The purpose of the Audit Committee (the “Committee”) is to represent and assist the Board of Directors (the “Board of Directors” or “Board”) of Natural Grocers by Vitamin Cottage, Inc. (the “Company”) in its general oversight of the Company’s accounting and financial reporting processes, audits of the financial statements, internal control and audit functions, and compliance with legal and regulatory requirements and ethical standards adopted by the Company.
The Audit Committee serves a board level oversight role and its primary duties and responsibilities are to:
- oversee the integrity of the Company’s financial statements, financial reports and other financial information provided by the Company to any governmental body or its stockholders;
- oversee the Company’s systems of internal control over financial reporting and disclosure controls and procedures;
- oversee the Company’s compliance with legal and regulatory requirements, including internal controls designed for that purpose;
- oversee the independence, qualifications, compensation and performance of the Company’s independent auditors (the “Auditors”);
- oversee the performance of the Company’s internal audit function;
- oversee the application of the Company’s Code of Ethics as established by management and the Board;
- provide an avenue of free, open and clear communication among the Auditors, management, the Committee and the Board; and
- prepare the Audit Committee report that the Securities and Exchange Commission (the “SEC”) rules require to be included in the Company’s annual proxy statement.
The Audit Committee shall consist of three or more directors determined by the Board of Directors to meet the director and audit committee member financial literacy requirements of the New York Stock Exchange (the “NYSE”). At least one member shall be an “audit committee financial expert,” as defined by the rules and regulations promulgated by the SEC.
No director may serve on the Committee unless such director satisfies the independence criteria in Rule 10A-3 of the Securities Exchange Act of 1934, as amended, and the independence criteria of the NYSE; provided that,(i) for up to 90 days from the date of the effectiveness of the Company’s registration statement on Form S-1 for the initial public offering of common stock of the Company (the “Registration Date”), the Audit Committee may have only one independent director, and (ii) for the period thereafter and up to one year from the Registration Date, the Committee may have only a majority of Independent Directors. No member of the Committee may have participated in the preparation of the financial statements of the Company or any of the Company’s current subsidiaries at any time during the past three years.
Members of the Committee, including the Chair of the Committee, shall be appointed by and serve at the discretion of the Board.
If a member serves on the audit committee of any other public company, the member must so inform the Audit Committee. If a member serves on the audit committee of more than two other public companies (in addition to the Audit Committee), the Audit Committee shall consult with the Board, and the Board shall determine, whether such simultaneous service would impair the ability of such member to effectively serve on the Audit Committee.
In fulfilling its responsibilities, as set forth below, the Audit Committee shall have authority to delegate its authority to subcommittees, including subcommittees consisting solely of one or more Company employees, in each case to the extent permitted by applicable law.
The Audit Committee shall meet at least quarterly, or more frequently, as circumstances dictate. The Committee shall meet separately and periodically with management, the personnel responsible for the internal audit function, and the Auditors. When necessary, the Committee shall meet in executive session outside of the presence of any senior executive officer of the Company. A majority of the Committee members must be in attendance for a quorum. The Committee may act by unanimous written consent. The Committee shall report regularly to the Board of Directors with respect to its activities.
The Audit Committee shall have the authority to engage independent legal, accounting and other advisors, as it determines necessary to carry out its duties and shall receive appropriate funding, as determined by the Committee, from the Company for payment of compensation to any such advisors. The Committee shall have sole authority to approve related fees and retention terms or to terminate any such advisors.
Absent actual knowledge to the contrary (which shall be promptly reported to the Board), each member of the Committee shall be entitled to rely on (i) the integrity of those persons or organizations within and outside the Company from which he or she receives information, (ii) the accuracy of the financial and other information provided to the Committee by such persons or organizations, and (iii) representations made by management and the Auditors as to any non-audit services provided by the Auditors to the Company or its affiliates.
Division of Responsibilities of the Audit Committee, the Auditors and Management
The primary responsibility of the Committee is to oversee the Company’s financial reporting process on behalf of the Board and report the results of its activities to the Board. The management of the Company is responsible for the preparation, presentation and integrity of the Company’s financial statements and for the effectiveness of internal control over financial reporting. Management is also responsible for maintaining appropriate accounting and financial reporting principles and policies as well as internal controls and procedures that provide for compliance with applicable accounting standards, laws and regulations. The Auditors are responsible for planning and carrying out audits of the Company’s annual financial statements in accordance with generally accepted auditing standards, reviewing the Company’s quarterly financial statements prior to the filing of each quarterly report, and annually auditing management’s assessment of the effectiveness of internal control over financial reporting and other auditing procedures when required.
