leases had been accounted for as operating leases.

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 the Credit Facility. Further, our incentive compensation plans base incentive compensation payments on EBITDA.

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Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that 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 EBITDA 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 as an alternative to, or substitute for, net income or other financial statement data presented in our consolidated financial statements as indicators of our financial performance. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

●

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

●

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.

The following table reconciles net income to EBITDA for the periods presented, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,
	2016		2015		2016		2015
Net income	$	2,680		4,345		10,005		13,312
Interest expense		768		768		2,154		2,217
Provision for income taxes		567		2,121		4,999		7,529
Depreciation and amortization		6,380		5,402		18,617		15,532
EBITDA	$	10,395		12,636		35,775		38,590

Liquidity and Capital Resources

On January 28, 2016, the Company entered into a new $30.0 million credit agreement (the Credit Facility). On May 10, 2016, the operating company entered into an amendment to the Credit Facility pursuant to which the amount available for borrowing thereunder was increased from $30.0 million to $45.0 million (including a $5.0 million sublimit for standby letters of credit). Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility.

Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, interest and principal payments for outstanding indebtedness and corporate taxes.

As of June 30, 2016, we had $2.7 million in cash and cash equivalents, as well as $25.2 million available for borrowing under the Credit Facility.

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On May 5, 2016, our Board authorized a new 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. During the three months ended June 30, 2016, we purchased 10,300 shares of our common stock for approximately $0.1 million (an average price of $13.46 per share) under the share repurchase program. 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 amount of shares purchased will be dictated by our capital needs and stock market conditions.

We plan to continue to open new stores, which has previously required, and may continue to require, us to borrow additional amounts under the Credit Facility. We plan to spend approximately $13.0 million to $15.0 million on capital expenditures during the remainder of fiscal year 2016 in connection with our 8 planned new store openings and one store relocation. 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 of the related sale.

We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store consisting of capital expenditures of approximately $1.7 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.2 million.

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

	Nine months ended June 30,
	2016			2015
Net cash provided by operating activities	$	20,732			29,221
Net cash used in investing activities		(39,290	)		(30,395	)
Net cash provided by (used in) financing activities		18,346			(705	)
Net decrease in cash and cash equivalents		(212	)		(1,879	)
Cash and cash equivalents, beginning of period		2,915			5,113
Cash and cash equivalents, end of period	$	2,703			3,234

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities decreased $8.5 million, or 29.1%, to $20.7 million for the nine months ended June 30, 2016, compared to $29.2 million for the nine months ended June 30, 2015. The decrease in cash provided by operating activities was primarily due to a decrease in net income, as adjusted for non-cash items such as depreciation and amortization resulting from the addition of new stores and deferred tax expense as well as changes in working capital driven by the timing of payment on inventory and other purchases. Our working capital requirements for inventory will likely continue to increase as we continue to open new stores.

Investing Activities

Net cash used in investing activities increased $8.9 million, or 29.3%, to $39.3 million for the nine months ended June 30, 2016 compared to $30.4 million for the nine months ended June 30, 2015 due to a $14.5 million increase in cash paid for property and equipment, which was driven by the timing of new store openings, relocations and remodels, partially offset by a decrease in the payment for acquisition.

Financing Activities

Cash provided by financing activities consists primarily of borrowings and repayments under our Credit Facility and payments of capital and financing lease obligations. Cash provided by financing activities was $18.3 million for the nine months ended June 30, 2016, compared to cash used in financing activities of $0.7 million for the nine months ended June 30, 2015. The increase in cash provided by financing activities for the nine months ended June 30, 2016 compared to the nine months ended June 30, 2015 was primarily due to net borrowings of $18.8 million under our Credit Facility during the nine months ended June 30, 2016.

Credit Facility

On January 28, 2016, the Company entered into 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.

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On May 10, 2016, the operating company entered into an amendment to the Credit Facility, pursuant to which the amount available for borrowing thereunder was increased from $30.0 million to $45.0 million (including a $5.0 million sublimit for standby letters of credit). The Company has the ability to increase the amount available for borrowing by an additional amount that may not exceed $5.0 million if the existing lenders or other eligible lenders agree to provide an additional commitment or commitments. The Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on January 31, 2021.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business, including cash dividends to the holding company for the repurchase of shares of common stock in an amount not to exceed $10.0 million.

At the same time it entered into the Credit Facility, the Company terminated its prior credit agreement (the Prior Credit Facility).

The Company had $18.8 million outstanding under the Credit Facility as of June 30, 2016 and zero outstanding under the Prior Credit Facility as of September 30, 2015. As of June 30, 2016 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. As of September 30, 2015, 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 Prior Credit Facility. The Company had $25.2 million available for borrowing under the Credit Facility as of June 30, 2016 and $14.0 million available for borrowing under the Prior Credit Facility as of September 30, 2015.

Share Repurchases

Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 5 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q and in Part II, Item 2 of this Form 10-Q.

Contractual Obligations

The following table summarizes our contractual obligations as of June 30, 2016, dollars in thousands:

	Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Operating leases (1)	$	485,237		33,916		74,672		71,398		305,251
Capital and financing lease obligations, including principal and interest payments (2)		46,495		3,789		7,642		7,714		27,350
Contractual obligations for construction related activities (3)		2,221		2,221		—		—		—
Debt obligations (4)		18,827		—		—		18,827		—
Interest payments (5)		1,340		292		584		464		—
	$	554,120		40,218		82,898		98,403		332,601

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(1)	Represents the minimum lease payments due under our operating leases, excluding annual common area maintenance, insurance and taxes related to our operating lease obligations.

(2)

Represents the payments due under our capital and financing lease obligations for 15 stores, all of which were open as of June 30, 2016. We do not record rent expense for these capital leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligations and interest expense.

(3)	Contractual obligations for construction-related activities include future payments to general contractors that are legally binding as of June 30, 2016 and relate to new store construction, relocations and remodels.

(4)	Represents the outstanding balance on our Credit Facility as of June 30, 2016. For purposes of this table, the outstanding balance was considered outstanding until January 31, 2021, which is the maturity date of the Credit Facility.

(5)	In order to calculate future interest payments during the remaining term of our Credit Facility, current amounts were considered outstanding until January 31, 2021, which is the maturity date of the Credit Facility.

We periodically make other commitments and become subject to other contractual obligations that we believe to be routine in nature and incidental to the operation of the business. Management believes that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.

Off-Balance Sheet Arrangements

As of June 30, 2016, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our Credit Facility. All of our stores and facilities, with one exception, are leased. We own two stores that are located on leased property. As of June 30, 2016, 15 store leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements. 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

We are exposed to interest rate changes of our long-term debt, and, to a limited extent, 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.

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Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of June 30, 2016.

Changes in Internal Control over Financial Reporting

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

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.

In Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc., filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint purports to state an action on behalf of a class of customers who used debit or credit cards at our stores. We believe the plaintiff's claims are without merit and intend to vigorously defend ourselves in this proceeding. On June 20, 2016, a Magistrate Judge of the United States District Court for the District of Colorado issued a Recommendation and Order dismissing the plaintiff’s complaint without prejudice. At this time, we cannot predict: (i) whether the Court will affirm the Magistrate Judge’s Recommendation and Order; (ii) whether, if the Court affirms the Magistrate Judge’s Recommendation and Order, the plaintiff will appeal such ruling; or (iii) the scope of the potential loss in the event of an adverse outcome.

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of the Company’s common stock during the quarter ended June 30, 2016 by the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act.

Period	Total Number of Shares Purchased		Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽²⁾		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or *Programs (in thousands)***
May 5, 2016 to May 31, 2016		—		—		—		—
June 1, 2016 to June 30, 2016		10,300	$	13.46		10,300	$	9,861

Total		10,300	$	13.46		10,300	$	9,861

⁽¹⁾ Average price paid per share includes commissions paid.

⁽²⁾ On May 5, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock.

Item 6. Exhibits

See Exhibit Index.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on July 28, 2016.

	Natural Grocers by Vitamin Cottage, Inc.


