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 manufactured under our owned brands, as well as under private labels on behalf of certain customers..
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 months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2022. Events occurring subsequent to September 30, 2021 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three months ended September 30, 2021.
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, 2021, filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2021 (the “2021 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 and, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), China Mist Brands, Inc., a Delaware corporation, and Boyd Assets Co., a Delaware corporation. All inter-company balances and transactions have been eliminated.
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 2021 Form 10-K.
During the three months ended September 30, 2021, there were no significant updates made to the Company’s significant accounting policies.
Concentration of Credit Risk
At September 30, 2021 and June 30, 2021, 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 asset positions. At September 30, 2021 and June 30, 2021, 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 40% and 31% of the Company’s trade accounts receivable balance was with five customers at September 30, 2021 and June 30, 2021, 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 estimated credit losses have been appropriately considered in establishing the allowance for doubtful accounts.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (the “FASB”). ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.
The following table provides a brief description of the recent ASUs applicable to the Company:
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
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In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”)
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The London Interbank Offered Rate (LIBOR) is set to expire at the end of 2021. Contracts affected by the rate change would be required to be modified. Under current U.S. GAAP, those modifications would have to be evaluated to determine whether they result in new contracts or continuation of the existing contracts. ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the transition from LIBOR to alternative reference rate.
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Issuance date of March 12, 2020 through December 31, 2022.
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The Company is currently evaluating the impact ASU 2020-04 will have on its consolidated financial statements.
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 3. Leases
The Company has entered into leases for building facilities, vehicles and other equipment. The Company’s leases have remaining contractual terms through September 30, 2028, some of which have options to extend the lease for up to 10 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease renewal until it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental unaudited consolidated balance sheet information related to leases is as follows:
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Classification
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September 30, 2021
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June 30, 2021
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(In thousands)
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Operating lease assets
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Right-of-use operating lease assets
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$
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29,133
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26,254
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Finance lease assets
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Property, plant and equipment, net
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697
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739
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Total lease assets
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$
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29,830
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$
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26,993
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Operating lease liabilities - current
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Operating lease liabilities - current
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6,908
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6,262
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Finance lease liabilities - current
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Other current liabilities
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193
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192
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Operating lease liabilities - noncurrent
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Operating lease liabilities - noncurrent
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22,455
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20,049
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Finance lease liabilities -noncurrent
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Other long-term liabilities
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521
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563
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Total lease liabilities
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$
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30,077
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$
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27,066
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The components of lease expense are as follows:
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Three Months Ended September 30,
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Classification
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2021
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2020
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(In thousands)
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Operating lease expense
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General and administrative expenses and cost of goods sold
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$
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1,782
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$
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1,625
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Finance lease expense:
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Amortization of finance lease assets
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General and administrative expenses
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41
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9
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Interest on finance lease liabilities
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Interest expense
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12
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—
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Total lease expense
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$
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1,835
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$
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1,634
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Maturities of lease liabilities are as follows:
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September 30, 2021
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(In thousands)
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Operating Leases
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Finance Leases
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2022
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$
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5,195
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$
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144
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2023
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$
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6,751
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$
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193
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2024
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$
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6,482
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$
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193
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2025
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$
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5,293
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$
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193
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2026
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$
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4,189
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$
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96
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Thereafter
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$
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6,476
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$
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—
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Total lease payments
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$
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34,386
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$
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819
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Less: interest
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$
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(5,023)
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$
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(105)
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Total lease obligations
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$
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29,363
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$
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714
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Lease term and discount rate:
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September 30, 2021
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June 30, 2021
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Weighted-average remaining lease terms (in years):
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Operating lease
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7.0
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7.3
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Finance lease
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4.3
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4.5
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Weighted-average discount rate:
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Operating lease
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5.58
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%
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5.23
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%
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Finance lease
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6.50
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%
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6.50
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%
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Other Information:
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Three Months Ended September 30,
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(In thousands)
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2021
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2020
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Cash paid for amounts included in the measurement of lease liabilities:
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Operating cash flows from operating leases
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$
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1,615
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$
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1,593
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Operating cash flows from finance leases
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$
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41
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$
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—
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Financing cash flows from finance leases
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$
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12
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$
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9
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 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 2021 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 September 30, 2021 and June 30, 2021:
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(In thousands)
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September 30, 2021
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June 30, 2021
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Derivative instruments designated as cash flow hedges:
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Long coffee pounds
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16,369
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14,625
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Derivative instruments not designated as cash flow hedges:
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Long coffee pounds
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4,130
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6,886
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Total
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20,499
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21,511
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Coffee-related derivative instruments designated as cash flow hedges outstanding as of September 30, 2021 will expire within 15 months. At September 30, 2021 and June 30, 2021 approximately 80% and 68%, 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. (“ISDA”) Master Agreement which was effective March 20, 2019, the Company on March 27, 2019, 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”). 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 had designated the Rate Swap derivative instrument as a cash flow hedge; however, during the three months ended September 30, 2020, the Company de-designated the Rate Swap derivative instrument. As a result, the balance in AOCI was frozen at the time of de-designation. The Company recognized $0.3 million out of AOCI and into interest expense for the three months ended September 30, 2021. The remaining balance of $2.2 million frozen in AOCI will be amortized over the life of the Rate Swap through October 11, 2023.