The Committee shall have a clear understanding with management and the Auditors that the Auditors are accountable to the Board and the Committee, as representatives of the Company’s stockholders. The Committee shall recommend the appointment of the Auditors to the Board for ultimate approval by the stockholders. The Auditors’ audit engagement letter shall be signed by the Chairperson of the Committee on behalf of the Company, such engagement having been previously approved by the Committee
Duties and Powers of the Committee
The Audit Committee shall:
With regard to the Auditors:
- Recommend to the Board and, as appropriate, to the stockholders, the appointment, compensation, retention, termination and other terms of the engagement of the Auditors, having evaluated their performance.
- Approve all audit engagement fees and terms and other compensation to be paid to the Auditors, which fees shall be paid by the Company.
- Oversee the work of the Auditors (including the resolution of any disagreement between management and the Auditors regarding financial reporting) who shall report to the Committee.
- Obtain and review at least annually a written report by the Auditors describing: (i) the firm’s internal quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, peer review, Public Company Accounting Oversight Board inspection, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues.
- Review and discuss with the Auditors the written statement from the Auditors concerning any relationship between the Auditors and the Company or any other relationships that may adversely affect the independence of the Auditors, and, based on such review, assesses the independence of the Auditors.
- Review with the Auditors at least annually, any relationships or services that may impact the quality of audit services or the objectivity and independence of the Auditors and review and evaluate the independence qualifications and performance of the relevant personnel of the Auditors.
- Review the process for the rotation of the lead audit partner, the concurring partner, and any other audit engagement team partner.
- Review and approve any procedures on the hiring of employees or former employees of the Auditors, with a view to preserving the Auditors’ independence.
- Establish policies and procedures for the review and pre-approval by the Committee of all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by the Auditors.
- Review and discuss with the Auditors: (i) its audit plans, and audit procedures, including the scope, fees and timing of the audit; (ii) the results of the annual audit examination and accompanying management letters; and (iii) the results of the Auditors’ procedures with respect to interim periods.
- Review and discuss reports from the Auditors on: (i) all critical accounting policies and practices used by the Company; (ii) alternative accounting treatments within generally accepted accounting principles (“GAAP”) related to material items that have been discussed with management, including the ramifications of the use of the alternative treatments and the treatment preferred by the Auditors; and (iii) other material written communications between the Auditors and management.
- Review and discuss with the Auditors the Auditors’ judgments as to the quality, not just the acceptability, of the Company’s accounting principles and such further matters as the Auditors present the Committee under generally accepted auditing standards.
- Discuss any significant matters arising from any audit and any errors, difficulties or serious differences of opinion encountered in the course of the audit and management’s response thereto.
- Obtain assurances from the Auditors that the audit was conducted in a manner consistent with applicable law and regulations.
- Remind the Auditors that they are accountable to the Board and the Committee as representatives of the stockholders and that the Committee expects to be advised of any areas that may require its attention.
- Review the use of auditors other than the Auditors in cases such as management’s request for second opinions.
- Consult, at least annually, with the Auditors, out of the presence of the management, about the adequacy, quality and integrity of the internal controls for financial reporting and the fair presentation and accuracy of the Company’s financial statements.
- Review and discuss with management and the Auditors various topics and events that may have significant financial impact on the Company or that are the subject of discussions between management and the Auditors. Discuss with the Auditors any significant accounting adjustments that were noted or proposed by the Auditors but were “passed” (as immaterial or otherwise).
With respect to the internal audit function:
- Determine whether the internal audit function should be performed by employees of the Company or third parties.
- Determine if needed, and then review and approve the appointment of the Chief Internal Auditor, which may be a third party.
- Advise the Chief Internal Auditor that he or she is expected to provide to the Committee summaries of the significant issues and practices relating to the accounting principles and policies, financial reporting, and internal control over financial reporting prepared by the internal audit function for management and management’s responses thereto.
- Review the scope of the internal audit program, and the performance of both the internal audit function and the Auditors in executing their plans and meeting their objectives.
- Receive a report on the activities of the internal audit function.
- Review the degree of independence of the internal audit function and the adequacy of staffing and resources.
With respect to disclosure and internal controls:
- Advise management, the internal audit function and the Auditors that they are expected to provide the Committee with a timely disclosure and analysis of transactions and other events that could materially impact the Company’s financial statements.
- Review and discuss with management the Company’s major financial risk exposures and the steps management has taken to monitor and control such exposures.
