UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended ~~March~~December 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34249

FARMER BROS. CO.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		95-0725980
(State of Incorporation)		(I.R.S. Employer Identification No.)
1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)

888-998-2468
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading ~~Symbol~~Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $1.00 par value	FARM	~~The~~ NASDAQ Global Select Market

None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the ~~registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ý NO ¨

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



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO ý

As of ~~April 30, 2019,~~January 31, 2020, the registrant had ~~17,040,100~~17,231,473 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.

TABLE OF CONTENTS



	Page
PART I – FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements	1

Condensed Consolidated Balance Sheets at ~~March~~December 31, 2019 and June 30, ~~2018~~2019	1

Condensed Consolidated Statements of Operations for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2019 and 2018	2

Condensed Consolidated Statements of Comprehensive Loss for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2019 and 2018	3

Condensed Consolidated Statements of Stockholders’ Equity for the ~~Nine~~Three and Six Months Ended ~~March~~December 31, 2019 and 2018	4

Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~March~~December 31, 2019 and 2018	6

Notes to Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4733

Item 3. Quantitative and Qualitative Disclosures About Market Risk	6446

Item 4. Controls and Procedures	6647

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	6748

Item 1A. Risk Factors	6748

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	6948

Item 3. Defaults Upon Senior Securities	6948

Item 4. Mine Safety Disclosures	6948

Item 5. Other Information	6948

Item 6. Exhibits	7049

SIGNATURES	7150

PART I - FINANCIAL INFORMATION (UNAUDITED)

Item 1. Financial Statements

FARMER BROS. CO.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands, except share and per share data)

March 31, 2019 June 30, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 12,194
$ 2,438
Accounts receivable, net 65,755
58,498
Inventories 100,370
104,431
Income tax receivable 346
305
Short-term derivative assets 144
—
Prepaid expenses 7,082
7,842
Total current assets 185,891
173,514
Property, plant and equipment, net 191,250
186,589
Goodwill 36,224
36,224
Intangible assets, net 29,528
31,515
Other assets 9,962
8,381
Deferred income taxes —
39,308
Total assets $ 452,855
$ 475,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable 62,810
56,603
Accrued payroll expenses 15,831
17,918
Short-term borrowings under revolving credit facility —
89,787
Short-term obligations under capital leases 57
190
Short-term derivative liabilities 5,543
3,300
Other current liabilities 7,548
10,659
Total current liabilities 91,789
178,457
Long-term borrowings under revolving credit facility 123,000
—
Accrued pension liabilities 46,776
40,380
Accrued postretirement benefits 17,949
20,473
Accrued workers’ compensation liabilities 4,938
5,354
Other long-term liabilities 2,619
1,812
Total liabilities $ 287,071
$ 246,476
Commitments and contingencies (Note 22)

Stockholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of March 31, 2019 and June 30, 2018; liquidation preference of $15,489 and $15,089 as of March 31, 2019 and June 30, 2018, respectively 15
15
Common stock, $1.00 par value, 25,000,000 shares authorized; 17,004,561 and 16,951,659 shares issued and outstanding as of March 31, 2019 and June 30, 2018, respectively 17,005
16,952
Additional paid-in capital 57,321
55,965
Retained earnings 155,072
220,307
Unearned ESOP shares —
(2,145 )
Accumulated other comprehensive loss (63,629 ) (62,039 )
Total stockholders’ equity $ 165,784
$ 229,055
Total liabilities and stockholders’ equity $ 452,855
$ 475,531



	December 31, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	9,130		$	6,983
Accounts receivable, net	60,404			55,155
Inventories	85,134			87,910
Income tax receivable	1,631			1,191
Short-term derivative assets	9,051			1,865
Prepaid expenses	5,820			6,804
Total current assets	171,170			159,908
Property, plant and equipment, net	171,983			189,458
Goodwill	36,224			36,224
Intangible assets, net	27,673			28,878
Other assets	9,520			9,468
Long-term derivatives assets	443			674
Right-of-use operating lease assets	19,696			—
Total assets	$	436,709		$	424,610
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	59,828			72,771
Accrued payroll expenses	16,021			14,518
Operating leases liabilities - current	5,571			—
Short-term derivative liabilities	368			1,474
Other current liabilities	7,982			7,309
Total current liabilities	89,770			96,072
Long-term borrowings under revolving credit facility	70,000			92,000
Accrued pension liabilities	45,717			47,216
Accrued postretirement benefits	22,597			23,024
Accrued workers’ compensation liabilities	5,000			4,747
Operating lease liabilities - noncurrent	14,318			—
Other long-term liabilities	3,147			4,057
Total liabilities	$	250,549		$	267,116
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of December 31, 2019 and June 30, 2019; liquidation preference of $15,899 and $15,624 as of December 31, 2019 and June 30, 2019, respectively	15			15
Common stock, $1.00 par value, 25,000,000 shares authorized; 17,177,448 and 17,042,132 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively	17,180			17,042
Additional paid-in capital	59,663			57,912
Retained earnings	158,310			146,177
Accumulated other comprehensive loss	(49,008		)	(63,652		)
Total stockholders’ equity	$	186,160		$	157,494
Total liabilities and stockholders’ equity	$	436,709		$	424,610

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands, except share and per share data)


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018			2019			2018			2019			2018
Net sales	$	146,679		$	157,927		$	453,892		$	457,006		$	152,498		$	159,773		$	291,098		$	307,213
Cost of goods sold	106,779			105,629			312,513			302,349			108,513			106,529			206,472			205,734
Gross profit	39,900			52,298			141,379			154,657			43,985			53,244			84,626			101,479
Selling expenses	34,422			37,754			111,323			112,736			34,906			39,591			68,520			76,901
General and administrative expenses	11,306			14,157			32,063			39,822			11,266			12,140			24,006			20,757
Restructuring and other transition expenses	26			52			4,700			311			—			207			—			4,674
Net gains from sale of spice assets	(203		)	(110		)	(593		)	(655		)
Net losses (gains) from sales of other assets	451			(590		)	1,564			(446		)
Impairment losses on intangible assets	—			3,820			—			3,820
Net (gains) losses from sales of assets													(11,057		)	804			(23,662		)	723
Operating expenses	46,002			55,083			149,057			155,588			35,115			52,742			68,864			103,055
Loss from operations	(6,102		)	(2,785		)	(7,678		)	(931		)
Income (loss) from operations													8,870			502			15,762			(1,576		)
Other (expense) income:
Dividend income	—			1			—			12
Interest income	—			—			—			2
Interest expense	(2,981		)	(2,547		)	(9,165		)	(7,221		)	(2,859		)	(3,332		)	(5,407		)	(6,184		)
Pension settlement charge	—			—			(10,948		)	—			—			(10,948		)	—			(10,948		)
Other, net	495			1,817			2,105			5,782			1,662			953			1,865			1,610
Total other expense	(2,486		)	(729		)	(18,008		)	(1,425		)	(1,197		)	(13,327		)	(3,542		)	(15,522		)
Loss before taxes	(8,588		)	(3,514		)	(25,686		)	(2,356		)
Income tax expense (benefit)	43,161			(1,321		)	39,149			16,058
Net loss	$	(51,749	)	$	(2,193	)	$	(64,835	)	$	(18,414	)
Income (loss) before taxes													7,673			(12,825		)	12,220			(17,098		)
Income tax benefit													(81		)	(2,725		)	(188		)	(4,012		)
Net income (loss)													7,754			(10,100		)	12,408			(13,086		)
Less: Cumulative preferred dividends, undeclared and unpaid	134			128			400			257			138			134			275			266
Net loss available to common stockholders	$	(51,883	)	$	(2,321	)	$	(65,235	)	$	(18,671	)
Net loss available to common stockholders per common share—basic	$	(3.05	)	$	(0.14	)	$	(3.84	)	$	(1.12	)
Net loss available to common stockholders per common share—diluted	$	(3.05	)	$	(0.14	)	$	(3.84	)	$	(1.12	)
Net earnings (loss) available to common stockholders													$	7,616		$	(10,234	)	$	12,133		$	(13,352	)
Net earnings (loss) available to common stockholders per common share—basic													$	0.44		$	(0.60	)	$	0.71		$	(0.79	)
Net earnings (loss) available to common stockholders per common share—diluted													$	0.43		$	(0.60	)	$	0.69		$	(0.79	)
Weighted average common shares outstanding—basic	17,003,206			16,760,145			16,982,247			16,727,624			17,159,108			16,985,157			17,127,153			16,971,995
Weighted average common shares outstanding—diluted	17,003,206			16,760,145			16,982,247			16,727,624			17,583,335			16,985,157			17,550,144			16,971,995

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

(In thousands)

Three Months Ended March 31, Nine Months Ended March 31,
2019 2018 2019 2018
Net loss $ (51,749 ) $ (2,193 ) $ (64,835 ) $ (18,414 )
Other comprehensive (loss) income, net of tax:
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax (5,905 ) (2,430 ) (11,254 ) (4,255 )
Gains (losses) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax 3,201
438
6,311
(426 )
Change in funded status of retiree benefit obligations, net of tax (1,943 ) —
(7,594 ) —
Pension settlement charge, net of tax 2,801
—
10,948
—
Total comprehensive loss, net of tax $ (53,595 ) $ (4,185 ) $ (66,424 ) $ (23,095 )



	Three Months Ended December 31,					Six Months Ended December 31,
	2019		2018			2019		2018
Net income (loss)	$	7,754	$	(10,100	)	$	12,408	$	(13,086	)
Other comprehensive (loss) income, net of tax:
Unrealized gains (losses) on derivative instruments designated as cash flow hedges, net of tax	11,284		748			7,395		(5,349		)
Losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold and interest expense, net of tax	4,661		1,650			7,249		3,110
Change in funded status of retiree benefit obligations, net of tax	—		(5,651		)	—		(5,651		)
Pension settlement charge, net of tax	—		8,147			—		8,147
Total comprehensive income (loss), net of tax	$	23,699	$	(5,206	)	$	27,052	$	(12,829	)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

																																								FARMER BROS. CO. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (In thousands, except share and per share data)

	Preferred Shares	Preferred Stock Amount		Common Shares	Common Stock Amount		Additional Paid-in Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total			Preferred Shares	Preferred Stock Amount		Common Shares	Common Stock Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2018	14,700	$	15	16,951,659	$	16,952	$	55,965		$	220,307		$	(2,145	)	$	(62,039	)	$	229,055
Net loss	—	—		—	—		—			(2,986		)	—			—			(2,986		)
Balance at June 30, 2019																						14,700	$	15	17,042,132	$	17,042	$	57,912		$	146,177		$	(63,652	)	$	157,494
Net income																						—	—		—	—		—			4,654			—			4,654
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—	—		—	—		—			—			—			(4,637		)	(4,637		)	—	—		—	—		—			—			(1,301		)	(1,301		)
ESOP compensation expense, including reclassifications	—	—		—	—		529			—			—			—			529			—	—		52,534	53		807			—			—			860
Share-based compensation	—	—		—	—		433			—			—			—			433			—	—		—	—		(1		)	—			—			(1		)
Issuance of common stock and stock option exercises																						—	—		532	—		—			—			—			—
Cumulative preferred dividends, undeclared and unpaid																						—	—		—	—		—			(137		)	—			(137		)
Balance at September 30, 2019																						14,700	$	15	17,095,198	$	17,095	$	58,718		$	150,694		$	(64,953	)	$	161,569
Net income																						—	—		—	—		—			7,754			—			7,754
Net reclassification of unrealized losses on cash flow hedges, net of taxes																						—	—		—	—		—			—			15,945			15,945
ESOP compensation expense, including reclassifications																						—	—		55,623	56		525			—			—			581
Issuance of common stock and stock option exercises																						—	—		—	—		319			—			—			319
Stock option exercises	—	—		26,042	26		300			—			—			—			326			—	—		26,627	29		101			—			—			130
Cumulative preferred dividends, undeclared and unpaid	—	—		—	—		—			(132		)	—			—			(132		)	—	—		—	—		—			(138		)	—			(138		)
Balance at September 30, 2018	14,700	15		16,977,701	16,978		57,227			217,189			(2,145		)	(66,676		)	222,588
Net loss	—	—		—	—		—			(10,100		)	—			—			(10,100		)
Net reclassification of unrealized gains on cash flow hedges, net of taxes	—	—		—	—		—			—			—			2,398			2,398
Pension settlement charge, net of taxes	—	—		—	—		—			—			—			8,147			8,147
Change in the funded status of retiree benefit obligations, net of taxes	—	—		—	—		—			—			—			(5,651		)	(5,651		)
ESOP compensation expense, including reclassifications	—	—		—	—		(1,740		)	—			2,145			—			405
Share-based compensation	—	—		16,266	16		474			—			—			—			490
Stock option exercises	—	—		8,562	9		173			—			—			—			182
Cumulative preferred dividends, undeclared and unpaid	—	—		—	—		—			(134		)	—			—			(134		)
Balance at December 31, 2018	14,700	15		17,002,529	17,003		56,134			206,955			—			(61,782		)	218,325
Net loss	—	—		—	—		—			(51,749		)	—			—			(51,749		)
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—	—		—	—		—			—			—			(2,705		)	(2,705		)
Pension settlement charge, net of taxes	—	—		—	—		—			—			—			2,801			2,801
Change in the funded status of retiree benefit obligations, net of taxes	—	—		—	—		—			—			—			(1,943		)	(1,943		)
ESOP compensation expense, including reclassifications	—	—		—	—		700			—			—			—			700
Share-based compensation	—	—		2,032	2		487			—			—			—			489
Cumulative preferred dividends, undeclared and unpaid	—	—		—	—		—			(134		)	—			—			(134		)
Balance at March 31, 2019	14,700	$	15	17,004,561	$	17,005	$	57,321		$	155,072		$	—		$	(63,629	)	$	165,784
Balance at December 31, 2019																						14,700	$	15	17,177,448	$	17,180	$	59,663		$	158,310		$	(49,008	)	$	186,160

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

																																													FARMER BROS. CO. CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued) (In thousands, except share and per share data)

	Preferred Shares	Preferred Stock Amount		Common Shares		Common Stock Amount			Additional Paid-in Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total			Preferred Shares	Preferred Stock Amount		Common Shares	Common Stock Amount		Additional Paid-in Capital			Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total
Balance at June 30, 2017	—	$	—	16,846,002		$	16,846		$	41,495		$	236,993		$	(4,289	)	(61,493		)	$	229,552
Net income	—	—		—		—			—			840			—			—			840
Adjustment due to the adoption of ASU 2017-12	—	—		—		—			—			342			—			(209		)	133
Adjustment due to the adoption of ASU 2016-09	—	—		—		—			—			1,641			—			—			1,641
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—	—		—		—			—			—			—			(993		)	(993		)
ESOP compensation expense, including reclassifications	—	—		—		—			580			—			—			—			580
Share-based compensation	—	—		(2,732	)	(3		)	229			—			—			—			226
Balance at September 30, 2017	—	—		16,843,270		16,843			42,304			239,816			(4,289		)	(62,695		)	231,979
Balance at June 30, 2018																								14,700	$	15	16,951,659	$	16,952	$	55,965		$	220,307		$	(2,145	)	$	(62,039	)	$	229,055
Net loss	—	—		—		—			—			(17,060		)	—			—			(17,060		)	—	—		—	—		—			(2,986		)	—			—			(2,986		)
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—	—		—		—			—			—			—			(1,215		)	(1,215		)	—	—		—	—		—			—			—			(4,637		)	(4,637		)
ESOP compensation expense, including reclassifications	—	—		—		—			(1,525		)	—			2,144			—			619			—	—		—	—		529			—			—			—			529
Share-based compensation	—	—		12,452		13			406			—			—			—			419			—	—		—	—		433			—			—			—			433
Stock option exercises	—	—		43,945		44			581			—			—			—			625
Consideration for Boyd Coffee acquisition	14,700	15		—		—			11,557			—			—			—			11,572
Issuance of common stock and stock option exercises																								—	—		26,042	26		300			—			—			—			326
Cumulative preferred dividends, undeclared and unpaid	—	—		—		—			—			(129		)	—			—			(129		)	—	—		—	—		—			(132		)	—			—			(132		)
Balance at December 31, 2017	14,700	15		16,899,667		16,900			53,323			222,627			(2,145		)	(63,910		)	226,810
Balance at September 30, 2018																								14,700	15		16,977,701	16,978		57,227			217,189			(2,145		)	(66,676		)	222,588
Net loss	—	—		—		—			—			(2,193		)	—			—			(2,193		)	—	—		—	—		—			(10,100		)	—			—			(10,100		)
Net reclassification of unrealized losses on cash flow hedges, net of taxes	—	—		—		—			—			—			—			(2,230		)	(2,230		)
Net reclassification of unrealized gains on cash flow hedges, net of taxes																								—	—		—	—		—			—			—			2,398			2,398
Pension settlement charge, net of taxes																								—	—		—	—		—			—			—			8,147			8,147
Change in the funded status of retiree benefit obligations, net of taxes																								—	—		—	—		—			—			—			(5,651		)	(5,651		)
ESOP compensation expense, including reclassifications	—	—		—		—			590			—			—			—			590			—	—		—	—		(1,740		)	—			2,145			—			405
Share-based compensation	—	—		(565	)	(1		)	459			—			—			—			458			—	—		16,266	16		474			—			—			—			490
Stock option exercises	—	—		28,886		29			408			—			—			—			437
Issuance of common stock and stock option exercises																								—	—		8,562	9		173			—			—			—			182
Cumulative preferred dividends, undeclared and unpaid	—	—		—		—			—			(128		)	—			—			(128		)	—	—		—	—		—			(134		)	—			—			(134		)
Balance at March 31, 2018	14,700	$	15	16,927,988		$	16,928		$	54,780		$	220,306		$	(2,145	)	$	(66,140	)	$	223,744
Balance at December 31, 2018																								14,700	$	15	17,002,529	$	17,003	$	56,134		$	206,955		$	—		$	(61,782	)	$	218,325

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

													FARMER BROS. CO.	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)	(In thousands)
	Nine Months Ended March 31,						Six Months Ended December 31,
	2019			2018			2019			2018
Cash flows from operating activities:
Net loss	$	(64,835	)	$	(18,414	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net income (loss)							$	12,408		$	(13,086	)
Adjustments to reconcile net loss to net cash used in operating activities:							Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	23,160			22,727			15,211			15,630
Provision for doubtful accounts	1,886			369
Impairment losses on intangible assets	—			3,820
Change in estimated fair value of contingent earnout consideration	—			(500		)
Restructuring and other transition expenses, net of payments	1,956			(1,084		)	—			2,457
Deferred income taxes	40,078			15,698			—			(3,265		)
Pension settlement charge	10,948			—			—			10,948
Net losses (gains) from sales of spice assets and other assets	971			(1,101		)
ESOP and share-based compensation expense	3,095			2,892
Net losses on derivative instruments and investments	9,228			305
Net (gains) losses from sales of assets							(23,662		)	723
Net losses on derivative instruments							4,075			6,205
Other adjustments							1,794			3,494
Change in operating assets and liabilities:
Proceeds from sales of trading securities	—			375
Accounts receivable	(7,651		)	(8,417		)	(5,285		)	(21,299		)
Inventories	3,937			(7,348		)	1,804			(11,326		)
Income tax receivable	1,621			162
Derivative assets (liabilities), net	(13,229		)	(6,129		)	1,965			(9,234		)
Prepaid expenses and other assets	(1,441		)	921
Other assets							361			1,194
Accounts payable	8,466			7,554			(10,608		)	21,534
Accrued payroll expenses and other current liabilities	(7,786		)	353
Accrued postretirement benefits	(2,524		)	(1,353		)
Other long-term liabilities	(380		)	(2,476		)
Net cash provided by operating activities	$	7,500		$	8,354
Accrued expenses and other liabilities							(258		)	(9,621		)
Net cash used in operating activities							$	(2,195	)	$	(5,646	)
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired	$	—		$	(39,608	)
Purchases of property, plant and equipment	(30,393		)	(25,889		)	(9,007		)	(23,120		)
Purchases of assets for construction of New Facility	—			(1,577		)
Proceeds from sales of property, plant and equipment	143			1,565			35,247			105
Net cash used in investing activities	$	(30,250	)	$	(65,509	)
Net cash provided (used) in investing activities							$	26,240		$	(23,015	)
Cash flows from financing activities:
Proceeds from revolving credit facility	$	50,642		$	76,513		$	38,000		$	40,642
Repayments on revolving credit facility	(17,417		)	(18,249		)	(60,000		)	(429		)
Payments of capital lease obligations	(185		)	(878		)
Payments of finance lease obligations							(27		)	(137		)
Payment of financing costs	(1,041		)	(560		)	—			(1,027		)
Proceeds from stock option exercises	507			1,062			129			507
Net cash provided by financing activities	$	32,506		$	57,888
Net cash (used) provided by financing activities							$	(21,898	)	$	39,556
Net increase in cash and cash equivalents	$	9,756		$	733		$	2,147		$	10,895
Cash and cash equivalents at beginning of period	2,438			6,241			6,983			2,438
Cash and cash equivalents at end of period	$	12,194		$	6,974		$	9,130		$	13,333

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

												FARMER BROS. CO.	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)	(In thousands)
	Nine Months Ended March 31,						Six Months Ended December 31,
	2019			2018			2019		2018
Supplemental disclosure of non-cash investing and financing activities:
Net change in derivative assets and liabilities included in other comprehensive loss, net of tax	$	(4,943	)	$	(4,681	)	$	14,644	$	(2,239	)
Non-cash additions to property, plant and equipment	$	739		$	2,146		$	284	$	2,928
Non-cash portion of earnout receivable recognized—spice assets sale	$	592		$	183		$	—	$	390
Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment	$	—		$	218
Non-cash portion of earnout payable recognized—West Coast Coffee acquisition	$	1,000		$	—		$	—	$	840
Non-cash consideration given—Issuance of Series A Preferred Stock	$	—		$	11,756
Non-cash Multiemployer Plan Holdback payable recognized—Boyd Coffee acquisition	$	—		$	1,056
Non-cash - Boyd Coffee post-closing working capital adjustment	$	2,277		$	—
Non-cash issuance of 401-K common stock							$	109	$	—
Cumulative preferred dividends, undeclared and unpaid	$	400		$	257		$	275	$	266

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FARMER BROS. CO.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Introduction and Basis of Presentation

Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company”), is a national coffee roaster, wholesaler and distributor of coffee, tea, and culinary products.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and ~~nine~~six months ended ~~March~~December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, ~~2019.~~2020. Events occurring subsequent to ~~March~~December 31, 2019 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and ~~nine~~six months ended ~~March~~December 31, 2019.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018,~~2019, filed with the Securities and Exchange Commission (the “SEC”) on September ~~13, 2018~~11, 2019 (the ~~“2018~~“2019 Form 10-K”).

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), CBI, China Mist Brands, Inc., a Delaware corporation, Boyd Assets Co., a Delaware corporation, and Coffee Bean International LLC, a Delaware limited liability company. All inter-company balances and transactions have been eliminated.

~~The Company has reclassified certain prior period amounts to conform to the current year presentation.~~

Use of Estimates

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note 2. Summary of Significant Accounting Policies

For a detailed discussion about the Company’s significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in the ~~2018~~2019 Form 10-K.

During the three and ~~nine~~six months ended ~~March~~December 31, 2019, other than as set forth below and the adoption of Financial Accounting Standards Board Accounting (“FASB”) Standards Update (“ASU”) ~~No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”),~~ ASU No. ~~2017-07, “Compensation—Retirement Benefits~~2016-02, “Leases (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”), ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), and ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)842)” (“ASU ~~2014-09”~~2016-02”), there were no significant updates made to the Company’s significant accounting policies.

~~Interest Rate Swap~~

The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for interest rate swap derivative instruments as an accounting hedge. For interest rate swap derivative instruments designated as a cash flow hedge, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.

The Company’s interest rate swap derivative instruments are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.

Concentration of Credit Risk

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.

The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. ~~See~~ ~~Note 6.~~

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.

Approximately ~~33%~~34% and ~~20%~~28% of the Company’s trade accounts receivable balance was with five customers at ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.

~~Coffee Brewing Equipment and Service~~Adoption of ASC 842 - Leases

Effective July 1, 2019, the Company adopted the FASB Topic 842 (“ASC 842”), Leases. The Company ~~capitalizes coffee brewing equipment~~adopted ASC 842 under the modified retrospective approach using the practical expedient; therefore, the presentation of prior year periods has not been adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of July 1, 2019 was necessary. The adoption of ASC 842 resulted in the recording of Operating lease right-of-use assets and ~~depreciates it over five years and reports the depreciation expense in cost~~Operating lease liabilities of ~~goods sold.~~$16.3 million, as of July 1, 2019. The adoption of ASC 842 had no impact on retained earnings. See Note 103~~. Further,~~ for detail discussions on the adoption of ASC 842.