In connection with a new revolver credit facility agreement in April 2021 (see Note 11 for details), the Company also executed a new ISDA agreement to transfer its interest swap to Wells Fargo (the “Amended Rate Swap”). Under the terms of the Amended Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.4725%, an increase of 0.275% from its original Rate Swap fixed rate of 2.1975%. The Amended Rate Swap utilizes the same notional amount of $65.0 million and maturity date of October 11, 2023 as the original interest rate swap.
The Company did not designate the Amended Rate Swap as a cash flow hedge. The Company’s obligations under the Amended Rate Swap are secured by the collateral which secures the loans under the new Revolver Credit Facility (see Note 11 for details) on a pari passu and pro rata basis with the principal of such loans.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:
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Derivative Instruments
Designated as Cash Flow Hedges
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Derivative Instruments Not Designated as Accounting Hedges
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September 30, 2021
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June 30, 2021
|
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September 30, 2021
|
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June 30, 2021
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(In thousands)
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Financial Statement Location:
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Short-term derivative assets:
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Coffee-related derivative instruments(1)
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$
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7,000
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$
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3,823
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|
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$
|
1,798
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|
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$
|
528
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Long-term derivative assets:
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Coffee-related derivative instruments (2)
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$
|
192
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|
$
|
292
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|
$
|
—
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|
$
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—
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Short-term derivative liabilities:
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Coffee-related derivative instruments
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$
|
68
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$
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20
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|
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$
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143
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$
|
3
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|
|
|
|
|
|
|
|
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Interest rate swap derivative instruments
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$
|
—
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|
|
$
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—
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|
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$
|
1,518
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|
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$
|
1,532
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Long-term derivative liabilities:
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|
|
|
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Coffee-related derivative instruments (3)
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|
$
|
10
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|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap derivative instruments (3)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,316
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|
|
$
|
1,653
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________________
(1) Included in “Short-term derivative assets” on the Company’s condensed consolidated balance sheets.
(2) Included in “Other assets” on the Company's condensed consolidated balance sheets.
(3) Included in “Other long-term liabilities” on the Company's condensed consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
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|
|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
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Financial Statement Classification
|
(In thousands)
|
|
2021
|
|
2020
|
|
|
|
|
|
Net losses recognized in AOCI - Interest rate swap
|
|
$
|
—
|
|
|
$
|
(304)
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|
|
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AOCI
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Net (losses) recognized from AOCI to earnings - Interest rate swap
|
|
$
|
—
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|
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$
|
(336)
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|
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Interest Expense
|
Net losses reclassified from AOCI to earnings for de-designated Interest rate swap
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|
$
|
(314)
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|
|
$
|
(339)
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|
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|
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Interest Expense
|
Net gains (losses) recognized in AOCI - Coffee-related
|
|
$
|
5,859
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|
|
$
|
4,265
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|
|
|
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AOCI
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Net gains (losses) recognized in earnings - Coffee - related
|
|
$
|
1,920
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|
|
$
|
364
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|
|
|
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|
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Cost of
goods sold
|
For the three months ended September 30, 2021 and 2020, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness.
Net (gains) losses on derivative instruments in the Company’s condensed consolidated statements of cash flows also include net (gains) losses on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three months ended September 30, 2021 and 2020. Gains and losses on coffee-related derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of operations and in Net (gains) losses on derivative instruments 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:
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|
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|
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Three Months Ended September 30,
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|
(In thousands)
|
|
2021
|
|
2020
|
|
|
|
|
Net gains on coffee-related derivative instruments(1)
|
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$
|
1,550
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|
|
$
|
496
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Non-operating pension and other postretirement benefits
|
|
894
|
|
|
7,744
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|
|
|
|
|
Other gains, net
|
|
—
|
|
|
319
|
|
|
|
|
|
Other, net
|
|
$
|
2,444
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|
|
$
|
8,559
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|
|
|
|
|
___________
(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 months ended September 30, 2021 and 2020.
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:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
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|
|
|
Gross Amount Reported on Balance Sheet
|
|
Netting Adjustments
|
|
Cash Collateral Posted
|
|
Net Exposure
|
September 30, 2021
|
|
Derivative Assets
|
|
$
|
8,990
|
|
|
$
|
(222)
|
|
|
$
|
—
|
|
|
$
|
8,768
|
|
|
|
Derivative Liabilities
|
|
$
|
3,055
|
|
|
$
|
(222)
|
|
|
$
|
—
|
|
|
$
|
2,833
|
|
June 30, 2021
|
|
Derivative Assets
|
|
$
|
4,643
|
|
|
$
|
(23)
|
|
|
$
|
—
|
|
|
$
|
4,620
|
|
|
|
Derivative Liabilities
|
|
$
|
3,208
|
|
|
$
|
(23)
|
|
|
$
|
—
|
|
|
$
|
3,185
|
|
Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges 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 September 30, 2021, $10.3 million of net gains on coffee-related derivative instruments designated as a cash flow 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 September 30, 2021.