- Review all financial statements requiring Board approval and report thereon to the Board.
- Discuss with management and the Auditors quarterly earnings press releases, including the interim financial information and any business outlook included therein.
- Review the Company’s annual and quarterly regulatory filings and disclosures before they are filed with any governmental authorities.
- Review and discuss with management and the Auditors the Company’s year-end audited financial statements and quarterly financial statements including: (i) the disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” (ii) any items required to be communicated to the Committee by the Auditors in accordance with standards established by the Public Company Accounting Oversight Board; and (iii) any other matters required to be reviewed under applicable legal, regulatory, or NYSE requirements.
- Review and discuss with management, the Auditors, and the Company’s Chief Internal Auditor: (i) the adequacy and effectiveness of the Company’s internal controls (including any significant deficiencies or material weaknesses) and significant changes in internal controls reported to the Committee by the Auditors or management; (ii) the Company’s internal audit procedures; and (iii) the adequacy and effectiveness of the Company’s disclosures controls and procedures, and management reports thereon.
- Review and discuss with management and the Auditors other matters related to the conduct of the audit which are to be communicated to the Audit Committee under generally accepted auditing standards, including matters required to be discussed by the Public Company Accounting Oversight Board Auditing Standard AU Section 380, Communications with Audit Committees, and Rule 2-07 of Regulation S-X. Based on this review and discussion, the Audit Committee will recommend to the Board whether the Company’s annual and quarterly financial statements should be filed with the SEC.
- Review and approve related-party transactions (as defined in the relevant NYSE requirements) and any off-balance sheet transactions.
- Discuss the kinds of financial information and earnings guidance to be provided, and the types of presentations made, to analysts, rating agencies and the public generally.
- Review a report of legal matters prepared by management with a view to ensuring that all potential material claims against the Company have been properly evaluated, accounted for, and disclosed.
- Discuss with the Company’s internal or external legal counsel and the Auditors, any significant legal, compliance or regulatory matters that may have a material effect on the financial statements or the Company’s business (including any SEC investigations or proceedings) and any report or opinion proposed to be rendered in connection therewith.
- Review the adequacy of the Company’s disaster recovery plan to ensure the ability to resume operations as rapidly and efficiently as possible in the event of a disaster.
- Review significant tax exposures and tax planning initiatives with a view to ensuring full compliance while minimizing tax costs.
- Receive reports on major accounting issues that have arisen and expected changes in accounting standards and the potential impact on the Company.
- Review management’s determination of goodwill impairment, if any, or other material impairment charges as required by accounting standards.
With regard to financial matters and securities:
- Review the impact of the Company’s financing plans on capital structure and any credit ratings.
- Review management’s recommendations regarding the Company’s dividend policy and make recommendations thereon to the Board.
With regard to Corporate Governance:
- Prepare the Audit Committee report that the rules of the SEC require to be included in the Company’s annual proxy statement and any report or other disclosures, including any recommendation of the Committee, required by applicable laws and regulations with respect to the Audit Committee to be included in the Company’s reports to stockholders.
- Review periodically the Company’s Code of Ethics.
- Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.
- Handle internal Company complaints referred to it by legal counsel or otherwise in respect of the Code of Ethics.
- Review any reports of material violations of securities laws or breaches of fiduciary duties or other matters brought to its attention by legal counsel or others and present findings to the Board.
- Review the activities of the Disclosure and Ethics Committee of management assigned to review the functioning of the Company’s disclosure controls and procedures.
- Review with the full Board any issues that arise with respect to the quality or integrity of the Company’s financial statements, the Company’s compliance with legal or regulatory requirements and internal procedures, the performance and independence of the Auditors or the performance of the internal audit function and make such recommendations with respect to the foregoing and other matters as the Committee may deem necessary or appropriate.
The Committee shall fulfill any other responsibilities not specified above that may be assigned to the Committee by the Board of Directors from time to time.
The Committee shall be responsible for developing and conducting an annual self-assessment of its performance. The Committee will design and coordinate the annual self-assessment in conjunction with the overall Board assessment process. The Committee shall report to the Board on the results of its assessment each year and shall make any appropriate recommendations to further enhance the Committee’s performance.
The Committee shall review this charter annually and may recommend to the Board from time to time any proposed changes to the charter and to any other documents related to the responsibilities of the Committee.
When appropriate, the Committee may designate one or more of its members to perform certain of its duties on its behalf, subject to such reporting to or ratification by the Committee as the Committee shall direct.