Natural Grocers by Vitamin Cottage, Inc 10-Q for FY2022 Q2
Natural Grocers by Vitamin Cottage, Inc. (NGVC)
About this 10-Q
Natural Grocers by Vitamin Cottage, Inc filed this 10-Q on May 5, 2022, covering the quarter ended March 31, 2022 (FY2022 Q2).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $271.82M
- up 4.9% from $259.2M a year earlier
- Net income
- $6.36M
- up 35.1% from net income of $4.7M a year earlier
- Diluted EPS
- $0.28
- up 33.3% from $0.21 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER:
Natural Grocers by Vitamin Cottage, Inc.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of | (I.R.S. Employer |
| | | |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol | Name of each exchange on which registered |
| | | |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | |
| Non –accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 2, 2022 was
Natural Grocers by Vitamin Cottage, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended March 31, 2022
Table of Contents
| Page Number |
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| Item 1. |
4 |
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| Consolidated Balance Sheets as of March 31, 2022 and September 30, 2021 (unaudited) |
4 |
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| 5 |
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| Consolidated Statements of Cash Flows for the six months ended March 31, 2022 and 2021 (unaudited) |
6 |
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| 7 |
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| Notes to Unaudited Interim Consolidated Financial Statements |
8 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
17 |
| Item 3. |
29 |
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| Item 4. |
29 |
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| Item 1. |
30 |
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| Item 1A. |
30 |
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| Item 5. |
30 |
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| Item 6. |
31 |
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| 32 |
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Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, “fiscal year 2022” refers to the year from October 1, 2021 to September 30, 2022).
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this Form 10-Q) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout this Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources, future growth, pending legal proceedings and other financial and operating information, are forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-Q.
The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political, economic, inflationary, business, labor market, competitive, market, regulatory and other factors, many of which are beyond our control. We believe these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (the Form 10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.
In addition, our actual results could differ materially from the forward-looking statements in this Form 10-Q due to risks and challenges related to the COVID-19 pandemic and the resulting government mandates, including: the length of time the COVID-19 pandemic continues; the inability of customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-priced or other perceived value offerings; the temporary inability of our employees to work due to illness; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; temporary store closures due to infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local, state or federal governmental authorities; the extent and duration of adverse economic conditions resulting, directly or indirectly, from the COVID-19 pandemic and government mandates, including levels of consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; increased operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state governments. We believe these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.
Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. You are advised, however, to consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). Our reports and other filings with the SEC are available at the SEC’s website at www.sec.gov. Our reports and other filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)
| March 31, 2022 | September 30, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | |||||||
| Accounts receivable, net | ||||||||
| Merchandise inventory | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Operating lease assets, net | ||||||||
| Finance lease assets, net | ||||||||
| Deposits and other assets | ||||||||
| Goodwill and other intangible assets, net | ||||||||
| Total other assets | ||||||||
| Total assets | $ | |||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | |||||||
| Accrued expenses | ||||||||
| Term loan facility, current portion | ||||||||
| Operating lease obligations, current portion | ||||||||
| Finance lease obligations, current portion | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Term loan facility, net of current portion | ||||||||
| Operating lease obligations, net of current portion | ||||||||
| Finance lease obligations, net of current portion | ||||||||
| Deferred income tax liabilities, net | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ par value, shares authorized, and and shares issued and outstanding at March 31, 2022 and September 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | |||||||
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
| Three months ended |
Six months ended |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net sales |
$ | |||||||||||||||
| Cost of goods sold and occupancy costs |
||||||||||||||||
| Gross profit |
||||||||||||||||
| Store expenses |
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| Administrative expenses |
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| Pre-opening expenses |
||||||||||||||||
| Operating income |
||||||||||||||||
| Interest expense, net |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
| Income before income taxes |
||||||||||||||||
| Provision for income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
| Net income |
$ | |||||||||||||||
| Net income per share of common stock: |
||||||||||||||||
| Basic |
$ | |||||||||||||||
| Diluted |
$ | |||||||||||||||
| Weighted average number of shares of common stock outstanding: |
||||||||||||||||
| Basic |
||||||||||||||||
| Diluted |
||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
| Six months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities: | ||||||||
| Net income | $ | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment of long-lived assets and store closing costs | ||||||||
| Loss on disposal of property and equipment | ||||||||
| Share-based compensation | ||||||||
| Deferred income tax expense | ||||||||
| Non-cash interest expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Decrease (increase) in: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Merchandise inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ( | ) | ||||
| Income tax receivable | ||||||||
| Operating lease assets | ||||||||
| (Decrease) increase in: | ||||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| Investing activities: | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of other intangibles | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Proceeds from property insurance settlements | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Borrowings under revolving facility | ||||||||
| Repayments under revolving facility | ( | ) | ||||||
| Borrowings under term loan facility | ||||||||
| Repayments under term loan facility | ( | ) | ( | ) | ||||
| Finance lease obligation payments | ( | ) | ( | ) | ||||
| Dividends to shareholders | ( | ) | ( | ) | ||||
| Loan fees paid | ( | ) | ||||||
| Payments on withholding tax for restricted stock unit vesting | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | |||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | |||||||
| Cash paid for interest on finance lease obligations, net of capitalized interest of $ and $, respectively | ||||||||
| Income taxes paid | ||||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Acquisition of property and equipment not yet paid | $ | |||||||
| Acquisition of other intangibles not yet paid | ||||||||
| Property acquired through operating lease obligations | ||||||||
| Property acquired through finance lease obligations | ||||||||
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended March 31, 2022 and March 31, 2021
(Unaudited)
(Dollars in thousands, except per share data)
| Common stock – $0.001 par value |
||||||||||||||||||||
| Shares outstanding |
Amount |
Additional paid-in capital |
Retained earnings |
Total stockholders’ equity |
||||||||||||||||
| Balances September 30, 2021 |
$ | $ | $ | $ | ||||||||||||||||
| Net income |
— | |||||||||||||||||||
| Cash dividends |
— | ( |
) |
( |
) |
|||||||||||||||
| Issuance of common stock |
||||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||
| Balances December 31, 2021 |
||||||||||||||||||||
| Net income |
— | |||||||||||||||||||
| Cash dividends |
— | ( |
) |
( |
) |
|||||||||||||||
| Issuance of common stock |
||||||||||||||||||||
| Share-based compensation |
||||||||||||||||||||
| Balances March 31, 2022 |
$ | $ | $ | $ | ||||||||||||||||
| Common stock – $0.001 par value |
||||||||||||||||||||
| Shares outstanding |
Amount |
Additional paid-in capital |
Retained earnings |
Total stockholders’ equity |
||||||||||||||||
| Balances September 30, 2020 |
$ | $ | $ | $ | ||||||||||||||||
| Net income |
— | |||||||||||||||||||
| Cash dividends |
— | ( |
) |
( |
) |
|||||||||||||||
| Issuance of common stock |
||||||||||||||||||||
| Share-based compensation |
— | |||||||||||||||||||
| Balances December 31, 2020 |
||||||||||||||||||||
| Net income |
— | |||||||||||||||||||
| Cash dividends |
— | ( |
) |
( |
) |
|||||||||||||||
| Issuance of common stock |
||||||||||||||||||||
| Share-based compensation |
— | |||||||||||||||||||
| Balances March 31, 2021 |
$ | $ | $ | $ | ||||||||||||||||
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 2022 and 2021
1. Organization
Nature of Business
Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. The Company operated
2. Basis of Presentation and Summary of Significant Accounting Policies
Consolidated Financial Statements
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-K. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending September 30.
The accompanying unaudited consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company (VC2). All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has reporting segment: natural and organic retail stores.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to valuation of inventories, useful lives of long-lived assets for depreciation and amortization, impairment of finite-lived intangible assets, long-lived assets, and goodwill, lease assumptions, allowances for self-insurance reserves, deferred tax assets and liabilities, and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes” (ASU 2019-12). The new guidance simplified the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements, and interim recognition of enactment of tax laws or rate changes. The provisions of ASU 2019-12 were effective for the Company’s first quarter of the fiscal year ending September 30, 2022. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2022.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements, but does not anticipate that these provisions will have material impacts on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR; however, the terms of our Credit Facility provide for a LIBOR successor rate once LIBOR is discontinued. The guidance only applies to modifications made prior to December 31, 2022. The Company does not anticipate that this ASU will have a material impact on its consolidated financial statements.
3. Revenue Recognition
The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In these transactions, the Company acts as a principal and recognizes revenue (net sales) from the sale of goods when control of the promised goods is transferred to the customer. Control refers to the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, the transferred goods.
The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and payment from the customer is also due at that time. Transaction prices are considered fixed. Discounts provided to customers at the point of sale are recognized as a reduction in revenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.
Proceeds from the sale of the Company’s gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company.
The balance of contract liabilities related to unredeemed gift cards was $
The following table disaggregates our revenue by product category for the three and six months ended March 31, 2022 and 2021, dollars in thousands and as a percentage of net sales:
| Three months ended March 31, | Six months ended March 31, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Grocery | $ | % | ||||||||||||||||||||||||||||||
| Dietary supplements | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| $ | % | |||||||||||||||||||||||||||||||
4. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the Company’s earnings.
Presented below are basic and diluted EPS for the three and six months ended March 31, 2022 and 2021, dollars in thousands, except per share data:
| Three months ended |
Six months ended |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net income |
$ | |||||||||||||||
| Weighted average number of shares of common stock outstanding |
||||||||||||||||
| Effect of dilutive securities |
||||||||||||||||
| Weighted average number of shares of common stock outstanding including effect of dilutive securities |
||||||||||||||||
| Basic earnings per share |
$ | |||||||||||||||
| Diluted earnings per share |
$ | |||||||||||||||
There were
5. Debt
Credit Facility
The Company is party to a Credit Facility, entered into on January 28, 2016 and subsequently amended, consisting of a $
The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, provided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $
On November 18, 2020, the Company entered into the Fourth Amendment to the Credit Facility (the Fourth Amendment) to provide for the Term Loan Facility and to permit payment of a one-time dividend of up to $
The Company had
As of March 31, 2022 and September 30, 2021, the Company was in compliance with the financial covenants under the Credit Facility.
Lease Obligations
As of March 31, 2022 and September 30, 2021, the Company had
Interest
The Company incurred gross interest expense of approximately $
6. Stockholders’ Equity
Share Repurchases
In May 2016, the Board of Directors (the Board) authorized a -year share repurchase program pursuant to which the Company may repurchase up to $
The Company did repurchase any shares of common stock during the three and six months ended March 31, 2022 and 2021. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $
During the three and six months ended March 31, 2022 and 2021, the Company reissued
Dividends
The Company paid quarterly cash dividends of $
7. Lease Obligations
The Company leases most of its stores, a bulk food repackaging facility and distribution center, and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from
Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets.
Most leases include one or more options to renew, with renewal terms normally expressed in periods of year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.
Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.
As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. We use other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.
Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (short-term leases) are not presented on the balance sheet. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.
The Company has
The components of total lease cost for the three and six months ended March 31, 2022 and 2021 were as follows, dollars in thousands:
| Three months ended March 31, | Six months ended March 31, | |||||||||||||||||
| Lease cost | Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost: | ||||||||||||||||||
| Cost of goods sold and occupancy costs | $ | |||||||||||||||||
| Store expenses | ||||||||||||||||||
| Administrative expenses | ||||||||||||||||||
| Pre-opening expenses | ||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||
| Depreciation of right-of-use assets | Store expenses | |||||||||||||||||
| Pre-opening expenses (2) | ||||||||||||||||||
| Interest on lease liabilities | Store expenses | |||||||||||||||||
| Pre-opening expenses (2) | ||||||||||||||||||
| Short-term lease cost | Store expenses | |||||||||||||||||
| Variable lease cost | Cost of goods sold and occupancy costs (1) | |||||||||||||||||
| Sublease income | Store expenses | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
| Total lease cost | $ | |||||||||||||||||
1 Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.