Right-of-use lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company ~~classifies~~uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain ~~expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include~~that the ~~cost of servicing~~company will exercise that ~~equipment (including service employees’ salaries, cost of transportation~~option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and ~~the cost of supplies and parts) and~~non-lease components, which are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the three months ended March 31, 2019 and 2018 were $12.7 million and $11.6 million, respectively. Coffee brewing costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the nine months ended March 31, 2019 and 2018 were $34.0 million and $29.4 million, respectively.combined for certain assets classes.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~Revenue Recognition~~Recent Accounting Pronouncements

~~The Company’s significant accounting policy for revenue was updated as a result of the adoption of ASU 2014-09.~~ The Company ~~recognizes revenue in accordance with~~considers the ~~five-step model prescribed by ASU 2014-09 in which the Company evaluates the transfer~~applicability and impact of ~~promised goods or services~~all ASUs issued. ASUs not listed below were assessed and ~~recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects~~either determined to be ~~entitled~~not applicable or expected to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASU 2014-09, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See ~~Note 21~~.

~~Shipping and Handling Costs~~

The Company’s shipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to the distribution centers and branches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with moving finished goods to customers. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $2.4 million and $4.2 million, respectively, in the three months ended March 31, 2019 and 2018. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $9.0 million and $9.3 million, respectively, in the nine months ended March 31, 2019 and 2018.

Effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, and made certain corrections relating to the classification of allied freight, overhead variances and purchase price variances (“PPVs”) from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. See ~~Note 3~~.

~~Pension Plans~~

The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation-General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.

~~The Company recognizes the overfunded or underfunded status of a defined benefit pension plan as an asset or liability~~have minimal impact on its condensed consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. The Company recognizes pension settlements when payments from the plan exceed the sum of service and interest cost components of net periodic pension cost associated with the plan for the fiscal year. See ~~Note 12~~.financial statements.

The ~~Company’s significant accounting policy for pension plans was updated as~~following table provides a ~~result~~brief description of the ~~adoption of ASU 2017-07, which impacted~~applicable recent ASUs issued by the presentation of the components of net periodic benefit cost in the condensed consolidated statements of income. Net periodic benefit cost, other than the service cost component, is retrospectively included in “Interest expense” and “Other, net” in the condensed consolidated statements of income.FASB:



Standard	Description	Effective Date	Effect on the Financial Statements or Other Significant Matters
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).	ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.	Annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.	Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”).	ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant.	Annual periods beginning after December 15, 2020. Early adoption is permitted.	Effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”).	ASU 2018-02 provides entities an option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.	The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively.	The Company did not elect the option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).	The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment.	Annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.	Effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-13.	The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. The amendments in ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.	Annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods.	Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not anticipate a material impact to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02.	ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02.	Annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted.	The Company adopted the new guidance effective July 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See Note 3 for the applicable disclosure of ASU 2016-02 adoption. .

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~Recently Adopted Accounting Standards~~Note 3. Leases

~~In March 2018,~~The Company makes a determination if an arrangement constitutes a lease at inception, and categorizes the ~~Financial Accounting Standards Board ("FASB") issued ASU 2018-05~~lease as either an operating or finance lease. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other long-term liabilities in the Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.

The Company has entered into leases for building facilities, vehicles and other equipment. The Company’s leases have remaining contractual terms of up to 10 years, some of which ~~amends ASC 740, “Income Taxes,”~~have options to ~~provide guidance on accounting~~extend the lease for ~~the tax effects~~up to 20 years. For purposes of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companiescalculating operating lease liabilities, lease terms are ~~able to record a reasonable estimate of the impact of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is~~deemed not to include options to extend ~~beyond one year from~~ the ~~enactment date.~~lease termination until it is reasonably certain that the Company will exercise that option. The ~~Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019. See~~ ~~Note 18~~.Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

~~In March 2017, the FASB issued ASU 2017-07 to amend the requirements in GAAP~~Supplemental unaudited consolidated balance sheet information related to ~~the income statement presentation of the~~leases is as follows:



	Classification	December 31, 2019
(In thousands)
Operating lease assets	Right-of-use operating lease assets	$	19,696
Finance lease assets	Property, plant and equipment, net	34
Total lease assets		$	19,730

Operating lease liabilities - current	Operating lease liabilities - current	$	5,571
Operating lease liabilities - noncurrent	Operating lease liabilities - noncurrent	14,318
Finance lease liabilities	Other long-term liabilities	35
Total lease liabilities		$	19,924

The components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. Under ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line itemslease expense are as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that include the service cost. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company adopted ASU 2017-07 beginning July 1, 2018 using a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from “Cost of goods sold,” “Selling expenses” and “General and administrative expenses” to “Interest expense” and “Other, net” in the condensed consolidated statements of income. Accordingly, “Interest expense” increased by $1.4 million and $1.6 million for the three months ended March 31, 2019 and 2018, respectively, and “Other, net” increased by $1.4 million and $1.7 million in the three months ended March 31, 2019 and 2018, respectively. “Interest expense” increased by $4.7 million and $4.9 million for the nine months ended March 31, 2019 and 2018, respectively, and “Other, net” increased by $4.9 million and $5.0 million in the nine months ended March 31, 2019 and 2018, respectively. See ~~Note 3~~ ~~and~~ ~~Note 6~~. In the fiscal years ended June 30, 2018 and 2017, “Interest expense” increased by $6.6 million and $6.4 million, respectively, and “Other, net” increased by $6.7 million and $6.8 million, respectively, due to reclassifications of net periodic benefit cost, other than the service component, as a result of adopting ASU 2017-07.follows:

In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business. The objective of adding the guidance is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively. The Company adopted ASU 2017-01 beginning July 1, 2018. The Company will apply the new guidance to all applicable transactions after the adoption date.

In November 2016, the FASB issued ASU 2016-18 that requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-18 beginning July 1, 2018.

In August 2016, the FASB issued ASU 2016-15 to address certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230, “Statement of Cash Flows” (“ASC 230”). ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable



		Three Months Ended December 31,		Six Months Ended December 31,
	Classification	2019		2019
(In thousands)
Operating lease expense	General and administrative expenses and cost of goods sold	$	1,253	$	2,363
Finance lease expense:
Amortization of finance lease assets	General and administrative expenses	13		26
Interest on finance lease liabilities	Interest expense	—		1
Total lease expense		$	1,266	$	2,390

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~source or use~~



	December 31, 2019
(In thousands)	Operating Leases			Finance Leases
Maturities of lease liabilities are as follows:
2020	$	2,826		$	27
2021	5,102			9
2022	3,631			—
2023	2,995			—
2024	2,699			—
Thereafter	5,375			—
Total lease payments	22,628			36
Less: interest	(2,739		)	(1		)
Total lease obligations	$	19,889		$	35

Lease term and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annualdiscount rate:



	December 31, 2019
Weighted-average remaining lease terms (in years):
Operating lease	8.8
Finance lease	0.7

Weighted-average discount rate:
Operating lease	4.50	%
Finance lease	4.50	%

Other Information:



	Six Months Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,165
Operating cash flows from finance leases	$	1
Financing cash flows from finance leases	$	25

Leased assets obtained in exchange for new finance lease liabilities	$	—
Leased assets obtained in exchange for new operating lease liabilities	$	—

Disclosures related to periods ~~beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 beginning July 1, 2018. Adoption~~prior to adoption of ASU ~~2016-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.~~2016-02

~~In May 2014, the FASB issued ASU 2014-09 to amend the accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled~~Rent expense paid for the ~~transfer of promised goods or services to customers. ASU 2014-09 replaces most existing revenue recognition guidance in GAAP.~~ fiscal year ended June 30, 2019 was $6.4 million.

The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015minimum annual payments under operating and 2016, the FASB issued additional ASUs related to ASU 2014-09 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. The Company adopted ASU 2014-09 beginning July 1, 2018 using the modified retrospective method for all contracts not completedcapital leases as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. The Company has included expanded disclosures in this report related to revenue recognition in order to comply with ASU 2014-09. See ~~Note 21~~.

~~New Accounting Pronouncements~~

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance in ASU 2018-15 is effective for public business entities for annual periods beginning after December 15,June 30, 2019 and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The guidance in ASU 2018-14 is effective for public business entities for annual periods beginning after December 15, 2020, and is effective for the Company beginning July 1, 2021. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 improves the effectiveness of fair value measurement disclosures and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The guidance in ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019 and should be applied either in the period of adoption or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-02 will have on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-stepare as follows:

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provide additional guidance to consider when implementing ASU 2016-02. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is currently identifying and compiling all leases and right–of–use terms to evaluate the impact of this guidance on its condensed consolidated financial statements, information systems, business processes, and financial statement disclosures. The Company expects the adoption will have a material effect on the Company’s financial position resulting from the increase in assets and liabilities as well as additional disclosures.



(In thousands)	Operating Lease Obligations		Capital Lease Obligations
Year Ended June 30,
2020	$	4,434	$	36
2021	3,238		1
2022	2,472		—
2023	2,131		—
2024	2,025		—
Thereafter	4,389		—
Total minimum lease payments	$	18,689	37
Less: imputed interest (0.82% to 10.66%)			(2		)
Present value of future minimum lease payments			35
Less: current portion			(34		)
Long-term capital lease obligations			$	1

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~Note 3. Changes in Accounting Principles and Corrections to Previously Issued Financial Statements~~

Effective June 30, 2018, the Company changed its method of accounting for its coffee, tea and culinary products from the LIFO basis to the FIFO basis. Total inventories accounted for utilizing the LIFO cost flow assumption represented 91% of the Company’s total inventories as of June 30, 2018 prior to this change in method. The Company believes that this change is preferable as it better matches revenues with associated expenses, aligns the accounting with the physical flow of inventory, and improves comparability with the Company’s peers.

Additionally, effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. The Company has determined that it is preferable to capitalize such costs into inventory and expense through cost of goods sold because it better represents the costs incurred in bringing the inventory to its existing condition and location for sale to customers, and it is consistent with the Company’s accounting treatment of similar costs.

In connection with these changes in accounting principles, subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended June 30, 2017, the Company determined that freight associated with certain non-coffee product lines ("allied") was incorrectly expensed as incurred in selling expenses, and the overhead variances and purchase price variances (“PPVs”) associated with these product lines were incorrectly expensed as incurred in cost of goods sold for the fiscal years ended June 30, 2017 and 2016 and for the first three quarters in the fiscal year ended June 30, 2018. These costs should have been capitalized as inventory costs in accordance with ASC 330, "Inventory." Accordingly, the Company has corrected the accompanying condensed consolidated financial statements for the three and nine months ended March 31, 2018 to capitalize the appropriate portion of these costs in ending inventory and to reclassify remaining allied freight to cost of goods sold.

In accordance with SFAS No. 154, “Accounting Changes and Error Corrections,” the change in method of accounting for coffee, tea and culinary products and the change in accounting principle for freight and warehousing overhead costs have been retrospectively applied, and the corrections relating to the reclassification and capitalization of allied freight and the capitalization of allied overhead variances and PPVs have been made, to all prior periods presented herein.

~~The cumulative effect on retained earnings for these changes as of July 1, 2017 is $17.6 million.~~

In addition to the foregoing, during the nine months ended March 31, 2019, the Company adopted new accounting standards that required retrospective application. The Company updated the condensed consolidated statements of income as a result of adopting ASU 2017-07, and updated the condensed consolidated statements of cash flows as a result of adopting ASU 2016-18. See ~~Note 2~~.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the three months ended March 31, 2018:~~

Three Months Ended
March 31, 2018
(In thousands, except per share data) As Previously Reported LIFO to FIFO Adjustment Preferable Freight and Warehousing Adjustments Corrections of Freight, Overhead Variances and PPVs ASU 2017-07 Adjustments(1) Retrospectively Adjusted
Cost of goods sold $ 99,117
$ (891 ) $ 5,888
$ 1,602
$ (87 ) $ 105,629
Gross profit $ 58,810
$ 891
$ (5,888 ) $ (1,602 ) $ 87
$ 52,298
Selling expenses $ 44,736
$ —
$ (5,495 ) $ (1,200 ) $ (287 ) $ 37,754
General and administrative expenses $ 13,766
$ —
$ —
$ —
$ 391
$ 14,157
Operating expenses $ 61,674
$ —
$ (5,495 ) $ (1,200 ) $ 104
$ 55,083
Loss from operations $ (2,864 ) $ 891
$ (393 ) $ (401 ) $ (18 ) $ (2,785 )
Interest expense $ (902 ) $ —
$ —
$ —
$ (1,645 ) $ (2,547 )
Other, net $ 154
$ —
$ —
$ —
$ 1,663
$ 1,817
Total other expense $ (747 ) $ —
$ —
$ —
$ 18
$ (729 )
Loss before taxes $ (3,611 ) $ 891
$ (393 ) $ (401 ) $ —
$ (3,514 )
Income tax expense (benefit) $ 297
$ (1,562 ) $ 436
$ (492 ) $ —
$ (1,321 )
Net loss $ (3,908 ) $ 2,452
$ (829 ) $ 92
$ —
$ (2,193 )
Net loss available to common stockholders $ (4,036 ) $ 2,452
$ (829 ) $ 92
$ —
$ (2,321 )
Net loss available to common stockholders per common share—basic $ (0.24 ) $ 0.14
$ (0.05 ) $ 0.01
$ —
$ (0.14 )
Net loss available to common stockholders per common share—diluted $ (0.24 ) $ 0.14
$ (0.05 ) $ 0.01
$ —
$ (0.14 )

~~_____________~~

~~(1) Reflects changes resulting from the adoption of ASU 2017-07. See~~ ~~Note 2~~.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the nine months ended March 31, 2018:~~

Nine Months Ended March 31, 2018
(In thousands, except per share data) As Previously Reported LIFO to FIFO Adjustment Preferable Freight and Warehousing Adjustments Corrections of Freight, Overhead Variances and PPVs ASU 2017-07 Adjustments(1) Retrospectively Adjusted
Cost of goods sold $ 283,670
$ 994
$ 15,578
$ 2,323
$ (216 ) $ 302,349
Gross profit $ 173,336
$ (994 ) $ (15,578 ) $ (2,323 ) $ 216
$ 154,657
Selling expenses $ 132,979
$ —
$ (16,418 ) $ (3,279 ) $ (546 ) $ 112,736
General and administrative expenses $ 39,007
$ —
$ —
$ —
$ 815
$ 39,822
Operating expenses $ 175,016
$ —
$ (16,418 ) $ (3,279 ) $ 269
$ 155,588
Loss from operations $ (1,680 ) $ (994 ) $ 840
$ 956
$ (53 ) $ (931 )
Interest expense $ (2,286 ) $ —
$ —
$ —
$ (4,935 ) $ (7,221 )
Other, net $ 794
$ —
$ —
$ —
$ 4,988
$ 5,782
Total other expense $ (1,478 ) $ —
$ —
$ —
$ 53
$ (1,425 )
Loss before taxes $ (3,158 ) $ (994 ) $ 840
$ 956
$ —
$ (2,356 )
Income tax expense $ 20,497
$ (4,931 ) $ 1,699
$ (1,207 ) $ —
$ 16,058
Net loss $ (23,655 ) $ 3,937
$ (859 ) $ 2,163
$ —
$ (18,414 )
Net loss available to common stockholders $ (23,912 ) $ 3,937
$ (859 ) $ 2,163
$ —
$ (18,671 )
Net loss available to common stockholders per common share—basic $ (1.43 ) $ 0.23
$ (0.05 ) $ 0.13
$ —
$ (1.12 )
Net loss available to common stockholders per common share—diluted $ (1.43 ) $ 0.23
$ (0.05 ) $ 0.13
$ —
$ (1.12 )

~~_________________~~

~~(1) Reflects changes resulting from the adoption of ASU 2017-07. See~~ ~~Note 2~~.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~The following table presents the impact of these changes on the Company's condensed consolidated statement of cash flows for the nine months ended March 31, 2018:~~

Nine Months Ended
March 31, 2018
(In thousands) As Previously Reported LIFO to FIFO Adjustment Preferable Freight and Warehousing Adjustments Corrections of Freight, Overhead Variances and PPVs Retrospectively Adjusted
Net loss $ (23,655 ) $ 3,937
$ (859 ) $ 2,163
$ (18,414 )
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income taxes $ 20,138
$ (4,932 ) $ 1,699
$ (1,207 ) $ 15,698
Net losses on derivative instruments and investments $ 3,292
$ (2,987 ) $ —
$ —
$ 305
Change in operating assets and liabilities:
Inventories $ (9,533 ) $ 3,981
$ (840 ) $ (956 ) $ (7,348 )
Derivative assets (liabilities), net $ (6,091 ) $ (38 ) $ —
$ —
$ (6,129 )
Accounts payable $ 7,516
$ 38
$ —
$ —
$ 7,554

~~The impacts shown above have also been reflected in the Company’s condensed consolidated statements of comprehensive loss for the three and nine months ended March 31, 2018 as follows:~~

Three Months Ended
March 31, 2018 Nine Months Ended
March 31, 2018
(In thousands) As Previously Reported Retrospectively Adjusted As Previously Reported Retrospectively Adjusted
Net loss $ (3,908 ) $ (2,193 ) $ (23,655 ) $ (18,414 )
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax $ (2,437 ) $ (2,430 ) $ (4,148 ) $ (4,255 )
Gains (losses) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax $ 1,355
$ 438
$ 1,724
$ (426 )
Total comprehensive loss, net of tax $ (4,990 ) $ (4,185 ) $ (26,079 ) $ (23,095 )

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~Note 4. Acquisitions~~

~~Boyd Coffee Company~~

On October 2, 2017 (“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee Company (“Boyd Coffee” or “Seller”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company’s growth potential, deepen the Company’s distribution footprint, and increase the Company’s capacity utilization at its production facilities.

~~At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility (see~~ ~~Note 13~~) and issued to Boyd Coffee 14,700 shares of the Company’s Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.

In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company’s consolidated balance sheet in “Other long-term liabilities" at June 30, 2018. See ~~Note 17~~. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.

The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company.

As of March 31, 2019 the Company satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. The Company has retained the remaining 1,670 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~The following table summarizes the final allocation of consideration transferred as of the acquisition date:~~

(In thousands) Fair Value
Estimated
Useful Life
(years)

Cash paid $ 38,871

Holdback Cash Amount 3,150

Multiemployer Plan Holdback 1,056

Fair value of Series A Preferred Stock (14,700 shares)(1) 11,756

Fair value of Holdback Stock (6,300 shares)(1) 4,825

Estimated post-closing net working capital adjustment (8,059 )
Total consideration $ 51,599

Accounts receivable $ 7,503

Inventory 9,415

Prepaid expense and other assets 1,951

Property, plant and equipment 4,936

Goodwill 25,395

Intangible assets:
  Customer relationships 16,000
10
  Trade name/trademark—indefinite-lived 3,100

Accounts payable (15,080 )
Other liabilities (1,621 )
  Total consideration $ 51,599

~~______________~~

(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.

In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. See ~~Note 11~~.

The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.

The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.

The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset, and this method utilizes revenue and cost projections including an assumed contributory asset charge.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s condensed consolidated statements of operations for the three and nine months ended March 31, 2019 (unaudited):

(In thousands) Three Months Ended Nine Months Ended
March 31, 2019 March 31, 2019
Net sales $ 18,494
$ 63,079
Income before taxes $ 668
$ 4,884

~~The Company considers the acquisition to be material to the Company’s financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”~~

The following table sets forth certain unaudited pro forma financial results for the Company for the three and nine months ended March 31, 2019 and 2018, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal period.

Three Months Ended March 31, Nine Months Ended March 31,
2019 2018 2019 2018
(In thousands)
Net sales $ 146,679
$ 157,927
$ 453,892
$ 478,988
Loss before taxes $ (8,588 ) $ (3,514 ) $ (25,686 ) $ (2,029 )

The unaudited pro forma financial results for the Company are based on estimates and assumptions, which the Company believes are reasonable. These results are not necessarily indicative of the Company’s condensed consolidated statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.

At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company transitioned production into its plants. Amounts paid by the Company to the Seller for these services totaled $3.7 million in the nine months ended March 31, 2019 and $10.2 million and $19.4 million in the three and nine months ended March 31, 2018, respectively. The transition services and co-manufacturing agreements expired on October 2, 2018 and no amounts were paid under these agreements in the three months ended March 31, 2019.

The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of inventory mark downs, legal expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses, of $2.4 million and $1.6 million during the three months ended March 31, 2019 and 2018, respectively, and $6.1 million and $5.0 million during the nine months ended March 31, 2019 and 2018, respectively. These expenses are included in cost of goods sold and operating expenses in the Company's condensed consolidated statements of operations.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~Note 5. Restructuring Plans~~

~~Corporate Relocation Plan~~

On February 5, 2015, the Company announced a plan (the “Corporate Relocation Plan”) to close its Torrance, California facility (the “Torrance Facility”) and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility in Northlake, Texas (the “New Facility”). Approximately 350 positions were impacted as a result of the Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.

In the nine months ended March 31, 2019, the Company incurred $3.4 million in restructuring and other transition expenses associated with the assessment by the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) of the Company’s share of the Western Conference of Teamsters Pension Plan (the “WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan (see ~~Note 12), of which the Company has paid $1.3 million and has outstanding contractual obligations of $2.1 million as of March 31, 2019.~~

Since the adoption of the Corporate Relocation Plan through March 31, 2019, the Company has recognized a total of $35.2 million in aggregate cash costs including $17.4 million in employee retention and separation benefits, $3.4 million in pension withdrawal liability, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company’s headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company also recognized from inception through March 31, 2019 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

~~Direct Store Delivery (“DSD”) Restructuring Plan~~

On February 21, 2017, the Company announced a restructuring plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company expects to complete the DSD Restructuring Plan by the end of fiscal 2019.

The Company estimates that it will recognize approximately $4.9 million of pre-tax restructuring charges by the end of fiscal 2019 consisting of approximately $2.7 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.

The Company incurred expenses related to the DSD Restructuring Plan in the amounts of $0.1 million and $0 in employee-related costs, and $1,500 and $0.1 million in other related costs for three months ended March 31, 2019 and 2018, respectively, and $1.3 million and $24,000 in employee-related costs and $0.2 million and $0.3 million in other related costs for the nine months ended March 31, 2019 and 2018, respectively. Since the adoption of the DSD Restructuring Plan through March 31, 2019, the Company has recognized a total of $4.5 million in aggregate cash costs including $2.6 million in employee-related costs, and $1.9 million in other related costs. As of March 31, 2019, the Company had paid a total of $4.4 million of these costs, and had a balance of $0.1 million in DSD Restructuring Plan-related liabilities on the Company’s condensed consolidated balance sheet. The remaining costs to be incurred for the remainder of fiscal 2019 are not expected to be material.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

Note 6.4. Derivative Instruments

Derivative Instruments Held

Coffee-Related Derivative Instruments

The Company is exposed to commodity price risk associated with its price to be fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the ~~2018~~2019 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.

The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at ~~March~~December 31, 2019 and June 30, ~~2018:~~2019:


(In thousands)	March 31, 2019	June 30, 2018	December 31, 2019	June 30, 2019
Derivative instruments designated as cash flow hedges:
Long coffee pounds	35,213	40,913	40,725	42,113
Derivative instruments not designated as cash flow hedges:
Long coffee pounds	4,394	2,546	1,238	6,070
Total	39,607	43,459	41,963	48,183

Coffee-related derivative instruments designated as cash flow hedges outstanding as of ~~March~~December 31, 2019 will expire within 2117 months. At December 31, 2019 and June 30, 2019 approximately 97% and 87%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.

Interest Rate Swap Derivative Instruments

Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) which was effective March 20, 2019, the Company on March 27, 2019, entered into aan interest rate swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). In December 2019, the Company amended the notional amount to $65.0 million. The Rate Swap is intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.

~~Interest rate swap derivative instruments designated as cash flow hedges outstanding as of March 31, 2019 will expire on October 11, 2023.~~

2214

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Effect of Derivative Instruments on the Financial Statements

Balance Sheets

Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:


	Derivative Instruments Designated as Cash Flow Hedges				Derivative Instruments Not Designated as Accounting Hedges				Derivative Instruments Designated as Cash Flow Hedges				Derivative Instruments Not Designated as Accounting Hedges
	March 31, 2019		June 30, 2018		March 31, 2019		June 30, 2018		December 31, 2019		June 30, 2019		December 31, 2019		June 30, 2019
(In thousands)
Financial Statement Location:
Short-term derivative assets:
Coffee-related derivative instruments(1)	$	—	$	—	$	4	$	—	$	8,718	$	1,254	$	333	$	611
Interest rate swap derivative instruments	$	144	$	—	$	—	$	—
Long-term derivative assets:
Coffee-related derivative instruments (2)									$	443	$	671	$	—	$	3
Short-term derivative liabilities:
Coffee-related derivative instruments	$	4,428	$	3,081	$	1,069	$	219
Long-term derivative liabilities(2):
Coffee-related derivative instruments	$	493	$	386	$	—	$	—
Interest rate swap derivative instruments	$	221	$	—	$	—	$	—
Coffee-related derivative instruments (3)									$	1	$	1,114	$	7	$	114
Interest rate swap derivative instruments (3)									$	360	$	246	$	—	$	—
Long-term derivative liabilities:
Coffee-related derivative instruments (4)									$	—	$	13	$	—	$	—
Interest rate swap derivative instruments (4)									$	1,069	$	1,599	$	—	$	—

________________

(1) Included in “Short-term derivative ~~liabilities”~~assets” on the Company’s condensed consolidated balance sheets.