The Company had designated the Rate Swap derivative instrument as a cash flow hedge; however, during the three months ended September 30, 2020, the Company de-designated the Rate Swap derivative instrument. The frozen AOCI is subsequently reclassified into interest expense in the period or periods when the hedged transaction affects 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 September 30, 2021, $1.2 million of net losses on the Rate Swap de-designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 5. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
7,192
|
|
|
$
|
—
|
|
|
$
|
7,192
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
1,798
|
|
|
$
|
—
|
|
|
$
|
1,798
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
143
|
|
|
$
|
—
|
|
Interest rate swap derivative liabilities (2)
|
|
$
|
2,834
|
|
|
—
|
|
|
$
|
2,834
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
4,115
|
|
|
$
|
—
|
|
|
$
|
4,115
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
$
|
—
|
|
Interest rate swap derivative liabilities (2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
528
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Interest rate swap derivative liabilities (1)
|
|
$
|
3,185
|
|
|
$
|
—
|
|
|
$
|
3,185
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
____________________
(1)The 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 instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.
Note 6. Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
Trade receivables
|
|
$
|
42,323
|
|
|
$
|
37,208
|
|
Other receivables(1)
|
|
1,388
|
|
|
3,438
|
|
Allowance for doubtful accounts
|
|
(334)
|
|
|
(325)
|
|
Accounts receivable, net
|
|
$
|
43,377
|
|
|
$
|
40,321
|
|
__________
(1) Includes vendor rebates and other non-trade receivables.
There was no material change in the allowance for doubtful accounts during the three months ended September 30, 2021.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 7. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
Coffee
|
|
|
|
|
Processed
|
|
$
|
23,482
|
|
|
$
|
20,917
|
|
Unprocessed
|
|
38,143
|
|
|
34,762
|
|
Total
|
|
$
|
61,625
|
|
|
$
|
55,679
|
|
Tea and culinary products
|
|
|
|
|
Processed
|
|
$
|
15,988
|
|
|
$
|
15,228
|
|
Unprocessed
|
|
64
|
|
|
60
|
|
Total
|
|
$
|
16,052
|
|
|
$
|
15,288
|
|
Coffee brewing equipment parts
|
|
$
|
6,185
|
|
|
$
|
5,824
|
|
Total inventories
|
|
$
|
83,862
|
|
|
$
|
76,791
|
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, purchase price variance and other expenses incurred in bringing the inventory to its existing condition and location. 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 8. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
Buildings and facilities
|
|
$
|
94,857
|
|
|
$
|
94,846
|
|
Machinery, vehicles and equipment
|
|
221,141
|
|
|
223,579
|
|
|
|
|
|
|
Capitalized software
|
|
24,187
|
|
|
24,218
|
|
Office furniture and equipment
|
|
14,031
|
|
|
13,834
|
|
|
|
$
|
354,216
|
|
|
$
|
356,477
|
|
Accumulated depreciation
|
|
(219,468)
|
|
|
(218,341)
|
|
Land
|
|
11,955
|
|
|
11,955
|
|
Property, plant and equipment, net
|
|
$
|
146,703
|
|
|
$
|
150,091
|
|
Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
Coffee Brewing Equipment
|
|
$
|
96,557
|
|
|
$
|
97,105
|
|
Accumulated depreciation
|
|
(70,774)
|
|
|
$
|
(70,705)
|
|
Coffee Brewing Equipment, net
|
|
$
|
25,783
|
|
|
$
|
26,400
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Depreciation expense related to capitalized CBE and other CBE related expenses provided to customers and reported in cost of goods sold were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
(In thousands)
|
|
2021
|
|
2020
|
|
|
|
|
Depreciation expense
|
|
$
|
1,964
|
|
|
$
|
2,360
|
|
|
|
|
|
Other CBE expenses
|
|
$
|
6,048
|
|
|
$
|
5,567
|
|
|
|
|
|
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 9. Intangible Assets
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
June 30, 2021
|
(In thousands)
|
|
Weighted
Average
Amortization
Period as of
September 30, 2021
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
|
Net
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
5.5
|
|
$
|
33,003
|
|
|
$
|
(20,242)
|
|
|
|
|
$
|
12,761
|
|
|
$
|
33,003
|
|
|
$
|
(19,692)
|
|
|
|
$
|
13,311
|
|
Non-compete agreements
|
|
0.2
|
|
220
|
|
|
(212)
|
|
|
|
|
8
|
|
|
220
|
|
|
(202)
|
|
|
|
18
|
|
Recipes
|
|
2.1
|
|
930
|
|
|
(653)
|
|
|
|
|
277
|
|
|
930
|
|
|
(619)
|
|
|
|
311
|
|
Trade name/brand name
|
|
2.2
|
|
510
|
|
|
(430)
|
|
|
|
|
80
|
|
|
510
|
|
|
(420)
|
|
|
|
90
|
|
Total amortized intangible assets
|
|
|
|
$
|
34,663
|
|
|
$
|
(21,537)
|
|
|
|
|
$
|
13,126
|
|
|
$
|
34,663
|
|
|
$
|
(20,933)
|
|
|
|
$
|
13,730
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, trade names and brand name with indefinite lives
|
|
|
|
$
|
4,522
|
|
|
$
|
—
|
|
|
|
|
$
|
4,522
|
|
|
$
|
4,522
|
|
|
$
|
—
|
|
|
|
$
|
4,522
|
|
Total unamortized intangible assets
|
|
|
|
$
|
4,522
|
|
|
$
|
—
|
|
|
|
|
$
|
4,522
|
|
|
$
|
4,522
|
|
|
$
|
—
|
|
|
|
$
|
4,522
|
|
Total intangible assets
|
|
|
|
$
|
39,185
|
|
|
$
|
(21,537)
|
|
|
|
|
$
|
17,648
|
|
|
$
|
39,185
|
|
|
$
|
(20,933)
|
|
|
|
$
|
18,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense for the three months ended September 30, 2021 and 2020 was $0.6 million in each period.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 10. Employee Benefit Plans
Single Employer Pension Plans
As of September 30, 2021, the Company has two defined benefit pension plans for certain employees, the "Farmer Bros. Plan" and the “Hourly Employees' Plan”. The Company froze benefit accruals and participation in these plans effective June 30, 2011 and October 1, 2016, respectively. After the plan freezes, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan.