2 Pre-opening expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.
Additional information related to the Company’s leases for the three and six months ended March 31, 2022 and 2021 were as follows, dollars in thousands:
| Three months ended March 31, | Six months ended March 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash flows from operating leases | $ | |||||||||||||||
| Operating cash flows from finance leases | ||||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | ||||||||||||||||
| Operating leases | ||||||||||||||||
| Finance leases | ||||||||||||||||
Additional information related to the Company’s leases as of March 31, 2022 and 2021 was as follows:
| March 31, 2022 | March 31, 2021 | |||||||
| Weighted-average remaining lease term (in years): | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted-average discount rate: | ||||||||
| Operating leases | % | |||||||
| Finance leases | % | |||||||
In the six months ended March 31, 2022, the Company incurred a charge of $
Future lease payments under non-cancellable leases as of March 31, 2022 were as follows, dollars in thousands:
| Fiscal Year | Operating leases | Finance leases | Total | |||||||||
| Remainder of 2022 | $ | |||||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total future undiscounted lease payments | ||||||||||||
| Less imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Total reported lease liability | ||||||||||||
| Less current portion | ( | ) | ( | ) | ( | ) | ||||||
| Noncurrent lease liability | $ | |||||||||||
The table above excludes $
8. Property and Equipment
The Company had the following property and equipment balances as of March 31, 2022 and September 30, 2021, dollars in thousands:
| As of |
||||||||||||||
| Useful lives (in years) |
March 31, 2022 |
September 30, 2021 |
||||||||||||
| Construction in process |
n/a | $ | ||||||||||||
| Land |
n/a | |||||||||||||
| Buildings |
– | |||||||||||||
| Land improvements |
– | |||||||||||||
| Leasehold and building improvements |
– | |||||||||||||
| Fixtures and equipment |
– | |||||||||||||
| Computer hardware and software |
– | |||||||||||||
| Less accumulated depreciation and amortization |
( |
) |
( |
) |
||||||||||
| Property and equipment, net |
$ | |||||||||||||
Depreciation and amortization expense for the three and six months ended March 31, 2022 and 2021 is summarized as follows, dollars in thousands:
| Three months ended |
Six months ended |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Depreciation and amortization expense included in cost of goods sold and occupancy costs |
$ | |||||||||||||||
| Depreciation and amortization expense included in store expenses |
||||||||||||||||
| Depreciation and amortization expense included in administrative expenses |
||||||||||||||||
| Depreciation and amortization expense included in pre-opening expenses (1) |
||||||||||||||||
| Total depreciation and amortization expense |
$ | |||||||||||||||
1 Pre-opening depreciation and amortization expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.
9. Goodwill and Other Intangible Assets
The Company had the following goodwill and other intangible asset balances as of March 31, 2022 and September 30, 2021, dollars in thousands:
| As of | ||||||||||||||
| Useful lives (in years) | March 31, 2022 | September 30, 2021 | ||||||||||||
| Amortizable intangible assets: | ||||||||||||||
| Other intangibles | – | $ | ||||||||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||||||||
| Amortizable intangible assets, net | ||||||||||||||
| Other intangibles in process | ||||||||||||||
| Trademark |
| Indefinite | ||||||||||||
| Deferred financing costs, net | ||||||||||||||
| Total other intangibles, net | ||||||||||||||
| Goodwill |
| Indefinite | ||||||||||||
| Total goodwill and other intangibles, net | $ | |||||||||||||
10. Accrued Expenses
The composition of accrued expenses as of March 31, 2022 and September 30, 2021 is summarized as follows, dollars in thousands:
| As of |
||||||||
| March 31, |
September 30, |
|||||||
| 2022 |
2021 |
|||||||
| Payroll and employee-related expenses |
$ | |||||||
| Accrued property, sales, and use tax payable |
||||||||
| Accrued marketing expenses |
||||||||
| Deferred revenue related to gift card sales |
||||||||
| Other |
||||||||
| Total accrued expenses |
$ | |||||||
11. Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
12. Related Party Transactions
The Company has ongoing relationships with related entities as noted below:
Chalet Properties, LLC: The Company has operating leases and finance lease with Chalet. Chalet is owned by the Company’s non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely, and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $
Isely Family Land Trust LLC: The Company has operating lease with the Land Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $
FTVC LLC: The Company has operating lease for a store location with FTVC, which is owned by the Company’s non-independent Board members and other related family members. Rent paid to FTVC was less than $
13. Commitments and Contingencies
In January 2020, a former assistant store manager filed a purported class action lawsuit in the United States District Court for the District of Colorado on behalf of current and former assistant store managers alleging that the Company violated the Fair Labor Standards Act (FLSA) and Colorado labor laws by misclassifying the assistant store managers as exempt. The alleged violations relate to failure to pay for overtime work. In November 2020, the court granted plaintiffs’ motion for conditional certification with regard to the FLSA claim. In September 2021, the court ordered
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 financial statements.
14. Subsequent Events
On May 4, 2022, the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2024.
On May 4, 2022, the Board approved the payment of a quarterly cash dividend of $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.
Company Overview
We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2022, we operated 162 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.
Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2021, we increased our store count at a compound annual growth rate of 5.2%. In fiscal year 2021, we opened three new stores and relocated/remodeled five existing stores. We plan to open four to five new stores and relocate/remodel two stores in fiscal year 2022. As of the date of this report, we have signed leases or acquired property for an additional six new stores that we plan to open in fiscal years 2022 and beyond. During the six months ended March 31, 2022, we relocated/remodeled one store. Between April 1, 2022 and the date of this Form 10-Q, we opened one new store and closed one store.
Performance Highlights
Key highlights of our performance for the three and six months ended March 31, 2022 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, daily average comparable store sales, are defined in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.
| ● |
Net sales. Net sales were $271.8 million for the three months ended March 31, 2022, an increase of $12.6 million, or 4.9%, compared to net sales of $259.2 million for the three months ended March 31, 2021. Net sales were $549.1 million for the six months ended March 31, 2022, an increase of $24.9 million, or 4.7%, compared to net sales of $524.2 million for the six months ended March 31, 2021. |
| ● |
Daily average comparable store sales. Daily average comparable store sales for the three months ended March 31, 2022 increased 4.3% compared to the three months ended March 31, 2021. Daily average comparable store sales for the six months ended March 31, 2022 increased 4.1% compared to the six months ended March 31, 2021. |
| ● |
Net income. Net income was $6.4 million for the three months ended March 31, 2022, an increase of $1.7 million, or 35.1%, compared to net income of $4.7 million for the three months ended March 31, 2021. Net income was $15.3 million for the six months ended March 31, 2022, an increase of $6.9 million, or 83.2%, compared to net income of $8.3 million for the six months ended March 31, 2021. |
| ● |
EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $15.8 million for the three months ended March 31, 2022, an increase of $1.6 million, or 11.6%, compared to $14.1 million for the three months ended March 31, 2021. EBITDA was $34.9 million for the six months ended March 31, 2022, an increase of $7.9 million, or 29.5%, compared to $27.0 million for the six months ended March 31, 2021. 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. |
| ● |
Adjusted EBITDA. Adjusted EBITDA was $16.1 million for the three months ended March 31, 2022, an increase of $1.7 million, or 11.8%, compared to $14.4 million for the three months ended March 31, 2021. Adjusted EBITDA was $35.6 million for the six months ended March 31, 2022, an increase of $7.7 million, or 27.8%, compared to $27.9 million for the six months ended March 31, 2021. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA. |
| ● |
Liquidity. As of March 31, 2022, cash and cash equivalents was $28.9 million, and there was $49.0 million available for borrowing under our Revolving Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million. |
| ● |
New store growth. We opened no new stores during the six months ended March 31, 2022. We operated a total of 162 stores as of March 31, 2022. We plan to open a total of four to five new stores in fiscal year 2022, which would result in an annual new store growth rate of between 2.5% and 3.1% for fiscal year 2022. |
| ● |
Store Relocations/Remodels. We relocated/remodeled one store during the six months ended March 31, 2022. |
Industry Trends and Economics
We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:
| ● |
COVID-19 pandemic. On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. During the course of the COVID-19 pandemic, federal, state and local authorities have imposed, from time to time, a number of public health mandates intended to prevent the spread of the virus, including vaccination mandates, social distancing, quarantine, wearing face coverings, and “stay-at-home” measures and certain of these public health mandates have had an adverse impact on the U.S. economy. Additional negative financial markets and industry-specific impacts could result from future case surges, outbreaks, COVID-19 virus variants, the potential that current vaccines may be less effective or ineffective against future COVID-19 virus variants, and the risk that large groups of the population may not receive vaccinations against COVID-19. The long-term economic impact of the COVID-19 pandemic is unknown at this time. |
| ● |
Impact of the COVID-19 pandemic on our operations. We believe we have acted proactively in response to the COVID-19 pandemic and the resulting government mandates. To date, all of our stores have continued operating since the start of the COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health measures have been implemented across our footprint from time to time and customers have adjusted to these new circumstances by consuming more food at home. The COVID-19 pandemic and government mandates have also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party. As a result of current global supply chain issues, partially attributable to the COVID-19 pandemic, we have experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products remain in relatively short supply or are unavailable from time to time. |
| ● |
Future impact of the COVID-19 pandemic. We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in particular, when the COVID-19 pandemic subsides. We expect the impact of the COVID-19 pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the COVID-19 pandemic, the governmental and public actions taken in response, including economic stabilization efforts, and the long-term effect the COVID-19 pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and government mandates make it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.- Risk Factors” in our Form 10-K. Additional information regarding the impact of the COVID-19 pandemic and government mandates on our business and results of operations is provided below in this MD&A. |
| ● |
Impact of broader economic trends and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, the political environment and consumer confidence. During the second quarter and first half of fiscal 2022, the costs of certain goods we sell were impacted by levels of inflation that are higher than we have experienced in recent years. The impact of inflation on our sales and profitability is influenced in part by our ability to adjust our retail prices accordingly. While we have been able to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current inflationary environment will continue or the impact of inflationary trends on our sales and profitability in the future. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation, including unemployment benefits. Since the onset of the COVID-19 pandemic, our ability to retain and attract store Crew members has been challenged by labor shortages broadly impacting the retail industry. |
| ● |
Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including the impact of the COVID-19 pandemic and the availability of construction materials and equipment. |
| ● |
Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up, and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutrition education, differentiate us in the industry and provide a competitive advantage. |
| ● |
Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or stricter regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations. |
Outlook
We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean and shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.
We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including the impact of the COVID-19 pandemic and the availability of construction materials and equipment. Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions, including inflationary trends. In the future, we believe there are opportunities for increased leverage of costs and increased economies of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our ability to leverage costs may be limited.
Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.
Key Financial Metrics in Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:
Net sales
Our net sales are comprised of gross sales net of discounts, in-house coupons, returns, and allowances. In comparing net sales between periods, we monitor the following:
| ● |
Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior fiscal year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters). |
| ● |
Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, returned, and exchanged. |
| ● |
Average transaction size. Average transaction size, or basket size, is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction. |
Cost of goods sold and occupancy costs
Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and sales increase. Rent payments for leases classified as finance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.
Gross profit and gross margin
Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.
Store expenses
Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and technology. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations, as well as store closure and lease termination costs. Store expenses also include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.
Administrative expenses
Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment, and computer hardware and software.
Pre-opening expenses
Pre-opening expenses for new stores and relocations/remodels may include rent expense, salaries, advertising, supplies, and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening interest and depreciation expense. Other pre-opening expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening costs are expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.
Interest expense, net
Interest expense consists of the interest associated with finance lease obligations, net of capitalized interest, and our Credit Facility.
Income tax expense
Income taxes are accounted for in accordance with the provisions of Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of restricted stock units.
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 |
Six months ended |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Statements of Income Data: * |
||||||||||||||||
| Net sales |
100.0 | % |
100.0 | 100.0 | 100.0 | |||||||||||
| Cost of goods sold and occupancy costs |
71.8 | 72.3 | 71.7 | 72.4 | ||||||||||||
| Gross profit |
28.2 | 27.7 | 28.3 | 27.6 | ||||||||||||
| Store expenses |
21.9 | 22.5 | 21.7 | 22.7 | ||||||||||||
| Administrative expenses |
3.0 | 2.5 | 2.8 | 2.6 | ||||||||||||
| Pre-opening expenses |
0.1 | 0.1 | 0.0 | 0.1 | ||||||||||||
| Operating income |
3.3 | 2.6 | 3.8 | 2.3 | ||||||||||||
| Interest expense, net |
(0.2 | ) |
(0.2 | ) |
(0.2 | ) |
(0.2 | ) |
||||||||
| Income before income taxes |
3.1 | 2.4 | 3.6 | 2.1 | ||||||||||||
| Provision for income taxes |
(0.7 | ) |
(0.5 | ) |
(0.8 | ) |
(0.5 | ) |
||||||||
| Net income |
2.3 | % |
1.8 | 2.8 | 1.6 | |||||||||||
| __________________________ |
||||||||||||||||
| *Figures may not sum due to rounding. |
||||||||||||||||
| Number of stores at end of period |
162 | 161 | 162 | 161 | ||||||||||||
| Number of new stores opened during the period |
0 | 1 | 0 | 2 | ||||||||||||
| Number of stores relocated/remodeled during the period |
0 | 1 | 1 | 1 | ||||||||||||
| Number of stores closed during the period |
0 | 0 | 0 | 0 | ||||||||||||
| Twelve-month store unit growth rate |
0.6 | % |
2.5 | 0.6 | 2.5 | |||||||||||
| Change in daily average comparable store sales |
4.3 | % |
(7.0 | ) |
4.1 | 2.0 | ||||||||||
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
| Three months ended March 31, |
Change In |
|||||||||||||||
| 2022 |
2021 |
Dollars |
Percent |
|||||||||||||
| Statements of Income Data: |
||||||||||||||||
| Net sales |
$ | 271,822 | 259,198 | 12,624 | 4.9 | % |
||||||||||
| Cost of goods sold and occupancy costs |
195,040 | 187,371 | 7,669 | 4.1 | ||||||||||||
| Gross profit |
76,782 | 71,827 | 4,955 | 6.9 | ||||||||||||
| Store expenses |
59,605 | 58,422 | 1,183 | 2.0 | ||||||||||||
| Administrative expenses |
8,172 | 6,358 | 1,814 | 28.5 | ||||||||||||
| Pre-opening expenses |
141 | 341 | (200 | ) |
(58.7 | ) |
||||||||||
| Operating income |
8,864 | 6,706 | 2,158 | 32.2 | ||||||||||||
| Interest expense, net |
(545 | ) |
(603 | ) |
58 | (9.6 | ) |
|||||||||
| Income before income taxes |
8,319 | 6,103 | 2,216 | 36.3 | ||||||||||||
| Provision for income taxes |
(1,962 | ) |
(1,399 | ) |
(563 | ) |
40.2 | |||||||||
| Net income |
$ | 6,357 | 4,704 | 1,653 | 35.1 | % |
||||||||||
Net sales
Net sales increased $12.6 million, or 4.9%, to $271.8 million for the three months ended March 31, 2022 compared to $259.2 million for the three months ended March 31, 2021, due to an $11.1 million increase in comparable store sales and a $1.5 million increase in new store sales. Daily average comparable store sales increased 4.3% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The daily average comparable store sales increase resulted from a 2.5% increase in daily average transaction size and a 1.8% increase in daily average transaction count. Comparable store average transaction size was $45.80 for the three months ended March 31, 2022. The increase in net sales during the three months ended March 31, 2022 was primarily driven by our customers’ response to COVID-19 pandemic trends early in the quarter, retail price inflation, marketing initiatives, promotional campaigns and increased engagement in our {N}power® customer loyalty program.