(2) Included in “Long-term derivative assets” on the Company's condensed consolidated balance sheets.

(3) Included in “Short-term liabilities” on the Company's condensed consolidated balance sheets.

(4) Included in “Other long-term liabilities” on the ~~Company’s~~Company's condensed consolidated balance sheets.

Statements of Operations

The following table presents pretax net gains and losses ~~on coffee-related and interest rate swap~~for the Company's derivative instruments designated as cash flow hedges, as recognized in ~~AOCI and~~“AOCI,” “Cost of goods sold” ~~(prior period amounts have been retrospectively adjusted to reflect the impact of certain changes in accounting principles~~ and ~~corrections to previously issued financial statements as described in~~ ~~Note 3~~)“Other, net”.



	Three Months Ended December 31,						Six Months Ended December 31,						Financial Statement Classification
(In thousands)	2019			2018			2019			2018			Financial Statement Classification
Net gains (losses) recognized in AOCI - Interest rate swap	$	448		$	—		$	(48	)	$	—		AOCI
Net losses recognized from AOCI to earnings - Interest rate swap	$	(52	)	$	—		$	(32	)	$	—		Interest Expense
Net losses reclassified from AOCI to earnings for partial unwind of our interest swap - Interest rate swap (1)	$	(407	)	$	—		$	(407	)	$	—		Interest Expense
Net gains (losses) recognized in AOCI - Coffee-related	$	12,130		$	1,005		$	7,431		$	(7,188	)	AOCI
Net losses recognized in earnings - Coffee - related	$	(3,451	)	$	(2,217	)	$	(6,922	)	$	(4,179	)	Cost of goods sold

________________

Three Months Ended March 31, Nine Months Ended March 31, Financial Statement Classification
(In thousands) 2019 2018 2019 2018
Net losses recognized in AOCI -Interest rate swap $ (78 ) $ —
$ (78 ) $ —
AOCI
Net losses recognized in AOCI - Coffee-related $ (3,988 ) $ (3,265 ) $ (11,176 ) $ (5,718 ) AOCI
Net (losses) gains recognized in earnings - Coffee-related $ (2,131 ) $ (588 ) $ (6,310 ) $ 573
Cost of Goods Sold


(1)	The $407 thousand of realized loss was due to partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80 million to $65 million.

For the three and ~~nine~~six months ended ~~March~~December 31, 2019 and 2018, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge ~~effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.~~effectiveness.

Net losses (gains) on derivative instruments in the Company’s condensed consolidated statements of cash flows also include net ~~gains and~~ losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three and ~~nine~~six months ended ~~March~~December 31, 2019 and 2018. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

operations and in “Net losses (gains) on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

Net gains and losses recorded in “Other, net” are as follows:


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Net losses on coffee-related derivative instruments(1)	$	(893	)	$	(444	)	$	(2,918	)	$	(537	)	$	419		$	(920	)	$	(624	)	$	(2,025	)
Net gains on investments	—			—			—			7
Non-operating pension and other postretirement benefit plans cost(2)	1,394			1,663			4,921			4,988
Non-operating pension and other postretirement benefit plans cost (2)													1,248			1,763			2,496			3,526
Other (losses) gains, net	(6		)	598			102			1,324			(5		)	110			(7		)	109
Other, net	$	495		$	1,817		$	2,105		$	5,782		$	1,662		$	953		$	1,865		$	1,610

___________

(1) Excludes net gains and losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three and ~~nine~~six months ended ~~March~~December 31, 2019 and 2018.

(2) Presented in accordance with ~~newly implemented~~ ASU 2017-07. ~~See~~ ~~Note 2~~.

Offsetting of Derivative Assets and Liabilities

The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.

The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparties as of the reporting dates indicated:

(In thousands) Gross Amount Reported on Balance Sheet Netting Adjustments Cash Collateral Posted Net Exposure
March 31, 2019 Derivative Assets $ 148
$ (148 ) $ —
$ —
Derivative Liabilities $ 6,211
$ (148 ) $ —
$ 6,063
June 30, 2018 Derivative Assets $ —
$ —
$ —
$ —
Derivative Liabilities $ 3,686
$ —
$ —
$ 3,686



(In thousands)		Gross Amount Reported on Balance Sheet			Netting Adjustments			Cash Collateral Posted		Net Exposure
December 31, 2019	Derivative Assets	$	9,494		$	(8	)	$	—	$	9,486
	Derivative Liabilities	$	(1,437	)	$	(8	)	$	—	$	(1,445	)
June 30, 2019	Derivative Assets	$	2,539		$	(698	)	$	—	$	1,841
	Derivative Liabilities	$	3,086		$	(698	)	$	—	$	2,388

Cash Flow Hedges

Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges ~~to the extent effective,~~ are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at ~~March~~December 31, 2019, ~~$11.6~~$5.2 million of net ~~losses~~gains on coffee-related derivative instruments designated as a cash flow ~~hedges~~hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of ~~March~~December 31, 2019. ~~Due to~~

Changes in the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values. At March 31, 2019 and June 30, 2018 approximately 89% and 94%, respectively,fair value of the Company's ~~outstanding coffee-related derivative instruments were designated as cash flow hedges.~~

~~For~~ interest rate swap derivative instruments designated as a cash flow hedge ~~the change in fair value of the derivative is reported~~are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects ~~earnings.~~earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of ~~March~~December 31, 2019, ~~$0.1~~$0.4 million of net ~~gains~~losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values. ~~At March 31, 2019 all of the Company's outstanding interest rate swap derivative instruments were designated as cash flow hedges.~~

2416

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note 7.5. Fair Value Measurements

Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:


(In thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
March 31, 2019
December 31, 2019
Derivative instruments designated as cash flow hedges:
Interest rate swap derivative assets(1)	$	144	$	—	$	144	$	—
Coffee-related derivative liabilities(2)	$	4,921	$	—	$	4,921	$	—
Coffee-related derivative assets (1)									$	9,161	$	—	$	9,161	$	—
Coffee-related derivative liabilities (1)									$	1	$	—	$	1	$	—
Interest rate swap derivative liabilities(2)	$	221	$	—	$	221	$	—	$	1,429	$	—	$	1,429	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets~~(2)~~(1)	$	4	$	—	$	4	$	—	$	333	$	—	$	333	$	—
Coffee-related derivative liabilities(2)	$	1,069	$	—	$	1,069	$	—
Coffee-related derivative liabilities(1)									$	7	$	—	$	7	$	—



(In thousands)	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
June 30, 2018
June 30, 2019
Derivative instruments designated as cash flow hedges:
Coffee-related derivative liabilities(2)	$	3,467	$	—	$	3,467	$	—
Coffee-related derivative assets (1)									$	1,925	$	—	$	1,925	$	—
Coffee-related derivative liabilities (1)									$	1,127	$	—	$	1,127	$	—
Interest rate swap derivative liabilities (2)									$	1,845	$	—	$	1,845	$	—
Derivative instruments not designated as accounting hedges:
Coffee-related derivative liabilities(2)	$	219	$	—	$	219	$	—
Coffee-related derivative assets (1)									$	614	$	—	$	614	$	—
Coffee-related derivative liabilities (1)									$	114	$	—	$	114	$	—

____________________


(1)	The ~~Company’s~~Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.


(2)	The Company's interest rate swap derivative ~~instruments~~instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.


~~(2)~~	~~The Company’s coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.~~

Note 8.6. Accounts Receivable, Net


(In thousands)	March 31, 2019			June 30, 2018			December 31, 2019			June 30, 2019
Trade receivables	$	64,975		$	54,547		$	57,652		$	53,593
Other receivables(1)	2,450			4,446			3,293			2,886
Allowance for doubtful accounts	(1,670		)	(495		)	(541		)	(1,324		)
Accounts receivable, net	$	65,755		$	58,498		$	60,404		$	55,155

__________

(1) Includes vendor rebates and other non-trade receivables.

The ~~$1.2~~$0.8 million ~~increase~~decrease in the allowance for doubtful accounts during the ~~nine~~six months ended ~~March~~December 31, 2019 was due to ~~bad debt expense~~improvement of ~~$1.9 million associated with an increase in aging receivables offset by net~~the Company’s accounts receivable ~~write-offs of $0.7 million.~~aging balance.

2517

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note 9.7. Inventories


(In thousands)	March 31, 2019		June 30, 2018		December 31, 2019		June 30, 2019
Coffee
Processed	$	27,955	$	26,882	$	27,492	$	25,769
Unprocessed	39,172		37,097		30,337		33,259
Total	$	67,127	$	63,979	$	57,829	$	59,028
Tea and culinary products
Processed	$	27,800	$	32,406	$	19,385	$	21,767
Unprocessed	80		1,161		94		74
Total	$	27,880	$	33,567	$	19,479	$	21,841
Coffee brewing equipment parts	$	5,363	$	6,885	$	7,826	$	7,041
Total inventories	$	100,370	$	104,431	$	85,134	$	87,910

In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, ~~PPVs~~purchase price variance (“PPVs”) and other expenses incurred in bringing the inventory to its existing condition and location. ~~See~~ ~~Note 3~~. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.

Note ~~10.~~8. Property, Plant and Equipment



(In thousands)	December 31, 2019			June 30, 2019
Buildings and facilities (1)	$	100,316		$	107,915
Machinery and equipment (1)	243,397			249,477
Capitalized software	28,770			27,666
Office furniture and equipment	13,858			14,035
	$	386,341		$	399,093
Accumulated depreciation	(227,671		)	(225,826		)
Land	13,313			16,191
Property, plant and equipment, net	$	171,983		$	189,458

__________

(In thousands) March 31, 2019 June 30, 2018
Buildings and facilities $ 108,697
$ 108,590
Machinery and equipment 247,073
231,581
Equipment under capital leases 1,369
1,408
Capitalized software 26,733
24,569
Office furniture and equipment 13,839
13,721
$ 397,711
$ 379,869
Accumulated depreciation (222,679 ) (209,498 )
Land 16,218
16,218
Property, plant and equipment, net $ 191,250
$ 186,589
(1) Decrease as of December 31, 2019 is due to the sale of assets. See Note 21 for details.

~~The Company capitalized coffee brewing equipment (included~~

Coffee Brewing Equipment (“CBE”) and Service

Capitalized CBE included in machinery and ~~equipment) in the amounts of $8.9 million and $8.1 million in the nine months ended March 31, 2019 and 2018, respectively. Depreciation expense related to capitalized coffee brewing~~ equipment reported in cost of goods sold was $2.3 million and $2.1 million in the three months ended March 31, 2019 and 2018, respectively, and $6.7 million and $6.5 million for the nine months ended March 31, 2019 and 2018, respectively.above are:



(In thousands)	December 31, 2019			June 30, 2019
Coffee Brewing Equipment	$	103,520		$	106,593
Accumulated depreciation	(69,581		)	$	(70,202	)
Coffee Brewing Equipment, net	$	33,939		$	36,391

2618

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Depreciation expense related to capitalized CBE and other CBE related expenses (excluding CBE depreciation) provided to customers and reported in cost of goods sold were as follows:



	Three Months Ended December 31,				Six Months Ended December 31,
(In thousands)	2019		2018		2019		2018
Depreciation expense	$	2,327	$	2,201	$	4,666	$	4,396

Other CBE expenses	$	8,446	$	8,410	$	16,171	$	16,916

Other expenses related to CBE provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. Therefore, these costs are included in cost of goods sold.

Note ~~11.~~9. Goodwill and Intangible Assets

There were no changes to the carrying value of goodwill in the ~~nine~~six months ended ~~March~~December 31, 2019. The carrying value of goodwill at ~~March~~December 31, 2019 and June 30, ~~2018~~2019 was $36.2 million.

The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:


	March 31, 2019					June 30, 2018						December 31, 2019							June 30, 2019
(In thousands)	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Weighted Average Amortization Period as of December 31, 2019	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Amortized intangible assets:
Customer relationships	$	33,003	$	(14,694	)	$	33,003	$	(12,903	)	7.3	$	33,003	$	(16,391	)	$	16,612	$	33,003	$	(15,291	)	$	17,712
Non-compete agreements	220		(111		)	220		(81		)	2.2	220		(142		)	78		220		(122		)	98
Recipes	930		(321		)	930		(221		)	3.8	930		(420		)	510		930		(354		)	576
Trade name/brand name	510		(337		)	510		(271		)	4.5	510		(365		)	145		510		(346		)	164
Total amortized intangible assets	$	34,663	$	(15,463	)	$	34,663	$	(13,476	)		$	34,663	$	(17,318	)	$	17,345	$	34,663	$	(16,113	)	$	18,550
Unamortized intangible assets:
Trademarks, trade names and brand name with indefinite lives	$	10,328	$	—		$	10,328	$	—			$	10,328	$	—		$	10,328	$	10,328	$	—		$	10,328
Total unamortized intangible assets	$	10,328	$	—		$	10,328	$	—			$	10,328	$	—		$	10,328	$	10,328	$	—		$	10,328
Total intangible assets	$	44,991	$	(15,463	)	$	44,991	$	(13,476	)		$	44,991	$	(17,318	)	$	27,673	$	44,991	$	(16,113	)	$	28,878

Aggregate amortization expense for the three months ended ~~March~~December 31, 2019 and 2018 was ~~$0.7~~$0.6 million and ~~$0.3~~$0.7 million, respectively. Aggregate amortization expense for the ~~nine~~six months ended ~~March~~December 31, 2019 and 2018 was ~~$2.0~~$1.2 million and ~~$1.7~~$1.3 million, respectively.

The Company ~~performed its annual test of~~tests goodwill and intangible assets for impairment annually, as of January 31, ~~2019, to determine~~or when events or changes in circumstances would indicate that the ~~recoverability~~carrying amounts of the ~~carrying values of goodwill and indefinite-lived intangible assets.~~assets may not be recoverable. The Company ~~also assessed~~is currently undergoing its annual testing. Events and circumstances have occurred, including those during the ~~recoverability~~current fiscal year, such as declining operating results, that may have a negative impact on the fair value of ~~certain finite-lived intangible~~these assets. ~~No impairment was recorded for the three and nine months ended March 31, 2019 as a result of the Company’s annual test of impairment.~~

2719

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~12.~~10. Employee Benefit Plans

The Company provides benefit plans for full-time employees who work 30 hours or more per week, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide health benefits after 30 days and other retirement benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.

The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.

Single Employer Pension Plans

~~As of March 31, 2019,~~Effective June 30, 2011, the Company ~~has two~~amended its defined benefit pension plans, freezing the benefit for ~~certain employees (the “Brewmatic Plan” and~~all participants. As of the ~~“Hourly Employees’ Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees’ Plan. After the plan freeze,~~effective date, participants do not accrue any benefits under the ~~plan,~~plans, and new hires are not eligible to participate in the ~~plan.~~

Effective December 1, 2018 the Company amended and terminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a defined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011.

Immediately prior to the termination of the Farmer Bros. Plan, the Company spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the Farmer Bros. Plan, all remaining plan participants elected to receive a distribution of his/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.

Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company reduced its overall pension projected benefit obligation by approximately $24.4 million as of December 31, 2018 and recognized a non-cash pension settlement charge of $10.9 million in the nine months ended March 31, 2019. At December 31, 2018, the new projected benefit obligation and fair value of plan assets for the Brewmatic Plan were $114.1 million and $67.4 million, respectively, resulting in a net underfunded status of $46.7 million. This represents a $6.7 million increase from the net underfunded status of the Farmer Bros. Plan and Brewmatic Plan as of June 30, 2018 primarily due to actual losses recognized on plan assets during the six months ended December 31, 2018. The Hourly Employees’ Plan was not impacted by this transaction.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

plans.

The net periodic benefit cost for the defined benefit pension plans is as follows:


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018			2019			2018			2019			2018
(In thousands)
Service cost	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Interest cost	1,173			1,432			4,025			4,296			1,059			1,426			2,118			2,852
Expected return on plan assets	(1,126		)	(1,456		)	(4,096		)	(4,368		)	(1,102		)	(1,485		)	(2,203		)	(2,970		)
Amortization of net loss(1)	380			418			1,120			1,254			370			370			740			740
Pension settlement charge	—			—			10,948			—			—			10,948			—			10,948
Net periodic benefit cost	$	427		$	394		$	11,997		$	1,182		$	327		$	11,259		$	655		$	11,570

___________

(1) These amounts represent the estimated portion of the net loss in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year.

On July 1, 2018, the Company adopted ASU 2017-07, which impacted the presentation of the components of net periodic benefit cost in the condensed consolidated statements of income. Net periodic benefit cost, other than the service cost component, is retrospectively included in “Interest expense” and “Other, net” in the condensed consolidated statements of income. See ~~Note 2~~.

Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost


	Fiscal
	2019	2018	December 31, 2019	June 30, 2019
Discount rate	4.10%	3.80%	3.45%	4.05%
Expected long-term return on plan assets	6.75%	6.75%	6.75%	6.75%

~~Basis Used to Determine Expected Long-Term Return on Plan Assets~~

The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (“CMA”) 2016. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2016 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.

Multiemployer Pension Plans

The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the ~~WCTPP~~Western Conference of Teamsters Pension Plan ("WCTPP") is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.

~~The risks~~Contributions made by the Company to the multiemployer pension plans were as follows:



	Three Months Ended December 31,				Six Months Ended December 31,
	2019		2018		2019		2018
(In thousands)
Contributions	$	452	$	283	$	880	$	778

Outstanding balance of ~~participating in~~settlement obligations of the Company to certain multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as ~~a withdrawal liability.~~follows:

~~The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal~~



(In thousands)	December 31, 2019		June 30, 2019
WCT Pension Trust (1)	$	344	$	1,487
Local 807 Pension Fund (2)	$	182	$	182

__________

(1) Initial liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. The Company agreed with the WCT Pension Trust’s assessment of pension withdrawal liability in the amount of $3.4 million, including interest, ~~which is~~commencing in September 10, 2018, payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822 ~~commencing September 10, 2018. At March 31, 2019 the Company had $2.1 million on its condensed consolidated balance sheet relating to this obligation~~ in ~~“Accrued payroll expenses.”~~February 2020.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Local 807 Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. On November 18, 2014, the Local 807 Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Local 807 Pension Fund adjusted to $4.9 million on January 5, 2015. In April 2015, the Company commenced quarterly installment payments to the Local 807 Pension Fund of $91,000 pending the final settlement of the liability. The Company recorded $3.8 million in “Other current liabilities” on its consolidated balance sheet at June 30, 2018 representing the present value of the Company’s estimated withdrawal liability at June 30, 2018.

~~During the three months ended December 31, 2018, the parties agreed to settle the Company’s remaining withdrawal liability to the Local 807 Pension Fund for a lump~~(2) Lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. As of ~~March~~December 31, 2019, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s condensed consolidated balance sheet.

Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material

Farmer Bros. Co.

Notes to ~~the Company’s results of operations and cash flows.~~Unaudited Condensed Consolidated Financial Statements (continued)

Multiemployer Plans Other Than Pension Plans

The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company’s participation in these plans is governed by collective bargaining agreements which expire on or before June 30, 2022.

401(k) Plan

The Company’s 401(k) Plan is available to all eligible employees. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service.

For the calendar years 2018 and 2017, the Company’s Board of Directors approved a Company matching contribution for eligible employees who worked more than 1,000 hours during the calendar year and who were employed at the end of the calendar year or, in the case of calendar year 2018, who were active participants in the plan at any time during the plan year and who were terminated in connection with certain reductions-in-force that occurred during 2018, of 50% of an employee’s annual contribution to the 401(k) Plan, up to 6% of the employee’s eligible income. For employees subject to a collective bargaining agreement, the match was only available if so provided in the labor agreement. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant’s first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance Facility, a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans (the “Administrative Committee”), or in connection with certain reductions-in-force that occurred during 2017 and 2018. A participant is automatically vested in the Company’s matching contribution in the event of death, disability or attainment of age 65 while employed by the Company.

The Company recorded matching contributions of ~~$0.7~~$0.6 million and ~~$0.5~~$0.4 million in operating expenses in the three months ended ~~March~~December 31, 2019 and 2018. The Company recorded matching contributions of ~~$1.6~~$1.3 million and ~~$1.5~~$0.9 million in operating expenses in the ~~nine~~six months ended ~~March~~December 31, 2019 and 2018.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

~~In second quarter of fiscal 2019,~~Additionally, the Company ~~amended and restated the 401(k) Plan effective January 1, 2019 to, among other things, provide for: (i)~~makes an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and certain union-represented employees equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions.compensation. During the three and ~~nine~~six months ~~March~~December 31, 2019, the Company contributed a total of ~~37,571~~54,025 and 109,649 shares of the Company’s common stock with a value of $0.6 million and $1.4 million, respectively, to eligible participants’ annual plan compensation. ~~During the three and nine months ended March 31, 2019, the Company charged $0.7 million related to stock contribution.~~

Postretirement Benefits

The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution.

The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee’s or retiree’s beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.

Retiree Medical Plan and Death Benefit

The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the three and ~~nine~~six months ended ~~March~~December 31, 2019 and 2018. Net periodic postretirement benefit cost ~~for the three and nine months ended March 31, 2019~~ was based on employee census information and asset information as of June 30, ~~2018.~~2019.


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018			2019			2018			2019			2018			2019			2018
(In thousands)
Components of Net Periodic Postretirement Benefit Cost (Credit):
Service cost	$	133		$	152		$	399		$	456		$	147		$	133		$	294		$	266
Interest cost	222			209			666			627			214			222			428			444
Amortization of net gain	(209		)	(210		)	(627		)	(630		)	(125		)	(209		)	(250		)	(418		)
Amortization of prior service credit	(439		)	(439		)	(1,317		)	(1,317		)	(392		)	(439		)	(784		)	(878		)
Net periodic postretirement benefit credit	$	(293	)	$	(288	)	$	(879	)	$	(864	)	$	(156	)	$	(293	)	$	(312	)	$	(586	)

On July 1, 2018, the Company adopted ASU 2017-07, which impacted the presentation of the components of net periodic postretirement benefit cost in the condensed consolidated statements of income. Net periodic postretirement benefit cost, other than the service cost component, is retrospectively included in “Interest expense” and “Other, net” in the condensed consolidated statements of income. See ~~Note 2~~.

Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost


	Fiscal		Fiscal
	2019	2018	2020	2019
Retiree Medical Plan discount rate	4.25%	4.13%	3.62%	4.25%
Death Benefit discount rate	4.25%	4.12%	3.64%	4.25%

3121

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~13. Revolving Credit Facility~~11. Debt Obligations

The following table summarizes the Company’s debt obligations:

December 31, 2019

June 30, 2019

(In thousands)

Debt Origination Date

Maturity

Original Borrowing Amount

Carrying Value

Weighted Average Interest Rate

Carrying Value

Weighted Average Interest Rate

Credit Facility

Revolver

11/6/2023

N/A

70,000

4.05

92,000

3.98

On November 6, 2018, the Company entered into a new $150.0 million senior secured revolving credit facility (the ~~“New Revolving~~“Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, with a sublimit on letters of credit and swingline loans of $15.0 million each. The ~~New~~ Revolving Facility includes an accordion feature whereby the Company may increase the revolving commitments or enter into one or more tranches of incremental term loans, up to an additional $75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Effective March 27, 2019, the Company entered into a ~~Rate Swap utilizing a~~rate swap agreement and in December 2019 amended the agreement. The impact of the amendment was $0.4 million of realized loss due to the partial unwinding of interest rate swap resulting from the amendment of the notional amount ~~of $80~~from $80.0 million ~~with an effective date of April 11, 2019 and a maturity date of October 11, 2023. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject~~ to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.$65.0 million. See Note 4 for details.

Under the ~~New~~ Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to the ability for the Company (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.

The New Revolving Facility replaced, by way of amendment and restatement, the Company’s senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on the Company’s eligible accounts receivable, eligible inventory, eligible equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts and eligible inventory, less required reserves. The commitment fee was a flat fee of 0.25% per annum irrespective of average revolver usage. Outstanding obligations were collateralized by all of the Company’s and guarantors’ assets, excluding, amongst other things, certain real property not included in the borrowing base. Borrowings under the Prior Revolving Facility bore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%; provided, that, after the Third Amendment Effective Date, (i) until MarchAt December 31, 2019, the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to the maintenance of a fixed charge coverage ratio, and provided for customary events of default.

At March 31, 2019, the Company was eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had outstanding borrowings of $123.0 million and utilized $2.0 million of the letters of credit sublimit. At March 31, 2019, the weighted average interest rate on the Company’s outstanding borrowings subject to interest rate variability under the New Revolving Facility was 4.25% and the Company was in compliance with all of the covenants under the ~~New~~ Revolving Facility.

The Company classifies borrowings contractually due to be settled one year or less as short-term and more than one year as long-term. The Company classifies outstanding borrowings as short-term or long-term based on its ability and intent to pay or refinance the outstanding borrowings on a short-term or long-term basis. Outstanding borrowings under the Company’s revolving credit facility were classified on the Company’s consolidated balance sheets as “Long-term borrowings under revolving credit facility” at March 31, 2019 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

Note ~~14.~~12. Employee Stock Ownership Plan

The Company’s ESOP was established in 2000. ~~The plan is a leveraged ESOP in which the Company is the lender. One~~As of the two loans established to fund the ESOP matured in fiscal 2016 and the remaining loan matured in December 2018. The loan was repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 3.80% at June 30, 2018.