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


	By:	/s/ SANDRA BUFFA
		Sandra Buffa, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number		Description
10.41		Customer Distribution Agreement by and among United Natural Foods, Inc., Tony’s Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food Markets, Inc. dated as of June 21, 2016#
10.42		First Amendment to Credit Agreement dated as of May 10, 2016, by and among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party thereto, the Lenders Party thereto and Bank of America, N.A., as Administrative Agent and L/C Issuer
31.1		Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3		Certification of Sandra Buffa, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1†		Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Cash Flows (unaudited) and (iv) notes to Unaudited Interim Consolidated Financial Statements.

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

† 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.

Exhibit 10.41

CONFIDENTIAL TREATMENT REQUESTED. Portions of this Exhibit have been redacted pursuant to a request for confidential treatment under Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended, and Rule 406 promulgated under the Securities Act of 1933, as amended. Omitted information, marked “[***]” in this Exhibit, has been filed separately with the Securities and Exchange Commission together with such request for confidential treatment.

CUSTOMER DISTRIBUTION AGREEMENT

This Customer Distribution Agreement (the “Agreement”) is dated as of June 21, 2016 (the “Effective Date”) by and among United Natural Foods, Inc., a Delaware corporation (“UNFI”), Tony’s Fine Foods, a California corporation (“Tony’s”) and Albert’s Organics, a New Jersey corporation (“Albert’s”) (UNFI, Tony’s and Albert’s being collectively referred to as “Supplier”), and Vitamin Cottage Natural Food Markets, Inc., a Colorado corporation (“Customer”).

WITNESSETH:

WHEREAS, Customer desires to engage Supplier as a distributor of certain products offered for sale by Supplier and ordered by Customer (the “Products”); and

WHEREAS, Suppliers desire to accept such engagement under the terms and conditions set forth herein.

Now, therefore, in consideration of the above premises and other good and valuable consideration, the receipt, adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. DISTRIBUTION. Supplier will distribute the Products to Customer, under the terms and conditions set forth herein.

2. TERM AND TERMINATION.

A. The initial term of this Agreement (the “Initial Term”) will commence on the Effective Date and will continue until May 31, 2021, subject to earlier termination as set forth in Section 2.B. Thereafter, the Agreement will renew automatically for successive one (1)-year periods (each a “Renewal Term”, and collectively with the Initial Term, the “Term”) unless either party provides the other party with written notice of its intention not to renew this Agreement at least ninety (90) days prior to the expiration of the Initial Term hereof or the applicable Renewal Term, as the case may be.

B. This Agreement may be terminated:

i. By Supplier or Customer, immediately upon written notice of termination, in the event of a material breach of this Agreement by the other party, if such breach continues uncured for a period of thirty (30) days after written notice of such breach;

ii. Automatically and without notice: (i) upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings; (ii) upon either party’s making of an assignment for the benefit of creditors; or (iii) upon either party’s dissolution or ceasing to do business; or

iii. By an executed written agreement between Supplier and Customer.

C. Notwithstanding anything to the contrary in this Agreement or in any ancillary documents, Supplier retains full rights to suspend shipments and exercise a right of setoff against any payments owed to Customer in the event Customer is delinquent in its payment obligations to Supplier.

3. PRICING. Pricing, including all allowances and credits, is set forth on Exhibit A attached hereto and incorporated herein.

4. SALES SUPPORT.

A. [***]. In addition, Tony’s and Albert’s will [***].

B. [***]. For purposes of this Agreement, the term “Vendor” means the party from whom Supplier purchases Products.

C. UNFI, Tony’s and Albert’s will each supply [***].

D. [***] will work with Customer to [***].

E. [***], will process all pricing files, handle pricing functions and administer any agreed-upon [***].

F. In the event Customer determines that any of the Supplier personnel identified in Sections 4.A through E is failing to perform his or her duties in a competent and timely manner, Customer may request that Supplier replace the relevant individual by providing written notice to Supplier. Such notice shall describe in reasonable detail Customer’s reasons for replacing the individual in question. Supplier will not unreasonably withhold any Customer request to replace any such individual. If Supplier consents to Customer’s request to replace the individual, Supplier will as promptly as reasonably practicable: (i) remove the individual identified in Customer’s notice from servicing Customer and (ii) provide a suitable replacement to perform the role in question.

5. PROMOTIONS.

A. Supplier will assist Customer with administering a monthly promotion program for Customer’s account. These promotions may include selected national and chain-specific promotions.

B. Supplier requires [***] of lead time from Customer on final information and estimated quantities for monthly promotions in order to insure maximum service level performance.

C. Supplier will present EDAP promotion pricing when available from any Vendor, subject to the conditions negotiated between Customer and the Vendor.

D. In the event Supplier advances any promotional monies to the Customer on behalf of any Vendor, [***].

6. ADVERTISING.

A. Supplier will provide such assistance as Customer may from time to time reasonably request in connection with administering Vendor-sponsored quarterly marketing programs, which may include print advertising, demos and event marketing.

B. In the event Supplier advances any advertising support monies to Customer on behalf of the Vendor, [***].

C. In the event Supplier acts on Customer’s behalf in processing advertisements, Supplier will [***].

D. In the event that Supplier acts on Customer’s behalf in processing coupons, coupons will be billed back to the Vendor at [***].

E. Any permitted deductions by either party must be supported by appropriate documentation, including but not necessarily limited to ad copy, demo reports and proof of performance.

7. NEW ITEM INTRODUCTORY FEES.

A. Supplier will provide such assistance as Customer may from time to time reasonably request in connection with administering fees to the Vendor on behalf of Customer for new item introductions (“New Item Introductory Fees”).

B. Customer will as promptly as reasonably possible provide to Supplier appropriate documentation from the Vendor or its authorized representative to support New Item Introductory Fees.

C. [***].

D. [***].

8. CUSTOMER CORE SETS. Supplier agrees to stock such new products as requested by Customer that will become part of the Product(s) that will be carried at all or substantially all of Customer’s stores (the “Customer Core Sets”). All Vendors proposed by Customer to provide Customer Core Sets must meet Supplier’s reasonable requirements, which will be promptly provided to Customer upon request. Product requests that are not part of the Customer Core Sets will be reviewed on a case by case basis. [***]Supplier Distribution Center (each, a “DC”). If such Product does not meet this minimum, [***]. Supplier will use reasonable commercial efforts to carry all Customer Core Sets in all the DCs.

9. PRIVATE LABEL PRODUCTS.

[***] (each, a “Private Label Product”). The cost charged by Supplier to Customer for each Private Label Product shall equal [***]. Minimum sales for Private Label Products shall be [***], with the exception of [***], which shall be [***]. If any Private Label Product does not meet this sales minimum, Supplier will have the right to discontinue such Product by providing written notice to Customer. Supplier and Customer agree to review pricing in [***] from the Effective Date; provided, however, that any change to the Private Label Product pricing will be subject to the parties’ mutual agreement.

A. Private Label Product SKUs must be shipped to Customer within sixty (60) days of being received by Supplier; otherwise, the charges set forth below shall apply:

Dry freight: [***].

ii.

Frozen freight: [***].

B. In the event that any Private Label Product is discontinued or terminated, goes out of date or otherwise becomes unsaleable through no fault of Supplier, Customer shall arrange for the delivery/removal from all DCs and shall take full responsibility for any such inventory within [***] of being notified by Supplier. Customer agrees to buy back any such inventory from Supplier.

C. Supplier shall notify Customer in writing if any Private Label Product SKU is: (i) approaching [***] from its expiration date, in the case of [***] and (ii) [***] from its expiration date, in the case of [***]. Within [***] of receiving such notice with respect to any Private Label Product, Customer shall direct Supplier to either: (i) deliver all such Products that to Customer’s stores; (ii) donate such Product and charge Customer at the applicable Cost of Product; or (iii) destroy such product and charge Customer for the actual disposal fees incurred, if any.

D. Supplier agrees to provide slots for Customer’s re-packaged bulk at each DC. Re-packaged bulk will be cross-docked to Customer’s distribution centers.

E. Supplier agrees to take commercially reasonable efforts to prevent any Private Label Product from being sold, distributed, conveyed or donated to any distribution network, store, entity or person not approved in advance by Customer.

