Changes in Accounting Principles and Corrections to Previously Issued Financial Statements

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

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

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

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

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

In addition to the foregoing, during the three months ended September 30, 2018, the Company adopted new accounting standards that required retrospective application. The Company updated the condensed consolidated statements of income as a result of adopting ASU 2017-07, and updated the condensed consolidated statements of cash flows as a result of adopting ASU 2016-18. See Note 2.

The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the three months ended September 30, 2017:



	Three Months Ended September 30, 2017
(In thousands, except per share data)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			ASU 2017-07 Adjustments(1)			Retrospectively Adjusted
Cost of goods sold	$	82,706		$	(445	)	$	4,462		$	(1,051	)	$	(42	)	$	85,630
Gross profit	$	49,007		$	445		$	(4,462	)	$	1,051		$	42		$	46,083
Selling expenses	$	38,915		$	—		$	(5,045	)	$	(1,042	)	$	28		$	32,856
General and administrative expenses	$	11,327		$	—		$	—		$	—		$	32		$	11,359
Operating expenses	$	50,265		$	—		$	(5,045	)	$	(1,042	)	$	60		$	44,238
(Loss) income from operations	$	(1,258	)	$	445		$	583		$	2,093		$	(18	)	$	1,845
Interest expense	$	(523	)	$	—		$	—		$	—		$	(1,645	)	$	(2,168	)
Other, net	$	87		$	—		$	—		$	—		$	1,663		$	1,750
Total other expense	$	(430	)	$	—		$	—		$	—		$	18		$	(412	)
(Loss) income before taxes	$	(1,688	)	$	445		$	583		$	2,093		$	—		$	1,433
Income tax (benefit) expense	$	(710	)	$	608		$	151		$	543		$	—		$	592
Net (loss) income	$	(978	)	$	(163	)	$	432		$	1,550		$	—		$	841
Net (loss) income available to common stockholders	$	(978	)	$	(163	)	$	432		$	1,550		$	—		$	841
Net (loss) income available to common stockholders per common share—basic	$	(0.06	)	$	(0.01	)	$	0.03		$	0.09		$	—		$	0.05
Net (loss) income available to common stockholders per common share—diluted	$	(0.06	)	$	(0.01	)	$	0.03		$	0.09		$	—		$	0.05

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

The following table presents the impact of these changes on the Company's condensed consolidated statement of cash flows for the three months ended September 30, 2017:



	Three Months Ended September 30, 2017
(In thousands)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Net (loss) income	$	(978	)	$	(163	)	$	432		$	1,550		$	841
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Deferred income taxes	$	(895	)	$	608		$	151		$	543		$	407
Net losses (gains) on derivative instruments and investments	$	261		$	(1,229	)	$	—		$	—		$	(968	)
Change in operating assets and liabilities:
Inventories	$	(8,539	)	$	821		$	(582	)	$	(2,093	)	$	(10,393	)
Derivative assets (liabilities), net	$	(455	)	$	(38	)	$	—		$	—		$	(493	)
Net cash provided by operating activities	$	7,104		$	(1	)	$	1		$	—		$	7,104

The impacts shown above have also been reflected in the Company’s condensed consolidated statement of comprehensive loss for the three months ended September 30, 2017. The resulting impacts adjusted previously reported unrealized (losses) gains on derivative instruments designated as cash flow hedges, net of tax, for the three months ended September 30, 2017 of $432,000 to $428,000. Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax, for the three months ended September 30, 2017 increased from losses of $4,000 to gains of $772,000. Total comprehensive loss, net of tax, for the three months ended September 30, 2017 decreased from $(1.4) million to $(0.4) million.