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 March 31, 2019, there were 962,953 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”)

One-third of the total number of shares subject to each 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 nine months ended March 31, 2019.



	Nine Months Ended March 31, 2019
Weighted average fair value of NQOs	$	7.78
Risk-free interest rate	3.0		%
Dividend yield	—		%
Average expected term	4.6 years
Expected stock price volatility	29.6		%

The following table summarizes NQO activity for the nine months ended March 31, 2019:



Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2018	161,324		26.82	5.10	741
Granted	154,263		25.04	—	—
Exercised	(28,798	)	11.32	—	466
Forfeited	(7,991	)	30.50	—	—
Expired	(879	)	31.70	—	—
Outstanding at March 31, 2019	277,919		27.32	5.98	78
Exercisable at March 31, 2019	49,227		27.60	4.54	78

The weighted-average grant-date fair value of options granted during the nine months ended March 31, 2019 was $8.66. 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 $20.01 at March 29, 2019 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 nine months ended March 31, 2019 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.

The Company received $0.3 million and $0.8 million in proceeds from exercises of vested NQOs in the nine months ended March 31, 2019 and 2018, respectively.

At March 31, 2019 and June 30, 2018, respectively, there was $1.8 million and $1.0 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at March 31, 2019 is expected to be recognized over the weighted average period of 2.3 years. Total compensation expense for NQOs in the three months ended March 31, 2019 and 2018 was $0.2 million and $0.1 million, respectively. Total compensation expense for NQOs in the nine months ended March 31, 2019 and 2018 was $0.5 million and $0.2 million, respectively.

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

The following table summarizes PNQ activity for the nine months ended March 31, 2019:



Outstanding PNQs:	Number of PNQs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2018	300,708		27.08	4.00	1,207
Granted	—		—	—	—
Exercised	(5,806	)	22.70	—	17
Forfeited	(6,916	)	31.43	—	—
Expired	(14,490	)	27.50	—	—
Outstanding at March 31, 2019	273,496		27.04	3.28	—
Exercisable at March 31, 2019	251,933		26.55	3.17	—

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 $20.01 at March 29, 2019 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 nine months ended March 31, 2019 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.

The Company received $0.1 million and $0.3 million in proceeds from exercises of vested PNQs in the nine months ended March 31, 2019 and 2018, respectively.

At March 31, 2019 and June 30, 2018, there was $0.2 million and $0.5 million, respectively, of unrecognized PNQ compensation cost. The unrecognized PNQ compensation cost at March 31, 2019 is expected to be recognized over the weighted average period of 0.6 years. Total compensation expense related to PNQs in the three months ended March 31, 2019 and 2018 was $0.1 million and $0.2 million, respectively. Total compensation expense related to PNQs in the nine months ended March 31, 2019 and 2018 was $0.3 million and $0.6 million, respectively.

Restricted Stock

These restricted stock awards granted in the nine months ended March 31, 2019 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, subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.

The following table summarizes restricted stock activity for the nine months ended March 31, 2019:



Outstanding and Nonvested Restricted Stock Awards:	Shares Awarded		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2018	14,958		33.48
Granted	18,298		23.98
Vested/Released	(12,722	)	33.81
Cancelled/Forfeited	—		—
Outstanding and nonvested at March 31, 2019	20,534		24.81

The total grant-date fair value of restricted stock granted during the nine months ended March 31, 2019 was $0.4 million. The total fair value of restricted stock vested during the nine months ended March 31, 2019 was $0.3 million.

At March 31, 2019 and June 30, 2018, there was $0.3 million in each period of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at March 31, 2019 is expected to be recognized over the weighted average period of 0.8 years. Total compensation expense for restricted stock was $0.1 million in each of the three months ended March 31, 2019 and 2018. Total compensation expense for restricted stock was $0.3 million and $0.2 million in the nine months ended March 31, 2019 and 2018, respectively.

Performance-Based Restricted Stock Units (“PBRSUs”)

The fiscal 2019 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, 2018 through June 30, 2021, 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. PBRSUs that are expected to vest are net of estimated forfeitures.

The following table summarizes PBRSU activity for the nine months ended March 31, 2019:



Outstanding and Nonvested PBRSUs:	PBRSUs Awarded(1)		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2018	35,732		31.70
Granted(1)	47,928		25.04
Vested/Released	—		—
Cancelled/Forfeited	(2,889	)	30.67
Outstanding and nonvested at March 31, 2019	80,771		27.78
Expected to vest at March 31, 2019	73,095		27.34

_____________

(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 total grant-date fair value of PBRSUs granted during the nine months ended March 31, 2019 was $1.2 million.

At March 31, 2019 and June 30, 2018, there was $1.7 million and $0.9 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at March 31, 2019 is expected to be recognized over the weighted average period of 2.2 years. Total compensation expense for PBRSUs were $0.1 million for each period for the three months ended March 31, 2019 and 2018. Total compensation expense for PBRSUs was $0.3 million and $0.1 million for the nine months ended March 31, 2019 and 2018, respectively.