10. SERVICE LEVEL. Supplier is committed to fill Customer’s orders for Products at a rate of at least [***] (the “Service Level”), except that any Products that Supplier is unable to procure due to over pulls, out of stock issues (including “manufacturer outs” and “vendor outs”) and other factors as to which Supplier has no control shall not count against Supplier for the purpose of establishing the Service Level. Customer understands that its promotional forecasting, if late or incomplete, will have a negative impact on the Service Level and that Supplier shall not be responsible for upholding the Service Level when Customer’s promotional forecasting is late or incomplete. Should Customer request that Supplier provide verification from Vendors or other manufacturers that a particular Product was unavailable to Supplier, Customer will make such request in writing and Supplier will request such proof from the Vendor or manufacturer. Supplier will provide a weekly fill rate report and an under/over report to Customer. If the fill rate goes below [***] for a [***], Supplier will as promptly as practicable develop and implement an action plan designed to regain the [***] fill rate. If, [***], the fill rate remains below [***]), the parties will immediately schedule a meeting at Customer’s Headquarters, to include the NGVC and UNFI CEOs (or their respective assigned proxies), to review corrective action to ensure prompt resolution to bringing the fill rate back to the [***] level.

11. CUSTOMER FEES. Customer may not impose any fees (whether by deduction or invoice) without prior written authorization from Supplier. Such fees could relate to, but may not be limited to, deliveries, incorrect UPC codes, file transmission issues and/or pricing discrepancies. These fees will not be accepted and all amounts will be the sole responsibility of the Customer, including repayment of deductions if needed.

12. NEW STORES AND RESET. Supplier will work with Customer on a new store opening discount file. Customer must supply signed authorizations and must continuously update this file. No credits will be issued for missing file authorizations. Customer will use its reasonable commercial efforts to provide the authorization file and new store order to Supplier [***] prior to shipment. Customer is responsible for updating the file going forward. Supplier will apply existing authorized deals on file in lieu of the authorization file from Customer until the authorization file is on file with Supplier. Supplier will not solicit deals on a “by store” basis. Supplier will extend “A” store open deals to Customer until such time, if any, that Customer’s New Store Discount Program is implemented.

13. EDI PROGRAMS. Supplier will offer EDI programs, specifically transaction sets 810, 880, 894, 856, 875, 895, 812 and 850.

14. ORDERS AND DELIVERY.

A. Once submitted, orders cannot be canceled without Supplier’s consent, not to be unreasonably withheld. When it is impractical to produce the exact quantity ordered, orders will be considered complete upon shipment of a substantially identical quantity over or under the amount specified in the order. Normal tolerances in specifications will be acceptable.

B. For direct store deliveries (“DSDs”), UNFI requires a [***] minimum order per store, per delivery. Delivery charges (calculated based on the total amount of the DSD invoice) will be applied at the bottom of the invoice based on the number of miles Customer’s store is located from the applicable DC per the chart below:

Miles from	Delivery
UNFI DC	Charge
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]

C. For DSD’s, Tony’s requires a [***] minimum order per delivery per store. No DSD delivery charge will apply to any Tony’s order.

D. For DSD’s, Albert’s requires a minimum [***] per order per store. No DSD delivery charge will apply to any Albert’s order.

E. Supplier will use commercially reasonable efforts to consolidate deliveries where capabilities allow.

F. Supplier shall not be charged or required to pay “lumper fees” or other fees associated with handling Product after delivery at Customer’s dock.

G. All deliveries shall be “drop and go” unless otherwise mutually agreed by the parties.

H. Supplier shall, at Supplier’s election, transport Products on Supplier fleet or Customer-approved carriers to individual Customer stores. Supplier shall comply with all applicable laws, including any regional or national limitations or guidelines regarding deliveries.

I. If a Customer store requests a change in a delivery time, Supplier will use commercially reasonable efforts to meet such request. If changes are required by municipal, residential or property owners on delivery hours, parking of trucks, delivery routes, curfews, noise ordinances, lease covenants, neighborhood covenants and/or operating hours, then Customer and Supplier will work together to make the scheduling changes necessary to comply with such restrictions.

J. Products will be delivered palletized and shrink-wrapped and meet Customer's quality standards and be free from damage, including, but not limited to, temperature damage, and be free from evidence of rodents or insects.

K. Title and risk of loss for Products purchased pursuant to this Agreement shall pass upon delivery to the Customer’s store when delivered by Supplier fleet or by independent carrier.

15. FUEL SURCHARGE.

A. For DSDs and cross-dock deliveries, Supplier will add a fuel surcharge per the chart below. The price per gallon for setting the fuel surcharge will be determined monthly using the prior month’s U.S. Weekly average from the U.S. Department of Energy’s Weekly Retail On-Highway Diesel Price report found at (www.eia.doe.gov). The monthly cost per gallon for any given month will be calculated as follows: the average of the prior month's U.S. weekly average prices (the sum of the four weekly prices, divided by four), rounded to two decimal places using standard rounding. One fuel surcharge per delivery will be applied to each Customer invoice.

B. The following Fuel Surcharge amounts will be billed directly to Customer’s Corporate Headquarters on a monthly basis:

Cost Per Gallon	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Delivery	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Gallon	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
Cost Per Delivery	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]

16. MERCHANDISING AND SERVICE. Supplier will provide merchandising resources to assist with new store set ups and Plan-o-grams (schematics).

17. PAYMENT TERMS AND CONDITIONS.

A. East Region Customers will remit payment to the following address(es):

United Natural Foods, Inc.

PO Box 706

Keene, New Hampshire 03431

Attention: Accounts Receivable

Albert’s Organics

144 Commerce Boulevard

Logan Township, NJ 08085

Attention: Accounts Receivable

B. West Region Customers will remit payment to the following address(es):

United Natural Foods, Inc.

PO Box 742930

Los Angeles, CA 90074-2930

Attention: Accounts Receivable

Tony’s Fine Foods

3575 Reed Avenue

P.O. Box 1501

West Sacramento, CA 95605

Attention: Accounts Receivable

C. Notwithstanding the provisions of subsections A and B above, payment may be made by electronic funds transfer. Customer should contact Supplier’s respective Accounts Receivable Departments (see Sections 17A and 17B, above) for additional information.

D. Payment terms are net [***] from the date of the invoice except for: (i) new stores, in which case payment terms will be net [***] from the date of the invoice on orders placed prior to opening through [***] after opening and (ii) invoices dated within [***] of the end of each of Customer’s fiscal quarter, in which case payment terms will be net [***] from the date of the invoice. For purposes of this Subsection, new store orders include orders dated before the opening date of each new store and invoices dated within [***] after the opening date of each new store.

E. All deductions require Advice of Correction (“AOC”) documentation from Customer.

F. Each Supplier invoice will contain an itemized description of the Products ordered, all associated fees and charges and all applicable taxes (exclusive of taxes based on Supplier’s income). In the event system issues prevent non-itemized charges from appearing on invoices, such amounts will be billed directly to Customer’s Corporate Headquarters on a monthly basis. Supplier is responsible for charging the correct taxes with respect to the Products identified on each invoice. Supplier may later make adjustments to the extent any fees, charges or tax amounts are incorrect on any invoice.

G. Customer will notify Supplier in writing of any dispute with respect to any invoice. Customer will not be required to pay any amounts disputed in an invoice until such dispute is resolved. Customer shall pay any amounts owed within [***] of Supplier’s providing backup information sufficient to resolve the dispute.

H. Should Customer overpay any invoice, Supplier shall: (i) as promptly as practicable provide written notice thereof to Customer and (ii) as directed by Customer in a written notice to Supplier, either (a) immediately credit such overpayment against future invoices for Products or (b) return the overpayment to Customer within [***] after Customer’s request therefor. In the event no written notice is received by Supplier, any overpayments discovered by Supplier shall be remitted to Customer by check or electronic funds transfer within fifteen (15) business days of Supplier’s discovery of such overpayment.

18. SUPPLIER’S REPRESENTATIONS, WARRANTIES AND COVENANTS. Supplier represents, warrants and covenants to Customer as follows:

A. Supplier (i) has sufficient personnel with adequate training and expertise to perform its obligations as contemplated hereunder in the time frames contemplated herein and (ii) will use reasonable care in the performance of its obligations under this Agreement.

