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. 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, 2018, there were 958,393 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 three months ended September 30, 2018, the Company granted no shares issuable upon the exercise of NQOs.

The following table summarizes NQO activity for the three months ended September 30, 2018:



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, 2018	161,324		26.82	9.24	5.1	741
Granted	—		—	—	—	—
Exercised	(24,345	)	11.81	5.54	—	398
Cancelled/Forfeited	—		—	—	—	—
Outstanding at September 30, 2018	136,979		29.49	9.90	5.5	223
Vested and exercisable at September 30, 2018	16,818		13.72	6.16	1.5	223
Vested and expected to vest at September 30, 2018	130,620		29.38	9.88	5.5	223

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 $26.40 at September 28, 2018 and $30.55 at June 29, 2018, 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 three months ended September 30, 2018 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 three months ended September 30, 2018, no NQOs vested and 24,345 NQOs were exercised. The Company received $0.3 million and $0.0 million in proceeds from exercises of vested NQOs in the three months ended September 30, 2018 and 2017, respectively.

At September 30, 2018 and June 30, 2018, respectively, there was $0.9 million and $1.0 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at September 30, 2018 is expected to be recognized over the weighted average period of 2.1 years. Total compensation expense for NQOs in the three months ended September 30, 2018 and 2017 was $97,000 and $2,000, respectively.

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

In the three months ended September 30, 2018, the Company granted no shares issuable upon the exercise of PNQs.

The following table summarizes PNQ activity for the three months ended September 30, 2018:



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, 2018	300,708		27.08	10.89	4.00	1,207
Granted	—		—	—	—	—
Exercised	(1,697	)	22.66	10.29	—	9
Cancelled/Forfeited	(1,563	)	30.34	11.45	—	—
Outstanding at September 30, 2018	297,448		27.09	10.89	3.79	530
Vested and exercisable at September 30, 2018	220,058		25.53	10.71	3.46	530
Vested and expected to vest at September 30, 2018	295,793		27.06	10.89	3.79	530

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 $26.40 at September 28, 2018 and $30.55 at June 29, 2018 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 three months ended September 30, 2018 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 three months ended September 30, 2018, no PNQs vested and 1,697 PNQs were exercised. The Company received $38,455 and $0 in proceeds from exercises of vested PNQs in the three months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, the Company met the performance targets for the fiscal 2016 PNQ awards and the fiscal 2015 PNQ awards.

Based on the Company’s failure to achieve certain financial objectives over the applicable performance period, a total of 18,708 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. The Company expects to meet the performance targets for the remainder of the fiscal 2017 PNQ awards.

At September 30, 2018 and June 30, 2018, there was $0.4 million and $0.5 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at September 30, 2018 is expected to be recognized over the weighted average period of 0.8 years. Total compensation expense related to PNQs in the three months ended September 30, 2018 and 2017 was $0.1 million and $0.2 million, respectively.

Restricted Stock

During the three months ended September 30, 2018, the Company granted no shares of restricted stock.

The following table summarizes restricted stock activity for the three months ended September 30, 2018:



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, 2018	14,958	33.48	1.7	457
Granted	—	—	—	—
Vested/Released	—	—	—	—
Cancelled/Forfeited	—	—	—	—
Outstanding and nonvested at September 30, 2018	14,958	33.48	0.4	395
Expected to vest at September 30, 2018	14,663	33.50	0.4	387

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 $26.40 at September 28, 2018 and $30.55 at June 29, 2018, 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, 2018 and June 30, 2018, there was $0.1 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, 2018 is expected to be recognized over the weighted average period of 0.7 years. Total compensation expense for restricted stock was $103,000 and $33,000 in the three months ended September 30, 2018 and 2017, respectively.

Performance-Based Restricted Stock Units (“PBRSUs”)

During the three months ended September 30, 2018, the Company granted no PBRSUs.

The following table summarizes PBRSU activity for the three months ended September 30, 2018:



Outstanding and Nonvested PBRSUs:	PBRSUs Awarded(1)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding and nonvested at June 30, 2018	35,732	31.70	3.4	1,092
Granted	—	—	—	—
Vested/Released	—	—	—	—
Cancelled/Forfeited	—	—	—	—
Outstanding and nonvested at September 30, 2018	35,732	31.70	2.1	943
Expected to vest at September 30, 2018	32,197	31.70	2.1	850

_____________

(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 September 30, 2018 represents the total pretax intrinsic value, based on the Company’s closing stock price of $26.40 at September 28, 2018 and $30.55 at June 29, 2018, representing the last trading day of the respective fiscal periods. PBRSUs that are expected to vest are net of estimated forfeitures.

At September 30, 2018 and June 30, 2018, there was $0.8 million and $0.9 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at September 30, 2018 is expected to be recognized over the weighted average period of 2.1 years. Total compensation expense for PBRSUs was $82,000 and $0 for the three months ended September 30, 2018 and 2017, respectively.