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 December 31, 2017, there were 950,914 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans. 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.

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

In the six months ended December 31, 2017, the Company granted 124,278 shares issuable upon the exercise of NQOs to eligible employees under the 2017 Plan. These NQOs have an exercise price of $31.70 per share, which was the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market 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 assumptions used in the Black-Scholes valuation model for NQOs granted during the six months ended December 31, 2017.



	Six Months Ended December 31, 2017
Weighted average fair value of NQOs	$31.70
Risk-free interest rate	2.0%
Dividend yield	—%
Average expected term	4.6 years
Expected stock price volatility	35.4%

The following table summarizes NQO activity for the six months ended December 31, 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	124,278		31.70	10.41	6.9	—
Exercised	(37,266	)	12.09	5.57	—	752
Cancelled/Forfeited	(4,194	)	24.41	10.60	—	—
Outstanding at December 31, 2017	216,282		23.71	8.51	4.8	1,825
Vested and exercisable at December 31, 2017	89,055		12.33	5.74	2.0	1,765
Vested and expected to vest at December 31, 2017	205,308		23.28	8.41	4.7	1,820

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 $32.15 at December 29, 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. The aggregate intrinsic value of NQO exercises in the six months ended December 31, 2017 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, 2017, 945 NQOs vested and 37,266 NQOs were exercised. Total fair value of NQOs vested during the six months ended December 31, 2017 was $12,000. The Company received $0.5 million and $0.4 million in proceeds from exercises of vested NQOs in the six months ended December 31, 2017 and 2016, respectively.

At December 31, 2017 and June 30, 2017, respectively, there was $1.3 million and $80,000 of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at December 31, 2017 is expected to be recognized over the weighted average period of 2.8 years. Total compensation expense for NQOs in the three months ended December 31, 2017 and 2016 was $62,000 and $47,000, respectively. Total compensation expense for NQOs in the six months ended December 31, 2017 and 2016 was $64,000 and $89,000, respectively.

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

In the six months ended December 31, 2017, the Company granted no shares issuable upon the exercise of PNQs. The following table summarizes PNQ activity for the six months ended December 31, 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	(6,679	)	26.10		10.87	—	45
Cancelled/Forfeited	(43,330	)	32.10		11.43	—	—
Outstanding at December 31, 2017	308,777		27.17	10.93	10.90	4.6	1,590
Vested and exercisable at December 31, 2017	200,904		25.87		10.80	4.2	1,278
Vested and expected to vest at December 31, 2017	303,990		27.10		10.89	4.5	1,585

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 $32.15 at December 29, 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. The aggregate intrinsic value of PNQ exercises in the six months ended December 31, 2017 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, 2017, 56,822 PNQs vested and 6,679 PNQs were exercised. Total fair value of PNQs vested during the six months ended December 31, 2017 was $0.6 million. The Company received $0.2 million and $0.1 million in proceeds from exercises of vested PNQs in the six months ended December 31, 2017 and 2016, respectively.

As of December 31, 2017, the Company met the performance targets for the fiscal 2016 PNQ awards and the fiscal 2015 PNQ awards.

In the six months ended December 31, 2017, based on the Company’s failure to achieve certain financial objectives over the applicable performance period, a total of 33,738 shares subject to fiscal 2017 PNQ awards were forfeited, representing 20% of the shares subject to each such award. Subject to certain continued employment conditions and subject to accelerated vesting in certain circumstances, one half of the remaining PNQs subject to the fiscal 2017 PNQ awards are scheduled to vest on each of the second and third anniversaries of the grant date.

At December 31, 2017 and June 30, 2017, there was $0.9 million and $1.8 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at December 31, 2017 is expected to be recognized over the weighted average period of 1.2 years. Total compensation expense related to PNQs in the three months ended December 31, 2017 and 2016 was $0.2 million and $0.4 million, respectively. Total compensation expense related to PNQs in the six months ended December 31, 2017 and 2016 was $0.4 million and $0.6 million, respectively.

Restricted Stock

During the six months ended December 31, 2017, the Company granted 13,110 shares of restricted stock under the 2017 Plan, including 11,406 shares of restricted stock to non-employee directors with a grant date fair value of $34.20 per share and 1,704 shares of restricted stock to eligible employees with a grant date fair value of $31.70 per share. The fiscal 2018 restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. During the six months ended December 31, 2016, the Company granted 5,106 shares of restricted stock to non-employee directors.

During the six months ended December 31, 2017, 7,934 shares of restricted stock vested.

The following table summarizes restricted stock activity for the six months ended December 31, 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 and nonvested at June 30, 2017	15,445		29.79	0.9	467
Granted	13,110		33.88	1.7	444
Vested/Released	(7,934	)	32.77	—	272
Cancelled/Forfeited	(3,390	)	25.57	—	—
Outstanding and nonvested at December 31, 2017	17,231		32.35	1.6	554
Expected to vest at December 31, 2017	16,411		32.32	1.5	528

The aggregate intrinsic values 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 $32.15 at December 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 December 31, 2017 and June 30, 2017, there was $0.5 million and $0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at December 31, 2017 is expected to be recognized over the weighted average period of 1.1 years. Total compensation expense for restricted stock was $0.1 million in each of the three months ended December 31, 2017 and 2016. Total compensation expense for restricted stock was $0.1 million in each of the six months ended December 31, 2017 and 2016.

Performance-Based Restricted Stock Units (“PBRSUs”)

During the six months ended December 31, 2017, the Company granted 37,414 PBRSUs under the 2017 Plan to eligible employees with a grant date fair value of $31.70 per unit. The fiscal 2018 PBRSU awards 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, 2017 through June 30, 2020, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% 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. No PBRSUs were granted during the six months ended December 31, 2016.

The following table summarizes PBRSU activity for the six months ended December 31, 2017:



Outstanding and Nonvested PBRSUs:	PBRSUs Awarded	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding and nonvested at June 30, 2017	—	—	—	—
Granted(1)	37,414	31.70	—	1,186
Vested/Released	—	—	—	—
Cancelled/Forfeited	—	—	—	—
Outstanding and nonvested at December 31, 2017	37,414	31.70	2.9	1,203
Expected to vest at December 31, 2017	32,495	31.70	2.9	1,045

_____________

(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 150% 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 aggregate intrinsic value of PBRSUs outstanding at December 31, 2017 represents the total pretax intrinsic value, based on the Company’s closing stock price of $32.15 at December 29, 2017, representing the last trading day of the fiscal period. PBRSUs that are expected to vest are net of estimated forfeitures.

At December 31, 2017 and June 30, 2017, there was $1.1 million and $0, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at December 31, 2017 is expected to be recognized over the weighted average period of 2.9 years. Total compensation expense for PBRSUs was $48,000 and $0 for the three months ended December 31, 2017 and 2016, respectively. Total compensation expense for PBRSUs was $48,000 and $0 for the six months ended December 31, 2017 and 2016, respectively.