B. Supplier has adequate processes and systems in place and has adequately educated its personnel to fully comply with, and will fully comply with, all federal, state and local regulations relating to handling and labeling of organic Products, including, but not limited to, the National Organic Standards as promulgated by the U.S. Department of Agriculture and such other federal, state or local laws as may apply to Supplier as a handler or processor of organic foods. Supplier acknowledges that Customer has placed substantial reliance on Supplier to handle various foods for human consumption so as to not invalidate any “organic” designation of such foods.

C. Supplier has proper security safeguards in place to ensure the confidentiality of all of Customer’s data as contained in Supplier’s computer systems. All such systems will perform without material defect or error in compliance with the performance standards set forth in this Agreement. Supplier has a disaster recovery program in place to ensure that, in the event of a catastrophic destruction of any portion of Supplier’s computer systems, wherever located, Supplier will be able to recover all necessary data to continue to perform its obligations hereunder.

D. All the DCs servicing Customer will be maintained and operated in accordance with Supplier’s warehousing and delivery standards and all applicable laws. Such DCs have the operational systems required to support the obligations of Supplier as set forth in this Agreement, and all such DCs have adequate capacity to order, store and deliver Products in accordance with the terms of this Agreement and in the amounts contemplated by Customer. All the DCs shall have sufficient security measures in place prior to receipt of Products for Customer to ensure that such Products are not tampered with or adulterated in any manner, and that all such Products shall be maintained at temperatures and other storage conditions necessary to preserve the freshness and integrity of the Products.

E. Supplier has a reliable recall system and policies in place including appropriate tracking, coding and accounting systems for all Products.

F. All Products are guaranteed to be in saleable condition at the time of pickup/delivery. While specific “expiration dates” will vary from product to product, most [***] will have a minimum of [***] shelf life and most [***] (which include, without limitation, all [***]) will have a minimum of [***] shelf life, with the exception of: (i) [***], which will have a minimum of [***] shelf life and (ii) [***], which will have a minimum of [***] shelf life. Minimum shelf life [***] include the day of delivery. For Tony’s and Albert’s minimum shelf life guarantees, see Exhibit A, Section 7A, below.

G. Supplier will observe the Continuing Quality Guarantee standards set out in Exhibit B.

H. Supplier has full power and authority to execute, deliver and perform this Agreement.

I. This Agreement has been duly and validly authorized, executed and delivered by Supplier and constitutes a valid and binding agreement enforceable against Supplier in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity.

19. CUSTOMER’S REPRESENTATIONS AND WARRANTIES. Customer represents, warrants and covenants to Supplier as follows:

A. Customer has full power and authority to execute, deliver and perform this Agreement.

B. This Agreement has been duly and validly authorized, executed and delivered by Customer and constitutes a valid and binding agreement enforceable against Customer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity.

20. COMPLIANCE WITH LAWS.

A. Each party covenants and agrees during the Term it will fully comply with all applicable laws, ordinances, regulations, licenses and permits of or issued by any federal, state or local government entity, agency or instrumentality applicable to its responsibilities hereunder. Each party agrees that it shall comply with all certification procedures and regulations. Each party shall promptly notify the other party after it becomes aware of any material adverse proposed law, regulation or order that, to its knowledge, may or does conflict with the parties’ obligations under this Agreement. The parties will then use reasonable efforts to promptly decide whether a change may be made to the terms of this Agreement to eliminate any such conflict or impracticability.

B. In connection with any organic Products, Supplier shall take all such actions as are required by any federally recognized certifying organization (or as required by law) in order for such Products to be certified as organic, including, without limitation, the maintenance of any required documentation and the taking of the necessary precautions to prevent Product compromise. Supplier shall provide its organic certifications to Customer at Customer’s request.

21. AUDIT RIGHTS.

A. No more than [***], Customer shall have the right, upon [***] prior written notice and at Customer’s expense, to: (i) verify Supplier’s performance of its obligations hereunder, including, without limitation, [***]; (ii) confirm that Supplier [***]; and (iii) audit [***]. To the extent Supplier is prevented from providing any information requested by Customer due to confidentiality obligations to a third party, Supplier will make commercially reasonable efforts to provide the requested information in redacted or abbreviated form.

B. Customer may use its own internal auditors [***]. Any such audit or inspection shall be conducted during Supplier’s normal business hours at a time mutually convenient to the parties.

C. Supplier shall cooperate with each Customer audit or inspection and provide such assistance as is reasonably required in carrying out any such audit or inspection. The parties shall cooperate to minimize any disruption caused by, and the cost incurred by Supplier in connection with, any such audit or inspection.

D. Following each audit or inspection, Customer and Supplier will: (i) meet to review the results of the audit or inspection and (ii) use reasonable commercial efforts to mutually agree on the most appropriate way to remediate any deficiencies identified in such audit or inspection.

E. To the extent that an audit performed by Customer reveals any error or incorrect charging (overcharge or undercharge) in any Supplier invoice that [***].

F. Customer shall bear the costs of any audit or inspection, unless such audit or inspection reveals a material discrepancy in the information previously supplied by Supplier, in which case the costs of the audit will be borne by Supplier.

G. Supplier will retain all its books and records (in any form or media) relating to this Agreement for a minimum period of [***] following the expiration or termination of this Agreement.

22. INSURANCE.

A. At the time of execution and throughout the Term, Supplier shall, at its own cost and expense, carry and maintain the insurance coverage listed below with insurers having a “Best’s” rating of A VII.

i. Workers' Compensation Insurance with statutory limits as required in the state(s) of operation; and providing coverage for any employee entering onto Customer’s premises, even if not required by statute.

ii. Commercial General Liability Insurance covering claims for bodily injury, death, personal injury or property damage occurring or arising out of the performance of this Agreement. The limits of insurance shall not be less than [***] per occurrence with a general aggregate limit of [***].

iii. Product Liability Insurance with limits of not less than [***] per occurrence.

iv. Comprehensive Automobile Liability Insurance covering the ownership, operation and maintenance of all owned, non-owned and hired motor vehicles used in connection with the performance of this Agreement, with limits of at least [***] per occurrence.

v. Umbrella or Excess Liability Insurance with limits not less than [***] per occurrence that provides additional limits for employer’s liability, commercial general liability, automobile liability and products liability insurance.

ii. Supplier will provide Customer with certificates of insurance evidencing all of the referenced insurance policies, which will provide that: (i) such insurance will not be materially modified or cancelled unless Customer has been given at least thirty (30) days’ advance written notice thereof; and (ii) such certificates will be renewed annually or as policy renewals occur. Limits of liability may be maintained through a combination of primary and excess policies.

23. CONFIDENTIAL INFORMATION.

A. As used herein, the term “Confidential Information” means any non-public, confidential or proprietary information relating to either party or its Affiliates (the “Disclosing Party”) that is furnished, disclosed or made accessible by the Disclosing Party to the other party (the “Receiving Party”) hereunder, whether verbally or in writing (including, but not limited to, trade secrets, business plans, marketing plans, financial data, specifications, models, samples, computer programs and documentation). All Confidential Information will remain the property of the Disclosing Party and no license or other rights in or to any Confidential Information are granted by virtue of this Agreement.

B. Confidential Information will not include any information that: (i) is in the possession of or known to the Receiving Party as of the Effective Date, as evidenced by documentation; (ii) is or becomes publicly available through no fault of the Receiving Party; (iii) is independently developed by the Receiving Party without the use of any Confidential Information; (iv) is obtained by the Receiving Party from a third party without breach by such third party of any obligation of confidence with respect to the information disclosed; or (v) is required to be disclosed pursuant to the order or requirement of a court, regulatory agency, or other government body of competent jurisdiction. If the Receiving Party is subject to an order or requirement to disclose Confidential Information, it: (i) will notify the Disclosing Party immediately of such order or requirement to disclose (unless prohibited by such court, agency or government body) and use reasonable efforts to resist, or to assist the Disclosing Party in resisting, such disclosure and, if such disclosure must be made, to obtain or assist in obtaining a protective order or comparable assurance that the Confidential Information disclosed will be held in confidence and not be further disclosed absent the Disclosing Party’s prior written consent and (ii) disclose only those portions of the Disclosing Party’s Confidential Information as are necessary to comply with such order or requirement.