Gross profit
Gross profit increased $5.0 million, or 6.9%, to $76.8 million for the three months ended March 31, 2022 compared to $71.8 million for the three months ended March 31, 2021, primarily driven by increased sales volume. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 28.2% for the three months ended March 31, 2022 compared to 27.7% for the three months ended March 31, 2021. The increase in gross margin during the three months ended March 31, 2022 was primarily driven by improved product margin and store occupancy leverage.
Store expenses
Store expenses increased $1.2 million, or 2.0%, to $59.6 million for the three months ended March 31, 2022 compared to $58.4 million for the three months ended March 31, 2021. Store expenses as a percentage of net sales were 21.9% and 22.5% for the three months ended March 31, 2022 and 2021, respectively. The reduction in store expenses as a percentage of net sales reflects leverage created by higher sales and a more normalized operating environment compared to the prior fiscal year period.
Administrative expenses
Administrative expenses increased $1.8 million to $8.2 million for the three months ended March 31, 2022 compared to $6.4 million for the three months ended March 31, 2021. Administrative expenses as a percentage of net sales were 3.0% and 2.5% for the three months ended March 31, 2022 and 2021, respectively.
Pre-opening expenses
Pre-opening expenses were $0.1 million for the three months ended March 31, 2022 compared to $0.3 million for the three months ended March 31, 2021.
Interest expense, net
Interest expense, net of capitalized interest, was $0.5 million in the three months ended March 31, 2022 compared to $0.6 million in the three months ended March 31, 2021.
Income taxes
Income tax expense increased $0.6 million for the three months ended March 31, 2022 to $2.0 million compared to $1.4 million for the three months ended March 31, 2021. The Company’s effective income tax rate was approximately 23.6% and 22.9% for the three months ended March 31, 2022 and 2021, respectively.
Net income
Net income was $6.4 million, or $0.28 diluted earnings per share, for the three months ended March 31, 2022 compared to $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021.
Six months ended March 31, 2022 compared to the six months ended March 31, 2021
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
| Six months ended March 31, |
Change In |
|||||||||||||||
| 2022 |
2021 |
Dollars |
Percent |
|||||||||||||
| Statements of Income Data: |
||||||||||||||||
| Net sales |
$ | 549,110 | 524,243 | 24,867 | 4.7 | % |
||||||||||
| Cost of goods sold and occupancy costs |
393,591 | 379,391 | 14,200 | 3.7 | ||||||||||||
| Gross profit |
155,519 | 144,852 | 10,667 | 7.4 | ||||||||||||
| Store expenses |
118,941 | 118,752 | 189 | 0.2 | ||||||||||||
| Administrative expenses |
15,465 | 13,662 | 1,803 | 13.2 | ||||||||||||
| Pre-opening expenses |
225 | 530 | (305 | ) |
(57.5 | ) |
||||||||||
| Operating income |
20,888 | 11,908 | 8,980 | 75.4 | ||||||||||||
| Interest expense, net |
(1,089 | ) |
(1,113 | ) |
24 | (2.2 | ) |
|||||||||
| Income before income taxes |
19,799 | 10,795 | 9,004 | 83.4 | ||||||||||||
| Provision for income taxes |
(4,527 | ) |
(2,459 | ) |
(2,068 | ) |
84.1 | |||||||||
| Net income |
$ | 15,272 | 8,336 | 6,936 | 83.2 | % |
||||||||||
Net sales
Net sales increased $24.9 million, or 4.7%, to $549.1 million for the six months ended March 31, 2022 compared to $524.2 million for the six months ended March 31, 2021, due to a $21.3 million increase in comparable store sales and a $3.6 million increase in new store sales. Daily average comparable store sales increased 4.1% for the six months ended March 31, 2022 compared to the six months ended March 31, 2021. The daily average comparable store sales increase resulted from a 2.4% increase in daily average transaction count and a 1.6% increase in daily average transaction size. Comparable store average transaction size was $45.57 for the six months ended March 31, 2022. The increase in net sales during the six months ended March 31, 2022 was primarily driven by our customers’ response to COVID-19 pandemic trends, retail price inflation, marketing initiatives, promotional campaigns and increased engagement in our {N}power® customer loyalty program.
Gross profit
Gross profit increased $10.7 million, or 7.4%, to $155.5 million for the six months ended March 31, 2022 compared to $144.9 million for the six months ended March 31, 2021, primarily driven by increased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 28.3% for the six months ended March 31, 2022 compared to 27.6% for the six months ended March 31, 2021. The increase in gross margin during the six months ended March 31, 2022 was primarily driven by improved product margin and store occupancy leverage.
Store expenses
Store expenses increased $0.2 million, or 0.2%, to $118.9 million for the six months ended March 31, 2022 compared to $118.8 million for the six months ended March 31, 2021. In the six months ended March 31, 2022, we recorded $0.1 million in operating lease asset impairment charges as a result of an early store relocation. In the six months ended March 31, 2021, we recorded $0.4 million in lease exit costs, primarily related to a lease termination fee associated with one store that closed in fiscal year 2019. Store expenses as a percentage of net sales were 21.7% and 22.7% for the six months ended March 31, 2022 and 2021, respectively. The reduction in store expenses as a percentage of net sales reflects leverage created by higher sales and a more normalized operating environment compared to the prior fiscal year period.
Administrative expenses
Administrative expenses increased $1.8 million to $15.5 million for the six months ended March 31, 2022 compared to $13.7 million for the six months ended March 31, 2021. Administrative expenses as a percentage of net sales were 2.8% and 2.6% for the six months ended March 31, 2022 and 2021, respectively.
Pre-opening expenses
Pre-opening expenses were $0.2 million for the six months ended March 31, 2022 compared to $0.5 million for the six months ended March 31, 2021.
Interest expense
Interest expense, net of capitalized interest, remained flat at $1.1 million for each of the six months ended March 31, 2022 and 2021.
Income taxes
Income tax expense increased $2.1 million for the six months ended March 31, 2022 to $4.5 million compared to $2.5 million for the six months ended March 31, 2021. The Company’s effective income tax rate was approximately 22.9% and 22.8% for the six months ended March 31, 2022 and 2021, respectively.
Net income
Net income was $15.3 million, or $0.67 diluted earnings per share, for the six months ended March 31, 2022 compared to $8.3 million, or $0.37 diluted earnings per share, for the six months ended March 31, 2021.
Non-GAAP financial measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing costs, lease exit costs, share-based compensation and non-recurring items. The adjustments to EBITDA for the six months ended March 31, 2022 included $0.1 million in operating lease asset impairment charges as a result of an early store relocation. The adjustments to EBITDA for the six months ended March 31, 2021 included $0.4 million in lease exit costs associated with one store that closed in fiscal year 2019.
The following table reconciles net income to EBITDA and Adjusted EBITDA, dollars in thousands:
| Three months ended |
Six months ended |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net income |
$ | 6,357 | 4,704 | 15,272 | 8,336 | |||||||||||
| Interest expense, net |
545 | 603 | 1,089 | 1,113 | ||||||||||||
| Provision for income taxes |
1,962 | 1,399 | 4,527 | 2,459 | ||||||||||||
| Depreciation and amortization |
6,907 | 7,420 | 14,020 | 15,057 | ||||||||||||
| EBITDA |
15,771 | 14,126 | 34,908 | 26,965 | ||||||||||||
| Impairment of long-lived assets and store closing costs |
— | — | 95 | 405 | ||||||||||||
| Share-based compensation |
296 | 239 | 590 | 487 | ||||||||||||
| Adjusted EBITDA (1) |
$ | 16,067 | 14,365 | 35,593 | 27,857 | |||||||||||
(1) Adjusted EBITDA for the three and six months ended March 31, 2021, as presented, has been recast to exclude share-based compensation to enhance the comparability of this measure between fiscal periods.
EBITDA increased 11.6% to $15.8 million for the three months ended March 31, 2022 compared to $14.1 million for the three months ended March 31, 2021. EBITDA increased 29.5% to $34.9 million for the six months ended March 31, 2022 compared to $27.0 million for the six months ended March 31, 2021. EBITDA as a percentage of net sales was 5.8% and 5.4% for the three months ended March 31, 2022 and 2021, respectively. EBITDA as a percentage of net sales was 6.4% and 5.1% for the six months ended March 31, 2022 and 2021, respectively.
Adjusted EBITDA increased 11.8% to $16.1 million for the three months ended March 31, 2022 compared to $14.4 million for the three months ended March 31, 2021. Adjusted EBITDA increased 27.8% to $35.6 million for the six months ended March 31, 2022 compared to $27.9 million for the six months ended March 31, 2021. Adjusted EBITDA as a percentage of net sales was 5.9% and 5.5% for the three months ended March 31, 2022 and 2021, respectively. Adjusted EBITDA as a percentage of net sales was 6.5% and 5.3% for the six months ended March 31, 2022 and 2021, respectively.
Management believes some investors’ understanding of our performance is enhanced by including EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe EBITDA and Adjusted EBITDA provide additional information about: (i) our operating performance, because they assist us in comparing the operating performance of our stores on a consistent basis, as they remove the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations, such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.
Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Commencing with its financial reporting for fiscal year 2021, the Company revised its definition of Adjusted EBITDA to exclude share-based compensation. The Company’s historical presentation of Adjusted EBITDA, including for the three and six months ended March 31, 2021, did not exclude share-based compensation. However, Adjusted EBITDA for the three and six months ended March 31, 2021, as presented in this report, has been recast to exclude share-based compensation to enhance the comparability of this measure between fiscal periods. Management believes that excluding share-based compensation from Adjusted EBITDA will enhance investors’ ability to assess period-to-period comparisons of the Company’s operating performance and make more meaningful comparisons between our operating performance and the operating performance of our competitors.
Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA and Adjusted EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:
| ● |
EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; |
| ● |
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; |
| ● |
EBITDA and Adjusted EBITDA do not reflect any depreciation or interest expense for leases classified as finance leases; |
| ● |
EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| ● |
Adjusted EBITDA does not reflect share-based compensation, impairment and store closing costs; |
| ● |
EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; and |
| ● |
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements. |
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.
Liquidity and Capital Resources
Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under our Revolving Facility. Our Credit Facility consists of the $50.0 million Revolving Facility and the fully drawn $35.0 million Term Loan Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service, cash dividends and corporate taxes. As of March 31, 2022, we had $28.9 million in cash and cash equivalents and $49.0 million available for borrowing under our Revolving Facility. On November 18, 2020, we entered into the $35.0 million Term Loan Facility maturing November 13, 2024.
In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. Our Board subsequently extended the share repurchase program, including most recently in May 2022, and the program will terminate on May 31, 2024. We did not repurchase any shares during the six months ended March 31, 2022. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash balances or borrowings under our Revolving Facility. The timing and the number of shares repurchased, if any, will be dictated by our capital needs and stock market conditions.
On May 4, 2022, our Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June 15, 2022 to stockholders of record as of the close of business on May 31, 2022. We paid quarterly cash dividends of $0.10 per share of common stock in each of the first two quarters of fiscal year 2022.
We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the Revolving Facility from time to time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Revolving Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for the next 12 months and foreseeable future. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
| Six months ended March 31, |
||||||||
| 2022 |
2021 |
|||||||
| Net cash provided by operating activities |
$ | 27,581 | 17,305 | |||||
| Net cash used in investing activities |
(12,295 | ) |
(9,541 | ) |
||||
| Net cash used in financing activities |
(10,075 | ) |
(15,321 | ) |
||||
| Net increase (decrease) in cash and cash equivalents |
5,211 | (7,557 | ) |
|||||
| Cash and cash equivalents, beginning of period |
23,678 | 28,534 | ||||||
| Cash and cash equivalents, end of period |
$ | 28,889 | 20,977 | |||||
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation, and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $10.3 million, or 59.4%, to $27.6 million for the six months ended March 31, 2022 compared to $17.3 million for the six months ended March 31, 2021. The increase in cash provided by operating activities was primarily due to an increase in net income adjusted for non-cash items as well as a reduction in the amount of cash used for working capital requirements, as compared to the amount of cash used for working capital in the prior fiscal year.
Investing Activities
Net cash used in investing activities increased $2.8 million, or 28.9%, to $12.3 million for the six months ended March 31, 2022 compared to $9.5 million for the six months ended March 31, 2021. This increase was primarily the result of increases of $2.2 million and $0.7 million in property and equipment and other intangibles acquisitions during the six months ended March 31, 2022 compared to the six months ended March 31, 2021, respectively, due to the impact of the timing of new store, relocation/remodel, and software projects under development.
We plan to spend approximately $15.7 million to $22.7 million on capital expenditures during the remainder of fiscal year 2022 in connection with four to five new store openings and two store relocations/remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store.
Acquisition of property and equipment not yet paid decreased $2.3 million to $2.1 million for the six months ended March 31, 2022 compared to $4.4 million for the six months ended March 31, 2021 due to the timing of payments related to new store openings and relocations/remodels.
Financing Activities
Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and dividends paid to stockholders. Net cash used in financing activities was $10.1 million for the six months ended March 31, 2022 compared to $15.3 million for the six months ended March 31, 2021
Credit Facility
The revolving commitment amount under the Revolving Facility is $50.0 million, including a $5.0 million sub-limit for standby letters of credit. We borrowed $35.0 million under the Term Loan Facility in December 2020. The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and Vitamin Cottage Two Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity date without premium or penalty. On November 18, 2020, we entered into the Fourth Amendment to provide for the Term Loan Facility and permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.
