Share-based Compensation

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

In the six months ended December 31, 2016, the Company granted no shares issuable upon the exercise of NQOs.

The following table summarizes NQO activity for the six months ended December 31, 2016:



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, 2016	219,629		13.87	6.28	3.7	3,995
Granted	—		—	—	—	—
Exercised	(37,344	)	9.41	4.24	—	909
Cancelled/Forfeited	(3,278	)	14.60	6.02	—	—
Outstanding at December 31, 2016	179,007		14.79	6.71	3.4	3,923
Vested and exercisable at December 31, 2016	146,472		12.16	5.66	3.0	3,594
Vested and expected to vest at December 31, 2016	177,402		14.67	6.66	3.4	3,908

The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $36.70 at December 30, 2016 and $32.06 at June 30, 2016, representing the last trading day of the fiscal periods, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in the six months ended December 31, 2016 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.

During the six months ended December 31, 2016, 6,196 NQO shares vested and 37,344 NQO shares were exercised. Total fair value of NQOs vested during the six months ended December 31, 2016 was $0.1 million. The Company received $0.4 million and $1.1 million in proceeds from exercises of vested NQOs in the six months ended December 31, 2016 and 2015, respectively.

At December 31, 2016 and June 30, 2016, respectively, there was $0.3 million and $0.4 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at December 31, 2016 is expected to be recognized over the weighted average period of 1.7 years. Total compensation expense for NQOs in the three months ended December 31, 2016 and 2015 was $47,000 and $0.1 million, respectively. Total compensation expense for NQOs in each of the six months ended December 31, 2016 and 2015 was $0.1 million.

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

In the six months ended December 31, 2016, the Company granted 149,223 shares issuable upon the exercise of PNQs to eligible employees under the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “LTIP”), with 20% of each such grant subject to forfeiture if a target modified net income goal for fiscal 2017 is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses related to the relocation of the Company’s corporate headquarters to Northlake, Texas. These PNQs have an exercise price of $32.85, which was the closing price of the Company’s common stock as reported on Nasdaq on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.

Following are the weighted average assumptions used in the Black-Scholes valuation model for PNQs granted during the six months ended December 31, 2016.



	Six Months Ended December 31, 2016
Weighted average fair value of PNQs	$11.42
Risk-free interest rate	1.53%
Dividend yield	—%
Average expected term	4.9 years
Expected stock price volatility	37.7%

The following table summarizes PNQ activity for the six months ended December 31, 2016:



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, 2016	288,599		25.83	10.82	5.7	1,798
Granted	149,223		32.85	11.42	6.9	—
Exercised	(2,366	)	22.60	10.30	—	24
Cancelled/Forfeited	—		—	—	—	—
Outstanding at December 31, 2016	435,456		28.25	11.03	5.8	3,678
Vested and exercisable at December 31, 2016	127,858		24.22	10.73	4.8	1,596
Vested and expected to vest at December 31, 2016	414,443		28.11	11.02	5.8	3,560

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 $36.70 at December 30, 2016 and $32.06 at June 30, 2016 representing the last trading day of the respective fiscal periods, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in the six months ended December 31, 2016 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.

During the six months ended December 31, 2016, 82,092 PNQ shares vested and 2,366 PNQ shares were exercised. Total fair value of PNQs vested during the six months ended December 31, 2016 was $0.9 million. The Company received $0.1 million and $0.2 million in proceeds from exercises of vested PNQs in the six months ended December 31, 2016 and 2015, respectively.

As of December 31, 2016, the Company met the performance target for the second and final tranche of the fiscal 2014 awards and the first tranche of the fiscal 2015 and fiscal 2016 awards and expects that it will achieve the performance targets set forth in the PNQ agreements for the remainder of the fiscal 2015 and 2016 awards, and the fiscal 2017 awards.

At December 31, 2016 and June 30, 2016, there was $3.0 million and $1.9 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at December 31, 2016 is expected to be recognized over the weighted average period of 1.6 years. Total compensation expense related to PNQs in the three months ended December 31, 2016 and 2015 was $0.4 million and $0, respectively. Total compensation expense related to PNQs in the six months ended December 31, 2016 and 2015 was $0.6 million and $0.1 million, respectively.

Restricted Stock

During the six months ended December 31, 2016, the Company granted 5,106 shares of restricted stock to non-employee directors under the LTIP with a grant date fair value of $35.25 per share. Unlike prior-year awards to non-employee directors, which vest ratably over a period of three years, the fiscal 2017 restricted stock awards cliff vest on the first anniversary of the date of grant subject to continued service to the Company through the vesting date and the acceleration provisions of the LTIP and restricted stock agreement. No shares of restricted stock were granted to employees during the six months ended December 31, 2016.

During the six months ended December 31, 2016, 4,896 shares of restricted stock vested.

The following table summarizes restricted stock activity for the six months ended December 31, 2016:



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, 2016	23,792		26.00	1.8	763
Granted	5,106		35.25	0.9	180
Exercised/Released	(4,896	)	24.53	—	168
Cancelled/Forfeited	—		—	—	—
Outstanding at December 31, 2016	24,002		28.27	1.4	881
Expected to vest at December 31, 2016	22,778		28.24	1.4	836

The aggregate intrinsic value of shares 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 $36.70 at December 30, 2016 and $32.06 at June 30, 2016, representing the last trading day of the respective fiscal periods. Restricted stock that is expected to vest is net of estimated forfeitures.

At December 31, 2016 and June 30, 2016, there was $0.5 million of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at December 31, 2016 is expected to be recognized over the weighted average period of 1.4 years. Total compensation expense for restricted stock was $0.1 million and $39,000 for the three months ended December 31, 2016 and 2015, respectively. Total compensation expense for restricted stock was $0.1 million in each of the six months ended December 31, 2016 and 2015.