C. The Receiving Party agrees: (i) to use the Confidential Information solely for the purpose of performing its obligations and exercising its rights under this Agreement; (ii) to make only such number of copies of any Confidential Information as may be reasonably necessary for the purpose of performing its obligations and exercising its rights under this Agreement; and (iii) not to disclose any Confidential Information to any third party, except to those of its employees who have a need to know such Confidential Information for purposes of fulfilling the Receiving Party’s obligations hereunder and who are bound in writing to maintain the confidentiality of such Confidential Information. The Receiving Party will be responsible for any breach of this Section 23 by its employees.

D. Upon the expiration or termination of the Agreement, or at any time upon the Disclosing Party’s request, the Receiving Party will promptly return to the Disclosing Party or, at the Disclosing Party’s direction, destroy all Confidential Information, in whole or in part, in whatever format, including any copies thereof.

E. The Receiving Party agrees that monetary damages will not be a sufficient remedy for any breach of its obligations under this Section 23 and that, in the event of such a breach, the Disclosing Party will be entitled to equitable relief, including injunction and specific performance. Such equitable relief will be in addition to other remedies at law or in equity that are available to the Disclosing Party.

F. The provisions of this Section 23 will survive for two (2) years following the expiration of termination of this Agreement.

24. MISCELLANEOUS.

A. Force Majeure. Neither party will be liable for any delay or failure in the performance of this Agreement, or in the delivery or shipment of goods, or for any damages suffered by the other party by reason of such delay or failure, if such delay or failure is, directly or indirectly, caused by, or in any manner arises from a “Force Majeure” event, which for purposes of this Agreement means fires, floods, accidents, civil unrest, acts of God, war, governmental interference or embargoes, strikes, labor difficulties, shortage of labor, fuel, power, materials, or supplies, transportation delays, or any other cause or causes (whether or not similar in nature to any of these hereinbefore specified) beyond Supplier’s reasonable control. In the event of a Force Majeure event, the party so affected shall, as promptly as reasonably practicable, give reasonable written notice to the other party of the cause and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as possible. All orders are accepted with the understanding that they are subject to Supplier’s ability to obtain the necessary Products, and all orders as well as shipments applicable thereto are subject to Supplier’s current manufacturing schedules, and government regulations, orders, directives, and restrictions that may be in effect from time to time.

B. Indemnification; Limitation on Liability.

i. As a distributor, Supplier employs reasonable efforts to obtain representations and warranties from its vendors that they comply with all local, state, regional, provincial and federal regulations regarding the manufacture, storage, transportation and distribution of food, food products and non-food products, in addition to all applicable labeling regulations. Notwithstanding, Supplier is not the manufacturer of the Products, however, and, except as set forth in this Agreement or the Exhibits hereto, makes no representations and/or warranties with respect to the manufacture of the Products.

ii. Supplier will indemnify, defend and hold harmless Customer and its parent, subsidiaries affiliates, stockholders, directors, officers, employees, agents, representatives, successors and assigns from and against any and all demands, claims, liabilities, losses, judgments, settlements, penalties, costs, expenses, fees (including reasonable fees of any attorneys), interest, liens, encumbrances, causes of action, damages of any kind and any other obligations (together “Damages”) sought by any third-party, alleging, arising out of or relating to: (i) any actual or alleged violation by Supplier of any federal, state or local law, including any statute, ordinance, administrative order, rule or regulation (including any violation of any applicable federal, state or local laws relating to any Product, including any label, packaging or invoice associated with such Product); (ii) any negligence or willful misconduct of Supplier or any of its employees or agents; (iii) the breach of any term of this Agreement; (iv) injury due to the presence or activities of Supplier or any of its employees or contractors at any Customer store or other property; (v) any Product’s infringement or misappropriation of any patent, trademark, trade name, trade dress, copyright, trade secret or proprietary right of any third party; (vi) injury to any person, or any other damage or loss alleged to have resulted from the Product having been adulterated or misbranded within the meaning of any applicable federal, state or local law or regulation; (vii) any defect involving the packaging, labeling, packing, shipping and/or invoicing of Product; or (viii) any Product recall or withdrawal or safety notice initiated as a result of a request by a government agency, local health authority or consumer protection agency or court action because of or resulting from a condition which existed at the time of delivery of the Product to any Customer Store.

iii. Supplier acknowledges that it generally obtains indemnification agreements from the various manufacturers, suppliers, vendors or distributors of the Products it purchases and sells. Supplier agrees to indemnify, defend and hold harmless Customer and its parent, subsidiaries affiliates, stockholders, directors, officers, employees, agents, representatives, successors and assigns from and against any and all Damages (including but not limited to, personal injury, illness or death of any person) arising from or pertaining to the handling, shipment, delivery, condition of, consumption or use of any Product (other than Private Label Products), without regard to any negligence by Supplier related to such Product. Supplier’s obligation to indemnify Customer for any Liabilities arising from any Products sold to Customer shall exist regardless of the existence or nonexistence of any such indemnification agreements from any Product manufacturer, supplier, vendor or distributor. Indemnification under this section does not extend to Damages arising out of any Private Label Products, except where the Liability is attributable to the negligence or intentional acts or omissions of Supplier.

iv. Supplier shall not be required to defend and indemnify any claim to the extent such claim arises from the negligence or the intentional act or omission of Customer or a customer of Customer.

v. Customer will notify Supplier within a reasonable time after it becomes aware of any indemnification claim hereunder. Notwithstanding the foregoing, Customer’s failure to provide any such notice to Supplier shall not relieve the Supplier of or from any of its indemnification obligations hereunder, except to the extent that Supplier suffers prejudice as a result of such failure.

vi. The parties hereto shall cooperate in the prosecution or defense of any third party claim and shall furnish such records, information and testimony and attend to such proceedings as may be reasonably requested in connection therewith. Supplier shall make no settlement of any claim which would give rise to liability on the part of Customer without Customer’s prior written consent, and Customer shall not be liable for the amount of any settlement effected without its prior written consent.

vii. EXCEPT AS SET FORTH IN THIS AGREEMENT AND THE EXHIBITS HERETO, SUPPLIER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. CUSTOMER’S EXCLUSIVE REMEDIES ARE SET FORTH IN THIS AGREEMENT. Neither party shall be liable to the other for consequential, incidental, indirect, punitive or special damages, including commercial loss and lost profits, however caused and regardless of legal theory or foreseeability, directly or indirectly arising under this Agreement, even if such party has been apprised of the possibility of such damages.

C. Dispute Resolution; Governing Law.

i. The parties agree to handle any and all disputes arising out of this Agreement in accordance with the dispute resolution process set forth in this Section 24.C.

ii. The parties shall first attempt to resolve any dispute in the normal course of business through their respective employees having direct operational responsibility for the relevant subject area. Any and all disputes between the parties which are not resolved in the normal course of business shall be promptly referred to the Chief Executive Officers of UNFI and Customer or their proxies, who will have sixty (60) days from the date of the referral to investigate, negotiate and resolve the dispute, unless the parties agree in writing to extend such period. If the Chief Executive Officers (or their proxies) are unable to resolve the dispute within such sixty (60) days period (as it may be extended), then the dispute may be resolved pursuant to Subsection (iii) below.

iii. Governing Law, Venue and Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflict of law principles thereof. The federal and/or state courts of Delaware will have exclusive personal and subject matter jurisdiction over, and the parties each hereby submit to the venue of such courts with respect to, any dispute arising pursuant to this order, and all objections to such jurisdiction and venue are hereby waived. The parties consent to service of process permitted under Delaware law or by certified mail, return receipt requested.

iv. Notwithstanding anything herein to the contrary, in the event either party breaches its confidentiality obligations under Section 23, the other party shall immediately be entitled to obtain injunctive or other equitable relief in any court of competent jurisdiction.

D. Entire Agreement. Other than any credit applications, this Agreement and any attached schedules contain the entire agreement between Supplier and Customer regarding the distribution of Products by Supplier and supersede all prior written or oral agreements regarding distribution of Products. Without limiting the generality of the foregoing, this Agreement supersedes that Distribution Agreement dated as of June 1, 2008 by and between Customer and UNFI, as amended (the “Prior Agreement”). The Prior Agreement shall terminate upon the execution of this Agreement.