The net periodic benefit (credit) cost for the defined benefit pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
—
|
|
|
|
|
|
Interest cost
|
|
848
|
|
|
859
|
|
|
|
|
|
Expected return on plan assets
|
|
(1,237)
|
|
|
(1,038)
|
|
|
|
|
|
Amortization of net loss(1)
|
|
339
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit (credit) cost
|
|
$
|
(50)
|
|
|
$
|
323
|
|
|
|
|
|
___________
(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.
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
June 30, 2021
|
Discount rate
|
|
2.60%
|
|
2.55%
|
Expected long-term return on plan assets
|
|
6.25%
|
|
6.25%
|
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 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.
Contributions made by the Company to the multiemployer pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
Contributions to WCTPP
|
|
$
|
244
|
|
|
$
|
224
|
|
|
|
|
|
Contributions to All Other Plans
|
|
7
|
|
|
4
|
|
|
|
|
|
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
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
through the collective bargaining process. The Company’s participation in these plans is governed by collective bargaining agreements which expire on or before January 31, 2025.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. 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. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors.
In March 2020, due to the impact the COVID-19 pandemic had on our business and financial results, the Company elected to suspend the 401(k) matching contribution for non-union employees and recorded no matching contributions in the three months ended September 30, 2020.
Beginning in July 2021, the Company re-instated a 401(k) matching program for non-union employees, by matching 50% of any non-union employee's annual contribution to the 401(k) Plan, up to 6% of such employee's eligible income, which is substantially similar to the program prior to its suspension in March 2020. The Company recorded matching contributions of $0.6 million in operating expenses in the three months ended September 30, 2021.
Additionally, the Company 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. During the three months ended September 30, 2021 and 2020, the Company contributed a total of 51,597 and 76,671 shares of the Company’s common stock with a value of $0.7 million and $0.5 million, respectively, to eligible participants’ annual plan compensation.
Postretirement Benefits
Retiree Medical Plan and Death Benefit
On March 23, 2020, the Company announced a plan to amend and terminate the postretirement medical benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”) effective January 1, 2021. As a result, the re-measurement generated a prior service credit. This credit, along with actuarial gains, were amortized over the remaining months of the plan through January 1, 2021. The Retiree Medical Plan is now terminated.
The Company provides a postretirement death benefit (“Death Benefit”) to certain 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. In June 2021, the Company amended the Death Benefit Plan effective immediately, which triggered re-measurement of the plan. In conjunction with the amendment, the Company created a new Executive Death Benefit Plan (the “Executive Death Benefit Plan”) for a small group of participants in the Death Benefit Plan. Under the Executive Death Benefit Plan, the participants receive the same benefits they would have received under the Death Benefit Plan.
The following table shows the components of net periodic postretirement benefit cost (credit) for the Retiree Medical Plan and Death Benefit for the three months ended September 30, 2021 and 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Components of Net Periodic Postretirement Benefit Cost (Credit):
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
5
|
|
|
|
|
|
Interest cost
|
|
7
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net gain
|
|
3
|
|
|
(2,728)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credit
|
|
—
|
|
|
(4,481)
|
|
|
|
|
|
Net periodic postretirement benefit cost (credit)
|
|
$
|
10
|
|
|
$
|
(7,131)
|
|
|
|
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2021
|
|
2020
|
Retiree Medical Plan discount rate
|
|
N/A
|
|
0.06%
|
Death Benefit discount rate
|
|
2.72%
|
|
2.87%
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 11. Debt Obligations
The following table summarizes the Company’s debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
June 30, 2021
|
(In thousands)
|
|
Debt Origination Date
|
|
Maturity
|
|
Principal Borrowing Amount
|
|
Carrying Value
|
|
Weighted Average Interest Rate (1)
|
|
Carrying Value
|
|
Weighted Average Interest Rate
|
Revolver
|
|
Various
|
|
4/25/2025
|
|
N/A
|
|
$
|
41,500
|
|
|
2.75
|
%
|
|
$
|
43,500
|
|
|
6.21
|
%
|
Term Loan
|
|
4/26/2021
|
|
4/25/2025
|
|
$47,500
|
|
$
|
45,332
|
|
|
7.50
|
%
|
|
$
|
45,278
|
|
|
7.50
|
%
|
Total
|
|
|
|
|
|
|
|
$
|
86,832
|
|
|
|
|
$
|
88,778
|
|
|
|
__________
(1) The weighted average interest rate excludes the fixed rate on the de-designated Amended Rate Swap
On April 26, 2021, the Company entered into a new senior secured facility composed of (a) a Credit Agreement, (the “Revolver Credit Facility Agreement”) by and among the Company, Boyd Assets Co., FBC Finance Company, Coffee Bean Holding Co., Inc., Coffee Bean International, Inc. and China Mist Brands, Inc., as borrowers (collectively, the “Borrowers”), Wells Fargo Bank, N.A. (“Wells Fargo”), as administrative agent and lender, and the other lenders party thereto, and various loan documents relating thereto including the Guaranty and Security Agreement, (the “Revolver Security Agreement”), by and among the Borrowers, as grantors, and Wells Fargo, as administrative agent, and (b) a Credit Agreement, (the “Term Credit Facility Agreement”) by and among the Borrowers, MGG Investment Group LP. (“MGG”), as administrative agent, and the lenders party thereto, and various loan documents relating thereto including the Guaranty and Security Agreement, (the “Term Security Agreement”), by and among the Borrowers, as grantors, and MGG, as administrative agent.