March 31, 2019 June 30, 2018
Loan amount (in thousands) $ —
$ 2,145

Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.

Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participants shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in the three and nine months ended March 31, 2019.

During the nine months ended March 31, 2019, the Company charged $0.9 million to compensation expense related to the ESOP. During the three and nine months ended March 31, 2018, the Company charged $0.6 million and $1.8 million, respectively, to compensation expense related to the ESOP.

March 31, 2019 June 30, 2018
Allocated shares 1,321,416
1,502,323
Committed to be released shares 72,114
73,826
Unallocated shares —
72,114
Total ESOP shares 1,393,530
1,648,263

(In thousands)
Fair value of ESOP shares $ 27,885
$ 50,354

~~During the three months ended~~ December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.

Shares are held by the plan trustee for allocation among participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.



	December 31, 2019		June 30, 2019
Allocated shares	1,393,530		1,393,530
Committed to be released shares	—		—
Unallocated shares	—		—
Total ESOP shares	1,393,530		1,393,530

(In thousands)
Fair value of ESOP shares	$	20,987	$	22,812

3322

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~15.~~13. Share-based Compensation

Farmer Bros. Co. 2017 Long-Term Incentive Plan

On June 20, 2017 (the “Effective Date”), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company’s prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans”). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.

The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of ~~March~~December 31, 2019, there were ~~962,953~~565,112 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.

The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.

The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator of the 2017 Plan may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.Plans for future issuance.

Non-qualified stock options with time-based vesting (“NQOs”)

One-third of the total number of shares subject to each stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.

Following are the assumptions used in the Black-Scholes valuation model for NQOs granted during the ~~nine~~six months ended ~~March~~December 31, ~~2019.~~2019:

Nine Months Ended March 31, 2019
Weighted average fair value of NQOs $ 7.78
Risk-free interest rate 3.0 %
Dividend yield — %
Average expected term 4.6 years
Expected stock price volatility 29.6 %

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~



	Six Months Ended December 31, 2019
Weighted average fair value of NQOs	$	4.65
Risk-free interest rate	1.7		%
Dividend yield	—		%
Average expected term	4.6 years
Expected stock price volatility	35.4		%

The following table summarizes NQO activity for the ~~nine~~six months ended ~~March~~December 31, 2019:


Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2018	161,324		26.82	5.10	741
Outstanding at June 30, 2019						198,049		27.35	5.25	40
Granted	154,263		25.04	—	—	431,344		14.48	—	—
Exercised	(28,798	)	11.32	—	466	(10,360	)	12.48	—	28
Forfeited	(7,991	)	30.50	—	—	(104,288	)	27.28	—	—
Expired	(879	)	31.70	—	—	(27,970	)	31.66	—	—
Outstanding at March 31, 2019	277,919		27.32	5.98	78
Exercisable at March 31, 2019	49,227		27.60	4.54	78
Outstanding at December 31, 2019						486,775		16.03	6.54	432
Exercisable at December 31, 2019						30,074		28.96	3.76	—

The weighted-average grant-date fair value of options granted during the ~~nine~~six months ended ~~March~~December 31, 2019 was ~~$8.66.~~$4.65. The aggregate intrinsic values outstanding at the end of ~~each fiscal~~ period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of ~~$20.01~~$15.06 at ~~March 29,~~December 31, 2019 and ~~$30.55~~$16.37 at June ~~29, 2018,~~28, 2019, representing the last trading day of the respective ~~fiscal~~ periods, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in the ~~nine~~six months ended ~~March~~December 31, 2019 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.

The Company received ~~$0.3~~$0.1 million and ~~$0.8~~$0.3 million in proceeds from exercises of vested NQOs induring the ~~nine~~six months ended ~~March~~December 31, 2019 and 2018, respectively.

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, respectively, there ~~was $1.8~~were $2.1 million and ~~$1.0~~$1.1 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at ~~March~~December 31, 2019 is expected to be recognized over the weighted average period of ~~2.3~~2.7 years. Total compensation expense for NQOs inwas $178.1 thousand and $185.0 thousand for the three months ended ~~March~~December 31, 2019 and 2018, ~~was $0.2 million and $0.1 million,~~ respectively. Total compensation expense for NQOs inwas $277.2 thousand and $283.0 thousand for the ~~nine~~six months ended ~~March~~December 31, 2019 and 2018, ~~was $0.5 million and $0.2 million,~~ respectively.

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Non-qualified stock options with performance-based and time-based vesting (“PNQs”)

The following table summarizes PNQ activity for the ~~nine~~six months ended ~~March~~December 31, 2019:


Outstanding PNQs:	Number of PNQs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)	Number of PNQs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2018	300,708		27.08	4.00	1,207
Outstanding at June 30, 2019						229,961		26.21	1.23	—
Granted	—		—	—	—	—		—	—	—
Exercised	(5,806	)	22.70	—	17	—		—	—	—
Forfeited	(6,916	)	31.43	—	—	(6,212	)	32.85	—	—
Expired	(14,490	)	27.50	—	—	(202,753	)	25.67	—	—
Outstanding at March 31, 2019	273,496		27.04	3.28	—
Exercisable at March 31, 2019	251,933		26.55	3.17	—
Outstanding at December 31, 2019						20,996		29.39	1.92	—
Exercisable at December 31, 2019						12,730		27.95	1.78	—

The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of ~~$20.01~~$15.06 at ~~March 29,~~December 31, 2019 and ~~$30.55~~$16.37 at June ~~29, 2018,~~28, 2019, representing the last trading day of the respective fiscal periods, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in the ~~nine~~six months ended ~~March~~December 31, 2019 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

There were no options exercised during the six months ended December 31, 2019. The Company received $0.1 ~~million and $0.3~~ million in proceeds from exercises of vested PNQs induring the ~~nine~~six months ended ~~March~~December 31, ~~2019 and 2018, respectively.~~2018.

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, there ~~was $0.2 million~~were zero and ~~$0.5 million,~~$39.7 thousand, respectively, of unrecognized PNQ compensation cost. ~~The unrecognized PNQ compensation cost at March 31, 2019 is expected to be recognized over the weighted average period of 0.6 years.~~ Total compensation expense related to PNQs in the three months ended ~~March~~December 31, 2019 and 2018 ~~was $0.1 million~~were $4.6 thousand and ~~$0.2 million,~~$146.4 thousand, respectively. Total compensation expense related to PNQs in the ~~nine~~six months ended ~~March~~December 31, 2019 and 2018 ~~was $0.3 million~~were $18.3 thousand and ~~$0.6 million,~~$324.5 thousand, respectively.

Restricted Stock

These restricted stock awards granted in the nine months ended March 31, 2019 cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.

The following table summarizes restricted stock activity for the ~~nine~~six months ended ~~March~~December 31, 2019:


Outstanding and Nonvested Restricted Stock Awards:	Shares Awarded		Weighted Average Grant Date Fair Value ($)	Shares Awarded		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2018	14,958		33.48
Outstanding and nonvested at June 30, 2019				32,056		21.10
Granted	18,298		23.98	48,654		15.05
Vested/Released	(12,722	)	33.81	(18,298	)	23.98
Cancelled/Forfeited	—		—	(1,704	)	31.70
Outstanding and nonvested at March 31, 2019	20,534		24.81
Outstanding and nonvested at December 31, 2019				60,708		15.66

The total grant-date fair value of restricted stock granted during the ~~nine~~six months ended ~~March~~December 31, 2019 was ~~$0.4 million. The total fair value of restricted stock vested during the nine months ended March 31, 2019 was $0.3~~$0.7 million.

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, there ~~was $0.3~~were $0.7 million ~~in each period~~and $0.4 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at ~~March~~December 31, 2019 is expected to be recognized over the weighted average period of 0.8 years. Total compensation expense for restricted stock ~~was~~were $0.2 million and $0.1 million, respectively, in ~~each of~~ the three months ended ~~March~~December 31, 2019 and 2018. Total compensation expense for restricted stock ~~was $0.3~~in the six months ended December 31, 2019 and 2018 were $0.4 million and $0.2 million, ~~in the nine months ended March 31, 2019 and 2018,~~ respectively.

~~Performance-Based Restricted Stock Units (“PBRSUs”)~~

The fiscal 2019 PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2018 through June 30, 2021, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs that are expected to vest are net of estimated forfeitures.

3624

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Performance-Based Restricted Stock Units (“PBRSUs”)

The following table summarizes PBRSU activity for the ~~nine~~six months ended ~~March~~December 31, 2019:


Outstanding and Nonvested PBRSUs:	PBRSUs Awarded(1)		Weighted Average Grant Date Fair Value ($)	PBRSUs Awarded(1)		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2018	35,732		31.70
Outstanding and nonvested at June 30, 2019				51,237		27.69
Granted(1)	47,928		25.04	76,256		14.42
Vested/Released	—		—	—		—
Cancelled/Forfeited	(2,889	)	30.67	(36,049	)	27.92
Outstanding and nonvested at March 31, 2019	80,771		27.78
Expected to vest at March 31, 2019	73,095		27.34
Outstanding and nonvested at December 31, 2019				91,444		16.54

_____________

(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and ~~150%~~200% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.

The total grant-date fair value of PBRSUs granted during the ~~nine~~six months ended ~~March~~December 31, 2019 was ~~$1.2~~$1.1 million.

At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, there ~~was $1.7~~were $1.1 million and ~~$0.9~~$0.3 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at ~~March~~December 31, 2019 is expected to be recognized over the weighted average period of ~~2.2~~2.6 years. Total compensation expense for PBRSUs were ~~$0.1 million for each period~~$77.2 thousand and $117.0 thousand, respectively, for the three months ended ~~March~~December 31, 2019 and 2018. Total compensation expense for PBRSUs ~~was $0.3~~were $0.1 million and ~~$0.1~~$0.2 million, respectively, for the ~~nine~~six months ended ~~March~~December 31, 2019 and ~~2018, respectively.~~2018.

Performance Cash Awards (“PCAs”)

In November 2019, the Company granted PCAs under the 2017 Plan to certain employees. The PCAs cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2019 through June 30, 2022, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan. At the end of the three-year performance period, the amount of PCAs that actually vest will be 0% to 200% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period.

The PCAs are measured initially based on a fixed amount of the awards at the date of grant and are required to be re-measured based on the probability of achieving the performance conditions at each reporting date until settlement. Compensation expense for PCAs is recognized over the applicable performance periods. The Company records a liability equal to the cost of PCAs for which achievement of the performance condition is deemed probable. As of December 31, 2019, the Company had recognized accrued liabilities of $16.9 thousand.

At December 31, 2019, there was $0.4 million of unrecognized PCA compensation cost. The unrecognized PCA compensation cost at December 31, 2019 is expected to be recognized over the weighted average period of 2.9 years. Total compensation expense for PCAs was $16.9 thousand for the three and six months ended December 31, 2019.

3725

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~16.~~14. Other Current Liabilities

Other current liabilities consist of the following:



(In thousands)	December 31, 2019		June 30, 2019
Accrued postretirement benefits	$	1,068	$	1,068
Accrued workers’ compensation liabilities	1,681		1,495
Cumulative preferred dividends, undeclared and unpaid (4)	1,198		305
Earnout payable (1)	—		1,000
Working capital dispute payable(2)	354		354
Other (3)	3,681		3,087
Other current liabilities	$	7,982	$	7,309

(In thousands) March 31, 2019 June 30, 2018
Accrued postretirement benefits $ 810
$ 810
Accrued workers’ compensation liabilities 1,789
1,698
Short-term pension liabilities (1) —
3,761
Earnout payable (2) 1,000
600
Other (3) 3,949
3,790
Other current liabilities $ 7,548
$ 10,659

~~___________~~

~~(1) Amount recorded at June 30, 2018 represents the present value of the Company’s estimated withdrawal liability under the Local 807 Pension Fund, which was settled as of December 31, 2018. See~~ __~~Note 12~~._________

~~(2) Includes $1.0 million and $0.6 million at March 31, 2019 and June 30, 2018, respectively, in~~(1) Represents estimated fair value of earnout payable in connection with the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017.

(2) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.

(3) Includes accrued property taxes, sales and use taxes and insurance ~~liabilities and~~liabilities.

(4) Per the ~~current portion of~~agreement, all the cumulative preferred dividends, undeclared and ~~unpaid.~~

unpaid are now payable. Therefore, the previously accrued long-term portion has been reclassified to current liabilities.

Note ~~17.~~15. Other Long-Term Liabilities

Other long-term liabilities include the following:


(In thousands)	March 31, 2019		June 30, 2018		December 31, 2019		June 30, 2019
Long-term obligations under capital leases	$	6	$	58
Finance lease liabilities					$	35	$	32
Derivative liabilities—noncurrent	714		386		1,068		1,612
Multiemployer Plan Holdback—Boyd Coffee (1)	—		1,056
Performance Cash Awards Liability					17		—
Cumulative preferred dividends, undeclared and unpaid—noncurrent	551		312		—		618
Deferred income taxes(2)	1,348		—
Deferred income taxes and other liabilities(1)					2,027		1,795
Other long-term liabilities	$	2,619	$	1,812	$	3,147	$	4,057

___________

(1) On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019. See ~~Note 4~~.

~~(2) Represents~~Includes deferred tax liabilities that have an indefinite reversal pattern.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

Note ~~18.~~16. Income Taxes

On December 22, 2017, the President of the United States signed into law the Tax Act. The SEC subsequently issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.

Pursuant to the Tax Act, the federal corporate tax rate was reduced to 21.0%, effective January 1, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The provisional amount recorded in fiscal 2018 relating to the re-measurement of the Company’s deferred tax balances as a result of the reduction in the corporate tax rate was $18.0 million. There were no provisional adjustments recorded in the three and nine months ended March 31, 2019. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019.

The income tax expense (benefit) and the related effective tax rates are as follows (in thousands, except effective tax rate):


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
	2019			2018(1)			2019			2018(1)			2019			2018			2019			2018
Income tax expense (benefit)	$	43,161		$	(1,321	)	$	39,149		$	16,058
Income tax benefit													$	(81	)	$	(2,725	)	$	(188	)	$	(4,012	)
Effective tax rate	(502.7		)%	37.6		%	(152.4		)%	(682.0		)%	(1.1		)%	21.0		%	(1.5		)%	23.3		%

~~___________~~

~~(1)~~ The ~~amounts~~lower effective tax rate is primarily due to the previously recorded valuation allowance and change in the Company’s estimated deferred tax liability. The Company’s interim tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The Company recognizes the effects of tax legislation in the period in which the law is enacted. Deferred tax assets and liabilities are remeasured using enacted tax rates ~~have been retrospectively adjusted~~expected to ~~reflect~~apply to taxable income in the ~~impact of certain changes in accounting principles and corrections~~years the Company estimates the related temporary differences to ~~previously issued financial statements as described in~~ ~~Note 3~~.

reverse. The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required. In making such assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators such as future income projections. After consideration of positive and negative evidence, including the Company’s cumulative 12-month income position at March 31, 2019, the Company concluded that it is more likely than not that the Company will not generate future income sufficient to realize the Company’s deferred tax assets at March 31, 2019. In addition, as of March 31, 2019, the Company concluded that certain federal and state net operating loss carry forwards and tax credit carryovers will not be utilized before expiration. As a result, the Company recorded a valuation allowance of $44.6 million to reduce deferred tax assets during the three months ended March 31, 2019.

The effective tax rates for the three and nine months ended March 31, 2019 varied from the federal statutory rate of 21.0% primarily due to a valuation allowance of $44.6 million taken against the deferred tax asset, in addition to state income taxes. The effective tax rates for the three and nine months ended March 31, 2018 varied from the federal statutory rate of 28.1% primarily due to income tax expense resulting from the adjustment of deferred tax amounts due to the enactment of the Tax Act, in addition to state income taxes.

~~As of March 31, 2019 and June 30, 2018 the Company had no unrecognized tax benefits.~~

3926

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by U.S. federal, state and local tax authorities. With limited exceptions, as of December 31, 2019 and June 30, 2019, the Company is no longer subject to income tax audits by taxing authorities for any years prior to 2016. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s condensed consolidated financial statements.

Note ~~19.~~17. Net ~~(Loss)~~ Income (loss) Per Common Share

~~Computation~~Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income ~~per share (“EPS”) for~~(loss) attributable to the ~~three and nine months ended March 31, 2019 excludes~~Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, ~~effect~~ of ~~551,415 shares issuable under~~the exercise of in-the-money stock options, ~~80,771 PBRSUs~~unvested performance-based restricted stock units, and ~~404,197~~ shares ~~issuable upon the assumed conversion~~ of ~~the outstanding~~ Series A Preferred Stock, ~~because~~as converted, during the ~~Company incurred net losses in~~periods presented. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such option’s exercise prices were greater than the ~~three~~average market price of our common shares for the period) and ~~nine months ended March 31, 2019 so~~unvested performance-based restricted stock units because their inclusion would be have been anti-dilutive. ~~There were no unearned ESOP shares excluded from EPS calculations in~~

The following table presents the ~~three~~computation of basic and ~~nine months ended March 31, 2019.~~

Computation of EPS for the three and nine months ended March 31, 2018 excludes the dilutive effect of 488,231 shares issuable under stock options, 36,108 PBRSUs and 383,611 shares issuable upon the assumed conversion of the outstanding Series A Preferred Stock because the Company incurred net losses in the three and nine months ended March 31, 2018 so their inclusion would be anti-dilutive. There were 72,114 unearned ESOP shares excluded from EPS calculations in the three and nine months ended March 31, 2018.diluted earnings per common share:

Three Months Ended March 31, Nine Months Ended March 31,
(In thousands, except share and per share amounts) 2019 2018(1) 2019 2018(1)
Undistributed net loss available to common stockholders $ (51,828 ) $ (2,318 )
$ (65,177 )
$ (18,658 )
Undistributed net loss available to nonvested restricted stockholders and holders of convertible preferred stock (55 ) (3 ) (58 ) (13 )
Net loss available to common stockholders—basic $ (51,883 ) $ (2,321 ) $ (65,235 ) $ (18,671 )

Weighted average common shares outstanding—basic 17,003,206
16,760,145
16,982,247
16,727,624
Effect of dilutive securities:
Shares issuable under stock options —
—
—
—
Shares issuable under PBRSUs —
—
—
—
Shares issuable under convertible preferred stock —
—
—
—
Weighted average common shares outstanding—diluted 17,003,206
16,760,145
16,982,247
16,727,624
Net loss per common share available to common stockholders—basic $ (3.05 ) $ (0.14 ) $ (3.84 ) $ (1.12 )
Net loss per common share available to common stockholders—diluted $ (3.05 ) $ (0.14 ) $ (3.84 ) $ (1.12 )

~~___________~~

~~(1) Prior period amounts have been retrospectively adjusted to reflect the impact of certain changes in accounting principles and corrections to previously issued financial statements as described in~~ ~~Note 3~~.



	Three Months Ended December 31,					Six Months Ended December 31,
(In thousands, except share and per share amounts)	2019		2018			2019		2018
Undistributed net earnings (loss) available to common stockholders	$	7,595	$	(10,225	)	$	12,104	$	(13,341	)
Undistributed net earnings (loss) available to nonvested restricted stockholders and holders of convertible preferred stock	21		(9		)	29		(11		)
Net earnings (loss) available to common stockholders—basic	$	7,616	$	(10,234	)	$	12,133	$	(13,352	)

Weighted average common shares outstanding—basic	17,159,108		16,985,157			17,127,153		16,971,995
Effect of dilutive securities:
Shares issuable under stock options	1,236		—			1,819		—
Shares issuable under PBRSUs	8,091		—			6,272		—
Shares issuable under convertible preferred stock	414,900		—			414,900		—
Weighted average common shares outstanding—diluted	17,583,335		16,985,157			17,550,144		16,971,995
Net earnings (loss) per common share available to common stockholders—basic	$	0.44	$	(0.60	)	$	0.71	$	(0.79	)
Net earnings (loss) per common share available to common stockholders—diluted	$	0.43	$	(0.60	)	$	0.69	$	(0.79	)

The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:



	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
Shares issuable under stock options	190,117	201,543	121,113	165,013
Shares issuable under convertible preferred stock	—	400,691	—	400,691
Shares issuable under PBRSUs	16,195	64,991	8,097	52,890

4027

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~20.~~18. Preferred Stock

The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.

On October 2, 2017, the Company issued 14,700 shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. At ~~March~~December 31, 2019, Series A Preferred Stock consisted of the following:



(In thousands, except share and per share amounts)	(In thousands, except share and per share amounts)										(In thousands, except share and per share amounts)
Shares Authorized	Shares Authorized	Shares Issued and Outstanding	Stated Value per Share		Carrying Value		Cumulative Preferred Dividends, Undeclared and Unpaid		Liquidation Preference		Shares Authorized	Shares Issued and Outstanding	Stated Value per Share		Carrying Value		Cumulative Preferred Dividends, Undeclared and Unpaid		Liquidation Preference
21,000		14,700	$	1,054	$	15,489	$	789	$	15,489		14,700	$	1,082	$	15,899	$	1,199	$	15,899

Note ~~21.~~19. Revenue Recognition

On July 1, 2018, the Company adopted ASU 2014-09, using the modified retrospective method for all contracts not completed as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. See ~~Note 2~~.

The Company’s primary source of revenue are sales of coffee, tea and culinary products. The Company recognizes revenue when control of the promised good or service is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales.

The Company delivers products to customers primarily through two methods, ~~DSD~~Direct-store-delivery (“DSD”) to the Company’s customers at their place of business and direct ship from the Company’s warehouse to the customer’s warehouse or facility. Each delivery or shipment made to a third party customer is to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates.

~~ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”), provides certain practical expedients in order to ease the burden of implementation.~~ The Company ~~elected to apply the practical expedient related to applying the guidance to a portfolio of~~disaggregates net sales from contracts with ~~similar~~customers based on the characteristics asof the Company does not expect the effects on its condensed consolidated financial statements to differ materially from applying the guidance to the individual contracts within that portfolio. For customers that have executed substantially similar contracts, including the ones utilizing our standard forms, the Company believes that evaluation of these contracts on an individual basis would not result in a material difference. Therefore, the Company has adopted the practical expedient and applied one accounting treatment to all such contracts.products sold:



	Three Months Ended December 31,
	2019				2018
(In thousands)	$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roasted)	$	96,177	63.1	%	$	99,286	62.1	%
Coffee (Frozen Liquid)	8,556		5.6	%	9,318		5.8	%
Tea (Iced & Hot)	7,563		5.0	%	8,651		5.4	%
Culinary	15,158		10.0	%	16,795		10.5	%
Spice	6,126		4.0	%	6,002		3.8	%
Other beverages(1)	17,299		11.3	%	18,915		11.8	%
Other revenues(2)	946		0.6	%	—		—	%
Net sales by product category	151,825		99.6	%	158,967		99	%
Fuel surcharge	673		0.4	%	806		0.6	%
Net sales	$	152,498	100.0	%	$	159,773	100	%

____________


(1)	Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.


(2)	Represents revenues for certain transition services related to the sale of the Company’s office coffee assets.

4128

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

~~In accordance with ASC Topic 606, the Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:~~



	Six Months Ended December 31,
	2019				2018
(In thousands)	$		% of total		$		% of total
Net Sales by Product Category:
Coffee (Roasted)	$	183,547	63.1	%	$	194,640	63.4	%
Coffee (Frozen Liquid)	16,484		5.7	%	17,874		5.8	%
Tea (Iced & Hot)	15,268		5.2	%	17,555		5.7	%
Culinary	29,361		10.1	%	32,789		10.7	%
Spice	12,332		4.2	%	12,160		4.0	%
Other beverages(1)	30,032		10.3	%	30,541		9.9	%
Other revenues(2)	2,701		0.9	%	—		—	%
Net sales by product category	289,725		99.5	%	305,559		99.5	%
Fuel surcharge	1,373		0.5	%	1,654		0.5	%
Net sales	$	291,098	100.0	%	$	307,213	100.0	%

___________

Three Months Ended March 31,
2019 2018
(In thousands) $ % of total $ % of total
Net Sales by Product Category:
Coffee (Roasted) $ 93,211
63.4 % $ 99,315
63.0 %
Coffee (Frozen Liquid) 8,267
5.8 % 8,675
5.0 %
Tea (Iced & Hot) 8,320
5.9 % 7,889
5.0 %
Culinary 15,990
11.0 % 16,872
11.0 %
Spice 5,736
4.1 % 6,115
4.0 %
Other beverages(1) 14,405
9.8 % 18,319
12.0 %
Net sales by product category 145,929
100 % 157,185
100 %
Fuel surcharge 750
— % 742
— %
Net sales $ 146,679
100 % $ 157,927
100 %

~~____________~~

~~(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.~~

Nine Months Ended March 31,
2019 2018
(In thousands) $ % of total $ % of total
Net Sales by Product Category:
Coffee (Roasted) $ 287,851
63.4 % $ 286,655
63.0 %
Coffee (Frozen Liquid) 26,141
5.9 % 25,825
6.0 %
Tea (Iced & Hot) 25,876
5.8 % 23,312
5.0 %
Culinary 48,779
10.9 % 48,011
10.0 %
Spice 17,895
4.0 % 18,722
4.0 %
Other beverages(1) 44,946
10.0 % 52,354
11.0 %
Net sales by product category 451,488
100 % 454,879
99.0 %
Fuel surcharge 2,404
— % 2,127
1.0 %
Net sales $ 453,892
100 % $ 457,006
100 %

~~____________~~

~~(1)~~


(1)	Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.