Base rate borrowings under the Credit Facility bear interest at a fluctuating base rate as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor rate (LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, commencing on March 31, 2021 and ending on September 30, 2024. Amounts repaid on the Term Loan Facility may not be reborrowed.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.
We had no amounts outstanding under the Revolving Facility as of each of March 31, 2022 and September 30, 2021. As of each of March 31, 2022 and September 30, 2021, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the Revolving Facility. We had $49.0 million available for borrowing under the Revolving Facility as of each of March 31, 2022 and September 30, 2021. We had $19.7 million of outstanding borrowings under the fully drawn Term Loan Facility as of March 31, 2022.
As of each of March 31, 2022 and September 30, 2021, the Company was in compliance with the financial covenants under the Credit Facility.
Share Repurchases
Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements included in this Form 10-Q.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances.
Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes regarding our market risk position from the information provided under Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officers and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.
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.
We periodically are involved in various legal proceedings, including discrimination and other employment-related claims, customer personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Form 10-K.
Related Party Lease
On May 4, 2022, the Company and Chalet, a related party owned by members of the Isely family, entered into a ground lease for the Company’s store location and store support center in Lakewood, Colorado (the “Lease”) and terminated the previously disclosed Sublease, dated June 1, 2006, between the Company and Chalet for the same location. The Lease permits the Company to construct a new building on the property to replace its existing store and provides for an initial term of 20 years, subject to additional extensions. The Company will pay annual rent of approximately $0.3 million with a 5% increase every five years. As required under the Company’s Related Party Transaction policy, the Company’s Audit Committee approved the terms of the transaction. This disclosure is responsive to Items 1.01 and 1.02 of Form 8-K.
Extension of Share Repurchase Program
On May 4, 2022, our Board authorized an extension of the Company’s previously announced share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2024. The dollar value of the shares of common stock that may yet be repurchased under the share repurchase program is approximately $8.3 million. Repurchases may be made from time to time at management's discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice. This disclosure is responsive to Item 8.01 of Form 8-K.
EXHIBIT INDEX
| Exhibit Number |
Description |
|
| 3.1 |
||
| 3.2 |
||
| 10.1 |
||
| 31.1 |
||
| 31.2 |
||
| 31.3 |
||
| 32.1† |
||
| 101 |
The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2022 and September 30, 2021 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended March 31, 2022 and 2021 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, 2022 and 2021 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2022 and 2021 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements. |
|
| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† The certifications attached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the SEC and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on May 5, 2022.
| Natural Grocers by Vitamin Cottage, Inc. |
||
| By: |
/s/ KEMPER ISELY |
|
| Kemper Isely, Co-President |
||
| (Principal Executive Officer) |
||
| By: |
/s/ TODD DISSINGER |
|
| Todd Dissinger, Chief Financial Officer |
||
| (Principal Financial and Accounting Officer) |
||
Exhibit 10.1
LEASE
THIS LEASE (“Lease”) is made effective as of May 4, 2022 (the “Effective Date”) by and between Chalet Properties, LLC, a Colorado limited liability company (“Landlord”) and Vitamin Cottage Natural Food Markets, Inc., a Colorado corporation (“Tenant”).
RECITALS
A. Landlord is the fee owner of certain real property in Jefferson County in the State of Colorado and legally described on Exhibit A attached hereto and incorporated herein by this reference (“Land”);
B. Landlord desires to Lease to Tenant, and Tenant desires to lease from Landlord, the Land, together with the Landlord-owned improvements thereon including, without limitation, the existing building (“Existing Building”) on the Land having a common street address of 12612 W. Alameda Parkway, Lakewood, Colorado 80228 (collectively, the “Premises”), according to the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises of the parties, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the foregoing recitals are true and correct and incorporated herein by this reference, and further agree as follows:
ARTICLE 1 – DEMISE OF PREMISES
1.1. Premises. Landlord, for and in consideration of the rents, covenants, and conditions herein set forth, does hereby lease to Tenant, and Tenant hereby does lease from Landlord, the Premises, for the Term, as defined in Article 2 below.
1.2. Quiet Enjoyment. As long as Tenant is not in default under this Lease beyond applicable notice and cure periods, Tenant shall have and enjoy quiet and undisturbed possession of the Premises and all of Tenant’s rights and benefits under this Lease without hindrance, ejection, or molestation by Landlord or any other person.
1.3. Easements. Tenant shall have the right to enter into agreements with utility and telecommunications companies creating easements in favor of such companies as are required in order to service the Premises as it exists from time to time; provided any such easements shall be in commercially reasonable form. Landlord agrees, at Tenant’s cost, to join in the grant of any such utilities easements and to execute any and all documents, agreements, and instruments in order to effectuate the same.
1.4. Covenant Documents. This Lease is subject to, and Tenant agrees to comply with, the covenant documents and other matters set forth in Exhibit B hereof (collectively, the “Covenant Documents”), to the extent that the same apply to the Premises. Tenant further agrees to perform the terms and conditions of the Covenant Documents and pay such operating costs and other charges and expenses under said Covenant Documents as though Tenant were the fee simple owner of the Premises, to the full extent that the same apply to the Premises. Landlord shall adopt no rules or regulations concerning the operation or use of the Premises, nor shall Landlord modify or agree to modify the Covenant Documents without Tenant’s prior written consent, which may be given or withheld in Tenant’s sole but discretion.
1.5 Prior Lease. The parties acknowledge that Tenant currently occupies the Premises pursuant to one or more prior leasing agreements (any and all such documents, collectively, the “Prior Lease”). The Prior Lease is terminated simultaneously upon full execution of this Lease. Notwithstanding anything in this Lease to the contrary, it is the agreement of the parties that any improvements or alterations installed upon the Premises by Tenant during the Prior Lease term shall be deemed the property of Tenant until the expiration or sooner termination of this Lease.
ARTICLE 2 - TERM
2.1. Initial Term. The initial term of this Lease (the “Initial Term”) shall commence on the Effective Date and shall terminate at 11:59 p.m. Mountain Time on the last day of the twentieth (20th) Lease Year (as hereinafter defined).
2.2. Options to Extend. Tenant may at its option extend the term of this Lease beyond the Initial Term for up to four (4) additional periods of ten (10) years each on the terms and conditions set forth in this Lease. Each additional ten (10)-year period exercised (if at all) by Tenant shall be referred to as an “Extended Term”. The Initial Term, together with each Extended Term, shall be referred to herein as the “Term” and each as so referenced is subject to, and shall be construed to include, early termination as provided herein. The “Expiration Date” as used herein, shall be the last day of the Term. Tenant's right to exercise each such option (“Option to Extend”) is subject to the following conditions precedent:
2.2.1. The Lease shall be in effect at the time notice of exercise of the Option to Extend is provided and on the last day of the then-current Term.
2.2.2. Without limiting Tenant's curing rights hereunder, to the extent applicable, no uncured Tenant Default exists at the time notice of the Option to Extend is provided or during the period from such time notice is given through and including the last day of the then-current Term.
2.2.3. Tenant shall provide written notice to Landlord exercising the Option to Extend not less than six (6) months prior to expiration of the then-current Term.
2.3. Exceptions. Notwithstanding anything in this Article to the contrary:
2.3.1. Should Tenant fail to timely provide written notice of its election to exercise an Extended Term (“Extension Term Election Notice”), Landlord shall notify Tenant in writing that it has missed the deadline for the Extension Term Election Notice and Tenant shall have ten (10) days after receipt of such notice from Landlord to provide Landlord with the Extension Term Election Notice and, if Tenant fails to provide the Extension Term Election Notice to Landlord within such 10-day period, Tenant’s Option to Extend (and any future Options to Extend) will be terminated and Tenant will be deemed to have waived its Option to Extend.
2.3.2. If the Term shall expire during the month of October, November or December of any year, then Tenant may, at its option by notice to Landlord not later than three (3) months prior to the end of the Term, elect to extend the Term until the immediately following January 31st.
2.4. Surrender. At the expiration or termination of this Lease, Tenant shall surrender immediate possession of the Premises in good condition and repair, reasonable wear and tear and damage by fire, casualty and the elements excepted. Any holding over by Tenant shall not operate, except by written agreement, to extend or renew this Lease or to imply or create a new lease, but in case of any such holdover, Tenant’s occupancy shall be treated as a month-to-month tenancy, any custom or law allowing other remedies or damages or which may be to the contrary notwithstanding. All Trade Fixtures (as defined in Section 10.2), movable furniture and personal effects of Tenant not removed from the Premises upon the vacation or abandonment thereof or upon the termination of this Lease for any cause whatsoever shall conclusively be deemed to have been abandoned and may be appropriated, sold, stored, destroyed or otherwise disposed of by Landlord without notice to Tenant and without obligation to account therefor, and Tenant shall reimburse Landlord for all reasonable expenses incurred in connection with the disposition of such property to the extent such expenses exceed the net proceeds from such disposition.
ARTICLE 3 - RENT
3.1. Fixed Rent. Commencing on the Effective Date, Tenant agrees to pay Landlord fixed rent for the use and occupancy of the Premises as it exists from time to time in the following amounts payable in advance in monthly installments on the first day of each and every month during the Term (“Fixed Rent”):
|
Period |
Annual Fixed Rent |
Monthly Installment |
||||||
|
Initial Term Effective Date – Lease Year 5 |
$ | 252,000.00 | $ | 21,000.00 | ||||
|
Lease Years 6 – 10 |
$ | 264,600.00 | $ | 22,050.00 | ||||
|
Lease Years 11 – 15 |
$ | 277,830.00 | $ | 23,152.50 | ||||
|
Lease Years 16 –20 |
$ | 291,721.56 | $ | 24,310.13 | ||||
|
First Extension Term* Lease Years 21 – 25 |
$ | 306,307.56 | $ | 25,525.63 | ||||
|
Lease Years 26 – 30 |
$ | 321,622.92 | $ | 26,801.91 | ||||
|
Second Extension Term* Lease Years 31 – 35 |
$ | 337,704.12 | $ | 28,142.01 | ||||
|
Lease Years 36 – 40 |
$ | 354,589.32 | $ | 29,549.11 | ||||
|
Third Extension Term* Lease Years 41 – 45 |
$ | 372,318.72 | $ | 31,026.56 | ||||
|
Lease Years 46 – 50 |
$ | 390,934.68 | $ | 32,577.89 | ||||
|
Fourth Extension Term* Lease Years 51 – 55 |
$ | 410,481.48 | $ | 34,206.79 | ||||
|
Lease Years 56 – 60 |
$ | 431,005.56 | $ | 35,917.13 | ||||
* If exercised by Tenant
As used in this Lease, “Lease Year” shall mean, in the case of the first Lease Year, the period commencing on the Effective Date and ending on the last day of the twelfth (12th) full calendar month thereafter (for example, if the Effective Date is May 4, 2022, the first Lease Year is the period May 4, 2022 – May 31, 2023). Thereafter during the term, “Lease Year” shall mean each successive twelve (l2) calendar month period following the expiration of the first Lease Year.
3.2. Triple Net Lease; Operating Expenses. This is a triple net lease. It is the agreement of Landlord and Tenant that the Fixed Rent payable hereunder shall be fully net to Landlord and that Tenant shall be responsible for the payment of all expenses of every kind and nature related to the occupancy, operation, maintenance and repair of the Premises during the Term, except any and all expenses incurred in connection with Landlord’s obligations as provided for herein, and excepting those specifically covered by third-party warranties. All such third-party warranties shall be assigned to, delivered to, and inure to the benefit of Tenant. During the Term, Tenant shall pay all Operating Expenses (as hereafter defined) directly to the vendor, provider or supplier thereof and shall pay all Real Estate Taxes (as hereafter defined) directly to the appropriate taxing authority on or before the due date of all such charges. “Operating Expenses” shall mean all operating expenses of any kind or nature which are incurred with respect to the occupancy, operation, maintenance and repair of the Premises, except those repairs specifically covered by third party warranties. Notwithstanding the foregoing, Operating Expenses shall exclude (i) any costs related to Landlord’s overhead, administrative and management costs and expenses including, without limitation, employee salaries, commissions, travel expenses, legal fees, management fees, depreciation and interest, and (ii) any expense which would be considered a “capital expense” under generally accepted accounting principles, except that a capital expense may be included in Operating Expenses, but only if amortized over its useful life using straight-line amortization and only such amortized portion shall be included in Operating Expenses for any given Lease Year). As used in this Lease, “Additional Rent” shall mean any sums due from Tenant under this Lease other than Fixed Rent. “Rent” shall mean collectively Fixed Rent and Additional Rent.
3.3 Real Estate Taxes. Prior to the Effective Date, Landlord shall make a mailing address change on the property tax records so that the tax bill and tax notices for the Premises will be mailed to Tenant at the address provided at Article 24. During the Term, Tenant shall pay directly to the taxing authority on or before the due date, the “Real Estate Taxes affecting the Premises and the improvements thereon as they exist from time to time. Landlord shall promptly, upon receipt, provide the tax bills for the Premises and Premises Improvements to Tenant. “Real Estate Taxes” shall mean, to the extent due and payable during the Term, all real estate taxes and/or assessments, ad valorem taxes, general and special assessments and special benefit taxes. In the case of general or special assessments or special benefit taxes, Tenant may pay the same in installments over the longest period allowed by applicable law, and only those installments (or partial installments) attributable to installment periods (or partial periods) falling within the Term of this Lease shall be included in Real Estate Taxes. Real Estate Taxes shall not include any increases in Real Estate Taxes arising out of the transfer of title to the Premises, income, transfer, sales or excise taxes. Tenant shall have the right to institute tax reduction or other proceedings to challenge Real Estate Taxes or reduce the assessed value of the Premises and improvements thereon, and Landlord shall cooperate with any such contest, appeal or proceeding. Should any Real Estate Taxes relate to or be payable over a period of time which encompasses all or a portion of the Term and either precedes or succeeds the Term, Tenant shall pay a pro rata share thereof based upon the portion of such Taxes due and payable during the Term. Landlord covenants and agrees that if there shall be any refunds or rebates on account of any tax, governmental imposition or levy paid by Tenant under the provisions of this Lease, such refund or rebate shall belong to Tenant. Any such refunds or rebates received by Landlord shall be held in trust for the benefit of Tenant and shall be forthwith paid to Tenant. Landlord shall, on request of Tenant, sign any receipt which may be necessary to secure the payment of any such refund or rebate, and shall pay over to Tenant such refund or rebate as received by Landlord.