The following summary description of the Revolver Credit Facility Agreement and the Revolver Security Agreement key items.
The Revolver Credit Facility Agreement, among other things include:
1.A commitment of up to $80.0 million (“Revolver”);
2.sublimit on letters of credit of $10.0 million;
3.maturity date of April 25, 2025, and has no scheduled payback required on the principal prior to the maturity date;
4.fully collateralized by all existing and future capital stock of the Borrowers (other than the Company) and all of the Borrowers' personal and real property;
5.Revolver calculated as the lesser of (a) $80.0 million and (b) the amount derived from pursuant to a borrowing base composed of the sum of (i) 85%of eligible accounts receivable (less a dilution reserve), plus (ii) the lesser of: (a) 80% of eligible raw material inventory, eligible in-transit inventory and eligible finished goods inventory (collectively, “Eligible Inventory”), and (b) 85% of the net orderly liquidation value (“NOLV”) of eligible inventory, minus (c) applicable reserve;
6.Interest under the Revolver is either LIBOR + 2.25% per annum, with LIBOR floor 0.50%, or base rate + 1.25% per annum; and
7.In the event that Borrowers’ availability to borrow under the Revolver falls below $10.0 million, financial covenant requires the Company to have a fixed charge coverage ratio of at least 1.00:1.00 at all such times.
The Revolver Credit Facility Agreement and the Revolver Security Agreement contain customary affirmative and negative covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's and its subsidiaries' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Revolver Credit Facility Agreement becoming immediately due and payable and termination of the commitments.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following summary description of the Term Credit Facility Agreement and the Term Security Agreement key items. Please refer to Exhibit 10.3 in this Quarterly Report on Form 10-Q for the full text of the agreements.
The Term Credit Facility Agreement, among other things include:
1.total commitment of $47.5 million in the form of a term loan (“Term Loan”);
2.maturity date of April 25, 2025;
3.fully collateralized by all existing and future capital stock of the Borrowers (other than the Company) and all of the Borrowers' personal and real property;
4.Interest under the Term Loan is either (a) LIBOR + 6.5% per annum, with LIBOR Floor 1.0%, or (b) base rate + 5.50% per annum, with a 3% floor on base rate;
5.financial covenants include;
(i) maintain qualified cash and Borrower’s availability to borrow under the Revolver of at least $15.0 million through September 30, 2021; and
(ii) Commencing on the fiscal quarter ending on March 31, 2022, quarterly minimum EBITDA and fixed charge coverage ratio requirements specified therein.
The Term Credit Facility Agreement and the Term Security Agreement contain customary affirmative and negative covenants and restrictions typical for a financing of this type that, among other things, require the Company to satisfy certain financial covenants and restrict the Company's and its subsidiaries' ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of its business, transfer and sell material assets and merge or consolidate. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Term Credit Facility Agreement becoming immediately due and payable and termination of the commitments.
At September 30, 2021, the Company had outstanding borrowings on the Revolver Credit Facility of $41.5 million and had utilized $4.1 million of the letters of credit sublimit.
As of September 30, 2021, the Company was in compliance with all of the financial covenants under the Revolver Credit Facility Agreement and the Term Credit Facility Agreement (collectively, the “Credit Facilities”). Furthermore, the Company believes it will be in compliance with the related financial covenants under these agreements for the next twelve months.
In connection with the Credit Facilities, the Company executed a new ISDA agreement to transfer its interest rate swap to Wells Fargo (“Amended Rate Swap”). Under the terms of the Amended Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.4725%, an increase of 0.275% from its original interest rate swap fixed rate of 2.1975%. The Amended Rate Swap utilizes the same notional amount of $65.0 million and maturity date of October 11, 2023 as the original interest rate swap.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 12. Employee Stock Ownership Plan
The Company’s Employee Stock Ownership Plan (“ESOP”) was established in 2000. As of 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
June 30, 2021
|
Allocated shares
|
|
1,041,054
|
|
|
1,067,687
|
|
Committed to be released shares
|
|
—
|
|
|
—
|
|
Unallocated shares
|
|
—
|
|
|
—
|
|
Total ESOP shares
|
|
1,041,054
|
|
|
1,067,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fair value of ESOP shares
|
|
$
|
8,755
|
|
|
$
|
13,549
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 13. Share-based Compensation
Farmer Bros. Co. Amended and Restated 2017 Long-Term Incentive Plan (the “2017 Plan”)
As of September 30, 2021, there were 110,066 shares available under the 2017 Plan including shares that were forfeited under the prior plans for future issuance.