(2)	Represents revenues for certain transition services related to the sale of the Company’s office coffee assets.

The Company does not have any material contract assets and liabilities as of ~~March~~December 31, 2019. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At ~~March~~December 31, 2019 and June 30, ~~2018,~~2019, “Accounts receivable, net” included, ~~$65.0~~$57.7 million and ~~$54.5~~$53.6 million, respectively, in receivables from contracts with customers.

4229

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~22.~~20. Commitments and Contingencies

For a detailed discussion about the Company’s commitments and contingencies, see Note ~~24,~~22, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the ~~2018~~2019 Form 10-K. During the ~~nine~~six months ended ~~March~~December 31, 2019, other than the following, or as otherwise disclosed in these footnotes in the current Form 10-Q, there were no material changes in the Company’s commitments and contingencies.

~~Expansion Project Contract~~

In the third quarter of fiscal 2018, the Company commenced a project to expand its production lines (the “Expansion Project”) in the New Facility, including expanding capacity to support the transition of acquired business volumes under a guaranteed maximum price contract of up to $19.3 million. In the nine months ended March 31, 2019, the Company paid $10.6 million for machinery and equipment expenditures associated with the Expansion Project. Since inception of the contract through March 31, 2019, the Company has paid a total of $18.9 million.

Purchase Commitments

As of ~~March~~December 31, 2019, the Company had committed to purchase green coffee inventory totaling ~~$60.4~~$60.7 million under fixed-price contracts, ~~and to~~$6.2 million in other ~~purchases totaling $16.0 million~~inventory under non-cancelable purchase orders ~~related primarily to the~~and $5.4 million in other purchases under non-cancelable purchase ~~of finished goods inventory.~~

As of March 31, 2019, the Company had commitments of $0.9 million for roasting equipment ordered for the New Facility which will be accrued by the Company upon delivery and acceptance of the equipment in the fourth quarter of fiscal 2019.orders.

Legal Proceedings

Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles

On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including the Company’s subsidiary, Coffee Bean International, Inc., which sell coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986 ~~also known as Proposition 65.~~(“Prop 65”). The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with ~~Proposition~~Prop 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT ~~has demanded~~alleges that the ~~alleged violators remove acrylamide from~~Company and the other defendants failed to provide warnings for their coffee ~~or provide Proposition 65~~products of exposure to the chemical acrylamide as required under Prop 65. Plaintiff seeks equitable relief, including providing warnings ~~on their~~to consumers of coffee products, ~~and pay $2,500~~as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day ~~for each and every violation while they are in~~per violation of ~~Proposition~~Prop 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Prop 65.

The Company, as part of a joint defense group (“JDG”) organized to defend against the lawsuit, disputes the claims of CERT. Acrylamide is not added to coffee but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.

The Company has ~~joined a Joint Defense Group, or JDG, and, along with the other co-defendants, has answered the complaint, denying, generally, the allegations~~asserted multiple affirmative defenses. Trial of the complaint, including the claimed violation of Proposition 65 and further denying CERT’s right to any relief or damages, including the right to require a warning on products. The Joint Defense Group contends that based on proper scientific analysis and proper applicationfirst phase of the standards set forth in Proposition 65, exposures to acrylamide from the coffee products pose no significant risk of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.

The JDG filed a pleading responding to claims and asserting affirmative defenses on January 22, 2013. The Court initially limited discovery to the four largest defendants, so the Company was not initially required to participate in discovery. The Court decided to handle the trial in two “phases,” and the “no significant risk level” defense, the First Amendment defense, and the federal preemption defense were tried in the first phase. Trialcase commenced on September 8, 2014, and ~~testimony completed on November 4, 2014, for the~~was limited to three ~~“Phase 1” defenses.~~

~~Following final trial briefing, the Court heard, on April 9, 2015, final arguments on the Phase 1 issues.~~affirmative defenses shared by all defendants. On September 1, 2015, the ~~Court ruled against~~trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the ~~JDG~~second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018, the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the defendants request for a stay of the Phase 3 trial.

On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation became effective on October 1, ~~affirmative defenses.~~2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. A status conference was held on July 11, 2019. The ~~JDG received permission~~Court granted the JDG’s motion for leave to amend its answers to add the coffee exemption regulation as a defense. Concurrently, the Court denied CERT’s motion to add OEHHA as a party but granted CERT’s motions to complete the administrative record with respect to the exemption and to undertake certain third party discovery. A status conference was held November 12, 2019 to discuss discovery issues and dispositive motions. Plaintiff’s motion to compel OEHHA to add documents to the rulemaking file for the new coffee exemption regulation was denied. CERT continues to pursue third-party discovery with plans to file ~~an interlocutory~~motions to compel appearances of proposed deponents. These motions, along with CERT’s eight summary judgment motions, were heard at a January 21, 2020 hearing where the Court denied several of CERT’s discovery requests. Further, the Court of Appeals scheduled a hearing on February 14, 2020 for additional discovery issues in the CERT vs OEHHA case. The JDG’s reply in support of its motion for summary judgment is currently due to the Court on March 16, 2020.

4330

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

appeal, which was filed by writ petition on October 14, 2015. On January 14, 2016, the Court of Appeals denied the JDG’s writ petition thereby denying the interlocutory appeal so that the case stays with the trial court.

On February 16, 2016, the Plaintiff filed a motion for summary adjudication arguing that based upon facts that had been stipulated by the JDG, the Plaintiff had proven its prima facie case and all that remains is a determination of whether any affirmative defenses are availableSubsequent to Defendants. On March 16, 2016, the Court reinstated the stay on discovery for all parties except for the four largest defendants. Following a hearing on April 20, 2016, the Court granted Plaintiff’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016. At the August 19, 2016 hearing on Plaintiff’s motion for summary adjudication (and the JDG’s opposition), the Court denied Plaintiff’s motion, thus maintaining the ability of the JDG to defend the issues at trial. On October 7, 2016, the Court continued the Plaintiff’s motion for preliminary injunction until the trial for Phase 2.

~~In November 2016, the parties pursued mediation, but were not able to resolve the dispute.~~

In December 2016, discovery resumed for all defendants. Depositions of “person most knowledgeable” witnesses for each defendant in the JDG commenced in late December and proceeded through early 2017, followed by new interrogatories served upon the defendants. The Court set a fact and discovery cutoff of May 31, 2017 and an expert discovery cutoff of August 4, 2017. Depositions of expert witnesses were completed by the end of July 2017. On July 6, 2017, the Court held hearings on a number of discovery motions and denied Plaintiff’s motion for sanctions as to all the defendants.

At a final case management conference on August 21, 2017 the Court set August 31, 2017 as the new trial date for Phase 2, though later changed the starting date for trial to September 5, 2017. The Court elected to break up trial for Phase 2 into two segments, the first focused on liability and the second on remedies. After 14 days at trial, both sides rested on the liability segment, and the Court set a date of November 21, 2017 for the hearing for all evidentiary issues related to this liability segment. The Court also set deadlines for evidentiary motions, issues for oral argument, and oppositions to motions. This hearing date was subsequently moved to January 19, 2018.

On March 28, 2018, the Court issued a proposed statement of decision in favor of Plaintiff. Following evaluation of the parties' objections to the proposed statement of decision, the Court issued its final statement of decision on May 7, 2018 which was substantively similar to the proposed statement from March 2018. The issuance of a final statement of decision does not itself cause or order any remedy, such as any requirement to use a warning notice. Any such remedy, including any monetary damages or fee awards, would be resolved in Phase 3 of the trial.

On June 15, 2018, California’s Office of Environmental Health Hazard Assessment (OEHHA) announced its proposal of a regulation that would establish, for the purposes of Proposition 65, that chemicals present in coffee as a result of roasting or brewing pose no significant risk of cancer. If adopted, the regulation would, among other things, mean that Proposition 65 warnings would generally not be required for coffee. Plaintiff had earlier filed a motion for permanent injunction, prior to OEHHA’s announcement, asking that the Court issue an order requiring defendants to provide cancer warnings for coffee or remove the coffee products from store shelves in California. The JDG petitioned the Court to (1) renew and reconsider the JDG’s First Amendment defense from Phase 1 based on a recent U.S. Supreme Court decision in a First Amendment case that was decided in the context of Proposition 65; (2) vacate the July 31, 2018 hearing date and briefing schedule for Plaintiff’s permanent injunction motion; and (3) stay all further proceedings pending the conclusion of the rulemaking process for OEHHA’s proposed regulation. On June 25, 2018, the Court denied the JDG’s motion to vacate the hearing on Plaintiff’s motion for permanent injunction and added the motion to stay to the July 31, 2018 docket to be heard. At the July 31st hearing, the Court granted the JDG’s application and agreed to continue the hearing on all motions to September 6, 2018.

~~At the September 6, 2018 hearing, the Court denied the JDG’s First Amendment motion, and denied the motion to stay pending conclusion of OEHHA’s rulemaking process. The~~January 21, 2020, Plaintiff ~~agreed to have the permanent injunction motion continued until after the remedies phase~~issued broad discovery against each of the ~~trial.~~defendants in hopes of opening up a third round of discovery. The ~~Court set the “Phase 3” remedies trial phase~~discovery focuses on “additives to ~~begin on October 15, 2018.~~

~~On September 20, 2018, the JDG filed a writ petition with the California Court of Appeals, Second Appellate District,~~and “flavorings” in coffee. Objections to set aside the lower court’s order denying the JDG’s motion to renew or reopen its First Amendment defense to the imposition of a cancer warning for their coffee products, or, alternatively, to set aside its order dated September 6, 2018, denying the JDG’s motion to stay this action pending adoption by the OEHHA of the proposed regulation. On October 12, 2018, the Court of Appeals issued a Temporary Stay Order. The Temporary Stay Order ordered the Phase 3 remedies trial be stayed until further notice and did not address the JDG’s First Amendment defense petition. The Court of Appeals also required the JDG to provide a written status update by January 15, 2019. Following the issuance of the Court of Appeal’s Temporary Stay Order, on October 15, 2018, the trial court issued a Notice of Court’s Ruling staying any further proceedings, including both remedies and liability, pending a ruling by the Court of Appeals.

~~Farmer Bros. Co.~~

~~Notes to Unaudited Condensed Consolidated Financial Statements (continued)~~

At a December 3, 2018 status conference, the Court continued its stay on the Phase 3 remedies trial. The Court set another status conference for February 4, 2019 and asked that the JDG submit a joint status report on appellate activities by January 28, 2019.

The JDG provided their written status update to the Court of Appeals timely on January 15, 2019, which update reported that OEHHA had submitted the final regulation (unchanged from its proposed rulemaking) to the California Office of Administrative Law (OAL) for review. OAL had 30 working days (until February 19, 2019) to approve, reject, or submit questions to OEHHA concerning the regulation. On January 31, 2019, the Court of Appeals continued its Temporary Stay Order and required the JDG to provide a written update by April 15, 2019.

Prior to February 19, 2019, OAL raised questions to OEHHA concerning the regulation, specifically OEHHA’s authority to make a determination for chemicals in coffee whether or not presently listed under Prop 65. As a result, OEHHA decided to take back the regulation from OAL to address those issues. Ondiscovery requests are due March 15, 2019, OEHHA announced that it was amending the language of the regulation to make clear that the “no significant risk” determination applies only to chemicals in coffee that are currently listed under Prop 65. OEHHA extended the public comment period until April 2, 2019. Once OEHHA has reviewed and developed responses to comments and created an updated final statement of reasons, it will resubmit the regulation to OAL. OAL will then have another 30 days to review the regulation. If OAL approves the regulation in time, it could be submitted for publication in the July 1, 2019 update to the California Code of Regulations, at which point it is expected that it would become effective.2020.

At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.

The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.

Note 21. Sales of Assets

Sale of Office Coffee Assets

In order to focus on its core product offerings, in July 2019, the Company completed the sale of certain assets associated with its office coffee customers for $9.3 million in cash paid at the time of closing plus an earnout of up to an additional $2.3 million if revenue expectations are achieved during test periods scheduled to occur at various branches at various times and concluding by early third quarter of fiscal year 2020. The Company recognized an initial net gain on the asset sales of $7.2 million during the six months ended December 31, 2019. The sale of office coffee assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company has signed a supply agreement to provide certain coffee products to the assets purchaser.

Sale of Branch Properties

During the six months ended December 31, 2019, the Company completed the sale of five branch properties and entered into two operating lease agreements with the purchasers of two of the branch properties as detailed in the following table:



(In thousands)
Name of Branch Property	Date Sold	Sales Price		Net Proceed		Gain (loss)			Long-Term Leaseback	Lease Term	Monthly Base Rent
Seattle, Washington	8/28/2019	$	7,900	$	7,300	$	6,800		No	N/A	N/A
Indianapolis, Indiana	11/19/2019	$	250	$	186	$	(173	)	No	N/A	N/A
Hayward, California(1)	12/23/2019	$	7,050	$	6,569	$	2,016		Yes	5 years	$	28
Denver, Colorado(1)	12/31/2019	$	2,300	$	2,075	$	1,989		Yes	7 years	$	17
Casper, Wyoming	12/31/2019	$	385	$	355	$	304		No	N/A	N/A

___________

(1) Has an option to renew the lease for additional five years.

Sale leaseback of Houston Facility

In November 2019, the Company completed the sale of its Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of closing costs, of $10.0 million. Cash proceeds from the sale of the Property were $9.0 million. The Company recognized a net gain on the Property sale of $7.3 million during the six months ended December 31, 2019. The Property did not meet the accounting guidance criteria to be classified as discontinued operations.

Following the close of the sale of the Property, the Company and the purchaser of the Property entered into a three-year leaseback agreement with respect to the Property for a base rent of $50,000 per month. The Company may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. The purchaser of the Property does not have any material relationship with the Company or its subsidiaries.

4531

Farmer Bros. Co.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Note ~~23.~~22. Subsequent Events

The Company evaluated all events or transactions that occurred after ~~March~~December 31, 2019 through the date the condensed consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:

None.



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

Certain statements contained in this Quarterly Report on Form 10-Q are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management’s current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact; actual results may differ materially due in part to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, ~~2018~~2019 filed with the Securities and Exchange Commission (the “SEC”) on September ~~13, 2018~~11, 2019 (the ~~“2018~~“2019 Form 10-K”) and Part II, Item 1A of this report. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” ~~��projects,~~“projects,” “expects,” “plans,” “believes,” “intends,” “will,” “could,” “assumes” and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. We intend these forward-looking statements to speak only at the time of this report and do not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulations of the SEC. Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the success of the Corporate Relocation Plan, the timing and success of implementation of the DSD Restructuring Plan, the Company’s success in consummating acquisitions and integrating acquired businesses, the impact of capital improvement projects, the adequacy and availability of capital resources to fund the Company’s existing and planned business operations and the Company’s capital expenditure requirements, the relative effectiveness of compensation-based employee incentives in causing improvements in Company performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of Company business and achievement of financial metrics related to those plans, the success of the Company to retain and/or attract qualified employees, the success of the Company’s adaptation to technology and new commerce channels, the effect of the capital markets as well as other external factors on stockholder value, fluctuations in availability and cost of green coffee, competition, organizational changes, the effectiveness of our hedging strategies in reducing price and interest rate risk, changes in consumer preferences, our ability to provide sustainability in ways that do not materially impair profitability, changes in the strength of the economy, business conditions in the coffee industry and food industry in general, our continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in our filings with the SEC. The results of operations for the three and ~~nine~~six months ended ~~March~~December 31, 2019 are not necessarily indicative of the results that may be expected for any future period.

Our Business ~~Overview~~

We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. In fiscal 2017, we completed the relocation of our corporate headquarters from Torrance, California to Northlake, Texas. We operate in one business segment.

We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurants, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and ~~consumer branded~~consumer-branded coffee and tea products, and foodservice distributors. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.

Our product categories consist of a robust line of ~~roasted~~roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T. and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. We offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also ~~value-added~~value added services such as market insight, beverage planning, and equipment placement and service.

We operate production facilities in Northlake, ~~Texas (the “New Facility”);~~Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, Texas, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; and Moonachie, New ~~Jersey; and Scottsdale, Arizona.~~Jersey. Our products reach our customers primarily in the following ways: through our nationwide ~~Direct Store Delivery (“DSD”)~~DSD network of ~~384~~365 delivery routes and ~~103~~101 branch warehouses as of ~~March~~December 31, 2019, or direct-shipped via common carriers or third-party distributors. DSD sales are made ~~“off-~~

~~truck”~~“off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products, and we rely on third-party logistics service providers for our long-haul distribution.

Summary Overview of Three Months Ended December 31, 2019 Results of Operations

During the three months ended December 31, 2019, we experienced sales declines in our DSD sales channel while our direct ship sales channel were comparable to the prior year period.

Similar to what we experienced in fiscal 2019, our DSD network continued to be negatively impacted by higher customer attrition, partially offset by sales to new customers. In addition, our DSD sales network was impacted by the sale of our office coffee business in July 2019. While our direct ship channel sales grew in terms of coffee pounds, unfavorable customer mix shift and the impact of coffee prices for our cost plus customers caused revenues to be comparable to the prior period.

During the three months ended December 31, 2019, gross margins declined by 4.5% to 28.8% from 33.3% mostly due to unfavorable customer mix shift and higher write-down of slow moving inventories. These declines were partially offset by lower freight costs, the impact of coffee prices and the start of our key initiative to rebalance production across our plant network.

Operating expenses declined by $17.6 million over the prior year quarter driven mostly by gains realized from several key near-term strategic priorities. During the three months ended December 31, 2019, we completed the sale of our Houston, Texas manufacturing facility and warehouse and four branch properties for an aggregate sale price of $20.0 million. Net cash proceeds from these assets sales were $18.3 million. We recognized a net gain on these asset sales of $11.4 million during three months ended December 31, 2019. The proceeds from the sales gave us increased liquidity and flexibility. Operating expenses also benefited from several cost saving initiatives implemented during the current fiscal year. These savings were slightly offset by proxy contest expenses and one-time executive severance costs associated with a corporate reorganization during the period.

Our capital expenditures for the six months ended December 31, 2019 were $9.0 million, representing lower maintenance capital spend of $7.5 million, a 61.0% reduction compared to the prior year period. These spending reductions were driven by several key initiatives put in place, including a focus on improving our coffee brewing equipment (“CBE”) program to drive cost savings.

As of December 31, 2019, the outstanding debt on our revolver was $70.0 million, a decline of $15.0 million since September 30, 2019 and $22.0 million since June 30, 2019. Additionally, our cash increased to $9.1 million as of December 31, 2019, compared to $7.0 million as of June 30, 2019. These improvements in our liquidity provide additional financial and operational flexibility.

Results of Operations

~~Changes in Accounting Principles and Corrections to Previously Issued Financial Statements~~

~~As discussed in~~ ~~Note 3~~, ~~Change in Accounting Principles and Corrections to Previously Issued Financial Statements,~~ of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report, prior period amounts recorded in our condensed consolidated financial statements have been retrospectively adjusted to reflect the impact of certain changes in accounting principles and corrections to previously issued financial statements, and the adoption of new accounting standards in the three and nine months ended March 31, 2019 that required retrospective application. The discussion of our results of operations for the three and nine months ended March 31, 2018 set forth below reflects these retrospective adjustments.

Financial Data Highlights (in thousands, except per share data and percentages)


	Three Months Ended March 31,						Favorable (Unfavorable)					Nine Months Ended March 31,						Favorable (Unfavorable)					Three Months Ended December 31,						Favorable (Unfavorable)					Six Months Ended December 31,						Favorable (Unfavorable)
	2019			2018			Change			% Change		2019			2018			Change			% Change		2019			2018			Change			% Change		2019			2018			Change			% Change
Income Statement Data:
Net sales	$	146,679		$	157,927		$	(11,248	)	(7.1	)%	$	453,892		$	457,006		$	(3,114	)	(0.7	)%	$	152,498		$	159,773		$	(7,275	)	(4.6	)%	$	291,098		$	307,213		$	(16,115	)	(5.2	)%
Gross margin	27.2		%	33.1		%	(5.9		)%	NM		31.1		%	33.8		%	(2.7		)%	NM		28.8		%	33.3		%	(4.5		)%	NM		29.1		%	33.0		%	(3.9		)%	NM
Operating expenses as a % of sales	31.4		%	34.9		%	3.5		%	NM		32.8		%	34.0		%	1.2		%	NM		23.0		%	33.0		%	10.0		%	NM		23.7		%	33.5		%	9.8		%	NM
Loss from operations	$	(6,102	)	$	(2,785	)	$	(3,317	)	(119.1	)%	$	(7,678	)	$	(931	)	$	(6,747	)	(724.7	)%
Net loss	$	(51,749	)	$	(2,193	)	$	(49,556	)	NM		$	(64,835	)	$	(18,414	)	$	(46,421	)	(252.1	)%
Net loss available to common stockholders per common share—basic	$	(3.05	)	$	(0.14	)	$	(2.91	)	NM		$	(3.84	)	$	(1.12	)	$	(2.72	)	NM
Net loss available to common stockholders per common share—diluted	$	(3.05	)	$	(0.14	)	$	(2.91	)	NM		$	(3.84	)	$	(1.12	)	$	(2.72	)	NM
Income (loss) from operations																							$	8,870		$	502		$	8,368		NM		$	15,762		$	(1,576	)	$	17,338		NM
Net income (loss)																							$	7,754		$	(10,100	)	$	17,854		NM		$	12,408		$	(13,086	)	$	25,494		194.8	%
Net earnings (loss) available to common stockholders per common share—basic																							$	0.44		$	(0.60	)	$	1.04		NM		$	0.71		$	(0.79	)	$	1.50		NM
Net earnings (loss) available to common stockholders per common share—diluted																							$	0.43		$	(0.60	)	$	1.03		NM		$	0.69		$	(0.79	)	$	1.48		NM

Operating Data:
Coffee pounds	27,873			27,733			140			0.5	%	80,719			80,034			685			0.9	%	29,360			27,398			1,962			7.2	%	55,318			52,845			2,473			4.7	%
EBITDA(1)	$	639		$	4,785		$	(4,146	)	(86.6	)%	$	2,109		$	22,657		$	(20,548	)	(90.7	)%	$	16,852		$	(3,188	)	$	20,040		NM		$	30,292		$	1,470		$	28,822		NM
EBITDA Margin(1)	0.4		%	3.0		%	(2.6		)%	NM		0.5		%	5.0		%	(4.5		)%	NM		11.1		%	(2.0		)%	13.1		%	NM		10.4		%	0.5		%	9.9		%	NM
Adjusted EBITDA(1)	$	4,535		$	10,644		$	(6,109	)	(57.4	)%	$	27,945		$	33,600		$	(5,655	)	(16.8	)%	$	7,448		$	12,443		$	(4,995	)	(40.1	)%	$	11,464		$	23,410		$	(11,946	)	(51.0	)%
Adjusted EBITDA Margin(1)	3.1		%	6.7		%	(3.6		)%	NM		6.2		%	7.4		%	(1.2		)%	NM		4.9		%	7.8		%	(2.9		)%	NM		3.9		%	7.6		%	(3.7		)%	NM

Percentage of Total Net Sales By Product Category
Coffee (Roasted)	63.4		%	63.0		%	0.4		%	0.6	%	63.4		%	63.0		%	0.4		%	0.6	%	63.1		%	62.1		%	1.0		%	1.6	%	63.1		%	63.4		%	(0.3		)%	(0.5	)%
Coffee (Frozen Liquid)	5.8		%	5.0		%	0.8		%	16.0	%	5.9		%	6.0		%	(0.1		)%	(1.7	)%	5.6		%	5.8		%	(0.2		)%	(3.4	)%	5.7		%	5.8		%	(0.1		)%	(1.7	)%
Tea (Iced & Hot)	5.9		%	5.0		%	0.9		%	18.0	%	5.8		%	5.0		%	0.8		%	16.0	%	5.0		%	5.4		%	(0.4		)%	(7.4	)%	5.2		%	5.7		%	(0.5		)%	(8.8	)%
Culinary	11.0		%	11.0		%	—		%	—	%	10.9		%	10.0		%	0.9		%	9.0	%	10.0		%	10.5		%	(0.5		)%	(4.8	)%	10.1		%	10.7		%	(0.6		)%	(5.6	)%
Spice	4.1		%	4.0		%	0.1		%	2.5	%	4.0		%	4.0		%	—		%	—	%	4.0		%	3.8		%	0.2		%	5.3	%	4.2		%	4.0		%	0.2		%	5.0	%
Other beverages(2)	9.8		%	12.0		%	(2.2		)%	(18.3	)%	10.0		%	11.0		%	(1.0		)%	(9.1	)%	11.3		%	11.8		%	(0.5		)%	(4.2	)%	10.3		%	9.9		%	0.4		%	4.0	%
Other revenues(3)																							0.6		%	—		%	0.6		%	NM		0.9		%	—		%	0.9		%	NM
Net sales by product category	100.0		%	100.0		%	—		%	—	%	100.0		%	99.0		%	1.0		%	NM		99.6		%	99.4		%	0.2		%	NM		99.5		%	99.5		%	(0.9		)%	NM
Fuel Surcharge	—		%	—		%	—		%	—	%	—		%	1.0		%	(1.0		)%	NM		0.4		%	0.6		%	(0.2		)%	NM		0.5		%	0.5		%	—		%	NM
Total	100.0		%	100.0		%	—		%	—	%	100.0		%	100.0		%	—		%	—	%	100.0		%	100.0		%	—		%	NM		100.0		%	100.0		%	(0.9		)%	—	%

Other data:
Capital expenditures related to maintenance	$	4,434		$	5,621		$	(1,187	)	(21.1	)%	$	17,001		$	17,373		$	(372	)	(2.1	)%	$	3,107		$	7,105		$	(3,998	)	(56.3	)%	$	7,459		$	12,567		$	(5,108	)	(40.6	)%
Total capital expenditures	$	7,273		$	11,217		$	(3,944	)	(35.2	)%	$	30,393		$	27,466		$	2,927		10.7	%	$	3,730		$	15,333		$	(11,603	)	(75.7	)%	$	9,007		$	23,120		$	(14,113	)	(61.0	)%
Depreciation and amortization expense	$	7,600		$	7,397		$	203		2.7	%	$	23,230		$	22,727		$	503		2.2	%	$	7,594		$	7,902		$	(308	)	(3.9	)%	$	15,211		$	15,630		$	(419	)	(2.7	)%

________________

NM - Not Meaningful

(1) EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See “Non-GAAP Financial Measures” below for a reconciliation of these non-GAAP measures to their corresponding GAAP measures.