E. Publicity. No press release or general public disclosure regarding this Agreement shall be issued by either party without the other party’s prior written approval of the form, content and timing of such press release or general public disclosure, except as may be required by applicable law or the rules of any securities exchange. Neither party shall use the other party’s names, marks, codes, drawings, specifications in any advertising, promotional efforts or publicity of any kind without the prior written permission of the other party as to the time, manner, format and media.

F. Modification and Waiver. No modification of any term or provision of this Agreement will be enforceable unless set forth in a writing executed by both parties. No waiver of any term or provision of this Agreement will be enforceable unless set forth in a writing executed by the party sought to be charged. The waiver by either party hereto of any of its rights or breaches by the other party under this Agreement in a particular instance will not be construed as a waiver of the same or different rights or breaches in subsequent instances. Without limiting the generality of the foregoing, the acceptance by Supplier of any partial payment due hereunder will not establish a custom or waive any rights of Supplier to enforce prompt payments hereunder.

G. Assignment. This Agreement may not be assigned by either party without the other party’s prior written consent (which consent shall not be unreasonably withheld or delayed). Notwithstanding the foregoing, either party may assign its interests hereunder, without obtaining the consent of the other party, to: (i) any entity that controls, is controlled by or is under common control with the assigning party or (ii) any person or entity that acquires all or substantially all the assigning party’s assets or shares of capital stock, provided (a) the assigning party provides written notice of such assignment to the other party within ten (10) days of such assignment; (b) the assignee agrees in writing to be bound by and observe the terms of this Agreement; and (c) the assignee satisfactorily completes Supplier’s credit application, unless such assignee is a pre-existing customer of Supplier.

H. Notices. Any written notices required in this Agreement may be made by personal delivery, facsimile, electronic mail, overnight or other delivery service, or first class mail. Notices by facsimile or electronic mail will be effective when transmission is complete and confirmed; notices by personal delivery will be effective upon delivery; notices by overnight or other delivery services will be effective when delivery is confirmed; and notices by mail will be effective four business days after mailing. The notice address for each party is set forth below the signatures, and is subject to change upon written notice thereof.

I. Severability. In the event any provision of this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect: (i) such provision shall be fully severable; (ii) this Agreement shall be construed and enforced as if such invalid, illegal or unenforceable provision had never comprised a portion of this Agreement; and (iii) the remaining provisions of this Agreement shall not be affected by such invalid, illegal or unenforceable provision or by its severance from this Agreement. Furthermore, in lieu of such invalid, illegal or unenforceable provision, there shall be added automatically as part of this Agreement a provision as similar in substance to such invalid, illegal or unenforceable provision as may by possible and be valid, legal and enforceable.

J. Counterparts; Execution. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together will constitute one and the same document. Delivery of an executed signature page of this Agreement by facsimile transmission or electronic photocopy (i.e., a “pdf”) shall be effective as delivery of a manually executed counterpart hereof.

[Signature page follows]

In witness whereof, the parties have duly executed this Agreement as evidenced by the signatures of their duly authorized representatives as of the Effective Date.

Vitamin Cottage Natural		UNITED NATURAL FOODS, INC.
FOOD MARKETS INC.


By:	/s/ Kemper Isely	By:	[***]
Name:	Kemper Isely	Name:	[***]
Title:	Co-President	Title:	[***]
Date:	June 21, 2016	Date:	June 21, 2016


12612 West Alameda Parkway		313 Iron Horse Way
Lakewood, CO 80228		Providence, RI 02908
Email: [email protected]		Fax No: 877-775-6476
		Email:	[***]


		Tony’s Fine Foods

		By:	[***]
		Name:	[***]
		Title:	[***]
		Date:	June 21, 2016


		3575 Reed Avenue
		West Sacramento, CA 95606

			ALBERT'S ORGANICS

			By:	[***]
			Name:	[***]
			Title:	[***]
			Date:	June 21, 2016


			144 Commerce Boulevard
			Logan Township, NJ 08085

			With a copy to:
			United Natural Foods, Inc.
			313 Iron Horse Way
			Providence, RI 02908

			Attn: Office of General Counsel

EXHIBIT A

PRICING

1. DEFINITIONS

A. Contracted Cost means [***].

B. Contracted Products means those Products governed by an agreement between the Customer and the vendor of the Products that prescribes the Contracted Cost for such Products.

C. Cost of Product means [***]. Cost of Product will not be adjusted for, and Customer will not be entitled to, [***]. In addition, Cost of Product will not be reduced by [***]. Vendors will include, without limitation, third-party affiliates and divisions of Supplier. Any invoice that forms the basis for Cost of Product may contain [***].

2. PRICING

A. Tony’s and Albert’s will distribute all Products ordered by Customer in the categories described below in Section 2B. The “Sell Price” of the Product equals: [***]. Sell Price is exclusive of all city, state, and federal excise taxes, including, without limitation, taxes on manufacture, sales, receipts, gross income, occupation, use and similar taxes. Wherever applicable, any tax or taxes (other than taxes based on Supplier’s income) will be added to the invoice as a separate charge to be paid by the Customer.

B. Tony’s and Albert’s products (excluding produce) will be priced per Category per the chart below.

	[***]
Categories	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]	[***]	[***]	[***]

Tony’s and Albert’s will review pricing every [***] for potential changes in Net Weekly Average Store Purchases. Customer will receive a [***] notification prior to any change in the applicable Mark-Up Percentage. New pricing will be activated [***] post quarter-end.

Item price changes (except produce and high commodities products) will be presented with a [***] lead time and will be implemented by the Effective Date. Supplier reserves the right to correct erroneous published descriptions or prices immediately.

C. Based on an annual sales volume (calculated on a calendar year basis) of [***], UNFI will charge [***]. UNFI agrees that Customer will be entitled to such pricing for the period between the Effective Date and December 31, 2016. Should Customer’s annual purchase volume fall below [***], UNFI reserves the right to [***]. Customer will receive [***] prior written notification from UNFI prior to any change in [***]. UNFI will take all technical and other steps reasonably necessary to ensure Customer’s ability to use [***] as expeditiously as possible. Provided UNFI has fulfilled such obligation, [***].

3. [***]

4. DISPUTES. If Customer disputes any pricing, Customer will so notify Supplier and the parties will diligently attempt to resolve the pricing issue. If the dispute cannot be resolved within [***], the Products in question may be removed from availability to Customer by Supplier. Once the dispute is resolved, the Products will be reinstated.

5. REBATES

A. Growth Incentive Rebate: Supplier will provide Customer with [***] based upon the following criteria:

1) [***].

2) Future years will be based upon the following chart:

[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]

3) [***].

4) [***].

B. Blue Marble Brands (BMB) Rebate: Blue Marble Brands LLC will provide [***] for the following brands:

[***]

[***].

1) [***].

[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]

2) [***].

C. [***].

6. SUPPLIER CREDIT POLICY

A. Requesting Credit:

1) At time of delivery, all pallet, box, tote, piece count discrepancies must be noted on the billing manifest. A signed billing manifest acknowledges receipt of items as verified by the driver.

2) For UNFI, all credits must be requested within [***] after delivery; for Tony’s all credits must be requested within [***] hours after delivery; and for Albert’s all credits must be requested within [***] after delivery for fresh produce and within [***] for non-produce items. For Albert’s, produce claims reported after [***] period will not be accepted.

3) Bulk items are subject to insect contamination. Please inspect all items promptly. We cannot issue credit for any claims reported more than [***] after delivery.

4) The following information must be supplied when requesting credit/Product pickup.

a) Store name, account number, invoice number, Supplier item code or UPC, and item description.

b) Quantity – please note which you are requesting, eaches or case credit (partial case credit may be given for damaged items).

c) Reason for credit.

d) Mispicks – please provide information on the item that was ordered and not received (mispicked), and not the item that was actually received. The Supplier “pull sticker” will have the necessary information.

5) As part of our credit process, all claims are subject to research before being approved.