3.4. Utility Charges, Service. Tenant shall pay all charges for water, electricity, gas, sewage, waste, trash and garbage disposal, telephone, and all other utility services furnished to the Premises commencing on the Effective Date. Tenant shall promptly pay and discharge, as and when the same become due, all utility and other charges including, without limitation, water, gas, electrical, telephone, and sewer charges, incurred during the Term of this Lease and the operation maintenance, use, occupancy, and upkeep of the Premises.
3.5. Rent Payments. Tenant shall have the right, at its option, to pay all or any items of Rent by check or by electronic means (including, without limitation, via ACH). If paying by check, then until notice to contrary is given by Landlord, checks shall be mailed to Landlord at the address provided for Landlord at Article 24. Should Tenant elect to pay by electronic means, Tenant shall give Landlord notice thereof, and upon receipt of such notice, Landlord shall promptly provide such information as is required to facilitate such electronic payments. Landlord shall, prior to the Effective Date, provide Tenant with a completed IRS Form W-9. Any successor to Landlord shall likewise provide Tenant with such completed IRS Form W-9 as a condition precedent to any rent or other payment from Tenant. Notwithstanding anything in this Lease to the contrary, Tenant shall not be deemed to be late on any payment of Rent if the same arrives after the fifth calendar day of a month for which such Rent is due so long as Tenant provides evidence to Landlord (in response to any applicable notice of non-payment or late payment) that such Rent: (1) if paid by physical check and mailed to Landlord, was postmarked to Landlord’s address by the first business day of such calendar month, or (2) if paid electronically, was initiated electronically using the information provided by Landlord by the first business day of such calendar month.
3.6. Security Deposit. No security deposit is required in connection with this Lease.
ARTICLE 4 –USE
4.1 Permitted Use. Tenant may use or cause the use of all or any portion of the Premises for any legal purpose not in violation of the Covenant Documents including, without limitation: (A) the operation of a natural food grocery store which including: (i) the sale of foods, vitamins and supplements, including the wholesale and retail sale of natural whole and prepared foods, canned goods and groceries, frozen and fresh vegetables, meats and sandwiches, dairy products, products of massage therapists, books and other reading materials, (ii) the operation of a juice bar, delicatessen, coffee bar and/or bakery and kiosks carrying the products of third party vendors, (iii) the sale of products customarily carried by large wholesale and retail natural food stores such as Whole Foods and Vitamin Shoppe, (iv) the offering of therapeutic or “chair” massages, (v) the operation of kiosks in the Premises carrying products typical of those contained in an natural food grocery store by third-party vendors; except that any such kiosk will not violate any restrictions in place at the time that this Lease is executed by all parties, (vi) lectures on various subjects, (vii) the sale of packaged alcohol and alcoholic beverages for off-site consumption and conducting tastings, samplings or similar events incidental to the sale of such alcohol and alcoholic beverages, (viii) a demonstration kitchen; (B) office and administrative uses; and/or (C) purposes incidental and related to the foregoing “(A)” and/or “(B)” (collectively, the “Permitted Use”). In addition to the foregoing, and subject to Tenant obtaining all necessary governmental and third-party approvals, Tenant shall be permitted to install and operate upon the Premises a horticultural container facility for agricultural, horticultural, educational and retail purposes. All costs associated with the horticultural container facility shall be borne by Tenant.
4.2 Operations at the Premises. Nothing in this Lease shall be construed to require Tenant to continuously operate its business in the Premises and it shall not be a default hereunder if Tenant ceases to operate its business in all or any portion of the Premises. Notwithstanding the foregoing, Tenant shall pay Fixed Rent and Additional Rent and perform its other obligations under this Lease even if it is not operating its business at the Premises.
ARTICLE 5 – EXCLUSIVITY
5.1. Covenant and Agreement. Landlord covenants and agrees that during the Term and any extensions or renewals thereof, no additional property which Landlord, directly or indirectly, may now or hereafter own or control, and which is contiguous to, or which is within five hundred (500) feet of any boundary of, the Premises, will be used by a grocery, nutritional supplements or produce store excluding incidental sales (the “Exclusive Use”). For purposes hereof “contiguous” shall mean property that is either adjoining the Premises or separated from the Premises only by a public or private street, alley or right-of-way.
5.2. Violation. In the event Landlord violates the Exclusive Use as described above and is unable to cure the same and if such failure continues for thirty (30) days after receipt of notice from Tenant (unless such breach cannot be cured in thirty (30) days and Landlord has commenced action to cure the breach and is diligently attempting to cure the breach), then as Tenant’s exclusive remedy for said Exclusive Use violation by Landlord, Fixed Rent shall abate and, in lieu thereof, Tenant will pay one-half (1/2) of Fixed Rent (“Alternative Fixed Rent”) for the period of time during which such violation continues. If any such violation continues for more than eighteen (18) full calendar months after the payment of Alternative Fixed Rent commences (“Correction Deadline”), then Tenant, at its sole discretion, shall have the one-time right to terminate this Lease by giving at least thirty (30) days prior written notice of termination delivered to Landlord within thirty (30) days after the Correction Deadline. If Tenant does not timely exercise the aforesaid right to terminate the Lease, then the Fixed Rent shall automatically revert to full Fixed Rent effective as of the expiration of the Correction Deadline. This notwithstanding, in the event another occupant or tenant leasing space violates the Exclusive Use without Landlord’s permission or consent (a “Rogue Tenant”), Tenant shall deliver written notice of such violation to Landlord and Landlord shall use commercially reasonable efforts to cause such tenant to cease violation of the Exclusive Use, which may include seeking injunctive relief to enjoin or restrain the Rogue Tenant from violating the Exclusive Use and provided Landlord has exercised such efforts to cause such Rogue Tenant to cease violation of the Exclusive Use, Landlord shall not be deemed to be in violation of its obligations under this Lease. In the event that Tenant files suit against any party to enforce the foregoing restrictions, Landlord agrees to cooperate fully with Tenant in the prosecution of any such suit, and reimburse Tenant for all of attorneys’ fees and court costs incurred by Tenant in connection with such suit, notwithstanding its resolution.
5.3. Indemnification. If after the Effective Date of the Lease, the Landlord enters into any agreement the effect of which is to declare as illegal the Exclusive Use, Landlord shall defend (by counsel reasonably satisfactory to Tenant), indemnify and hold Tenant harmless from any damages, loss, or cost (including, without limitation, attorneys’ fees and costs) suffered by Tenant thereby, or from the enforcement of said agreement against Tenant.
ARTICLE 6 – ALTERATIONS; CONSTRUCTION OF NEW BUILDING
6.1. Alterations, Generally. At any time and from time to time during the Term, Tenant, at Tenant’s cost and expense, may make such structural and non-structural alterations and additions to the Premises (including, without limitation, to the Existing Building) as Tenant desires, provided: (a) any such alterations or additions shall comply with all state and local building codes, laws and ordinances, and the Covenant Documents; (b) such alterations or additions shall not unreasonably diminish the utilities and building components that service the Premises; (c) Tenant shall not permit mechanics’ or other liens to stand against the Premises for work or material furnished in connection with such alterations or additions, or if such lien is filed, Tenant shall, at Tenant’s own cost and expense, cause the same to be canceled, discharged of record, bonded over or establish a third-party escrow to cover the payment of the lien prior to the commencement of a lien foreclosure action; and (d) if such alterations or additions shall cost in excess of $300,000.00, then Tenant shall provide at least thirty (30) days’ advance notice thereof to Landlord, and thereafter Tenant shall provide Landlord with such reasonable information about the alterations or additions as Landlord shall request. Landlord shall cooperate at no out of pocket cost to Landlord in securing necessary permits and approvals in connection with such alterations or additions.
6.2 Construction of New Building. Without limiting the foregoing, at any time during the Initial Term, Tenant shall have the right, but not the obligation, to construct, at Tenant’s sole cost and expense, a new building upon the Land (the “New Building”), together with such landscaping, parking, drives, signage and other improvements as Tenant shall desire to serve the New Building (collectively, the “New Building Improvements”), in each case conforming in all respects with local building code requirements, zoning requirements and this Lease. Upon completion of the New Building and receipt by Tenant of all necessary governmental permits and approvals, Tenant shall have the right, without payment of any additional Fixed Rent, to operate at the New Building for the Permitted Use for the remainder of the Term, as the same may be extended pursuant to this Lease. Tenant shall, upon Landlord’s request, deliver “As-Built” plans to Landlord for the New Building and/or New Building Improvements following completion of same.
6.3 Ownership of New Building Improvements; Reversion. Should Tenant elect to construct the New Building Improvements, then, notwithstanding any provision of this Lease to the contrary, title to the New Building Improvements (and any other alterations, equipment and fixtures built, made or installed by Tenant in, on, under or to the New Building) shall be vested in Tenant (or its permitted successors and assigns) who shall retain title thereto for the duration of the Term. Following completion of the New Building Improvements, if Tenant requires any document or acknowledgment to confirm its ownership of the Tenant Improvements, then Landlord shall execute, acknowledge, and deliver such required documents in a form reasonably acceptable to Landlord and Tenant within thirty (30) days following Tenant's written request therefor. Title to the New Building Improvements will revert to Landlord at the end of the Term or the termination of this Lease, whichever first occurs.
6.4 Landlord’s Prohibition. Landlord covenants and agrees that Landlord shall not make any alterations or additions to the Premises without Tenant’s written consent including, but not limited to, erecting, constructing, or installing or allowing to be erected, constructed, or installed any subsequent signage, buildings or other improvements (either permanent or temporary in nature) or making any changes to the Premises which would materially obstruct or diminish the general proximity of the parking field to Tenant’s front door, materially diminish signage, visibility of, or the access to the Premises or otherwise materially interfere with the traversing of vehicular and/or pedestrian traffic from nearby public roadways. Landlord shall not permit any mechanics’ or other liens to stand against the Premises for work or material furnished to Landlord.
6.5. Leases for Equipment. Landlord acknowledges and agrees that Tenant’s Trade Fixtures may be leased from an equipment lessor and that Tenant may execute and enter into an equipment lease with respect to such Trade Fixtures. Landlord shall execute and deliver a document commercially reasonably acceptable to Landlord in which Landlord: (i) acknowledges and agrees that the Trade Fixtures constitute the personal property of Tenant, and shall not be considered to be part of the Premises, regardless of whether or by what means they become attached thereto; (ii) agrees that it will not claim any interest in such Trade Fixtures; (iii) agrees that any equipment lessor may enter the Premises for the purpose of exercising any right it may have under the provisions of any equipment lease, including the right to remove such Trade Fixtures, provided that such equipment lessor agrees to repair any damage resulting from such removal; and (iv) any such other provisions as may be common and reasonable. Landlord waives any statutory landlord’s lien and any attachment for Rent on the Trade Fixtures that Landlord may have or may hereafter acquire.
ARTICLE 7 - TITLE AND POSSESSION
7.1. Representation, Warranty and Covenant. Landlord covenants, represents and warrants to Tenant as follows: (i) that Landlord owns fee simple title to the Premises; (ii) that Landlord has the full right, power and authority, without the consent or approval of any other party, to enter into this Lease and perform the obligations on the part of the Landlord to be kept and performed; (iii) that said entire property comprising the Premises is now and shall be as of the date of the recording of a Memorandum of Lease as defined in Section 19.3, free and clear of all liens, encumbrances and restrictions, except for those items set forth on Exhibit C attached hereto and made a part hereof; and (iv) that upon Tenant paying the rents and keeping the agreements of this Lease on its part to be kept and performed, Tenant shall have peaceful uninterrupted possession of the entire Premises during the Term; it being understood, however, that Landlord shall not be responsible for the acts or omissions of any third party which may interfere with Tenant’s use and enjoyment of the Premises unless caused by the negligence or willful misconduct of Landlord or in the event that the Landlord has failed to enforce the Tenant’s rights under Article 5. Prior to the Effective Date, Landlord has delivered to Tenant evidence of Landlord’s title to the Premises. Landlord warrants and represents to Tenant that no encumbrance or restriction imposed upon the Premises, whether or not described in this Section 7.1, shall impair or restrict any right granted to Tenant or derived by Tenant under this Lease.
7.2. Subordination. This Lease is and shall be subject and subordinate to: (i) the Covenant Documents, and to all renewals, additions, modifications, consolidations, replacements and extensions of any of the foregoing; provided, that Landlord shall not agree to any amendment, modification, alteration or cancellation of such documents if the same would materially adversely alter any term, covenant or condition of this Lease which is to the Tenant’s benefit without Tenant’s prior written approval, which will not be unreasonably withheld, conditioned, or delayed; (ii) all mortgages which now or in the future may affect the Premises or any portion thereof; provided, that Tenant’s obligation to subordinate this Lease to any future mortgage is conditioned upon the execution and delivery to Tenant of an agreement, in form and substance reasonably acceptable to Tenant, executed by such mortgagee or trustee, either: (y) making such mortgage, deed of trust or other encumbrance in the nature of a mortgage subject and subordinate to this Lease and to the leasehold estate created hereby and to all of Tenant’s rights hereunder, or (z) obligating such mortgagee or trustee and any successor thereto to be bound by this Lease and by all of Tenant’s rights hereunder (such an agreement, and the agreement referenced in Section 19.2 of this Lease, being an “SNDA”). For each SNDA, Landlord shall pay Tenant an amount equal to Three Hundred Fifty Dollars ($350.00) (the “SNDA Fee”) within thirty (30) days after the SNDA is provided (the “SNDA Fee Deadline”) and, if Landlord fails to pay the SNDA Fee by the SNDA Fee Deadline, then Tenant may offset the SNDA Fee against the next payment becoming due from Tenant to Landlord hereunder or otherwise.