Farmer Bros. Co. 2020 Inducement Incentive Award Plan (the “2020 Inducement Plan”)
As of September 30, 2021, there were 171,371 shares available under the 2020 Inducement Plan.
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. There were no NQOs granted during the three months ended September 30, 2021.
The following table summarizes NQO activity for three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding NQOs:
|
|
Number
of NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
Outstanding at June 30, 2021
|
|
513,325
|
|
|
13.06
|
|
|
|
5.17
|
|
706
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
Forfeited
|
|
(5,320)
|
|
|
15.94
|
|
|
|
—
|
|
—
|
|
Expired
|
|
(18,627)
|
|
|
21.12
|
|
|
|
—
|
|
—
|
|
Outstanding at September 30, 2021
|
|
489,378
|
|
|
12.75
|
|
|
|
5.09
|
|
185
|
|
Exercisable at September 30, 2021
|
|
244,315
|
|
|
13.37
|
|
|
|
4.96
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values outstanding at the end of period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $8.41 at September 30, 2021 and $12.69 at June 30, 2021, representing the last trading day of the respective 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. NQOs outstanding that are expected to vest are net of estimated forfeitures.
There were no options exercised during three months ended September 30, 2021 and 2020.
At September 30, 2021 and June 30, 2021, respectively, there was $0.7 million and $0.9 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at September 30, 2021 is expected to be recognized over the weighted average period of 1.1 years. Total compensation expense for NQOs was $0.2 million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
The following table summarizes PNQ activity for the three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in
thousands)
|
Outstanding at June 30, 2021
|
|
11,750
|
|
|
29.76
|
|
|
|
0.71
|
|
—
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
—
|
|
—
|
|
Expired
|
|
(8,035)
|
|
|
28.88
|
|
|
|
—
|
|
—
|
|
Outstanding at September 30, 2021
|
|
3,715
|
|
|
31.71
|
|
|
|
1.80
|
|
—
|
|
Exercisable at September 30, 2021
|
|
3,714
|
|
|
31.72
|
|
|
|
1.80
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $8.41 at September 30, 2021 and $12.69 at June 30, 2021, representing the last trading day of the respective fiscal periods, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates.
There were no options exercised during three months ended September 30, 2021 and 2020.
At September 30, 2021 and June 30, 2021, there was no unrecognized PNQ compensation cost. There was no compensation expense related to PNQs in the three months ended September 30, 2021 and 2020.
Restricted Stock
The following table summarizes restricted stock activity for the three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested Restricted Stock Awards:
|
|
Shares
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
|
|
|
Outstanding and nonvested at June 30, 2021
|
|
681,570
|
|
|
10.47
|
|
|
|
|
|
Granted
|
|
275,602
|
|
|
8.96
|
|
|
|
|
|
Vested/Released
|
|
(114,237)
|
|
|
12.06
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(16,592)
|
|
|
5.93
|
|
|
|
|
|
Outstanding and nonvested at September 30, 2021
|
|
826,343
|
|
|
11.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total grant-date fair value of restricted stock granted during the three months ended September 30, 2021 was $2.5 million.
At September 30, 2021 and June 30, 2021, there was $4.7 million and $2.8 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at September 30, 2021 is expected to be recognized over the weighted average period of 1.3 years. Total compensation expense for restricted stock was $0.5 million and $0.5 million, respectively, in the three months ended September 30, 2021 and 2020.
Performance-Based Restricted Stock Units (“PBRSUs”)
The following table summarizes PBRSU activity for the three months ended September 30, 2021:
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested PBRSUs:
|
|
PBRSUs
Awarded(1)
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
|
|
|
Outstanding and nonvested at June 30, 2021
|
|
354,466
|
|
|
6.06
|
|
|
|
|
|
Granted(1)
|
|
158,659
|
|
|
8.91
|
|
|
|
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
|
|
|
|
Cancelled/Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding and nonvested at September 30, 2021
|
|
513,125
|
|
|
6.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_____________
(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 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 three months ended September 30, 2021 was $1.4 million.
At September 30, 2021 and June 30, 2021, there was $2.3 million and $1.0 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at September 30, 2021 is expected to be recognized over the weighted average period of 2.7 years. Total compensation expense for PBRSUs was $106.5 thousand and $49.6 thousand, respectively, for the three months ended September 30, 2021 and 2020.
Cash-Settled Restricted Stock Units (“CSRSUs”)
CSRSUs vest in equal installments over a three-year period from the grant date, and are cash-settled upon vesting based on the Company’s common stock closing share price on the vesting date.
The CSRSUs are accounted for as liability awards, and compensation expense is measured at fair value on the date of grant and recognized on a straight-line basis over the vesting period net of forfeitures. Compensation expense is remeasured at each reporting date with a cumulative adjustment to compensation cost during the period based on changes in the Company’s common stock closing share price.