(2) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.

(3) Represents revenues for certain transition services related to the sale of our office coffee assets.

The following table sets forth information regarding our condensed consolidated results of operations for the three and ~~nine~~six months ended ~~March~~December 31, 2019 and 2018 (in thousands, except percentages):


	Three Months Ended March 31,						Favorable (Unfavorable)					Nine Months Ended March 31,						Favorable (Unfavorable)					Three Months Ended December 31,						Favorable (Unfavorable)					Six Months Ended December 31,						Favorable (Unfavorable)
	2019			2018			Change			% Change		2019			2018			Change			% Change		2019			2018			Change			% Change		2019			2018			Change			% Change
Net sales	$	146,679		$	157,927		$	(11,248	)	(7.1	)%	$	453,892		$	457,006		$	(3,114	)	(0.7	)%	$	152,498		$	159,773		$	(7,275	)	(4.6	)%	$	291,098		$	307,213		$	(16,115	)	(5.2	)%
Cost of goods sold	106,779			105,629			(1,150		)	(1.1	)%	312,513			302,349			(10,164		)	(3.4	)%	108,513			106,529			(1,984		)	(1.9	)%	206,472			205,734			(738		)	(.4	)%
Gross profit	39,900			52,298			(12,398		)	(23.7	)%	141,379			154,657			(13,278		)	(8.6	)%	43,985			53,244			(9,259		)	(17.4	)%	84,626			101,479			(16,853		)	(16.6	)%
Selling expenses	34,422			37,754			3,332			8.8	%	111,323			112,736			1,413			1.3	%	34,906			39,591			4,685			11.8	%	68,520			76,901			8,381			10.9	%
General and administrative expenses	11,306			14,157			2,851			20.1	%	32,063			39,822			7,759			19.5	%	11,266			12,140			874			7.2	%	24,006			20,757			(3,249		)	(15.7	)%
Restructuring and other transition expenses	26			52			26			50.0	%	4,700			311			(4,389		)	NM		—			207			207			100.0	%	—			4,674			4,674			100.0	%
Net gains from sale of spice assets	(203		)	(110		)	93			84.5	%	(593		)	(655		)	(62		)	(9.5	)%
Net losses (gains) from sales of other assets	451			(590		)	(1,041		)	(176.4	)%	1,564			(446		)	(2,010		)	NM
Impairment losses on intangible assets	—			3,820			3,820			100.0	%	—			3,820			3,820			100.0	%
Net (gains) losses from sales of assets																							(11,057		)	804			11,861			NM		(23,662		)	723			24,385			NM
Operating expenses	46,002			55,083			9,081			16.5	%	149,057			155,588			6,531			4.2	%	35,115			52,742			17,627			33.4	%	68,864			103,055			34,191			33.2	%
Loss from operations	(6,102		)	(2,785		)	(3,317		)	(119.1	)%	(7,678		)	(931		)	(6,747		)	NM
Other (expense) income :
Dividend income	—			1			(1		)	NM		—			12			(12		)	NM
Interest income	—			—			—			—	%	—			2			(2		)	NM
Income (loss) from operations																							8,870			502			8,368			NM		15,762			(1,576		)	17,338			NM
Other (expense) income:
Interest expense	(2,981		)	(2,547		)	(434		)	(17.0	)%	(9,165		)	(7,221		)	(1,944		)	(26.9	)%	(2,859		)	(3,332		)	473			14.2	%	(5,407		)	(6,184		)	777			12.6	%
Pension settlement charge	—			—			—			—	%	(10,948		)	—			(10,948		)	NM		—			(10,948		)	10,948			(100.0	)%	—			(10,948		)	10,948			(100.0	)%
Other, net	495			1,817			(1,322		)	(72.8	)%	2,105			5,782			(3,677		)	(63.6	)%	1,662			953			709			74.4	%	1,865			1,610			255			15.8	%
Total other expense	(2,486		)	(729		)	(1,757		)	(241.0	)%	(18,008		)	(1,425		)	(16,583		)	NM		(1,197		)	(13,327		)	12,130			91.0	%	(3,542		)	(15,522		)	11,980			(77.2	)%
Loss before taxes	(8,588		)	(3,514		)	(5,074		)	(144.4	)%	(25,686		)	(2,356		)	(23,330		)	NM
Income tax expense (benefit)	43,161			(1,321		)	(44,482		)	NM		39,149			16,058			(23,091		)	(143.8	)%
Net loss	$	(51,749	)	$	(2,193	)	(49,556		)	NM		$	(64,835	)	$	(18,414	)	(46,421		)	(252.1	)%
Income (loss) before taxes																							7,673			(12,825		)	20,498			159.8	%	12,220			(17,098		)	29,318			171.5	%
Income tax benefit																							(81		)	(2,725		)	(2,644		)	(97.0	)%	(188		)	(4,012		)	(3,824		)	95.3	%
Net income (loss)																							$	7,754		$	(10,100	)	17,854			176.8	%	$	12,408		$	(13,086	)	25,494			194.8	%
Less: Cumulative preferred dividends, undeclared and unpaid	134			128			(6		)	(4.7	)%	400			257			(143		)	(55.6	)%	138			134			(4		)	(3.0	)%	275			266			(9		)	(3.4	)%
Net loss available to common stockholders	$	(51,883	)	$	(2,321	)	(49,562		)	NM		$	(65,235	)	$	(18,671	)	(46,564		)	(249.4	)%
Net earnings (loss) available to common stockholders																							$	7,616		$	(10,234	)	17,850			174.4	%	$	12,133		$	(13,352	)	25,485			190.9	%

_____________

NM - Not Meaningful

~~The following section discusses the period-over-period fluctuations of our condensed consolidated results of operations for the three and nine months ended March 31, 2019 compared to 2018.~~

Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2019 Compared to Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2018

Net Sales

The following table presents changes in units sold, unit price and net sales by product category in the three and ~~nine~~six months ended ~~March~~December 31, 2019 compared to the same periods in the prior fiscal year (in thousands, except unit price and percentages):


	Three Months Ended March 31,				Favorable (Unfavorable)					Nine Months Ended March 31,				Favorable (Unfavorable)					Three Months Ended December 31,				Favorable (Unfavorable)					Six Months Ended December 31,				Favorable (Unfavorable)
	2019		2018		Change			% Change		2019		2018		Change			% Change		2019		2018		Change			% Change		2019		2018		Change			% Change
Units sold
Coffee (Roasted)	22,298		22,186		112			0.5	%	64,575		64,027		548			0.9	%	23,488		21,918		1,570			7.2	%	44,254		42,276		1,978			4.7	%
Coffee (Frozen Liquid)	101		101		—			—	%	336		295		41			13.9	%	100		110		(10		)	(9.1	)%	198		235		(37		)	(15.7	)%
Tea (Iced & Hot)	740		716		24			3.4	%	2,097		1,963		134			6.8	%	723		723		—			—	%	1,348		1,358		(10		)	(0.7	)%
Culinary	1,986		2,255		(269		)	(11.9	)%	6,186		6,422		(236		)	(3.7	)%	1,934		2,112		(178		)	(8.4	)%	3,792		4,200		(408		)	(9.7	)%
Spice	162		221		(59		)	(26.7	)%	552		711		(159		)	(22.4	)%	171		175		(4		)	(2.3	)%	339		390		(51		)	(13.1	)%
Other beverages(1)	1,100		1,637		(537		)	(32.8	)%	4,009		4,695		(686		)	(14.6	)%	1,459		1,855		(396		)	(21.3	)%	2,397		2,908		(511		)	(17.6	)%
Total	26,387		27,116		(729		)	(2.7	)%	77,755		78,113		(358		)	(0.5	)%	27,875		26,893		982			3.7	%	52,328		51,367		961			1.9	%

Unit Price
Coffee (Roasted)	$	4.2	$	4.5	$	(0.3	)	(6.7	)%	$	4.5	$	4.5	$	—		(0.4	)%	$	4.12	$	4.53	$	(0.41	)	(9.1	)%	$	4.18	$	4.60	$	(0.42	)	(9.1	)%
Coffee (Frozen Liquid)	$	81.9	$	85.9	$	(4.0	)	(4.7	)%	$	77.8	$	87.5	$	(9.7	)	(11.1	)%	$	85.65	$	84.47	$	1.18		1.4	%	$	83.21	$	75.98	$	7.23		9.5	%
Tea (Iced & Hot)	$	11.2	$	11.0	$	0.2		1.8	%	$	12.3	$	11.9	$	0.5		3.9	%	$	10.46	$	11.96	$	(1.50	)	(12.5	)%	$	11.33	$	12.93	$	(1.60	)	(12.4	)%
Culinary	$	8.1	$	7.5	$	0.6		8.0	%	$	7.9	$	7.5	$	0.4		5.5	%	$	7.98	$	7.95	$	0.03		.4	%	$	7.95	$	7.81	$	0.14		1.8	%
Spice	$	35.4	$	27.7	$	7.7		27.8	%	$	32.4	$	26.3	$	6.1		23.1	%	$	35.73	$	34.32	$	1.41		4.1	%	$	36.40	$	31.19	$	5.21		16.7	%
Other beverages(1)	$	13.1	$	11.2	$	1.9		17.0	%	$	11.2	$	11.2	$	0.1		0.5	%	$	11.95	$	10.20	$	1.75		17.2	%	$	12.68	$	10.50	$	2.18		20.8	%
Average unit price	$	5.6	$	5.8	$	(0.2	)	(3.4	)%	$	5.8	$	5.9	$	(0.1	)	(0.2	)%	$	5.47	$	5.94	$	(0.47	)	(7.9	)%	$	5.56	$	5.98	$	(0.42	)	(7.0	)%

Total Net Sales By Product Category(2)
Coffee (Roasted)	$	93,211	$	99,315	$	(6,104	)	(6.1	)%	$	287,851	$	286,655	$	1,196		0.4	%	$	96,692	$	99,286	$	(2,594	)	(2.6	)%	$	185,067	$	194,640	$	(9,573	)	(4.9	)%
Coffee (Frozen Liquid)	8,267		8,675		(408		)	(4.7	)%	26,141		25,825		316			1.2	%	8,556		9,318		(762		)	(8.2	)%	16,484		17,874		(1,390		)	(7.8	)%
Tea (Iced & Hot)	8,320		7,889		431			5.5	%	25,876		23,312		2,564			11.0	%	7,563		8,651		(1,088		)	(12.6	)%	15,268		17,555		(2,287		)	(13.0	)%
Culinary	15,990		16,872		(882		)	(5.2	)%	48,779		48,011		768			1.6	%	15,435		16,795		(1,360		)	(8.1	)%	30,145		32,789		(2,644		)	(8.1	)%
Spice	5,736		6,115		(379		)	(6.2	)%	17,895		18,722		(827		)	(4.4	)%	6,126		6,002		124			2.1	%	12,332		12,160		172			1.4	%
Other beverages(1)	14,405		18,319		(3,914		)	(21.4	)%	44,946		52,354		(7,408		)	(14.1	)%	17,440		18,915		(1,475		)	(7.8	)%	30,391		30,541		(150		)	(.5	)%
Net sales by product category	$	145,929	$	157,185	$	(11,256	)	(7.2	)%	$	451,488	$	454,879	$	(3,391	)	(0.7	)%	$	151,812	$	158,967	$	(7,155	)	(4.5	)%	$	289,687	$	305,559	$	(15,872	)	(5.2	)%
Fuel Surcharge	750		742		8			1.1	%	2,404		2,127		277			13.0	%	686		806		(120		)	(14.9	)%	1,411		1,654		(243		)	(14.7	)%
Total	$	146,679	$	157,927	$	(11,248	)	(7.1	)%	$	453,892	$	457,006	$	(3,114	)	(0.7	)%	$	152,498	$	159,773	$	(7,275	)	(4.6	)%	$	291,098	$	307,213	$	(16,115	)	(5.2	)%

____________

(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.

(2) Certain transition service revenues related to the sale of our office coffee assets are not separately presented. The amounts are included in each of the product categories.

Net sales in the three months ended ~~March~~December 31, 2019 decreased ~~$11.2~~$7.3 million, or ~~7.1%~~4.6%, to ~~$146.7~~$152.5 million from ~~$157.9~~$159.8 million in the three months ended ~~March~~December 31, 2018. The ~~decrease~~decline in net sales was ~~driven~~ primarily ~~by declines~~due to a decline in ~~revenues and~~ volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and culinary products, and the impact of ~~lower~~ coffee prices for our cost plus ~~customers~~customers. Sales through our DSD network were impacted by the sale of our office coffee business in July of 2019 and ~~a reduction in revenues due to higher~~net customer ~~attrition related~~attrition. Our direct ship sales were comparable to the ~~Boyd Business integration~~prior year period because the increase in direct ship volume was offset by unfavorable customer mix shift and ~~route optimization.~~the impact of coffee prices for our cost plus customers. Net sales in the three months ended ~~March~~December 31, 2019 included ~~$2.1~~$2.5 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to ~~$2.4~~$1.0 million in price decreases to customers utilizing such arrangements in the three months ended ~~March~~December 31, 2018.

Net sales in the ~~nine~~six months ended ~~March~~December 31, 2019 decreased ~~$3.1~~$16.1 million, or ~~0.7%~~5.2%, to ~~$453.9~~$291.1 million from ~~$457.0~~$307.2 million in the ~~nine~~six months ended ~~March~~December 31, 2018. The decline in net sales was primarily due to ~~declines~~a decline in revenues and volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and culinary products, unfavorable customer mix within our direct sales, non-recurring sales of industrial soup based products associated with the Boyd’s acquisition which we stopped selling last year, and the impact of ~~lower~~ coffee prices for our cost plus customers.

~~The decline~~ Sales through our DSD network were impacted by the sale of our office coffee business in ~~net sales was partially offset by an increase in sales from~~July of 2019, higher customer attrition and lower inventory fill rates associated with downtime at our Houston plant during the ~~addition~~earlier part of the ~~Boyd Business which is fully reflected~~current period. Net sales in the ~~nine~~six months ended ~~March~~December 31, 2019 ~~compared to only six months of Boyd Business operations~~included $5.1 million in ~~the nine months ended March 31, 2018. The impact of~~ price decreases to customers utilizing commodity-based pricing arrangements, ~~was $5.1 million~~where the changes in ~~price decreases during~~ the ~~nine months ended March 31, 2019~~green coffee commodity costs are passed on to the customer, as compared to ~~$1.9~~$3.0 million in price decreases to customers utilizing such arrangements in the ~~nine~~six months ended ~~March~~December 31, 2018.

The following table presents the effect of changes in unit sales, unit pricing and product mix in the three and ~~nine~~six months ended ~~March~~December 31, 2019 compared to the same periods in the prior fiscal year (in millions):


	Three Months Ended March 31, 2019 vs. 2018			% Change		Nine Months Ended March 31, 2019 vs. 2018			% Change		Three Months Ended December 31, 2019 vs. 2018			% of Total Mix Change		Six Months Ended December 31, 2019 vs. 2018			% of Total Mix Change
Effect of change in unit sales	$	(4.1	)	(36.6	)%	$	(2.1	)	(67.7	)%	$	5.4		74.0	%	$	5.3		32.9	%
Effect of pricing and product mix changes	(7.1		)	(63.4	)%	(1.0		)	(32.3	)%	(12.7		)	(174.0	)%	(21.4		)	(132.9	)%
Total decrease in net sales	$	(11.2	)			$	(3.1	)			$	(7.3	)	(100.0	)%	$	(16.1	)	(100.0	)%

Unit sales ~~decreased 2.7%~~increased 3.7% and average unit price decreased by ~~3.4%~~7.9% in the three months ended ~~March~~December 31, 2019 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of ~~7.1%~~4.6%. The decrease in unit sales was primarily due to declines in revenues and volume of green coffee processed and sold through our DSD network. Average unit price decreased in the three months ended March 31, 2019 primarily due to a decrease in the average price of roasted coffee partially offset by price increases on the majority of our other products. In addition, average unit price decreased during the quarter due to a higher mix of product being sold via direct ship versus DSD, as direct ship has a lower average unit price. In the three months ended March 31, 2019, we processed and sold approximately 27.9 million pounds of green coffee as compared to approximately 27.7 million pounds of green coffee processed and sold in the three months ended March 31, 2018. There were no new product category introductions in the three months ended March 31, 2019 or 2018 which had a material impact on our net sales.

Unit sales ~~decreased 0.5%~~increased 1.9% and average unit price decreased by ~~0.2%~~7.0% in the ~~nine~~six months ended ~~March~~December 31, 2019 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of ~~0.7%~~5.2%. The decrease in unit sales was primarily due to declines in revenues and volume of green coffee processed and sold through our DSD network partially offset by an increase in unit sales from the addition of the Boyd Business which is fully reflected in the nine months ended March 31, 2019, compared to only six months of Boyd Business operations in the nine months ended March 31, 2018. Average unit price decreased ~~in the nine~~during three and six months ended ~~March~~December 31, 2019 ~~primarily~~ due to a ~~decrease in the~~higher mix of product sold via direct ship versus DSD network, as direct ship has a lower average ~~price of roasted coffee partially offset by price increases on the majority of our other products.~~unit price. There were no new product category introductions in the ~~nine~~three and six months ended ~~March~~December 31, 2019 or 2018, which had a material impact on our net sales.

Gross Profit

Gross profit in the three months ended ~~March~~December 31, 2019 decreased ~~$12.4~~$9.3 million, or ~~23.7%~~17.4%, to ~~$39.9~~$44.0 million from ~~$52.3~~$53.2 million in the three months ended ~~March~~December 31, 2018. Gross margin decreased to ~~27.2%~~28.8% in the three months ended ~~March~~December 31, 2019 from ~~33.1%~~33.3% in the three months ended ~~March~~December 31, 2018. Gross profit in the six months ended December 31, 2019 decreased $16.9 million, or 16.6%, to $84.6 million from $101.5 million in the six months ended December 31, 2018. Gross margin decreased to 29.1% in the six months ended December 31, 2019 from 33.0% in the six ended December 31, 2018.

The decrease in gross profit ~~for~~in the three and six months ended ~~March~~December 31, 2019 was primarily driven by lower net sales of ~~$11.2~~$7.3 million ~~between the periods~~and $16.1 million, respectively, and higher ~~cost~~costs of goods sold. Cost of goods sold in the three months ended ~~March~~December 31, 2019 ~~increased $1.2 million, or 1.1%, to $106.8 million, or 72.8%~~was 71.2% of net sales ~~from $105.6 million, or 66.9%~~as compared 66.7% of net sales, in the three months ended ~~March~~December 31, 2018. Margin was negatively impacted by higher mark downs on slow moving inventory, higher manufacturing costs driven by downtime associated with certain aging production infrastructure, higher coffee brewing equipment and labor costs associated with increased installation activities during the period, higher manufacturing variances due to lower volumes and unfavorable shift in customer mix. Margin impact was partially offset by lower green coffee purchase costs. The average Arabica “C” market price of green coffee decreased 9.6% in the three months ended March 31, 2019 as compared to the prior year period.

Gross profit in the nine months ended March 31, 2019 decreased $13.3 million, or 8.6%, to $141.4 million from $154.7 million in the nine months ended March 31, 2018. Gross margin decreased to 31.1% in the nine months ended March 31, 2019 from 33.8% in the nine months ended March 31, 2018. The decrease in gross profit for the nine months ended March 31, 2019 was primarily driven by lower net sales of $3.1 million between the periods and higher cost of goods sold. Cost of goods sold in the ~~nine~~six months ended ~~March~~December 31, 2019 ~~increased $10.2 million, or 3.4%, to $312.5 million, or 68.9%~~was 70.9% of net sales ~~from $302.3 million, or 66.2%~~as compared 67.0% of net sales, ~~in the nine months ended March 31, 2018. Margin was negatively impacted by higher~~

~~coffee brewing equipment and labor costs associated with increased installation activity during the period, higher production costs associated with the production operations~~ in the ~~New Facility, including higher depreciation expense for the New Facility, higher manufacturing costs driven~~six months ended December 31, 2018. Margins were negatively impacted by ~~downtime associated with certain aging production infrastructure~~unfavorable customer mix and higher ~~mark downs~~write-down of ~~slow-moving~~slow moving inventories, partially offset by lower ~~green~~freight costs and the impact of coffee ~~purchase costs. The average Arabica “C” market price of green coffee decreased 15.4% in~~prices during the ~~nine~~six months ended ~~March~~December 31, ~~2019 as compared to the prior year period.~~2019.

Operating Expenses

In the three months ended ~~March~~December 31, 2019, operating expenses decreased ~~$9.1~~$17.6 million, or ~~16.5%~~33.4%, to ~~$46.0~~$35.1 million, or ~~31.4%~~23.0% of net sales, from ~~$55.1~~$52.7 million, or ~~34.9%~~33.0% of net sales, in the three months ended ~~March~~December 31, 2018, primarily due to a $11.9 million increase in net gains from sales of assets, a $4.7 million decrease in selling expenses, $0.9 million decrease in general and administrative expenses and the absence of ~~$3.8~~$0.2 million in ~~impairment losses on intangible~~restructuring and other transition expenses.

The decrease in selling expenses was primarily due to efficiencies realized from DSD route optimization. The decrease in general and administrative expenses was associated primarily with reductions in third party costs and the absence of Boyd Coffee integration costs, partially offset by higher employee incentive costs, proxy contest expenses and severance costs during the three months ended December 31, 2019. The three months ended December 31, 2018 includes a one–time credit for employees incentives costs.

Net gains from sales of assets ~~reported~~ in the ~~prior year period,~~three months ended December 31, 2019 were primarily associated with the sales of the Houston Property and four office branch properties for $7.3 million and $4.1 million, respectively.

In the six months ended December 31, 2019, operating expenses decreased $34.2 million, or 33.2%, to $68.9 million, or 23.7% of net sales, from $103.1 million, or 33.5% of net sales, in the six months ended December 31, 2018, primarily due to a ~~$3.3~~$24.4 million increase in net gains from sales of assets, a $8.4 million decrease in selling expenses and the absence of $4.7 million in restructuring and other transition expenses, partially offset by a ~~$2.9~~$3.2 million ~~decrease~~increase in general and administrative expenses.

The decrease in selling expenses was primarily due to ~~synergies achieved through~~headcount reductions, the conclusion of Boyd ~~Business acquisition and headcount reductions~~Coffee integration at the beginning of October 2018 and other efficiencies realized from DSD route ~~optimization, partially offset by higher insurance and employee benefit costs.~~optimization. The ~~decrease~~increase in general and administrative expenses was associated primarily with ~~synergies achieved through~~employee incentive and benefit costs, proxy contest expenses and executive severance costs incurred during the ~~Boyd Business acquisition, the conclusion of the transition services and co-manufacturing agreements with Boyd Coffee at the beginning of October 2018, and lower acquisition and integration costs.~~

~~In the nine~~six months ended ~~March~~December 31, ~~2019, operating expenses decreased $6.5 million, or 4.2%, to $149.1 million, or 32.8% of net sales, from $155.6 million, or 34.0% of net sales, in the nine~~2019. The six months ended ~~March~~December 31, 2018 ~~primarily due to~~includes a $7.8 million decrease in general and administrative expenses and the absence of $3.8 million in impairment losses on intangible assets reported in the prior year period, partially offset by a $4.4 million increase in restructuring and other transition expenses and a $2.0 million increase in net losses (gains) from sales of other assets.

