Share-based Compensation

Farmer Bros. Co. 2017 Long-Term Incentive Plan

On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company’s prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan. The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan.

The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of September 30, 2017, there are 931,548 shares available for future issuance under the 2017 Plan. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.

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

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

As of September 30, 2017, no awards have been granted under the 2017 Plan.

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

In the three months ended September 30, 2017, the Company granted no shares issuable upon the exercise of NQOs.

The following table summarizes NQO activity for the three months ended September 30, 2017:



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, 2017	133,464		13.05	5.99	2.6	2,299
Granted	—		—	—	—	—
Exercised	—		—	—	—	—
Cancelled/Forfeited	(4,194	)	24.41	10.60	—	—
Outstanding at September 30, 2017	129,270		12.68	5.84	2.0	2,608
Vested and exercisable at September 30, 2017	125,376		12.13	5.64	1.9	2,598
Vested and expected to vest at September 30, 2017	129,108		12.66	5.83	2.0	2,607

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 $32.85 at September 30, 2017 and $30.25 at June 30, 2017, representing the last trading day of the respective fiscal periods, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. NQOs outstanding that are expected to vest are net of estimated forfeitures.

During the three months ended September 30, 2017, no NQOs vested or were exercised. The Company received $0.1 million in proceeds from exercises of vested NQOs in the three months ended September 30, 2016.

At September 30, 2017 and June 30, 2017, respectively, there was $34,000 and $80,000 of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at September 30, 2017 is expected to be recognized over the weighted average period of 1.4 years. Total compensation expense for NQOs in the three months ended September 30, 2017 and 2016 was $2,000 and $42,000, respectively.

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

In the three months ended September 30, 2017, the Company granted no shares issuable upon the exercise of PNQs.

The following table summarizes PNQ activity for the three months ended September 30, 2017:



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, 2017	358,786		27.75	10.96	5.2	1,181
Granted	—		—	—	—	—
Exercised	—		—	—	—	—
Cancelled/Forfeited	(24,622	)	31.54	11.44	—	—
Outstanding at September 30, 2017	334,164		27.75	10.96	5.2	1,181
Vested and exercisable at September 30, 2017	150,761		23.97	10.58	3.9	1,339
Vested and expected to vest at September 30, 2017	326,704		27.38	10.92	4.8	1,788

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 $32.85 at September 30, 2017 and $30.25 at June 30, 2017 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. PNQs outstanding that are expected to vest are net of estimated forfeitures.

During the three months ended September 30, 2017, no PNQs vested or were exercised. The Company received $0.1 million in proceeds from exercises of vested PNQs in the three months ended September 30, 2016.

As of September 30, 2017, the Company met the performance targets for the fiscal 2016 PNQ awards and the first two tranches of the fiscal 2015 PNQ awards. The Company expects to meet the performance targets for the remainder of the fiscal 2015 award. The Company did not meet the performance target for the fiscal 2017 awards and will record a 20% reduction in total shares granted under the fiscal 2017 award in November 2017 when the service condition for the first tranche of the fiscal 2017 award will be fulfilled.

At September 30, 2017 and June 30, 2017, there was $1.3 million and $1.8 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at September 30, 2017 is expected to be recognized over the weighted average period of 1.2 years. Total compensation expense related to PNQs in each of the three months ended September 30, 2017 and 2016 was $0.2 million.

Restricted Stock

During the three months ended September 30, 2017, the Company granted no shares of restricted stock.

The following table summarizes restricted stock activity for the three months ended September 30, 2017:



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, 2017	15,445		29.79	0.9	467
Granted	—		—	—	—
Exercised/Released	—		—	—	—
Cancelled/Forfeited	(2,732	)	24.41	—	—
Outstanding at September 30, 2017	12,713		30.94	0.6	418
Expected to vest at September 30, 2017	12,493		30.94	0.6	410

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 $32.85 at September 29, 2017 and $30.25 at June 30, 2017, representing the last trading day of the respective fiscal periods. Restricted stock that is expected to vest is net of estimated forfeitures.

At September 30, 2017 and June 30, 2017, there was $0.2 million and $0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at September 30, 2017 is expected to be recognized over the weighted average period of 0.8 years. Total compensation expense for restricted stock was $33,000 and $60,000 for the three months ended September 30, 2017 and 2016, respectively.