The following table summarizes CSRSU activity for the three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested CSRSUs:
|
|
CSRSUs
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
|
|
|
Outstanding and nonvested at June 30, 2021
|
|
185,602
|
|
|
4.31
|
|
|
|
|
|
Granted
|
|
85,851
|
|
|
8.91
|
|
|
|
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
|
|
|
|
Cancelled/Forfeited
|
|
(10,440)
|
|
|
4.31
|
|
|
|
|
|
Outstanding and nonvested at September 30, 2021
|
|
261,013
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total grant-date fair value of CSRSUs granted during the three months ended September 30, 2021 was $0.8 million.
At September 30, 2021 and June 30, 2021, there was $1.8 million and $2.0 million, respectively, of unrecognized compensation cost related to CSRSU. The unrecognized compensation cost related to CSRSU at September 30, 2021 is expected to be recognized over the weighted average period of 2.5 years. Total compensation expense for CSRSUs was a credit of $5,896 thousand in the three months ended September 30, 2021.
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
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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 September 30, 2021, there was no liability and no unrecognized PCA compensation cost since it was deemed not probable that the Company will achieve the target performance conditions.
Total compensation expense for PCAs was $25.8 thousand for the three months ended September 30 2020.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 14. Other Current Liabilities
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
Cumulative preferred dividends, undeclared and unpaid
|
|
$
|
2,198
|
|
|
$
|
2,051
|
|
Accrued workers’ compensation liabilities
|
|
944
|
|
|
1,016
|
|
Finance lease liabilities
|
|
193
|
|
|
192
|
|
|
|
|
|
|
Other (1)
|
|
4,382
|
|
|
3,166
|
|
Other current liabilities
|
|
$
|
7,717
|
|
|
$
|
6,425
|
|
_________
(1) Includes accrued property taxes, sales and use taxes and insurance liabilities other than workers compensation.
Note 15. Other Long-Term Liabilities
Other long-term liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2021
|
|
June 30, 2021
|
|
|
|
|
|
Derivative liabilities—noncurrent
|
|
$
|
1,326
|
|
|
$
|
1,653
|
|
Deferred compensation(1)
|
|
1,703
|
|
|
1,716
|
|
Finance lease liabilities
|
|
521
|
|
|
563
|
|
Deferred income taxes and other liabilities
|
|
1,160
|
|
|
1,160
|
|
Other long-term liabilities
|
|
$
|
4,710
|
|
|
$
|
5,092
|
|
___________
(1) Includes payroll taxes and cash-settled restricted stock units liabilities.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 16. Income Taxes
The income tax expense and the related effective tax rates are as follows (in thousands, except effective tax rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
|
|
|
Income tax expense
|
|
$
|
62
|
|
|
$
|
142
|
|
|
|
|
|
Effective tax rate
|
|
(2.6)
|
%
|
|
(2.3)
|
%
|
|
|
|
|
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 expected to apply to taxable income in the years the Company estimates the related temporary differences to 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.
Tax expense in the three months ended September 30, 2021 was $62 thousand compared to $142 thousand in the three months ended September 30, 2020, which primarily relates to state income tax expense in certain jurisdictions.
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 September 30, 2021, the Company is no longer subject to income tax audits by taxing authorities for any years prior to 2018. 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.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 17. Net Loss Per Common Share
Basic net income (loss) per common share is calculated by dividing net 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 loss attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested performance-based restricted stock units, and shares of the Company’s Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), as converted, during the 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 average market price of our common shares for the period) and unvested performance-based restricted stock units because their inclusion would have been anti-dilutive.
The following table presents the computation of basic and diluted earnings loss per common share:
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Three Months Ended September 30,
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(In thousands, except share and per share amounts)
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2021
|
|
2020
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|
|
|
|
Undistributed net loss available to common stockholders
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|
$
|
(2,474)
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|
|
$
|
(6,236)
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|
|
|
|
|
Undistributed net loss available to nonvested restricted stockholders and holders of convertible preferred stock
|
|
(97)
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|
|
(176)
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|
|
|
|
Net loss available to common stockholders—basic
|
|
$
|
(2,571)
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|
|
$
|
(6,412)
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|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
17,969,694
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|
|
17,420,442
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|
|
|
|
Effect of dilutive securities:
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|
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Shares issuable under stock options
|
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—
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|
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—
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|
|
|
|
|
Shares issuable under PBRSUs
|
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—
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|
|
—
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|
|
|
|
|
Shares issuable under convertible preferred stock
|
|
—
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|
|
—
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|
|
|
|
|
Weighted average common shares outstanding—diluted
|
|
17,969,694
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|
|
17,420,442
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Net loss available to common stockholders per common share—basic
|
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$
|
(0.14)
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$
|
(0.37)
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|
|
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|
|
Net loss available to common stockholders per common share—diluted
|
|
$
|
(0.14)
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|
|
$
|
(0.37)
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|
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The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
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Three Months Ended September 30,
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2021
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2020
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Shares issuable under stock options
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384,520
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548,671
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Shares issuable under convertible preferred stock
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440,990
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425,887
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|
|
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Shares issuable under PBRSUs
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383,783
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|
|
84,364
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|
|
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 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 September 30, 2021, Series A Preferred Stock consisted of the following:
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(In thousands, except share and per share amounts)
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Shares Authorized
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Shares Issued and Outstanding
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Stated Value per Share
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Carrying Value
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Cumulative Preferred Dividends, Undeclared and Unpaid
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Liquidation Preference
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21,000
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|
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14,700
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|
|
1,150
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|
|
$
|
16,899
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|
|
$
|
2,199
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|
|
$
|
16,899
|
|
Note 19. Revenue Recognition
The Company’s primary sources 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 through 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, facility or address. 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.
The Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
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|
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|
|
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|
|
Three Months Ended September 30,
|
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|
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2021
|
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2020
|
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|
|
|
(In thousands)
|
|
$
|
|
% of total
|
|
$
|
|
% of total
|
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|
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Net Sales by Product Category:
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Coffee (Roasted)
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$
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70,597
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65.1
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%
|
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$
|
66,154
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|
|
68.0
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%
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|
Tea & Other Beverages (1)
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19,037
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|
17.6
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%
|
|
15,529
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|
|
16.0
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%
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Culinary
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13,075
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|
|
12.1
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%
|
|
10,423
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|
|
10.7
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%
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|
|
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Spices
|
|
5,199
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|
|
4.8
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%
|
|
4,746
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|
|
4.9
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%
|
|
|
|
|
|
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|
|
Net sales by product category
|
|
107,908
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|
|
99.6
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%
|
|
96,852
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|
|
99.6
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%
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Delivery Surcharge
|
|
454
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|
0.4
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%
|
|
418
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0.4
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%
|
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|
|
|
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Net sales
|
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$
|
108,362
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|
|
100.0
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%
|
|
$
|
97,270
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|
100.0
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%
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____________
(1)Includes all beverages other than roasted coffee, including frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.
The Company does not have any material contract assets and liabilities as of September 30, 2021. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At September 30, 2021 and June 30, 2021, “Accounts receivable, net” included, $42.3 million and $37.2 million, respectively, in receivables from contracts with customers.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 20. Commitments and Contingencies
For a detailed discussion about the Company’s commitments and contingencies, see Note 22, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the 2021 Form 10-K. During the three months ended September 30, 2021, 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.
Purchase Commitments
As of September 30, 2021, the Company had committed to purchase green coffee inventory totaling $37.9 million under fixed-price contracts, and $13.6 million in inventory and other purchases under non-cancelable purchase 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 sells coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986 (“Prop 65”). The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Prop 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under Prop 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500 per day per violation of 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 asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the 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, 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 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 continued to pursue third-party discovery with plans to file 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. The JDG’s reply in support of its motion for summary judgment was due to the Court on the March 16, 2020 however, on March 17, 2020, notice was given that the Court was rescheduling the hearings set for March 23, 2020. Due to COVID 19 restrictions, the Court continued the hearing on the nine motions until July 16, 2020. At the hearing, the Court denied three of CERT’s motions for summary adjudication that challenged the
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
OEHHA rulemaking, and rescheduled the balance of the pending motions for August 10, 2020. Subsequent to the hearing on January 21, 2020, Plaintiff made broad discovery requests against each of the defendants in hopes of opening up a third round of discovery. The discovery focuses on “additives to” and “flavorings” in coffee. The JDG has responded to the discovery requests but Plaintiff has filed a motion to compel further answers to discovery and production of documents.
At the August 10, 2020 hearing, the Court denied multiple motions by the Plaintiffs for summary adjudication. The hearing on the remaining motions was scheduled for August 25, 2020 and at that hearing, the Court denied CERT’s motion for summary judgment and granted the JDG’s motion for summary judgment, noting that the discovery and claims regarding additives were outside the scope of this case. Notice of Judgment in favor of defendants was entered on October 6, 2020.
On November 20, 2020, CERT filed an appeal with the Superior Court of California. On January 29, 2021, CERT filed another appeal with the Superior Court of California. On April 9, 2021, CERT filed it’s opening brief on the first appeal. The Company filed its responsive brief on August 27, 2021. CERT’s response is due November 15, 2021. The Company believes that the likelihood that the Company will ultimately incur a loss in connection with this litigation is less than reasonably possible.
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 Branch Property
During the three months ended September 30, 2021, the Company completed the sale of the following branch properties, none of which were leased back:
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|
|
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|
|
|
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|
|
(In thousands)
|
|
|
|
|
|
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|
|
Name of Branch Property
|
|
Date Sold
|
|
Sales Price
|
|
Net Proceeds
|
|
Gain on Sale
|
Santa Ana, California
|
|
7/2/2021
|
|
$
|
4,299
|
|
|
$
|
4,072
|
|
|
$
|
3,571
|
|
Santa Fe Springs, California
|
|
7/7/2021
|
|
$
|
2,650
|
|
|
$
|
2,507
|
|
|
$
|
1,509
|
|
Assets Held for Sale
As of September 30, 2021, one branch property met the accounting guidance criteria to be classified as held for sale. As such, the Company evaluated this asset to determine whether the carrying value exceeded the fair value less any costs to sell. No loss was recorded as of September 30, 2021 and the aggregate assets held for sale are presented as a separate line item in the condensed consolidated balance sheet. The branch property did not meet the accounting guidance criteria to be classified as discontinued operations.
The following table presents net book value related to the major classes of assets that were classified as held for sale:
|
|
|
|
|
|
(In thousands)
|
September 30, 2021
|
Land
|
90
|
|
Assets held for sale
|
$
|
90
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 22. Subsequent Events
The Company evaluated all events or transactions that occurred after September 30, 2021 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