Share-based Compensation

On December 5, 2013, the Company’s stockholders approved the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”), which is an amendment and restatement of, and successor to, the Farmer Bros. Co. 2007 Omnibus Plan (the "Omnibus Plan"). The principal change to the Amended Equity Plan was to limit awards under the plan to performance-based stock options and to restricted stock under limited circumstances.

Stock Options

The share-based compensation expense recognized in the Company’s consolidated statements of operations is based on awards ultimately expected to vest. Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the stock options. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Non-Qualified Stock Options with Time-Based Vesting (“NQOs”)

In the three months ended September 30, 2015, the Company granted 1,582 shares issuable upon the exercise of NQOs with an exercise price of $25.50 per share to an eligible employee under the Amended Equity Plan which vest ratably over a three-year period. No comparable grants were made in the three months ended September 30, 2014.

Following are the weighted average assumptions used in the Black-Scholes valuation model for NQOs granted during the three months ended September 30, 2015.



	Three Months Ended September 30, 2015
Weighted average fair value of NQOs	$	11.06
Risk-free interest rate	1.52		%
Dividend yield	—		%
Average expected term	5.1 years
Expected stock price volatility	47.9		%

The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 4.8% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes NQO activity for the three months ended September 30, 2015:



Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2015	329,300		12.30	5.54	3.9	3,700
Granted	1,582		25.50	11.06	7.0	—
Exercised	(19,095	)	16.51	6.21	—	172
Cancelled/Forfeited	(7,290	)	13.49	5.94	—	—
Outstanding at September 30, 2015	304,497		12.08	5.52	3.7	4,620
Vested and exercisable, September 30, 2015	228,100		10.62	4.89	3.3	3,794
Vested and expected to vest, September 30, 2015	301,858		12.00	5.49	3.7	4,604

The aggregate intrinsic value outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.25 at September 30, 2015 and $23.50 at June 30, 2015, representing the last trading day of the applicable fiscal period, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of that date. The aggregate intrinsic value of stock option exercises in the three months ended September 30, 2015 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.

No NQOs vested during the three months ended September 30, 2015. During the three months ended September 30, 2015 and 2014, the Company received $0.3 million and $0.6 million, respectively, in proceeds from exercises of vested NQOs.

As of September 30, 2015 and June 30, 2015, there was $0.3 million and $0.4 million, respectively, of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at September 30, 2015 is expected to be recognized over the weighted average period of 1.9 years. Total compensation expense for NQOs in the three months ended September 30, 2015 and 2014 was $34,000 and $0.1 million, respectively.

Non-Qualified Stock Options with Performance-Based and Time-Based Vesting (“PNQs”)

In the three months ended September 30, 2015, the Company granted no shares issuable upon the exercise of PNQs.

The following table summarizes PNQ activity for the three months ended September 30, 2015:



Outstanding PNQs:	Number of PNQs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2015	224,067		22.44	10.31	6.0	237
Granted	—		—	—	—	—
Exercised	(1,301	)	19.95	9.85	—	—
Cancelled/Forfeited	(14,421	)	22.66	10.29	—	—
Outstanding at September 30, 2015	208,345		22.44	10.32	5.8	1,002
Vested and exercisable, September 30, 2015	33,658		21.32	10.51	4.7	200
Vested and expected to vest, September 30, 2015	192,371		22.40	10.32	5.7	933

No PNQs vested during the three months ended September 30, 2015 and 1,301 PNQs were exercised during the three months ended September 30, 2015.

As of September 30, 2015, the Company met the performance target for the first year of the fiscal 2014 and fiscal 2015 awards and expects that it will achieve the cumulative performance targets set forth in the PNQ agreements for the fiscal 2014 and fiscal 2015 awards.

As of September 30, 2015 and June 30, 2015, there was $1.2 million and $1.5 million, respectively, in unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at September 30, 2015 is expected to be recognized over the weighted average period of 2.1 years. Total compensation expense for PNQs in each of the three months ended September 30, 2015 and 2014 was $0.1 million.

Restricted Stock

In the three months ended September 30, 2015, the Company granted 327 shares of restricted stock under the Amended Equity Plan with a grant date fair value of $25.50 per share to an eligible employee.

Shares of restricted stock generally vest at the end of three years for eligible employees and ratably over a period of three years for non-employee directors. During the three months ended September 30, 2015, no shares of restricted stock vested.

The following table summarizes restricted stock activity for the three months ended September 30, 2015:



Outstanding and Nonvested Restricted Stock Awards:	Shares Awarded		Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2015	47,082		16.48	1.2	1,106
Granted	327		25.50	3.0	8
Cancelled/Forfeited	(2,468	)	11.81	—	—
Outstanding at September 30, 2015	44,941		16.80	1.1	1,225
Expected to vest, September 30, 2015	43,282		16.63	1.0	1,179

The aggregate intrinsic value of shares outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $27.25 at September 30, 2015 and $23.50 at June 30, 2015, representing the last trading day of the applicable fiscal period. Restricted stock that is expected to vest is net of estimated forfeitures.

Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Compensation expense recognized in the three months ended September 30, 2015 was $45,000 and $30,000, respectively. As of September 30, 2015 and June 30, 2015, there was approximately $0.4 million and $0.5 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to the restricted stock at September 30, 2015 are expected to be recognized over the weighted average period of 1.9 years.