B. Returning Product:

1) All returns must be approved by the Supplier’s respective Credits Department prior to being returned and must be in original cartons/packages, free of price tags and in saleable condition, or NO credit will be issued. Authorized returns will be picked up via the UNFI driver on your next delivery. UNFI’s drivers cannot accept returns without pre-authorization. All returns are subject to UNFI’s verification for credit to be considered final.

2) Supplier does not accept the return of the following:

a) Discontinued items,

b) Products that do not sell,

c) Retailer’s promotional or ad items,

d) Seasonal or Holiday merchandise,

e) Appliances or Media products, or

d) Consumer returns not authorized by the Manufacturer.

C. Miscellaneous Information:

1) Restock fee – Supplier agrees not to charge Customer a restock fee on returns or refused loads for cause, but reserves the right to deny credit/returns on misordered products or products refused at time of delivery without cause.

2) Product Code Dates – Tony’s and Albert’s guarantees that dated perishables will have the minimum expiration dates shown in this Exhibit A, Section 7A. Supplier guarantees [***] on all non-perishable products. The product code date policy applies to all store orders, per-opening store orders, and DC orders.

3) Supplier will accept the “mispick” and “return order” documents from Customer in place of the standard UNFI credit request forms.

4) Customer agrees to specify damages, mispicks, and BNR on the AOC documents submitted to Supplier.

7. TONY’S AND ALBERT’S PRODUCTS

A. Upon delivery, Tony’s and Albert’s guarantees the minimum shelf life for each Product category listed below (however, there are item exceptions within each category depending on the item and manufacturer).

1) [***]

2) [***]

3) [***]

4) [***]

5) [***]

6) [***]

7) [***]

B. [***] are non-refundable except when damaged or unsalable due to manufacture’s defect unless agreed upon by Vendor and Customer.

8. ACQUISITIONS. When taking over an account, Supplier will not assume responsibility for: (i) perishable items, (ii) Products with less than [***] shelf life or (iii) Products that are not offered in Supplier’s catalogue. Responsibility for these Products is to be assumed by the Customer or the Vendor.

EXHIBIT B

Continuing Quality Guarantee

Supplier is committed to the distribution of safe, wholesome, high quality Products. Supplier is a licensed and insured distributor of food and non-food products and is not the manufacturer of most of the products (“Products”) it sells to its customers (“Customers”). Supplier recognizes that its Customers desire to provide consumers with Products that consistently meet and exceed the highest safety, regulatory and quality standards. Supplier is likewise committed to providing Products that meet and exceed these high standards. As such, Supplier endeavors to ensure that each of its vendors (“Vendors”) share and embrace this same commitment to safety and quality. This Continuing Quality Guarantee has been developed based on the notion that the relationship between Supplier and Customer is one of distributor and customer.

Core Values:

Supplier has established a set of six Core Values that inspire our approach to business. Supplier expects its suppliers to comply with a Code of Conduct that demonstrates support of these same core values:

	●	Integrity and respect in all of our actions
	●	Trust and accountability in all relationships
	●	Open and honest communication with employees
	●	Profitable growth of the organization
	●	A safe and healthy work environment
	●	Social and environmental responsibility for the health of the planet

Representations and Warranties:

As a distributor, Supplier employs reasonable efforts to obtain representations and warranties from its vendors that they comply with all local, state, regional, provincial and federal regulations regarding the manufacture, storage, transportation and distribution of food, food products and non-food products, in addition to all applicable labeling regulations. As a general practice, Supplier endeavors to purchase Products from Vendors that warrant that:

All Products are manufactured, packaged, labeled, packed, shipped and invoiced in compliance with the applicable requirements of federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and all other countries in which the Product is manufactured and that all required labeling is affixed to Products and passed on to Supplier or its customers;

All Products are a) not adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, as amended, and regulations adopted thereunder (the “FD&C Act”); b) not articles that are prohibited, under the FD&C Act or any successor thereto, from being introduced into interstate commerce; c) not prohibited under any public health, safety or environmental laws, or any other laws regulations or ordinances of any state or other government authority which are applicable to such shipment or delivery; d) merchantable and fit for their intended purpose, and will pass without objection in trade; and (e) compliant with all applicable provisions of the Meat Inspection Act (“MIA”), Poultry Product Inspection (“PPIA”) and/or Egg Product Inspection Act (“EPIA”), including all applicable rules and regulations adopted thereunder.

If applicable, all advertising and promotional materials developed or provided by Vendor for any Product will comply with all applicable requirements of federal, state and local laws, regulations, ordinances and administrative orders and rules of the United States and all other countries in which the Vendor does business, including, without limitation and if applicable, those promulgated by the U.S. Food and Drug Administration, the U.S. Department of Agriculture, the U.S. Federal Trade Commission and the Environmental Protection Agency;

Vendor a) verifies its product supply chains to evaluate and address risks of human trafficking and slavery (and will disclose to Supplier whether a third party conducted the evaluation for Vendor); b) audits its own vendors to evaluate compliance with Vendor’s company standards (and will specify to Supplier whether the audits are independent and unannounced); c) requires its direct vendors to certify that the products they provide to Vendor comply with the laws of the country in which the supplier does business; d) maintains internal accountability standards for employees and contractors concerning human trafficking and slavery; e) ensures that Vendor employees and management responsible for supply chain management are trained to identify human trafficking and slavery and how to mitigate risks within supply chains;

Vendor and all employees and agents involved in the manufacturing, processing or delivery of the Products will strictly adhere to all applicable federal, state and local laws, regulations and prohibitions of the United States, its territories and all countries in which the Product is produced with respect to the operation of their production facilities and their other business and labor practices, including but not limited to the California Transparency in Supply Chains Act of 2010, and comply with existing local and federal laws regarding slavery and human trafficking in the country or countries in which UNFI’s business with Supplier is being conducted;

All intellectual property or proprietary rights used by Vendor in connection with the Products are owned by Vendor or Vendors has been properly authorized to use such rights in connection with the Products and to sell the Products that incorporate such proprietary rights to Supplier for use or further resale.

Notwithstanding that Supplier endeavors to obtain the above warranties from its vendors, Supplier is not the manufacturer of the Products it distributes and does not make any representations and/or warranties with respect to the manufacture of such Products. EXCEPT AS SET FORTH IN THE AGREEMENT AND THE EXHIBITS THERETO, SUPPLIER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, FOR THE PRODUCTS IT DISTRIBUTES.

Food Safety:

Supplier considers Food Safety to be of the utmost importance. As such, Supplier has a reputable auditing firm perform annual Third Party Good Manufacturing Practices (GMP) Audits at its distribution centers, and all of its distribution centers are certified by accredited Food Safety certifiers. In conjunction with food safety, all Supplier divisions utilize accredited pest control services that are aware of Supplier’s organic status, to monitor and report on regularly scheduled facility visits and any pest issues that are detected.

GFSI Standards Certification and HACCP Program:

Supplier’s Distribution Centers have HACCP plans and Supplier operates and maintains its facilities in accordance therewith. Supplier has HACCP trained personnel employed at each of its facilities, who are responsible for ensuring the implementation of Supplier’s HACCP program.

Supplier has obtained certification to one of the GFSI-recognized programs (“Safe Quality Foods” or “SQF”) at nearly all of its facilities company-wide. Complete SQF Certification is anticipated during 2016.

Certified Organic Distributor:

In 2002, Supplier became the first coast-to-coast natural products company certified in organic distribution. This certification by Quality Assurance International, a USDA accredited organic certification organization, means that Supplier meets the stringent standards of the USDA National Organic Program and that Supplier has all the required systems in place to verify and maintain the organic integrity of product through the entire supply chain.

Food Safety Evaluations and Site Visits by Customers:

Supplier shall make the facilities and warehouses that it owns and operates available to Customer for complete GMP and food safety evaluations during regular business hours and upon reasonable request.

Bioterrorism Act of 2002:

Supplier complies with the Bioterrorism Act of 2002 and requires its suppliers and anyone making deliveries to or visiting its distribution centers to comply with its strict requirements as well.