ARTICLE 8 - ENCUMBRANCE OF LEASEHOLD ESTATE
8.1. Tenant's Right to Encumber. Tenant may, at any time, encumber all or any portion of its interest in this Lease and the leasehold estate by deed of trust, mortgage, or other security instrument upon obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld, and shall be further conditioned upon the agreement of the leasehold mortgagee to simultaneously deliver default notices to Landlord and Tenant. Each such mortgage, deed of trust, or other security instrument acquired by the holder of any leasehold mortgage shall be subject and subordinate to all rights and interests of Landlord herein and shall be a lien only on Tenant's interests in and to this Lease and the leasehold estate created hereby and shall not be a lien on Landlord's fee interest in the Premises or reversionary interest in the improvements. Each leasehold mortgage shall be subject to the terms and provisions of this Lease; and the holder of any leasehold mortgage, or anyone claiming by, through, or under the same, shall not, by virtue thereof, acquire any greater rights hereunder than Tenant has under this Lease. Tenant shall deliver to Landlord copies of all documents recorded to evidence any and all leasehold mortgages and all notices of default received by Tenant from the holder of any leasehold mortgage.
8.2. Tenant's Obligations. Tenant covenants and agrees to pay the indebtedness secured by any leasehold mortgage entered into in compliance with the provisions hereof when the same shall become due and payable and to perform, when such performance is required, all obligations of the mortgagor thereunder. Tenant further agrees not to suffer or permit any default to occur and continue under any leasehold mortgage. Tenant shall cause a true, complete, and correct copy of the original of each leasehold mortgage, together with written notice containing the name and post office address of the holder thereunder, to be delivered to Landlord. Tenant shall, from time to time, when and as requested by Landlord, deliver to Landlord a certificate from the holders of the leasehold mortgages certifying as to the amount of the unpaid principal balance under the leasehold mortgage held by such person, together with accrued interest thereon, and as to the existence or absence of defaults thereunder.
8.3. Rights of Leasehold Mortgagee. A leasehold mortgagee approved hereunder may enforce its rights under its mortgage and acquire title to the Tenant's leasehold estate in any lawful way, and upon foreclosure of such leasehold mortgage and issuance of a certificate of title, take possession of the Premises; subject, however, to the Lease, including, without limitation, the "Use" provisions hereof, all other terms, provisions, and conditions of the Lease, and any leasehold mortgage that is senior in lien to the leasehold mortgage in question. During such time as the leasehold mortgagee or any successor in interest is the owner and holder of the leasehold estate and Tenant's interest hereunder, whether by foreclosure or otherwise, such interests acquired hereunder shall be subject to all of the terms, conditions, and provisions of this Lease.
ARTICLE 9 - MAINTENANCE
Tenant, at Tenant’s sole cost and expense, shall maintain all elements of the Premises as it exists from time to time and make all necessary repairs and replacements, whether interior or exterior, to all parts of the same including but not limited to interior and exterior structural and non-structural components, all signs, and all utility lines including but not limited to sewers, sewer connections, pipes, conduits, ducts and wires leading to and from the Premises, all parking fields and facilities, and all landscaping and snow removal. Further, Tenant shall make all changes and installations, and pay the cost, if any, of all inspections required to comply with the valid requirements of public authorities as they apply to the Premises.
ARTICLE 10 – EQUIPMENT; TRADE FIXTURES; SIGNS
10.1. Installation and Operation. Tenant shall have the right to install mechanical equipment, including satellite dishes or other antennae for telecommunications (the “Equipment”) affixed to the roof or other portions of the Premises (including the New Building, should it be constructed). Tenant will ensure that the Equipment will be maintained and operated in accordance with all local and building rules of construction and occupancy codes and shall be responsible for the repair of all damage to the Premises (including but not limited to the roof of the Premises) caused as a result of the installation of the Equipment, and Tenant’s maintenance, use, operation, and removal thereof. The Equipment is and shall remain the property of Tenant or Tenant’s assignee, transferee or sublessee, and Landlord and Tenant agree that the installation thereof at the Premises shall not cause the satellite dishes or other antennae for telecommunications to become a fixture pursuant to this Lease or by operation of law. Tenant shall be responsible for the repair and maintenance of the Equipment during the Term and its removal at the Expiration Date. Tenant may also install pay telephones, automatic teller machines and other electronic consumer service apparatus on the Premises.
10.2. Trade Fixtures; Removal. Tenant shall at all times have the right to remove all fixtures, machinery, equipment, appurtenances and other property furnished or installed by Tenant or by Landlord at Tenant’s expense, including but not limited to any walk-in coolers or freezers, gondolas, wiring used to service any checkout counters, and any similar personal property that may be affixed to the Premises (“Trade Fixtures”), it being expressly understood and agreed that said property shall not become part of the Premises but shall at all times be and remain the personal property of Tenant and shall not be subject to any statutory, equitable, or common law Landlord’s lien. Trade Fixtures will exclude those items which constitute essential building systems (including, but not limited to, as base lighting, electrical, plumbing, mechanical, ceiling, bathroom fixtures or heating, ventilation and air conditioning) and all fire-safety items, flooring, water heaters, interior walls, partitions, and doors, additional utility work (if applicable), grease trap (if applicable), and parapet/facade renovation (if applicable), which such items are or shall become part of the real property.
10.3 Signs. Tenant may install and operate interior and/or exterior signage upon the Premises, including the Existing Building and, if completed, the New Building, without Landlord’s consent, subject in each instance to the Covenant Documents and applicable legal and governmental requirements. Landlord hereby grants Tenant full use of both sides of any existing monument and/or pylon signs serving the Premises, and shall permit Tenant the right to construct and use any additional monument or pylon signs at Tenant's expense. Subject to compliance with the Covenant Documents and governmental requirements, Tenant shall also have the right to place temporary signs on and about the Premises from time to time, including without limitation banner signs. Upon Tenant’s request, Landlord shall cooperate with Tenant’s efforts to obtain necessary approvals for its signage, including without limitation the maximum signage permitted by law.
ARTICLE 11 – HAZARDOUS MATERIALS
11.1. Hazardous Materials. Unless otherwise set forth herein, it is the agreement of the parties that, as between Landlord and Tenant: (a) Landlord shall be responsible for costs and necessary remediation, if any, resulting from Hazardous Materials (as hereinafter defined) that are attributable to Landlord, or caused by neighboring properties, or that are determined to have existed at the Premises prior to the date Tenant first took possession of the Premises (including under any prior lease or sublease at the Premises), and (b) Tenant shall be responsible for costs and necessary remediation of Hazardous Materials, if any, that are attributable to Tenant, or that first became present on the Premises on or after the date Tenant first took possession of the Premises (including, without limitation, under any prior lease or sublease). In furtherance of the foregoing:
11.1.1. Tenant represents and warrants that to Tenant’s actual knowledge, no Hazardous Materials in violation of Environmental Law (as hereinafter defined) are present at the Premises as of the Effective Date. During the Term, Tenant shall not cause or permit the Premises to become contaminated by any Hazardous Materials being brought upon, kept or used in or about the Premises by Tenant, its agents, employees, or contractors. Notwithstanding the foregoing, Tenant may bring ordinary amounts of Hazardous Materials used in connection with Tenant’s business (including, but not limited to, cleaning solutions) so long as the same is used, stored and disposed of in accordance with applicable law. If the presence of Hazardous Materials on the Premises caused or permitted by Tenant results in contamination of the Premises, or if contamination of the Premises by Hazardous Materials otherwise occurs for which, under applicable law, Tenant is liable to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord harmless from Environmental Damages (as hereinafter defined) caused by Tenant.
11.1.2. Landlord represents and warrants to Tenant that, to Landlord’s actual knowledge, no Hazardous Materials in violation of Environmental Law (as hereinafter defined) are present at the Premises as of the Effective Date. Landlord agrees to indemnify, defend and hold Tenant and its officers, directors, employees, and agents harmless from any Environmental Damages that are attributable to Hazardous Materials that existed at or under the Premises or prior to the date Tenant first took possession of the Premises (including without limitation under any prior lease or sublease).
11.1.3. As used herein, “Hazardous Materials” shall mean any hazardous or toxic chemical, waste, byproduct, pollutant, contaminant, compound, product or substance, including, without limitation, asbestos, polychlorinated biphenyls, petroleum (including crude oil or any fraction or by-product thereof), underground storage tanks, and any material the exposure to, or manufacture, possession, presence, use, generation, storage, transportation, treatment, release, disposal, abatement, cleanup, removal, remediation or handling of which is prohibited, controlled or regulated by any Environmental Law.
11.1.4. As used herein the term “Environmental Damages” means (i) all claims, judgments, damages, penalties, fines, costs, liabilities and losses; and (ii) all sums paid for settlement of claims, and reasonable attorneys,’ consultant’s and experts’ fees.
11.1.5. As used herein, “Environmental Law” shall mean any federal, state, regional, county or local governmental statute, law, regulation, ordinance, order or code or any consent decree, judgment, permit, license, code, covenant, deed restriction, common law, or other requirement presently in effect or hereafter created, issued or adopted, pertaining to protection of the environment, health or safety of persons, natural resources, conservation, wildlife, waste management, and pollution (including, without limitation, regulation of releases and disposals to air, land, water and ground water), including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,42 U.S.C. 9601 et seq., Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and Solid and Hazardous Waste Amendments of 1984,42 U.S.C. 6901 et seq., Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977,33 U.S.C. 1251 et seq., Clean Air Act of 1966, as amended, 42 U.S.C. 7401 et seq., Toxic Substances Control Act of 1976,15 U.S.C. 2601 et seq., Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. 651 et seq., Emergency Planning and Community Right-to-Know Act of 1986,42 U.S.C. 11001 et seq., National Environmental Policy Act of 1975, 42 U.S.C. 300(f) et seq., and all amendments as well as any similar state or local statute or code and replacements of any of the same and rules, regulations, guidance documents and publications promulgated thereunder.
11.2 Environmental Conditions Discovered During Construction of New Building. Notwithstanding any provision in this Lease to the contrary, if conditions suggesting the presence of Hazardous Materials are discovered during the planning or construction of the New Building Improvements, Tenant shall promptly notify Landlord. If the presence of Hazardous Materials is attributable to Tenant, Tenant shall cause the same to be remediated or cleared to the extent required by law and this Lease. If the presence of Hazardous Materials is attributable to Landlord, neighboring properties, or is determined to have existed at the Premises prior to the date Tenant first took possession of the Premises (including under any prior lease or sublease at the Premises), Landlord shall cause the same to be remediated or cleared to the extent required by law or this Lease. If Landlord is required to remediate as hereinabove provided but fails to complete necessary remediation within 180 days after receipt of Tenant’s notice, Tenant shall have the right to terminate this Lease by delivering notice to Landlord.
ARTICLE 12 – CASUALTY AND CONDEMNATION
12.1 Casualty. If after the Effective Date, the all or any portion of the Premises shall be damaged or destroyed by fire or other casualty, then Tenant shall repair and restore the same to (i) its condition immediately prior to such damage or destruction (taking into consideration normal wear and tear) or (ii) subject to Landlord’s consent which will not be unreasonably withheld, conditioned, or delayed, to a condition similar in nature to those buildings and premises then being constructed by or on behalf of Tenant at the time of the damage or destruction (so long as such new buildings and premises are of comparable construction, size and standards as the Premises or portion thereof being repaired or replaced), without abatement of rent. Subject to the payment of proceeds by Tenant as expressly set forth in Section 12.1.2 below, under no circumstances shall Tenant be liable for any loss or damage including, but not limited to, damage to the Premises resulting from fire or other casualty. Notwithstanding the foregoing, in the event the Premises are damaged to the extent of twenty-five percent (25%) or more thereof, or is destroyed by fire or other casualty, and such casualty occurs after the first day of the final year of the Initial Term or the final year of any Extended Term:
12.1.1. Tenant may cancel this Lease by notice to Landlord.
12.1.2. If Tenant has so canceled this Lease and the fire or other casualty is an insurable casualty under Tenant’s special form coverage insurance, Tenant shall provide Landlord with the proceeds of such insurance in an amount required by Article 13 of this Lease
exclusive, however, of the unamortized cost of improvements made by or on behalf of Tenant to the Premises, including, if constructed, the New Building.