The decrease in general and administrative expenses during the nine months ended March 31, 2019 was primarily due to synergies achieved from the integration of the Boyd Business and conclusion of the transition services and co-manufacturing agreements with Boyd Coffee at the beginning of October 2018, partially offset by higher bad debt expense. In the nine months ended March 31, 2019, we paid Boyd Coffee a total of $3.7 millionone–time credit for ~~services under these agreements, as compared to $19.4 million paid for such services in the nine months ended March 31, 2018.~~employees incentives costs.

Net ~~losses~~gains from sales of assets in the ~~nine~~six months ended ~~March~~December 31, 2019 ~~included net losses of $1.6 million from sales of other assets,~~were primarily associated with the ~~Boyd Coffee plant decommissioning offset by $0.6 million in earnout from~~sales of the ~~sale of spice assets, as compared to $0.7 million in earnout from~~Houston Property, the ~~sale of spice~~office coffee assets and ~~net gains of $0.4~~five office branch properties for $7.3 million, ~~from sales of other assets in the prior year period.~~$7.2 million and $10.9 million, respectively.

Restructuring and other transition expenses in the nine months ended March 31, 2019 increased $4.4 million, as compared to the same period in the prior fiscal year. This increase includes $3.4 million, including interest, assessed by the Western Conference of Teamsters Pension Trust (the “WC Pension Trust”) in the nine months ended March 31, 2019, representing the Company’s share of the Western Conference of Teamsters Pension Plan (“WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan. In addition, in the nine months ended March 31, 2019, we incurred $1.4 million in restructuring and other transition expenses, primarily employee-related costs, associated with the DSD Restructuring Plan, as compared to $0.3 million in restructuring and other transition expenses associated with the DSD Restructuring Plan in the nine months ended March 31, 2018.

Total Other Expense

Total other expense in the three ~~and nine~~ months ended ~~March~~December 31, 2019 was ~~$2.5 million and $18.0~~$1.2 million compared to ~~$0.7 million and $1.4~~$13.3 million in the three ~~and nine~~ months ended ~~March~~December 31, 2018. Total other expense in the six months ended December 31, 2019 was $3.5 million compared to $15.5 million in the six months ended December 31, 2018. The change in total other expense in the three and ~~nine~~six months ended ~~March~~December 31, 2019 was primarily a result of;

the absence of pension settlement charge in the current period;

reduced employee post retirement benefit gains;

lower interest expense;

higher ~~interest expense~~net gains on coffee-related derivative instruments in the three months ended December 31, 2019; and ~~higher~~

lower net losses on coffee-related derivative instruments ~~and, for~~in the ~~nine~~six months ended ~~March~~December 31, ~~2019, a pension settlement charge in the amount of $10.9 million.~~2019.

The pension settlement charge incurred in the ~~nine~~three and six months ended ~~March~~December 31, ~~2019~~2018 of $10.9 million was due to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees effective December 1, 2018. By terminating the Farmer Bros. Plan, we reduced our overall pension projected benefit obligation by approximately $24.4 million as of December 31, 2018. The $10.9 million pension settlement charge is non-cash. As a result of the pension plan termination, we expect to

~~realize lower Pension Benefit Guaranty Corporation expenses in the future of approximately $0.3 million to $0.4 million per year.~~

Interest expense in the three months ended ~~March~~December 31, 2019 ~~increased $0.4~~decreased $0.5 million to ~~$3.0~~$2.9 million from ~~$2.5~~$3.3 million in the prior year period. Interest expense in the ~~nine~~six months ended ~~March~~December 31, 2019 decreased $0.8 million to $5.4 million from $6.2 million in the prior year period. The decrease in interest expense in the three and six months ended December 31, 2019 was principally due to lower pension interest expense and lower borrowings on our credit facility, partially offset by a$0.4 million of realized loss from the partial unwinding of our interest rate swap notional amount from $80.0 million to $65.0 million.

Other, net in the three months ended December 31, 2019 increased by $0.7 million to $1.7 million compared to $1.0 million in the prior year period. Other, net in the six months ended December 31, 2019 increased by $0.3 million to $1.9 million ~~to $9.2 million as~~ compared to ~~$7.2~~$1.6 million in the prior year period. The increase in interest expense in the three and nine months ended March 31, 2019 was principally due to higher outstanding borrowings on our revolving credit facility, including borrowings for operations and borrowings related to the Boyd Business acquisition and the write-off of deferred financing costs of $0.5 million associated with the ending of our prior credit facility which was replaced with a new facility in November 2018.

Other, net in the three months ended March 31, 2019 decreased by $1.3 million to $0.5 million compared to in $1.8 million in the prior year period. Other, net decreased by $3.7 million to $2.1 million in the nine months ended March 31, 2019 from $5.8 million in the prior year period. The decrease in Other, net in the three and nine months ended March 31, 2019 was primarily ~~due to increased~~a result of mark-to-market ~~losses~~net gains on coffee-related derivative instruments not designated as accounting ~~hedges.~~hedges in the three months ended December 31, 2019 compared same prior year period mark-to-market net losses. In the six months ended December 31, 2019, coffee-related derivative instruments not designated as accounting hedges was impacted by lower mark-to-market net losses compared same prior year period.

Income Taxes

In the three and ~~nine~~six months ended ~~March~~December 31, 2019, we recorded income tax ~~expense~~benefit of ~~$43.2~~$0.1 million and ~~$39.1~~$0.2 million, respectively, compared to ~~income tax benefit of $1.3~~$2.7 million and ~~income tax expense $16.1~~$4.0 million in the three and ~~nine~~six months ended ~~March~~December 31, 2018, respectively. The ~~higher~~lower tax ~~expense of $43.2 million in the current quarter~~benefit is primarily due to athe previously recorded valuation allowance ~~of $44.6 million recorded to reduce~~and change in our estimated deferred tax ~~assets.~~liability during the three and six months ended December 31, 2019 as compared to the prior year period. See Note 1816, Income Taxes, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.

Non-GAAP Financial Measures

In addition to net (loss) income determined in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures in assessing our operating performance:

“EBITDA” is defined as net (loss) income excluding the impact of:

income taxes;

interest expense; and

depreciation and amortization expense.

“EBITDA Margin” is defined as EBITDA expressed as a percentage of net sales.

“Adjusted EBITDA” is defined as net (loss) income excluding the impact of:

income taxes;

interest expense;

(loss) income from short-term investments;

depreciation and amortization expense;

ESOP and share-based compensation expense;

non-cash impairment losses;

non-cash pension withdrawal expense;

restructuring and other transition expenses;

severance costs;

proxy related expenses;

net gains and losses from sales of assets;

non-cash pension settlement charges; and

acquisition and integration costs.

“Adjusted EBITDA Margin” is defined as Adjusted EBITDA expressed as a percentage of net sales.

Restructuring and other transition expenses are expenses that are directly attributable to (i) ~~the Corporate Relocation Plan, consisting primarily of~~ employee retention and separation benefits, pension withdrawal expense, facility-related costs and other related costs such as travel, legal, consulting and other professional services; and (ii) ~~the DSD Restructuring Plan, consisting primarily of~~ severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel.

~~Beginning in the first quarter of fiscal 2019, for~~For purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and Adjusted EBITDA Margin, we have excluded the impact of interest expense resulting from the adoption of ASU 2017-07, ~~because such interest expense is not reflective of our ongoing operating results. See~~ ~~Note 2~~, ~~Summary of Significant Accounting Policies--Recently Adopted Accounting Standards, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~In the second quarter of fiscal 2019, we modified the calculation of Adjusted EBITDA and Adjusted EBITDA Margin to exclude a~~ non-cash pretax pension settlement charge resulting from the amendment and termination of the Farmer Bros. Plan effective December 1, ~~2018. This modification to our non-GAAP financial measures was made~~2018 and severance because ~~such expenses~~these items are not reflective of our ongoing operating ~~results and adjusting for them will help investors with comparability of our~~ results.

We believe these non-GAAP financial measures provide a useful measure of the Company’s operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the Company’s ongoing operating performance. Further, management utilizes these measures, in addition to GAAP measures, when evaluating and comparing the Company’s operating performance against internal financial forecasts and budgets.

We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and

EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our competitors.

EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin, as defined by us, may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.

~~Prior year periods set~~Set forth ~~in the tables~~ below ~~have been retrospectively adjusted~~is a reconciliation of reported net income (loss) to ~~reflect the impact of certain changes in accounting principles~~EBITDA (unaudited):



	Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2019			2018			2019			2018
Net income (loss), as reported	$	7,754		$	(10,100	)	$	12,408		$	(13,086	)
Income tax expense (benefit)	(81		)	(2,725		)	(188		)	(4,012		)
Interest expense (1)	1,585			1,735			2,861			2,938
Depreciation and amortization expense	7,594			7,902			15,211			15,630
EBITDA	$	16,852		$	(3,188	)	$	30,292		$	1,470
EBITDA Margin	11.1		%	(2.0		)%	10.4		%	0.5		%

____________

(1) Excludes interest expense related to pension plans and ~~corrections to previously issued financial statements, and the adoption of new accounting standards in the three and nine months ended March 31, 2019 that required retrospective application. See~~ ~~Note 3~~, ~~Changes in Accounting Principles and Corrections to Previously Issued Financial Statements, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~postretirement benefits.

Set forth below is a reconciliation of reported net ~~loss to EBITDA (unaudited):~~

Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2019 2018 2019 2018
Net loss, as reported $ (51,749 ) $ (2,193 ) $ (64,835 ) $ (18,414 )
Income tax expense (benefit) 43,161
(1,321 ) 39,149
16,058
Interest expense (1) 1,627
902
4,565
2,286
Depreciation and amortization expense 7,600
7,397
23,230
22,727
EBITDA $ 639
$ 4,785
$ 2,109
$ 22,657
EBITDA Margin 0.4 % 3.0 % 0.5 % 5.0 %

~~____________~~

(1) Excludes interest expense of $1.4 million and $1.6 million in the three months ended March 31, 2019 and 2018, respectively, and $4.7 million and $4.9 million in the nine months ended March 31, 2019 and 2018, respectively, resulting from the adoption of ASU 2017-07. See ~~Note 2~~, ~~Summary of Significant Accounting Policies--Recently Adopted Accounting Standards, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~Set forth below is a reconciliation of reported net loss~~income (loss) to Adjusted EBITDA (unaudited):


	Three Months Ended March 31,						Nine Months Ended March 31,						Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2019			2018			2019			2018			2019			2018			2019			2018
Net loss, as reported	$	(51,749	)	$	(2,193	)	$	(64,835	)	$	(18,414	)
Net income (loss), as reported													$	7,754		$	(10,100	)	$	12,408		$	(13,086	)
Income tax expense (benefit)	43,161			(1,321		)	39,149			16,058			(81		)	(2,725		)	(188		)	(4,012		)
Interest expense(1)	1,627			902			4,565			2,286			1,585			1,735			2,861			2,938
Depreciation and amortization expense	7,600			7,397			23,230			22,727			7,594			7,902			15,211			15,630
ESOP and share-based compensation expense	1,238			1,048			3,095			2,892			909			945			1,778			1,857
Restructuring and other transition expenses(2)	26			52			4,700			311			—			207			—			4,674
Net gains from sale of spice assets	(203		)	(110		)	(593		)	(655		)
Net losses (gains) from sales of other assets	451			(590		)	1,564			(446		)	(11,057		)	804			(23,662		)	723
Impairment losses on intangible assets	—			3,820			—			3,820
Proxy contest-related expenses													259			—			259			—
Acquisition and integration costs	2,384			1,639			6,122			5,021			—			2,727			—			3,738
Pension settlement charge	—			—			10,948			—			—			10,948			—			10,948
Severance													485			—			2,797			—
Adjusted EBITDA	$	4,535		$	10,644		$	27,945		$	33,600		$	7,448		$	12,443		$	11,464		$	23,410
Adjusted EBITDA Margin	3.1		%	6.7		%	6.2		%	7.4		%	4.9		%	7.8		%	3.9		%	7.6		%

____________

(1) Excludes interest expense ~~of $1.4 million~~related to pension plans and ~~$1.6 million in the three~~postretirement benefits.

(2) The six months ended ~~March~~December 31, ~~2019 and~~ 2018, ~~respectively, and $4.7 million and $4.9 million in the nine months ended March 31, 2019 and 2018, respectively, resulting from the~~

~~adoption of ASU 2017-07. See~~ ~~Note 2~~, ~~Summary of Significant Accounting Policies--Recently Adopted Accounting Standards, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~(2) In the nine months ended March 31, 2019,~~ includes $3.4 million, including interest, assessed by the WC Pension Trust representing the Company’s share of the ~~WCTPP~~Western Conference of Teamsters Pension Plan ("WCTPP") unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation ~~Plan, net of payments of $0.8 million in the nine months ended March 31, 2019.~~Plan.

Liquidity, Capital Resources and Financial Condition

The following table summarizes our debt obligations:

December 31, 2019

June 30, 2019

(In thousands)

Debt Origination Date

Maturity

Original Borrowing Amount

Carrying Value

Weighted Average Interest Rate

Carrying Value

Weighted Average Interest Rate

Credit Facility

Revolver

11/6/2023

N/A

70,000

4.05

92,000

3.98

Revolving Credit Facility

On November 6, 2018, ~~(the “Closing Date”),~~ we entered into a new $150.0 million senior secured revolving credit facility (the ~~“New Revolving~~“Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, with a sublimit on letters of credit and swingline loans of $15.0 million each. The ~~New~~ Revolving Facility includes an accordion feature whereby we may increase the revolving commitments or enter into one or more tranches of incremental term loans, up to an additional $75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the ~~New~~ Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Effective March 27, 2019, we entered into an interest rate swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). Under the terms of the Rate Swap, we receive 1-month LIBOR, subject to ~~a 0% floor, and make payments based~~manage our interest rate risk on a fixed rate of 2.1975%. Our obligations under the International Swap Dealers Association, Inc. Master Agreement (“ISDA”), including the related Schedule to the ISDA Master Agreement, entered into in connection with the transaction are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. We have designated the Rate Swap derivative instruments as a cash flow hedge.our floating-rate indebtedness. See Note 4 for details.

Under the ~~New~~ Revolving Facility, we are subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. We are allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to the ability for the Company (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.

The New Revolving Facility replaced, by way of amendment and restatement, our senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on our eligible accounts receivable, eligible inventory, eligible equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts and eligible inventory, less required reserves. The commitment fee was a flat fee of 0.25% per annum irrespective of average revolver usage. Outstanding obligations were collateralized by all of our assets, excluding, amongst other things, certain real property not included in the borrowing base. Borrowings under the Prior Revolving Facility bore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%; provided, that, after the Third Amendment Effective Date, (i) until MarchAt December 31, 2019, the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to the maintenance of a fixed charge coverage ratio, and provided for customary events of default.

At March 31, 2019, we were eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had outstanding borrowings of $123.0 million and utilized $2.0 million of the letters of credit sublimit. At March 31, 2019, the weighted average interest rate on our outstanding borrowings subject to interest rate variability under the New Revolving Facility was 4.25% and we were in compliance with all of the covenants under the ~~New~~ Revolving Facility.

At ~~April 30, 2019,~~January 31, 2020, we ~~were eligible to borrow up to a total of $150.0 million under the New Revolving Facility and~~ had outstanding borrowings of ~~$121.0~~$80.0 million and utilized $2.0 million of the letters of credit ~~sublimit.~~

~~We classify borrowings contractually due~~sublimit under the Revolving Facility. The amount available to ~~be settled one year or less~~borrow is subject to a leverage covenant ratio as ~~short-term and more than one year as long-term. We classify outstanding borrowings as short-term or long-term based on our ability and intent to pay or refinance~~defined under the outstanding borrowings on a short-term or long-term basis. Outstanding borrowings under our revolving credit facility were classified on our consolidated balance sheets as “Long-term borrowings under revolving credit facility” at March 31, 2019 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.

Revolving Facility agreement.

Liquidity

We generally finance our operations through cash flows from operations and borrowings under our revolving credit facility described above. In fiscal 2018, we filed a shelf registration statement with the SEC which allows us to issue unspecified amounts of common stock, preferred stock, depository shares, warrants for the purchase of shares of common stock or preferred stock, purchase contracts for the purchase of equity securities, currencies or commodities, and units consisting of any combination of any of the foregoing securities, in one or more series, from time to time and in one or more offerings up to a total dollar amount of $250.0 million. We believe our ~~New~~ Revolving Facility, to the extent available, in addition to our cash flows from operations, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months.

Our ~~New~~ Revolving Facility includes financial covenants that are tested each ~~quarter, including that adjusted EBITDA to debt~~fiscal quarter. The ratio of consolidated total indebtedness (net of unrestricted cash up to $7.5 million) to adjusted EBITDA (as defined in the Revolving Credit Facility) must not exceed 3.5 to 1.0. The ratio of adjusted EBITDA (as defined in the Revolving Credit Facility) to consolidated interest expense must not be less than 3.0 to 1.0. As of ~~March~~December 31, 2019, ~~our leverage ratio as defined in our credit facility was lower than 3.5 to 1.0, therefore,~~ we were in compliance with ~~the~~both financial ~~covenant.~~covenants.

At ~~March~~December 31, 2019, we had ~~$12.2~~$9.1 million in cash and cash equivalents. At ~~March~~December 31, 2019, none of the cash in our coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related and interest swap derivative instruments held could have a significant impact on cash deposit requirements under certain of our broker and counterparty agreements and may adversely affect our liquidity.

Cash Flows

The significant captions and amounts from our condensed consolidated statements of cash flows are summarized below:

Nine Months Ended March 31,
2019 2018
Condensed Consolidated Statements of cash flows data (in thousands)
Net cash provided by operating activities $ 7,500
$ 8,354
Net cash used in investing activities (30,250 ) (65,509 )
Net cash provided by financing activities 32,506
57,888
Net increase in cash and cash equivalents $ 9,756
$ 733



	Six Months Ended December 31,
	2019			2018
Condensed Consolidated Statements of cash flows data (in thousands)
Net cash used in operating activities	$	(2,195	)	$	(5,646	)
Net cash provided (used) in investing activities	26,240			(23,015		)
Net cash (used) provided by financing activities	(21,898		)	39,556
Net increase in cash and cash equivalents	$	2,147		$	10,895

Operating Activities

Net cash ~~provided by~~used in operating activities was ~~$7.5~~$2.2 million in the ~~nine~~six months ended ~~March~~December 31, 2019 compared to net cash ~~provided by~~used in operating activities of ~~$8.4~~$5.6 million in the ~~nine~~six months ended ~~March~~December 31, ~~2018, a~~2018. The $3.5 million decrease ~~of $0.9 million. The decrease~~in cash used was primarily attributable to a ~~higher~~lower use of cash for working capital ~~of $2.6 million~~ during the current fiscal period. Working capital during the ~~nine~~six months ended ~~March~~December 31, 2019 was impacted by, among other items, ~~cash purchases to fund higher~~lower inventory levels and ~~higher payroll and benefit costs associated with the Boyd Business integration, as well as slower~~improvement in trade accounts receivable collections, ~~of several large direct ship customer accounts receivables. These were~~ partially offset by ~~improved vendor terms and timing of accrued liabilities compared to cash settlement of such items.~~decline in outstanding accounts payable balance.

Investing Activities

Net cash ~~used in~~provided by investing activities during the ~~nine~~six months ended ~~March~~December 31, 2019 was ~~$30.3~~$26.2 million as compared to ~~$65.5~~net cash used of $23.0 million in the ~~nine~~six months ended ~~March~~December 31, ~~2018, a decrease of $35.3 million. Investment~~2018. The $49.3 million increase in cash provided from investment activities ~~were elevated in the prior year period~~was principally due to the ~~acquisition~~sales of assets during the ~~Boyd Business~~current period resulting in net cash proceeds of $35.2 million. In addition, cash used for ~~$39.6 million in cash. For the nine months ended March 31, 2019 we had~~ purchases of property, plant and equipment ~~of $30.4~~decreased $14.1 million ~~which included $13.4 million for~~primarily due to prior period including purchase of machinery and equipment ~~relating to~~for the ~~Expansion Project,~~Northlake, Texas plant expansion, and ~~$17.0 million in maintenance capital expenditures. Maintenance capital expenditures included higher~~lower coffee brewing equipment purchases ~~compared to~~in the ~~prior~~current year ~~period due to an increased level of installations for new customers.~~period.

Financing Activities

Net cash ~~provided by~~used in financing activities in the ~~nine~~six months ended ~~March~~December 31, 2019 was ~~$32.5~~$21.9 million as compared to ~~$57.9~~net cash provided of $39.6 million in the ~~nine~~six months ended ~~March~~December 31, 2018, a decrease of ~~$25.4~~$61.5 million. Net cash ~~provided by~~used in financing activities in the ~~nine~~six months ended ~~March~~December 31, 2019 included ~~$33.2~~$22.0 million in net payments under our Revolving Facility compared to $40.2 million in net borrowings ~~under our New Revolving Facility and~~

~~Prior Revolving Facility, compared to $58.3 million in net borrowings under the Prior Revolving Facility~~ in the ~~nine~~six months ended ~~March~~December 31, 2018.

~~Acquisitions~~

On October 2, 2017, we acquired substantially all of the assets and certain specified liabilities of Boyd Coffee Company (“Boyd Coffee”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States, in consideration of cash and preferred stock. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to our product portfolio, improve our growth potential, deepen our distribution footprint and increase our capacity utilization at our production facilities. At closing, for consideration of the purchase, we paid Boyd Coffee $38.9 million in cash from borrowings under our Prior Revolving Facility and issued to Boyd Coffee 14,700 shares of Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the closing date. Additionally, we held back $3.2 million in cash and 6,300 shares of Series A Preferred Stock, with a fair value of $4.8 million as of the closing date, for the satisfaction of any post-closing working capital adjustments and to secure Boyd Coffee’s (and the other seller parties’) indemnification obligations under the purchase agreement.

In addition to the $3.2 million cash holdback, as part of the consideration for the purchase, at closing we held back $1.1 million in cash to pay, on behalf of Boyd Coffee, any assessment of withdrawal liability made against Boyd Coffee following the closing date in respect of Boyd Coffee’s multiemployer pension plan, which amount was recorded in “Other long-term liabilities” on our consolidated balance sheet at June 30, 2018. On January 8, 2019, Boyd Coffee notified the Company of the assessment of $0.5 million in withdrawal liability against Boyd Coffee, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019.

As of March 31, 2019 we have satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. We have retained the remaining 1,670 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.

At closing, the parties entered into a transition services agreement where Boyd Coffee agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative support during a transition period of up to 12 months. We also entered into a co-manufacturing agreement with Boyd Coffee for a transition period of up to 12 months as we transitioned production into our plants. Amounts paid by the Company to Boyd Coffee for these services totaled $3.7 million in the nine months ended March 31, 2019 and $10.2 million and $19.4 million in the three and nine months ended March 31, 2018, respectively. The transition services and co-manufacturing agreements expired on October 2, 2018 and no amounts were paid under these agreements in the three months ended March 31, 2019.

We incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of inventory mark downs, legal expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses, of $2.4 million and $1.6 million, respectively, during the three months ended March 31, 2019 and 2018, and $6.1 million and $5.0 million, respectively, during the nine months ended March 31, 2019 and 2018. These expenses are included in operating expenses in the Company's condensed consolidated statements of operations.

~~See~~ ~~Note 4~~, ~~Acquisitions, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~DSD Restructuring Plan~~

As a result of an ongoing operational review of various initiatives within our DSD selling organization, in the third quarter of fiscal 2017, we commenced a plan to reorganize our DSD operations in an effort to realign functions into a channel based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). We estimate that we will recognize approximately $4.9 million of pretax restructuring charges by the end of fiscal 2019 consisting of approximately $2.7 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. We expect to complete the DSD Restructuring Plan by the end of fiscal 2019.