Recall Process:

Supplier understands that Customer expects to be provided with products that consistently meet the highest health, safety and quality standards. Supplier, as a distributor in the middle between its Vendors and its Customers, shall notify Customer of a FDA classified recall as soon as practicable but in no event longer than [***] from notification by its Vendor and in the case of a recall that poses a serious health risk, Supplier shall provide such notice within [***] from receipt of complete and necessary information from the supplier. Supplier shall not be subject to any recall fees associated with any recalls or market withdrawals, including fees, assessments, costs, and/or expenses incurred and/or imposed by Customer associated with or resulting from a recall or market withdrawal (“Recall Fees”). To the extent, however, that Supplier is able to recover any Recall Fees from the Vendor or manufacturer, Supplier will pass the recovered Recall Fees on to Customer.

This Continuing Quality Guarantee is the sole guarantee provided by Supplier and supersedes any oral or prior document relating to the subject matter hereof.

Exhibit 10.42

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT, dated as of May 10, 2016 (this “Amendment”), is entered into among VITAMIN COTTAGE NATURAL FOOD MARKETS, INC., a Colorado corporation (the “Borrower”), the Guarantors party hereto, the Lenders party hereto and BANK OF AMERICA, N.A., as Administrative Agent and L/C Issuer (in such capacity, the “Administrative Agent”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement (as defined below).

RECITALS

WHEREAS, the Borrower, the Guarantors, the Lenders and the Administrative Agent are parties to that certain Credit Agreement, dated as of January 28, 2016 (as amended or modified from time to time, the “Credit Agreement”); and

WHEREAS, the parties hereto have agreed to amend the Credit Agreement as provided herein.

NOW, THEREFORE, in consideration of the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

AGREEMENT

1. Amendments.

(a) The following definition is hereby added to Section 1.01 of the Credit Agreement in the appropriate alphabetical order to read as follows:

“First Amendment Effective Date” means May 10, 2016.

(b) The definition of “Aggregate Revolving Commitments” in Section 1.01 of the Credit Agreement is hereby amended to read as follows:

“Aggregate Revolving Commitments” means the Revolving Commitments of all the Lenders. The initial amount of the Aggregate Revolving Commitments in effect on the First Amendment Effective Date is $45,000,000.

(i) the sum of the aggregate amount of all increases in the Aggregate Revolving Commitments after the First Amendment Effective Date shall not exceed $5,000,000;

(d) Section 7.08 of the Credit Agreement is hereby amended to read as follows:

7.08 Restricted Payments; Certain Payments of Indebtedness.

No Loan Party will declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (a) the Borrower and Parent may declare and pay dividends with respect to its common stock payable solely in additional shares of its common stock, (b) so long as no Default exists or would arise as a result thereof, Subsidiaries of the Borrower may declare and pay dividends ratably to the holders of their Equity Interests, (c) the Borrower may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Borrower and its Subsidiaries, (d) so long as no Default exists or would arise as a result thereof, the Borrower and Parent may repurchase, redeem, or otherwise buy back shares of Parent’s common stock in an aggregate amount not to exceed $10,000,000; provided, that, with respect to each of clauses (a) through (d) above, such Person and the Persons holding its Equity Interests are in compliance with Section 7-80-606 of the Colorado Revised Statutes, and (e) so long as no Default exists or would arise as a result thereof, the Borrower may pay cash dividends to the Parent in an amount sufficient to allow the Parent to pay (i) reasonable audit and other accounting expenses incurred in the ordinary course of business, (ii) Taxes due and payable by the Parent to any taxing authority and reasonable expenses incurred in connection with preparation of related Tax returns and filings, (iii) reasonable and necessary expenses (including professional fees and expenses) incurred by the Parent in connection with (A) registration, public offerings and exchange listing of equity securities and maintenance of the same, (B) compliance with reporting obligations under, or in connection with compliance with, federal or state securities laws, and (C) indemnification and reimbursement of directors, officers and employees in respect of liabilities relating to their serving in any such capacity, or obligations in respect of director and officer insurance (including premiums therefor), (iv) repurchases of shares of Parent’s common stock pursuant to clause (d) above in an aggregate amount not to exceed $10,000,000, and (v) other reasonable expenses incurred by Parent in the ordinary course of business.

(e) Schedule 2.01 to the Credit Agreement is hereby amended to read as set forth in Exhibit A attached hereto.

2. Effectiveness; Conditions Precedent. This Amendment shall be effective as of the date hereof when all of the conditions set forth in this Section 2 shall have been satisfied in form and substance satisfactory to the Administrative Agent.

(a) Receipt by the Administrative Agent of copies of this Amendment duly executed by the Borrower, the Guarantors and Required Lenders.

(b) Payment of all fees and expenses owed by the Loan Parties to the Administrative Agent.

3. Ratification of Credit Agreement. Each Loan Party acknowledges and consents to the terms set forth herein and agrees that this Amendment does not impair, reduce or limit any of its obligations under the Loan Documents, as amended hereby. This Amendment is a Loan Document.

4. Authority/Enforceability. Each Loan Party represents and warrants as follows:

(a) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment.

(b) This Amendment has been duly executed and delivered by each Loan Party and constitutes its legal, valid and binding obligations, enforceable in accordance with its terms, except as may be limited by applicable Debtor Relief Laws or by equitable principles relating to enforceability.

(c) No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with the execution, delivery or performance by such Loan Party of this Amendment.

(d) The execution and delivery of this Amendment does not (i) violate the terms of its Organization Documents or (ii) violate any Law.

5. Representations and Warranties of the Loan Parties. Each Loan Party represents and warrants to the Lenders that after giving effect to this Amendment (a) the representations and warranties of each Loan Party contained in Article V of the Credit Agreement are true and correct as of the date hereof, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and (b) no Default exists.

6. Counterparts/Facsimile. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts of this Amendment by facsimile or other secure electronic format (.pdf) shall be effective as an original.

7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

8. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

9. Headings. The headings of the sections hereof are provided for convenience only and shall not in any way affect the meaning or construction of any provision of this Amendment.

10. Severability. If any provision of this Amendment is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Amendment shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

[remainder of page intentionally left blank]

Each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written.

BORROWER:	VITAMIN COTTAGE NATURAL FOOD MARKETS, INC.,
	a Colorado corporation


	By:	/s/ Kemper Isely
	Name:	Kemper Isely
	Title:	Co-President

GUARANTORS:	NATURAL GROCERS BY VITAMIN COTTAGE, INC.,
	a Delaware corporation


	By:	/s/ Kemper Isely
	Name:	Kemper Isely
	Title:	Co-President

	VITAMIN COTTAGE TWO LTD. LIABILITY COMPANY,
	a Colorado limited liability company


	By:	/s/ Kemper Isely
	Name:	Kemper Isely
	Title:	Manager

ADMINISTRATIVE AGENT:	BANK OF AMERICA, N.A.,
	as Administrative Agent


	By:	/s/ Satish S. Chander
	Name:	Satish S. Chander
	Title:	SVP

LENDERS:	BANK OF AMERICA, N.A.,
	as a Lender and L/C Issuer


	By:	/s/ Satish S. Chander
	Name:	Satish S. Chander
	Title:	SVP

Exhibit A

Schedule 2.01

Commitments and Applicable Percentages

Lender	Revolving Commitment	Applicable Percentage of Revolving Commitment
Bank of America, N.A.	$45,000,000.00	100.000000000%
TOTAL	$45,000,000.00	100.000000000%

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;

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: July 28, 2016

	/s/ Kemper Isely
	Kemper Isely
	Co-President and a Principal Executive Officer

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;

(a)

(b)

(c)

(d)

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)

(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: July 28, 2016

	/s/ Zephyr Isely
	Zephyr Isely
	Co-President and a Principal Executive Officer

Exhibit 31.3

CERTIFICATION

I, Sandra Buffa, 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;

(a)

(b)

(c)

(d)

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)

(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: July 28, 2016

	/s/ Sandra Buffa
	Sandra Buffa
	Chief Financial Officer and Principal Financial Officer

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 June 30, 2016 (the “Report”), 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 Sandra Buffa, 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 or her 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: July 28, 2016

	/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/ Sandra Buffa
	Sandra Buffa
	Chief Financial Officer and Principal Financial Officer

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Form 10-Q Natural Grocers by Vitam For: Jun 30

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