12.2. Condemnation. If all or a portion of the Premises or so much thereof as to materially, adversely impact Tenant’s ability to utilize the Premises for the Permitted Use (as reasonably determined by Tenant in its sole and absolute discretion) shall be taken under power of eminent domain or transferred under threat thereof (“Entire Taking”), then this Lease, at the option of Tenant exercised by giving notice of such election within thirty (30) days after such taking or transfer, whichever is earlier, shall forthwith cease and terminate and the Fixed Rent shall be duly apportioned as of the date of such taking or transfer. No award for the Entire Taking shall be apportioned and Tenant hereby assigns to Landlord any award which may be made as a result of the Entire Taking, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof. Notwithstanding the foregoing, Tenant shall be entitled to obtain, directly from the condemning authority, an award for its Trade Fixtures, equipment and personal property, moving or relocation expenses, business dislocation damages and the unamortized cost of leasehold improvements, if any, to the extent Landlord’s award as a result of the Entire Taking is not diminished. In the event of a partial taking under power of eminent domain or partial transfer under threat thereof (“Partial Taking”) which does not result in a termination of this Lease, Fixed Rent shall be reduced in proportion to the reduction in the size of the Premises so taken and this Lease shall be modified accordingly. Promptly after obtaining knowledge thereof, Landlord or Tenant, as the case may be, shall notify the other of any pending or threatened condemnation or taking or transfer affecting the Premises or the Store. Each party shall have the right to seek from the condemning authority so much of an award as may be available so long as the award otherwise payable hereunder to one is not diminished by an award to the other as a result of such taking or transfer. Notwithstanding anything in this Lease to the contrary, should Tenant construct the New Building, and thereafter, a taking by governmental authority shall render the New Building unviable, in Tenant’s sole discretion, for Tenant’s operations therein, such taking shall be deemed an “Entire Taking” for purposes of this Lease.
ARTICLE 13 – INSURANCE
13.1. Insurance During Term. Commencing with the Effective Date and continuing until the Expiration Date, Tenant shall carry special form coverage insurance (embraced by “Causes of Loss-Special Form”) utilizing a form of policy providing coverage at least as broad as ISO policy form CP 10 30), including flood and earthquake coverage, covering the Premises as it exists from time to time and the other improvements on the Premises to the extent of not less than 100% of replacement value, (less foundations), with companies which are authorized to do business in the State in which the Premises is located and are governed by the regulatory authority which establishes maximum rates in the vicinity. Tenant shall also procure commencing with the commencement of construction of the New Store and continuing in effect during the entire Construction Period and Term commercial general liability insurance for personal injury, bodily injury (including wrongful death) and damage to property with a combined single limit of not less than Three Million and No/100 Dollars ($3,000,000.00), per occurrence and annual aggregate, insuring against any and all liability of the insured with respect to the Premises, or arising out of the maintenance, use or occupancy thereof, including premises operations, products and completed operations providing coverage at least as broad as ISO policy form CG 0001. Such amounts shall be increased, not more frequently than once every five (5) years, to levels customary in other comparable natural food stores in the vicinity of the Premises upon the reasonable request of Landlord. Tenant shall also carry a policy or policies of business income/business interruption insurance and extra expense coverage (collectively, “Business Income Insurance”) during the Term with coverage that will reimburse Tenant for all direct and indirect loss of income and changes and costs incurred arising out of all named perils insured against by Tenant's policies of property insurance, including prevention of, or denial of use of or access to, all or part of the Premises as a result of those named perils. The Business Income Insurance coverage must provide coverage for no less than twelve (12) months of the loss of income, charges and costs contemplated under this Lease. The proceeds from Tenant's casualty insurance hereunder shall be paid and applied only as set forth in Article 11 hereof.
13.2. Master Insurance Policy; Deductibles; Claims-Made Insurance. Any insurance carried or required to be carried by Tenant pursuant to this Lease, at Tenant’s option, may be carried pursuant to a master policy of insurance or so-called blanket policy of insurance covering other locations of Tenant or its corporate affiliates, or any combination thereof. Any policies required herein shall not have a deductible in excess of $25,000.00 (provided, however, the deductible with respect to flood and earthquake coverage may be increased to an amount not in excess of $50,000.00). Notwithstanding the foregoing, upon written notice to Landlord, Tenant may request that it increase the deductible to commercially reasonable amounts and Landlord agrees not to unreasonably refuse such request, but, in any case, the deductible shall not exceed the requirements of Landlord’s lender. If Tenant obtains any general liability insurance policy on a claims-made basis, Tenant shall provide continuous liability coverage for claims arising during the entire Term, regardless of when such claims are made, either by obtaining an endorsement providing for an unlimited extended reporting period in the event such policy is canceled or not renewed for any reason whatsoever or by obtaining new coverage with a retroactive date the same as or earlier than the expiration date of the canceled or expired policy.
13.3. Insurer. Except as otherwise approved in writing by the Landlord, all such insurance shall be procured from an insurance company or companies authorized to do business in Colorado, with general policyholder’s ratings of not less than “A-” and a financial rating of not less than “XI” in the most current available Best’s Insurance Reports. All such policies shall name Landlord and Landlord’s lender (if so requested) as an additional insured. All insurance maintained by Tenant shall be primary to any insurance provided by Landlord.
13.4. Certificates; Waiver of Subrogation; Cancellation. Tenant shall provide a certificate or certificates of such insurance to Landlord upon commencement of the Term and at least thirty (30) days prior to any annual renewal date thereof and upon reasonable request from time to time and such certificate or certificates shall disclose that such insurance names Landlord as an additional insured, in addition to the other requirements set forth herein. Landlord and Tenant each agrees to use its commercially reasonable efforts to include in each of its policies insuring against loss, damage or destruction by fire or other casualty a waiver of the insurer’s right of subrogation against the other party, or if such waiver should be unobtainable or unenforceable: (i) an express agreement that such policy shall not be invalidated if the insured waives the right of recovery against any party responsible for a casualty covered by the policy before the casualty; or (ii) any other form of permission for the release of such party. Each such policy which shall so name a party hereto as an additional insured shall contain, if obtainable, agreements by the insurer that the policy will not be canceled without at least thirty (30) days prior notice to both insured and that the act or omission of one insured will not invalidate the policy as to the other insured.
13.5. Insurance During Construction of New Building Improvements. Should Tenant elect to construct the New Building, then, upon the commencement of its construction and continuing through its completion, Tenant shall, to the extent not covered by any other insurance required to be carried by Tenant hereunder, carry commercial general liability insurance covering public liability as provided in Section 13.1 and builder’s risk insurance coverage (the “Builder’s Risk Insurance”) as provided in this Section 13.5 naming Landlord as additional insured (the “Construction Period Insurance”). The Builder’s Risk Insurance shall cover the work required to construct the New Building (the “Work”) to the full insurable value thereof. In the event of any change order resulting in the performance of additional Work in connection with the construction of the New Building, the amount of such insurance shall be increased if and to the extent necessary to cover the cost of such additional Work. Builder’s Risk Insurance shall be on an “all-risk” or equivalent policy form and shall include, without limitation, insurance against the perils of fire with extended coverage and physical loss or damage including, without duplication of coverage, theft, vandalism, malicious mischief, collapse, earthquake, flood, windstorm, falsework, testing and start-up, temporary buildings and debris removal including demolition occasioned by enforcement of any applicable legal requirements.
ARTICLE 14 – INDEMNIFICATION
Except for loss, cost and expense caused by fire or other casualty, Landlord and Tenant shall each indemnify, defend and hold harmless the other against and from any and all claims, damages, actions, loss, cost and expense (including but not limited to attorneys fees) resulting directly or indirectly from their own respective acts or omissions or the acts or omissions of their respective employees or agents acting within the scope of their employment or agency (“Related Parties”). Except as set forth above, Landlord shall not be liable for, and Tenant waives all claims for loss or damage to Tenant’s business or loss, theft or damage to Tenant’s property or the property of any person claiming by, through or under Tenant resulting from: (i) wind or weather; or (ii) any act or omission of any party other than Landlord or Landlord Related Parties. Tenant is hereby placed on notice that it should take necessary measures to insure itself against any such losses.
ARTICLE 15 - EXCULPATION
In the event of any transfer, assignment or conveyance of Landlord’s interest in the Lease, Landlord shall be relieved of all covenants and obligations of Landlord hereunder; provided, that such purchaser or successor has assumed all such covenants and obligations of the Landlord hereunder. Tenant acknowledges and agrees that the liability of Landlord under this Lease shall be limited to Landlord’s interest in the Premises and the rents, income and profits thereunder. Each party acknowledges and agrees that the other party shall not be liable for any special, indirect, incidental, consequential, punitive, or exemplary damages (including loss of profits, loss of revenue, or loss of good will) for any claim, whether based on warranty, contract, tort (including negligence), strict liability, or otherwise, even if Landlord or Tenant as the case may be, has been advised of the possibility of such damage. Nothing contained herein shall limit either party’s right to injunctive or other equitable relief.
ARTICLE 16 - DEFAULTS AND REMEDIES
16.1. Default by Tenant. If any Fixed Rent is due and payable and remains unpaid for ten (10) days after receipt of notice from Landlord of such nonpayment, or if Tenant breaches any of the other covenants of this Lease and if such other breach continues for thirty (30) days after receipt of notice from Landlord of such other breach (either of the foregoing, subject to the immediately succeeding sentence, being a “Tenant Default”), Landlord shall then, as its sole legal remedy, but in addition to its remedies in equity, if available, have the right to sue for due and payable Rent, or to terminate this Lease and re-enter the Premises. Notwithstanding the foregoing, (i) a Tenant Default shall not be deemed to have occurred if (x) Tenant shall pay said Rent within said ten (10) days or (y) if the Tenant Default is non-monetary, Tenant in good faith within said thirty (30) days commences to correct such non-monetary breach, and diligently proceeds therewith to correct such breach and (ii) Landlord shall not have the right to terminate this Lease if such nonmonetary breach is not material.
16.2. Default by Landlord. If Landlord shall from time to time fail to pay any sum or sums due to Tenant and if such failure continues for thirty (30) days after receipt of notice from Tenant of such default, then such failure, subject to the immediately succeeding sentence, shall be a “Landlord Payment Default”. Upon the occurrence and continuation of a Landlord Payment Default, Tenant shall have the right and is hereby irrevocably authorized and directed to deduct such sum or sums from Fixed Rent and other sums due Landlord, together with interest thereon at the so-called prime rate charged from time to time by JP Morgan Chase Bank (or its successors and assigns), plus two percent (2%) until fully reimbursed (the “Default Rate”). If Landlord shall from time to time fail to perform any act or acts required of Landlord by this Lease and if such failure continues for thirty (30) days after receipt of notice from Tenant of such failure (such failure, subject to the immediately succeeding sentence, a “Landlord Performance Default”), Tenant shall then have the right, in addition to such remedies as may be available under law or in equity, at Tenant’s option, to perform such act or acts, in such manner as Tenant deems reasonably necessary, and the full amount of the cost and expense so incurred shall immediately be owing by Landlord to Tenant, and Tenant shall have the right and is hereby irrevocably authorized and directed to deduct such amount from Fixed Rent and other sums due Landlord, together with interest thereon at the Default Rate until fully reimbursed by Landlord. Notwithstanding the foregoing, if such failure, despite commercially reasonable efforts to cure it, cannot be cured in thirty (30) days and Landlord shall in good faith within said thirty (30) days commence to correct such failure, and diligently proceed therewith to completion of such correction, then a Landlord Performance Default shall not be deemed to have occurred. If a condition that would constitute a Landlord Performance Default constitutes an imminent threat of harm to Tenant, the Premises or persons upon the Premises, Tenant shall be permitted to take immediate curative action and Landlord shall reimburse Tenant the costs thereof, plus interest at the Default Rate (or if Landlord fails to reimburse Tenant, Tenant shall have a right of setoff for same); provided, Tenant shall notify Landlord of the condition and Tenant’s curative action as promptly as reasonably possible.
16.3. Delay and Consent. No delay on the part of either party in enforcing any of the provisions of this Lease shall be considered as a waiver thereof. Any consent or approval granted by either party under this Lease must be in writing and shall not be deemed to waive or render unnecessary the obtaining of consent or approval with respect to any subsequent act or omission for which consent is required or sought.
16.4. Interest; Late Charges. If Tenant shall fail to pay, when the same is due and payable, any Fixed Rent, or any other charges or amounts due and payable hereunder to Landlord, such amounts shall bear interest at the rate of six percent (6%) per annum from the date after the due date until paid. If Tenant shall fail to pay, when the same is due and payable, any Fixed Rent, or any other charges or amounts hereunder, Tenant shall pay to Landlord a late payment charge in the amount of one hundred twenty-five dollars ($125) to cover Landlord's additional administrative expenses necessitated by Tenant's failure to make timely payment; provided, that the aforesaid late payment charge shall be subject to a six percent (6%) increase at the beginning of the sixth (6th) year of the Term and at the beginning of each Extended Term, if exercised. Landlord need not accept any payments past the due date therefor unless accompanied by the late payment charge. This provision for a late payment charge shall be in addition to all of Landlord's other rights and remedies under this Lease or at law or in equity, and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner.
16.5. Performance by Landlord. If Tenant shall at any time fail to pay, when the same is due and payable, any Fixed Rent, or any other charges or amounts hereunder, or shall fail to perform or observe any covenant or condition contained in this Lease, the performance of which involves something more than merely the payment of money, then Landlord, after thirty (30) days written notice to Tenant (or upon such shorter notice as may be reasonable in case of an emergency), and without waiving or releasing Tenant from any obligation and without being considered an election of remedies, may perform the same for the account of Tenant and charge Tenant the actual cost of any such performance, as well as interest thereon at the rate of twelve percent (12%) per annum from the date of Landlord’s making of such payment.
ARTICLE 17 - RESERVED
ARTICLE 18 - ASSIGNMENT AND SUBLEASE
18.1. Right to Assign and Sublease. Tenant shall have the right to assign this Lease, in whole or in part, and to sublet all or any portion of the Premises or New Store (once constructed) or both without Landlord’s consent. Such assignment or subletting shall not release Tenant from liability hereunder, except that: (a) in the event Landlord and any assignee modify or amend this Lease without Tenant’s consent so as to increase the obligations of Tenant hereunder, Tenant’s liability hereunder shall not be increased, but instead shall continue as it existed prior to such modification or amendment, and (b) in the event the assignee or sublessee has a net worth that is greater than or equal to Fifty Million Dollars ($50,000,000.00) at the time of an assignment or sublease, Tenant shall be released from any further liability under the Lease. Tenant shall be entitled to any and all Rent and other consideration relating to any such subleasing or assignment.