We incurred expenses related to the DSD Restructuring Plan in the amounts of $0.1 million and $0 in employee-related costs and $1,500 and $0.1 million in other related costs for three months ended March 31, 2019 and 2018, respectively, and $1.3 million and $24,000 in employee-related costs and $0.2 million and $0.3 million in other related costs for the nine months ended March 31, 2019 and 2018, respectively. Since the adoption of the DSD Restructuring Plan through March 31, 2019, we have recognized a total of $4.5 million in aggregate cash costs including $2.6 million in employee-related costs and $1.9 million in other related costs. As of March 31, 2019, we had paid a total of $4.4 million of these costs and had a balance of $0.1 million in DSD Restructuring Plan-related liabilities on our condensed consolidated balance sheet. The remaining costs to be incurred for the remainder of fiscal 2019 are not expected to be material. We may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan. See ~~Note 5~~, ~~Restructuring Plans-Direct Store Delivery (“DSD”) Restructuring Plan, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~Corporate Relocation Plan~~

In the nine months ended March 31, 2019, we incurred $3.4 million in restructuring and other transition expenses associated with the assessment by the WCTPP of our share of the WCTPP unfunded benefits due to our partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan. Since the adoption of the Corporate Relocation Plan through March 31, 2019, we have recognized a total of $35.2 million in aggregate cash costs including $17.4 million in employee retention and separation benefits, $3.4 million in pension withdrawal liability, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of our Torrance operations and certain distribution operations and $7.4 million in other related costs. We also recognized from inception through March 31, 2019 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. See ~~Note 5~~, ~~Restructuring Plans—Corporate Relocation Plan,~~ ~~of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

~~New Facility Expansion Project~~

In the third quarter of fiscal 2018, we commenced a project to expand our production lines (the “Expansion Project”) in the New Facility, including expanding capacity to support the transition of acquired business volumes under a guaranteed maximum price contract of up to $19.3 million. See ~~Note 22~~, ~~Commitments and Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report.~~

Capital Expenditures

For the ~~nine~~three and six months ended ~~March~~December 31, 2019 and 2018, our capital expenditures paid were as follows:


	Nine Months Ended March 31,				Three Months Ended December 31,				Six Months Ended December 31,
(In thousands)	2019		2018		2019		2018		2019		2018
Maintenance:
Coffee brewing equipment	$	12,460	$	8,118	$	1,990	$	4,805	$	4,135	$	8,922
Building and facilities	50		324		58		15		133		15
Vehicles, machinery and equipment	2,187		5,804		349		1,153		1,036		1,723
IT, software, office furniture and equipment	2,304		3,127		710		1,132		2,155		1,907
Capital expenditures, maintenance	$	17,001	$	17,373	$	3,107	$	7,105	$	7,459	$	12,567

Expansion Project:
Machinery and equipment	$	13,392	$	5,601	$	623	$	8,228	$	1,548	$	10,553
Capital expenditures, Expansion Project	$	13,392	$	5,601	$	623	$	8,228	$	1,548	$	10,553

New Facility Costs
Building and facilities, including land	—		1,577
Machinery and equipment	—		2,489
Software, office furniture and equipment	—		426
Capital expenditures, New Facility	$	—	$	4,492

Total capital expenditures	$	30,393	$	27,466	$	3,730	$	15,333	$	9,007	$	23,120

In fiscal ~~2019,~~year 2020, we anticipate paying between ~~$34.0~~$17.0 million to ~~$37.0~~$20.0 million in maintenance capital expenditures. We expect to finance these expenditures through cash flows from operations and borrowings under our ~~New~~ Revolving Facility.

Depreciation and amortization ~~expense was $23.2~~expenses were $7.6 million and ~~$22.7~~$7.9 million in the ~~nine~~three months ended ~~March~~December 31, 2019 and 2018, respectively. Depreciation and amortization expense were $15.2 million and $15.6 million in the six months ended December 31, 2019 and 2018, respectively. We anticipate our depreciation and amortization expense will be approximately ~~$7.5~~$7.3 million to ~~$8.0~~$7.6 million per quarter in the remainder of fiscal ~~2019~~year 2020 based on our existing fixed asset commitments and the useful lives of our intangible assets.

Commitments and Contingencies

~~Working Capital~~

~~At March 31, 2019 and June 30, 2018, our working capital was composed of the following:~~

March 31, 2019 June 30, 2018
(In thousands)
Current assets $ 185,891
$ 173,514
Current liabilities(1) 91,789
178,457
Working capital $ 94,102
$ (4,943 )

~~________________~~

(1) Current liabilities includes short-term borrowings under the Prior Revolving Facility of $89.8 million as of June 30, 2018. Outstanding borrowings under our revolving credit facility were reclassified on our condensed consolidated balance sheet from short-term to long-term as of March 31, 2019.

~~Contractual Obligations~~

~~During the nine months ended March 31, 2019, other than the following, or as otherwise discussed in this report, there were no material changes in our contractual obligations.~~

In the nine months ended March 31, 2019, we paid $10.6 million for machinery and equipment expenditures associated with the Expansion Project. Since inception of the contract through March 31, 2019, we have paid a total of $18.9 million.

In connection with our partial withdrawal from the WCTPP, we agreed with the WCT Pension Trust’s assessment of pension withdrawal liability in the amount of $3.4 million, including interest, which is payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822, commencing September 10, 2018. At March 31, 2019, we had paid $1.3 million and recorded $2.1 million on our condensed consolidated balance sheet relating to this obligation in “Accrued payroll expenses.”

Effective December 1, 2018 we amended and terminated the Farmer Bros. Plan. Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As ~~a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, we reduced our overall pension projected benefit obligation by approximately $24.4 million as~~ of December 31, 2018 and recognized a non-cash pension settlement charge of $10.9 million in the nine months ended March 31, 2019. At December 31, 2018, the new projected benefit obligation and fair value of plan assets for the Brewmatic Plan were $114.1 million and $67.4 million, respectively, resulting in a net underfunded status of $46.7 million. This represents a $6.7 million increase from the net underfunded status of the Farmer Bros. Plan and Brewmatic Plan as of June 30, 2018 primarily due to actual losses recognized on plan assets during the six months ended December 31, 2018.

During the three months ended December 31, 2018, the Company and the Local 807 Pension Fund agreed to settle the Company’s remaining withdrawal liability to the Local 807 Pension Fund relating to the Company’s withdrawal from the Local 807 Labor Management Pension Plan in fiscal 2012 for a lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. As of March 31, 2019, we ~~paid the Local 807 Pension Fund $3.0 million in cash and recorded $0.2 million in “Accrued pension liabilities” on our condensed consolidated balance sheet.~~

~~As of March 31, 2019, the Company~~ had committed to purchase green coffee inventory totaling ~~$60.4~~$60.7 million under fixed-price contracts, ~~and to~~$6.2 million in other ~~purchases totaling $16.0 million~~inventory under non-cancelable purchase orders ~~related primarily to the~~and $5.4 million in other purchases under non-cancelable purchase ~~of finished goods inventory.~~

As of March 31, 2019, we had commitments of $0.9 million for roasting equipment ordered for the New Facility which will be accrued by the Company upon delivery and acceptance of the equipment in the fourth quarter of fiscal 2019.orders.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues

and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. For a summary of our significant accounting policies, see Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and in our ~~2018~~2019 Form 10-K. For a summary of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our ~~2018~~2019 Form 10-K.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report and in our ~~2018~~2019 Form 10-K. For a summary of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our ~~2018~~2019 Form 10-K.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.



Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Borrowings under our New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Borrowings under our Prior Revolving Facility bore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%; provided, that, after the Third Amendment Effective Date, (i) until March 31, 2019 the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%.

Effective March 27, 2019, we entered into a swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023. The Rate Swap is intended to manage our interest rate risk on our floating-rate indebtedness under the New Revolving Facility. Under the terms of the Rate Swap, we receive 1-month LIBOR, subject to a 0% floor, and make payments based on a fixed rate of 2.1975%. Our obligations under the ISDA entered into in connection with the transaction are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. We have designated the Rate Swap derivative instruments as a cash flow hedge.

At ~~March~~December 31, 2019, we were eligible to borrow up to a total of $150.0 million, subject to a leverage covenant ratio as defined under the ~~New~~ Revolving Facility agreement and had outstanding borrowings of ~~$123.0~~$70.0 million and utilized $2.0 million of the letters of credit sublimit. As a result of the interest rate swap, only ~~$43.0~~$5.0 million is now subject to interest rate variability. The weighted average interest rate on our outstanding borrowings subject to interest rate variability under the ~~New~~ Revolving Facility at ~~March~~December 31, 2019 was ~~4.25%~~4.05%.

The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings subject to interest rate variability under the ~~New~~ Revolving Facility based on the weighted average interest rate on the outstanding borrowings as of ~~March~~December 31, 2019:


($ in thousands)	Principal	Interest Rate		Annual Interest Expense
(In thousands)						Principal	Interest Rate		Annual Interest Expense
–150 basis points	$43,000	2.75	%	$	1,183	$5,000	2.55	%	$	128
–100 basis points	$43,000	3.25	%	$	1,398	$5,000	3.05	%	$	153
Unchanged	$43,000	4.25	%	$	1,828	$5,000	4.05	%	$	203
+100 basis points	$43,000	5.25	%	$	2,258	$5,000	5.05	%	$	253
+150 basis points	$43,000	5.75	%	$	2,473	$5,000	5.55	%	$	278

Commodity Price Risk

We are exposed to commodity price risk arising from changes in the market price of green coffee. We value green coffee inventory on the FIFO basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers.

We purchase over-the-counter coffee-related derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments also may be entered into at the direction See Note 4, Derivative Instruments, of the ~~customer under commodity-based pricing arrangements~~Notes to ~~effectively lock in~~ the ~~purchase price of green coffee under such customer arrangements, in certain cases up to 18 months or longer in the future. We account~~Unaudited Condensed Consolidated Financial Statements for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods.

W~~hen we designate coffee-related derivative instruments as cash flow hedges, we formally document the hedging instruments and hedged items, and measure at each balance sheet date the effectiveness~~further discussions of our ~~hedges. The change in fair value of the~~ derivative is reported in AOCI and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. For the three months ended March 31, 2019 and 2018, respectively, we reclassified $2.1 million in net losses and $0.6 million in net losses on coffee-related derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from AOCI. For the nine months ended March 31, 2019 and 2018,instruments.

respectively, we reclassified $6.3 million in net losses and $0.6 million in net gains on coffee-related derivative instruments designated as cash flow hedges, excluding tax, respectively, into cost of goods sold from AOCI. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss deferred in AOCI in “Other, net” at that time.

For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” In the three months ended March 31, 2019 and 2018, we recorded in “Other, net” net losses of $0.9 million and $0.4 million, respectively, on coffee-related derivative instruments not designated as accounting hedges. In the nine months ended March 31, 2019 and 2018, we recorded in “Other, net” net losses of $2.9 million and $0.5 million, respectively, on coffee-related derivative instruments not designated as accounting hedges.

The following table summarizes the potential impact as of ~~March~~December 31, 2019 to net loss and AOCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not include, when applicable, the corresponding changes in the underlying hedged items:


	Increase (Decrease) to Net Loss					Increase (Decrease) to AOCI					Increase (Decrease) to Net Loss					Increase (Decrease) to AOCI
	10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate			10% Increase in Underlying Rate		10% Decrease in Underlying Rate
(In thousands)
Coffee-related derivative instruments(1)	$	434	$	(434	)	$	3,667	$	(3,667	)	$	161	$	(161	)	$	5,662	$	(5,662	)

__________

(1) The Company’s purchase contracts that qualify as normal purchases include green coffee purchase commitments for which the price has been locked in as of ~~March~~December 31, 2019. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.



Item 4.	Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

As of ~~March~~December 31, 2019, our management, with the participation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial and accounting officer), carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

Management has determined that there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended ~~March~~December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION



Item 1.	Legal Proceedings

The information set forth in Note 2202, Commitments and Contingencies, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.



Item 1A.	Risk Factors

~~An increase~~For a discussion of our other potential risks and uncertainties, see the information under “Item 1A. Risk Factors” in our ~~debt leverage could adversely affect our liquidity and results of operations and a covenant that governs our current indebtedness may limit our ability to borrow.~~

~~As of March~~Annual Report on Form 10‑K for the year ended June 30, 2019, which is accessible on the SEC’s website at www.sec.gov. During the six months ended December 31, 2019, and 2018, we had outstanding borrowings under our revolving credit facility of $123.0 million and $85.9 million, respectively, with excess availability of $25.0 million and $35.7 million, respectively. We may incur significant indebtedness inthere have been no material changes to the future, including through additional borrowings under the credit facility, exercise of the accordion feature under the credit facility to increase the revolving commitment by up to an additional $75.0 million, through the issuance of debt securities, or otherwise. Our present indebtedness and any future borrowings could have adverse consequences, including:

~~requiring a substantial portion of our cash flow from operations to make payments on our indebtedness;~~

~~reducing the cash flow available or limiting our ability to borrow additional funds, to pay dividends, to fund capital expenditures and other corporate purposes and to pursue our business strategies;~~

~~limiting our flexibility in planning for, or reacting to, changes~~risk factors disclosed in our ~~businesses and the industries in which we operate;~~

~~increasing our vulnerability to general adverse economic and industry conditions; and~~

~~placing us at a competitive disadvantage compared to our competitors that have less debt.~~

To the extent we become more leveraged, we face an increased likelihood that one or more of the risks described above would materialize. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt or seek additional equity capital, or need to change certain elements of our strategy, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. If we are unable to make payments as they come due or comply with the restrictions and covenants under the credit facility or any other agreements governing our indebtedness, there could be a default under the terms of such agreements. In such event, or if we are otherwise in default under the credit facility or any such other agreements, the lenders could terminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our lenders under the credit facility could foreclose on their security interests in our assets. If any of those events occur, our assets might not be sufficient to repay in full all of our outstanding indebtedness and we may be unable to find alternative financing on acceptable terms or at all. Failure to maintain existing or secure new financing could have a material adverse effect on our liquidity and financial position.

In addition, our New Revolving Facility includes financial covenants that are tested each quarter, including that adjusted EBITDA to debt (net of unrestricted cash up to $7.5 million) must not exceed 3.5 to 1.0. As of March 31, 2019 ~~our leverage ratio as defined in our credit facility was lower than 3.5 to 1.0.~~

~~Our liquidity may be materially adversely affected by constraints in the capital and credit markets and limitations under our financing arrangements.~~

We need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and finance business opportunities. Without sufficient liquidity, we could be forced to curtail our operations, or we may not be able to pursue business opportunities. The principal sources of our liquidity are funds generated from operating activities, available cash, and our New Revolving Facility. If our sources of liquidity do not satisfy our requirements, we may need to seek additional financing. The future availability of financing will depend on a variety of factors, such as economic and market conditions, the regulatory environment for banks and other financial institutions, the availability of credit and our reputation with potential lenders. Further, disruptions in national and international credit markets could result in limitations on creditForm 10‑K.

availability, tighter lending standards, higher interest rates on consumer and business loans, and higher fees associated with obtaining and maintaining credit availability. In addition, in the event of disruptions in the financial markets, current or future lenders may become unwilling or unable to continue to advance funds under any agreements in place, increase their commitments under existing credit arrangements or enter into new financing arrangements. These factors could materially adversely affect our liquidity, costs of borrowing, and our ability to respond to changes in the market, to pursue business opportunities, or to grow our business, and threaten our ability to meet our obligations as they become due. In addition, covenants in our debt agreements could restrict or delay our ability to respond to business opportunities, or in the event of a failure to comply with such covenants, could result in an event of default, which if not cured or waived, could have a material adverse effect on us.

Our accounts receivable represents a significant portion of our current assets and a substantial portion of our trade accounts receivables relate principally to a limited number of customers, increasing our exposure to bad debts and counter-party risk which could potentially have a material adverse effect on our results of operations.

A significant portion of our trade accounts receivable are from five customers. The concentration of our accounts receivable across a limited number of parties subjects us to individual counter-party and credit risk as these parties may breach our agreement, claim that we have breached the agreement, become insolvent and/or declare bankruptcy, delaying or reducing our collection of receivables or rendering collection impossible altogether. Certain of the parties use third-party distributors or do business through a network of affiliate entities which can make collection efforts more challenging and, at times, collections may be economically unfeasible. Adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our debtors. This could increase our exposure to losses from bad debts and have a material adverse effect on our business, financial condition and results of operations.

~~Increases in the cost of green coffee could reduce our gross margin and profit.~~

Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Although coffee “C” market prices in fiscal 2018 averaged 11% below the historical average for the past five years, there can be no assurance that green coffee prices will remain at these levels in the future. The supply and price of green coffee may be impacted by, among other things, weather, natural disasters, real or perceived supply shortages, crop disease (such as coffee rust) and pests, general increase in farm inputs and costs of production, a change in the use of the “C” market as the benchmark for determining green coffee prices or an increase in green coffee purchased and sold on a negotiated basis rather than directly on commodity markets in response to higher production costs relative to “C” market prices, political and economic conditions or uncertainty, labor actions, foreign currency fluctuations, armed conflict in coffee producing nations, acts of terrorism, government actions and trade barriers, and the actions of producer organizations that have historically attempted to influence green coffee prices through agreements establishing export quotas or by restricting coffee supplies. Speculative trading in coffee commodities can also influence coffee prices. Additionally, specialty green coffees tend to trade on a negotiated basis at a premium above the “C” market price which premium, depending on the supply and demand at the time of purchase, may be significant. Increases in the “C” market price may also impact our ability to enter into green coffee purchase commitments at a fixed price or at a price to be fixed whereby the price at which the base “C” market price will be fixed has not yet been established. There can be no assurance that our purchasing practices and hedging activities will mitigate future price risk. As a result, increases in the cost of green coffee could have an adverse impact on our profitability.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None



Item 6.	Exhibits



Exhibit No.		Description

3.1		Amended and Restated Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.1 to the Company’s ~~Current~~Annual Report on Form ~~8-K~~10-K filed with the SEC on ~~June 26, 2017~~September 11, 2019 and incorporated herein by reference).

3.2		Certificate of Amendment to the Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference).

~~3.3~~		Amended and Restated Bylaws, adopted as of October 14, 2018 (filed as Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, filed with the SEC on February 11, 2019 and incorporated herein by reference).

~~10.1~~10.58		~~ISDA Master~~Separation and Release Agreement ~~dated as of March 20, 2019,~~ by and between David Robson and Farmer Bros. Co. ~~and Citibank, N.A.~~dated November 1, 2019 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on ~~March 29,~~November 7, 2019 and incorporated herein by reference).

~~10.2~~10.59		~~Schedule to~~Form of Indemnification Agreement for Directors and Officers of the ~~ISDA Master Agreement, dated~~Company, as adopted on December 8, 2017 (with updated schedule of ~~March 20, 2019, by and between Farmer Bros. Co. and Citibank, N.A. (filed~~indemnitees attached)(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on ~~March, 29,~~November 7, 2019 and incorporated herein by reference).

~~10.3~~10.60		~~Interest Rate Swap Confirmation, dated as~~Form of ~~March 28, 2019, by and between Farmer Bros., Co. and Citibank, N.A.~~Change in Control Severance Agreement for Executive Officers of the Company (with updated schedule of executive officers attached). (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on ~~March 29,~~November 7, 2019 and incorporated herein by reference).

10.61		Purchase and Sale Agreement, by and between Farmer Bros. Co., as Seller and Sage Interest, Inc., as Buyer (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 19, 2019 and incorporated herein by reference).

10.62*		Amendment No. 1 dated September 6, 2019 by and among Farmer Bros. Co., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, to that certain Amended and Restated Credit Agreement dated as of November 6, 2018.

31.1*		Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Principal Financial and Accounting Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**		Principal Financial and Accounting Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the fiscal period ended ~~March~~December 31, 2019, formatted in eXtensible Business Reporting Language: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity and (vi) Notes to Unaudited Condensed Consolidated Financial Statements (furnished herewith).

________________




*	Filed herewith

**	Furnished, not filed, herewith

SIGNATURES

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




	FARMER BROS. CO.

	By:		/s/ ~~CHRISTOPHER P. MOTTERN~~Deverl Maserang
			~~Christopher P. Mottern~~Deverl Maserang ~~Interim~~ President and Chief Executive Officer (~~chief~~principal executive officer)
			~~May 7, 2019~~February 6, 2020

	By:		/s/ ~~David G. Robson~~Scott Lyon
			~~David G. Robson~~Scott Lyon ~~Treasurer and Chief Financial Officer~~Corporate Controller (interim principal financial and accounting officer)
			~~May 7, 2019~~February 6, 2020

7150



	Three Months Ended March 31, 2018
(In thousands, except per share data)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			ASU 2017-07 Adjustments(1)			Retrospectively Adjusted
Cost of goods sold	$	99,117		$	(891	)	$	5,888		$	1,602		$	(87	)	$	105,629
Gross profit	$	58,810		$	891		$	(5,888	)	$	(1,602	)	$	87		$	52,298
Selling expenses	$	44,736		$	—		$	(5,495	)	$	(1,200	)	$	(287	)	$	37,754
General and administrative expenses	$	13,766		$	—		$	—		$	—		$	391		$	14,157
Operating expenses	$	61,674		$	—		$	(5,495	)	$	(1,200	)	$	104		$	55,083
Loss from operations	$	(2,864	)	$	891		$	(393	)	$	(401	)	$	(18	)	$	(2,785	)
Interest expense	$	(902	)	$	—		$	—		$	—		$	(1,645	)	$	(2,547	)
Other, net	$	154		$	—		$	—		$	—		$	1,663		$	1,817
Total other expense	$	(747	)	$	—		$	—		$	—		$	18		$	(729	)
Loss before taxes	$	(3,611	)	$	891		$	(393	)	$	(401	)	$	—		$	(3,514	)
Income tax expense (benefit)	$	297		$	(1,562	)	$	436		$	(492	)	$	—		$	(1,321	)
Net loss	$	(3,908	)	$	2,452		$	(829	)	$	92		$	—		$	(2,193	)
Net loss available to common stockholders	$	(4,036	)	$	2,452		$	(829	)	$	92		$	—		$	(2,321	)
Net loss available to common stockholders per common share—basic	$	(0.24	)	$	0.14		$	(0.05	)	$	0.01		$	—		$	(0.14	)
Net loss available to common stockholders per common share—diluted	$	(0.24	)	$	0.14		$	(0.05	)	$	0.01		$	—		$	(0.14	)



	Nine Months Ended March 31, 2018
(In thousands, except per share data)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			ASU 2017-07 Adjustments(1)			Retrospectively Adjusted
Cost of goods sold	$	283,670		$	994		$	15,578		$	2,323		$	(216	)	$	302,349
Gross profit	$	173,336		$	(994	)	$	(15,578	)	$	(2,323	)	$	216		$	154,657
Selling expenses	$	132,979		$	—		$	(16,418	)	$	(3,279	)	$	(546	)	$	112,736
General and administrative expenses	$	39,007		$	—		$	—		$	—		$	815		$	39,822
Operating expenses	$	175,016		$	—		$	(16,418	)	$	(3,279	)	$	269		$	155,588
Loss from operations	$	(1,680	)	$	(994	)	$	840		$	956		$	(53	)	$	(931	)
Interest expense	$	(2,286	)	$	—		$	—		$	—		$	(4,935	)	$	(7,221	)
Other, net	$	794		$	—		$	—		$	—		$	4,988		$	5,782
Total other expense	$	(1,478	)	$	—		$	—		$	—		$	53		$	(1,425	)
Loss before taxes	$	(3,158	)	$	(994	)	$	840		$	956		$	—		$	(2,356	)
Income tax expense	$	20,497		$	(4,931	)	$	1,699		$	(1,207	)	$	—		$	16,058
Net loss	$	(23,655	)	$	3,937		$	(859	)	$	2,163		$	—		$	(18,414	)
Net loss available to common stockholders	$	(23,912	)	$	3,937		$	(859	)	$	2,163		$	—		$	(18,671	)
Net loss available to common stockholders per common share—basic	$	(1.43	)	$	0.23		$	(0.05	)	$	0.13		$	—		$	(1.12	)
Net loss available to common stockholders per common share—diluted	$	(1.43	)	$	0.23		$	(0.05	)	$	0.13		$	—		$	(1.12	)



	Nine Months Ended March 31, 2018
(In thousands)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Net loss	$	(23,655	)	$	3,937		$	(859	)	$	2,163		$	(18,414	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred income taxes	$	20,138		$	(4,932	)	$	1,699		$	(1,207	)	$	15,698
Net losses on derivative instruments and investments	$	3,292		$	(2,987	)	$	—		$	—		$	305
Change in operating assets and liabilities:
Inventories	$	(9,533	)	$	3,981		$	(840	)	$	(956	)	$	(7,348	)
Derivative assets (liabilities), net	$	(6,091	)	$	(38	)	$	—		$	—		$	(6,129	)
Accounts payable	$	7,516		$	38		$	—		$	—		$	7,554



(In thousands)	Fair Value			Estimated Useful Life (years)

Cash paid	$	38,871
Holdback Cash Amount	3,150
Multiemployer Plan Holdback	1,056
Fair value of Series A Preferred Stock (14,700 shares)(1)	11,756
Fair value of Holdback Stock (6,300 shares)(1)	4,825
Estimated post-closing net working capital adjustment	(8,059		)
Total consideration	$	51,599

Accounts receivable	$	7,503
Inventory	9,415
Prepaid expense and other assets	1,951
Property, plant and equipment	4,936
Goodwill	25,395
Intangible assets:
Customer relationships	16,000			10
Trade name/trademark—indefinite-lived	3,100
Accounts payable	(15,080		)
Other liabilities	(1,621		)
Total consideration	$	51,599



(In thousands)	Three Months Ended		Nine Months Ended
	March 31, 2019		March 31, 2019
Net sales	$	18,494	$	63,079
Income before taxes	$	668	$	4,884



	March 31, 2019		June 30, 2018
Loan amount (in thousands)	$	—	$	2,145



	Nine Months Ended March 31, 2019
Weighted average fair value of NQOs	$	7.78
Risk-free interest rate	3.0		%
Dividend yield	—		%
Average expected term	4.6 years
Expected stock price volatility	29.6		%