18.2. Agreement by Landlord. In the event of a subletting of all or a portion of the Premises, and upon Tenant's request, Landlord shall promptly furnish and deliver to Tenant, in form and substance reasonably acceptable to Tenant, an agreement executed by Landlord, obligating Landlord to be bound as Landlord by any such sublease and by all of the subtenant's rights thereunder in the event that this Lease is terminated for any reason (“Lease Termination”); provided, that: (i) Landlord's obligations under such sublease shall be no greater than Landlord's obligations under this Lease; (ii) in the event of a Lease termination, such sublease shall automatically terminate if subtenant's obligations under such sublease are less than Tenant's obligations under this Lease (including the payment of the Rent due hereunder); and (iii) in the event of a Lease termination, such sublease shall automatically terminate if the subtenant does not cure any breach of this Lease in accordance with the terms hereof.
18.3. Transfer of Title. In the event that Landlord conveys its interest in the Premises to any other person or entity, Tenant shall have no obligation to pay Rent to any such transferee until Tenant has been so notified and has received satisfactory evidence of such conveyance together with a written direction from such transferee as to the name and address of the new payee of Fixed Rents. It is understood and agreed that Tenant’s withholding of Fixed Rent until its receipt of such satisfactory evidence shall not be deemed a default under this Lease.
ARTICLE 19 – ESTOPPEL CERTIFICATES, NON-DISTURBANCE AGEEMENTS AND MEMORANDUM OF LEASE
19.1. Estoppel Certificate. Each party agrees to execute and deliver to the other party from time to time an estoppel certificate within twenty (20) days after receipt of the other party’s request for such certificate in a form reasonably acceptable to the other party, which certificate may include information as to any prior modification of this Lease, the date of commencement of the Term and the termination date of this Lease, and to the best of Tenant’s or Landlord’s knowledge, whether or not the other party is in default of this Lease (an “Estoppel Certificate”). For each Estoppel Certificate, the party requesting it (the “Estoppel Requestor”) shall pay the party providing it (the “Estoppel Provider”) an amount equal to Fifty Dollars ($50.00) (the “Estoppel Fee”) within thirty (30) days after the Estoppel Certificate is provided (the “Estoppel Fee Deadline”) and, if the Estoppel Requestor fails to pay the Estoppel Fee by the Estoppel Fee Deadline, then the Estoppel Provider may offset the Estoppel Fee against the next payment becoming due from the Estoppel Provider to the Estoppel Requestor hereunder or otherwise.
19.2. Nondisturbance Agreements. Landlord shall obtain standard recognition and nondisturbance agreements from its current and future mortgage holders recognizing this Lease, and agreeing not to terminate it or Tenant's possession of the Premises for so long as Tenant is not in default of the Lease.
19.3 Memorandum of Lease. A Memorandum of Lease suitable for recording describing the Premises and setting forth the names and addresses of Landlord and Tenant, the length of the Initial Term, the length and number of any Extended Terms, Tenant’s Exclusive Use and Tenant’s right first refusal (hereinafter described) (the “Memorandum of Lease”) shall be executed and delivered by Landlord to Tenant upon the request of either party promptly at any time after Delivery. Upon the expiration or earlier termination of this Lease, Tenant if and when requested by Landlord, shall execute a termination agreement or similar instrument nullifying the Memorandum of Lease, which Landlord may record. Tenant shall not record any mortgage or other lien or encumbrance against Landlord's fee simple interest in the Premises, other than the Memorandum of Lease, without Landlord’s written permission.
ARTICLE 20 - RIGHT OF FIRST REFUSAL
In the event that Landlord shall receive a Bona Fide Offer to purchase the Premises at any time and from time to time on or after the date hereof and during the Term of this Lease from any person or entity, Landlord shall so notify Tenant in writing, together with a true and correct copy of said Bona Fide Offer. For purposes hereof, a “Bona Fide Offer” shall be deemed to be one made in writing (including a letter of intent, memorandum of understanding or document of similar import) by a person or entity that is not related or affiliated with Landlord which Landlord intends to accept (subject to this Article). In submitting the Bona Fide Offer to Tenant, Landlord shall segregate the price and the terms of the offer for the Premises from the price and other terms connected with any additional property or properties that such person or entity is offering to purchase from Landlord. Tenant may, at Tenant's option and within fifteen (15) days after receipt of Landlord's notice of said Bona Fide Offer and receipt of a copy thereof, offer to purchase the Premises at the price and upon the terms and conditions as are contained in said Bona Fide Offer, in which event, Landlord shall sell the Premises to Tenant upon said terms and conditions and said price; furthermore, in such event, Landlord shall convey the Premises to Tenant by special warranty deed. Notwithstanding the foregoing, the price that Tenant shall pay for the Premises shall be reduced by (i) an amount equal to broker's fees or commissions that would have been payable by either the purchaser or Landlord if the Premises were sold pursuant to a Bona Fide Offer; and (ii) the amount of any payment(s) to be made by the proposed purchaser to any entity owned or controlled by, or affiliated with, the proposed purchaser. Landlord shall provide Tenant evidence of the amount of broker's fees or commissions payable in connection with any such Bona Fide Offer. Landlord covenants that it shall accept no such Bona Fide Offer or convey the Premises until it has complied with the terms of this Article. Any conveyance of the Premises made in the absence of full satisfaction of this Article shall be void. Tenant may enforce this Article, without limitation, by injunction, specific performance or other equitable relief. The failure of Tenant to exercise the right of first refusal contained herein within the aforesaid fifteen (15) day period shall be a waiver of Tenant’s right of first refusal contained in this Article 20.
Tenant's election not to exercise its right of first refusal shall not prejudice Tenant's rights hereunder as to any further Bona Fide Offer. The terms and conditions contained in this Article shall be binding upon the heirs, successors and assigns of Landlord.
It is understood by Landlord and Tenant that an offer to acquire the Premises from a person or entity that is related or affiliated with Landlord is not a Bona Fide Offer and thus Tenant does not have a right of first refusal as to such offer and therefore shall not prejudice Tenant's rights hereunder as to any further Bona Fide Offer.
ARTICLE 21 - BROKERAGE
Landlord and Tenant each represents that it has dealt with no broker or agent with respect to this Lease and each party hereby indemnifies, defends, saves and holds the other harmless against any claims for brokerage commissions or compensation or other claims of any kind (including reasonable attorney’s fees) arising out of the falsity of this representation.
ARTICLE 22 – FORCE MAJEURE
Neither party shall be liable for delays in performance, or inability to perform, arising out of causes beyond its reasonable control and without its fault or negligence including, but not limited to, acts of God or of the public enemy, acts of the government including, without limitation, governmental orders, pandemic, foreign or domestic terrorists, fires, floods, epidemics, strikes, labor disturbances or freight embargos, but excluding, without limitation, delays caused by subcontractors or suppliers and/or financial related performance or ability of either party. Any such delay or inability to perform shall be of no greater scope and/or no longer duration than is reasonable required, and the non-performing party shall use reasonable efforts to remedy such delay or inability to perform.
ARTICLE 23 - RESERVED
ARTICLE 24 - NOTICES
Unless otherwise specifically provided in this Lease or by law, any and all notices or other communications required or permitted by this Lease or by law to be served on, given to, or delivered to any party to this Lease shall be in writing and shall be deemed duly served, given, delivered, and received when personally delivered (including confirmed overnight delivery service to the party to whom it is directed), or in lieu of such personal delivery, when three (3) business days have elapsed following deposit thereof in the United States mail, first-class postage prepaid, certified, return receipt requested, addressed to:
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Tenant: |
Kemper Isely Co-President 12612 W. Alameda Parkway Lakewood, CO 80228 |
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Landlord: |
Chalet Properties, LLC P.O. Box 260169 Lakewood, CO 80226 |
Any party may change its address for the purpose of this paragraph by giving written notice of such change to the other party in the manner provided in its paragraph.
ARTICLE 25 - MISCELLANEOUS
25.1. Recitals. The recitals on the first page of this Lease are true and correct and are hereby incorporated into this Lease by this reference.
25.2 Captions. Captions in this Lease are inserted for convenience of reference only and do not define, describe, or limit the scope or the intent of this Lease or any of its terms.
25.3. Conditions and Covenants; Binding Effect; Survival. All of the provisions of this Lease shall be deemed as running with the land, and constructed to be “conditions” as well as “covenants” as though the words specifically expressing or imparting covenants and conditions were used in each separate provision. Subject to any provision of this Lease that may prohibit or curtail assignment of any rights hereunder, this Lease shall bind and inure to the benefit of the respective heirs, assigns, personal representatives, and successors of the parties hereto. All representations, warranties, and indemnities of each party under this Lease shall survive the Expiration Date. Any other provision of this Lease that extends beyond the Term or that is required to ensure that the parties are able to fully exercise their rights and perform their obligations under this Lease shall survive the expiration or termination of this Lease.
25.4. No Waiver of Breach. No failure by either Landlord or Tenant to insist upon the strict performance by the other of any covenant, agreement, term, or condition of this Lease, or to exercise any right or remedy consequent upon a breach thereof, shall constitute a waiver of any such breach or of such covenant, agreement, term, or condition. No waiver of any breach shall affect or alter this Lease, but each and every covenant, condition, agreement, and term of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach.
25.5. Entire Agreement; Waiver; Amendment. This Lease contains the entire agreement between the parties regarding the subject matter hereof. Any oral or written representations, agreements, understandings, and statements shall be of no force and effect. No modification, waiver, amendment, discharge, or change of this Lease shall be valid unless the same is in writing and signed by the party against which the enforcement of such modification, waiver, amendment, discharge, or change is or may be sought. Each party agrees that it shall, upon the other's request, take any and all commercially reasonable steps, and execute, acknowledge, and deliver to the other party and all further commercially reasonable instruments necessary or expedient to effectuate the purpose of this Lease.
25.6. Governing Law; Waiver of Trial By Jury; Attorney’s Fees. This Lease shall be construed and enforced in accordance with the laws of the State of Colorado, without giving effect to principles of conflicts of law. Landlord and Tenant mutually, expressly, irrevocably, and unconditionally waive trial by jury for any proceedings arising out of or in connection with this Lease, or any conduct or course of dealing of the parties, statements (whether oral or written) or actions of any persons. This waiver is a material inducement to Landlord to accept delivery of this Lease. If either party retains an attorney to enforce or interpret this Lease, the prevailing party shall be entitled to recover, in addition to all other items of recovery permitted by law, reasonable attorneys' fees and costs incurred through litigation, bankruptcy proceedings, and all appeals.
25.7. Severability. If any term, provision, covenant, or condition of this Lease is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired, or invalidated.
25.8. Counterparts. This Lease may be executed in one or more counterparts, each of which shall be deemed an original and when taken together will constitute one instrument. Delivery of an executed signature page of this Lease by facsimile or electronic photocopy (i.e., a “pdf”) will be as effective as delivery of a manually executed counterpart hereof.
25.9. Arm’s-Length Negotiations. All provisions of this Lease have been negotiated by both parties at arm’s length and neither party shall be deemed the scrivener of this Lease. This Lease shall not be construed for or against either party by reason of the authorship or alleged authorship of any provision hereof.
25.10. Time of the Essence. Time is declared to be of the essence of this Lease and each and every provision of this Lease.
25.11. Keys. Tenant shall not be required to deliver keys to Landlord. Tenant will maintain an emergency lock box, Knox Box, or similar secured facility with keys and which may be used by emergency services such as fire and rescue.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective as of the day and year first above written.
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VITAMIN COTTAGE NATURAL FOOD MARKETS, INC. |
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By: |
/s/ Kemper Isely |
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Name: |
Kemper Isely |
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Title: |
Co-President |
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CHALET PROPERTIES, LLC |
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By: |
/s/ Zephyr Isely |
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Name: |
Zephyr Isely |
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Title: |
Manager |
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Exhibit 31.1
CERTIFICATION
I, Kemper Isely, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.; |
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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; |
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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; |
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4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(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; |
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(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; |
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(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 |
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(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 |
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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): |
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(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 |
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(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: May 5, 2022
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/s/ Kemper Isely |
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Kemper Isely |
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Co-President and a Principal Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Zephyr Isely, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.; |
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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; |
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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; |
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4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(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; |
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(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; |
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(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 |
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(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 |
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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): |
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(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 |
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(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: May 5, 2022
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/s/ Zephyr Isely |
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Zephyr Isely |
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Co-President and a Principal Executive Officer |
Exhibit 31.3
CERTIFICATION
I, Todd Dissinger, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Natural Grocers by Vitamin Cottage, Inc.; |
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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; |
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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; |
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4. |
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(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; |
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(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; |
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(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 |
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(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 |
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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): |
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(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 |
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(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: May 5, 2022
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/s/ Todd Dissinger |
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Todd Dissinger |
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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 March 31, 2022, Kemper Isely, Co-President and a Principal Executive Officer of the Company, Zephyr Isely, Co-President and a Principal Executive Officer of the Company, and Todd Dissinger, Chief Financial Officer and Principal Financial Officer of the Company, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:
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● |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 5, 2022
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/s/ Kemper Isely |
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Kemper Isely |
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Co-President and a Principal Executive Officer |
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/s/ Zephyr Isely |
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Zephyr Isely |
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Co-President and a Principal Executive Officer |
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/s/ Todd Dissinger |
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Todd Dissinger |
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Chief Financial Officer and Principal Financial Officer |