Share-based Compensation

On December 5, 2013, the Company’s stockholders approved the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”). The Amended Equity Plan is an amendment and restatement of, and successor to, the Farmer Bros. Co. 2007 Omnibus Plan (the “Omnibus Plan”). The principal change to the Amended Equity Plan was to limit awards under the plan to performance-based stock options and to restricted stock under limited circumstances.

Stock Options

The share-based compensation expense recognized in the Company’s consolidated statements of operations is based on awards ultimately expected to vest. Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the stock options. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

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

In fiscal 2015, the Company granted 25,703 shares issuable upon the exercise of NQOs with a weighted average exercise price of $23.91 per share to eligible employees under the Amended Equity Plan which vest ratably over a three-year period.

Following are the weighted average assumptions used in the Black-Scholes valuation model for NQOs granted during the fiscal years ended June 30, 2015, 2014 and 2013:



	Year Ended June 30,
	2015			2014			2013
Weighted average fair value of NQOs	$	10.38		$	9.17		$	5.69
Risk-free interest rate	1.5		%	1.7		%	0.9		%
Dividend yield	—		%	—		%	—		%
Average expected term	5.1 years			6 years			6 years
Expected stock price volatility	47.9		%	50.4		%	49.5		%

The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 4.8% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The following table summarizes NQO activity for the three most recent fiscal years:



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, 2012	667,235		12.84	4.78	4.8	143
Granted	192,892		12.12	5.69	6.5	374
Exercised	(117,482	)	10.24	5.23	—	336
Cancelled/Forfeited	(185,218	)	13.83	5.92	—	—
Outstanding at June 30, 2013	557,427		12.81	5.44	5.1	1,620
Granted	1,927		18.68	9.17	6.4	—
Exercised	(112,964	)	13.10	5.81	—	895
Cancelled/Forfeited	(33,936	)	16.63	6.13	—	—
Outstanding at June 30, 2014	412,454		12.44	5.30	4.4	3,782
Granted	25,703		23.91	10.38	6.8	—
Exercised	(95,723	)	16.17	5.86	—	747
Cancelled/Forfeited	(13,134	)	11.26	5.00	—	—
Outstanding at June 30, 2015	329,300		12.30	5.54	3.9	3,700
Vested and exercisable, June 30, 2015	249,105		11.13	5.00	3.5	3,082
Vested and expected to vest, June 30, 2015	326,723		12.22	5.51	3.9	3,684

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 $23.50 at June 30, 2015, $21.61 at June 30, 2014 and $14.06 at June 28, 2013, representing the last trading day of the respective fiscal years, 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 stock option exercises in each fiscal period above 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.

Total fair value of NQOs vested during fiscal 2015, 2014 and 2013 was $0.5 million, $0.7 million and $1.0 million, respectively. The Company received $1.5 million in proceeds from exercises of vested NQOs in each of fiscal 2015 and 2014, respectively, and $1.2 million in fiscal 2013.



Nonvested NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Grant Date Fair Value ($)	Weighted Average Remaining Life (Years)
Outstanding at June 30, 2012	343,239		10.76	4.20	6.3
Granted	192,892		12.12	5.69	6.5
Vested	(188,909	)	11.56	5.33	—
Forfeited	(31,561	)	13.82	5.92	—
Outstanding at June 30, 2013	315,661		10.80	5.12	6.1
Granted	1,927		18.68	9.17	6.4
Vested	(133,957	)	11.02	5.21	—
Forfeited	(15,833	)	11.48	5.49	—
Outstanding at June 30, 2014	167,798		10.65	5.06	5.3
Granted	25,703		23.91	10.38	6.8
Vested	(101,172	)	9.87	4.72	—
Forfeited	(12,134	)	10.31	4.91	—
Outstanding at June 30, 2015	80,195		15.94	7.21	5.2

As of June 30, 2015, 2014 and 2013, there was $0.4 million, $0.7 million and $1.3 million, respectively, of unrecognized compensation cost related to NQOs. Total compensation expense for NQOs was $0.4 million, $0.6 million and $0.9 million in fiscal 2015, 2014 and 2013, respectively.

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

In the fiscal year ended June 30, 2015, the Company granted 121,024 shares issuable upon the exercise of PNQs with an exercise price of $23.44 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, commencing on February 9, 2016, based on the Company’s achievement of modified net income targets for fiscal years within the performance period as approved by the Compensation Committee, subject to catch-up vesting of previously unvested shares in a subsequent year within the three year period in which a cumulative modified net income target as approved by the Compensation Committee is achieved, in each case, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement.

In the fiscal year ended June 30, 2014, the Company granted a total of 112,442 shares issuable upon the exercise of PNQs with a weighted average exercise price of $21.27 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ vesting on the first anniversary of the grant date based on the Company’s achievement of a modified net income target for the first fiscal year of the performance period as approved by the Compensation Committee, and the remaining two-thirds of the total number of shares subject to each PNQ vesting on the third anniversary of the grant date based on the Company’s achievement of a cumulative modified net income target for all three years during the performance period as approved by the Compensation Committee, in each case, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date. No PNQs were granted prior to fiscal 2014.

Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal years ended June 30, 2015 and 2014:



	Year Ended June 30,
	2015			2014
Weighted average fair value of PNQs	$	10.16		$	10.49
Risk-free interest rate	1.5		%	1.8		%
Dividend yield	—		%	—		%
Average expected term	5 years			6 years
Expected stock price volatility	47.9		%	50.5		%

The following table summarizes PNQ activity in fiscal 2015 and 2014:



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, 2013	—		—	—	—	—
Granted	112,442		21.27	10.49	6.5	—
Cancelled/Forfeited	—		—	—	—	—
Outstanding at June 30, 2014	112,442		21.27	10.49	6.5	38
Granted	121,024		23.44	10.16	6.6	—
Cancelled/Forfeited	(9,399	)	21.33	10.52	—	—
Outstanding at June 30, 2015	224,067		22.44	10.31	6.0	237
Vested and exercisable, June 30, 2015	34,959		21.27	10.49	5.0	78
Vested and expected to vest, June 30, 2015	204,669		22.40	10.32	6.0	226

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 $23.50 at June 30, 2015 and $21.61 at June 30, 2014 representing the last trading day of the respective fiscal years, 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.

Total fair value of PNQs vested during the fiscal year ended June 30, 2015 was $0.4 million. No PNQs vested during the fiscal year ended June 30, 2014, and no PNQs were exercised during the fiscal years ended June 30, 2015 and 2014.

As of June 30, 2015, the Company met the performance target for the first year of the fiscal 2014 awards and expects that it will achieve the cumulative performance targets set forth in the PNQ agreements for the fiscal 2014 awards and the performance targets set forth in the PNQ agreements for the fiscal 2015 awards.

In the fiscal years ended June 30, 2015 and 2014, the Company recognized $0.5 million and $0.3 million, respectively, in compensation expense for PNQs and as of June 30, 2015 and 2014, there was approximately $1.5 million and $0.9 million, respectively, of unrecognized compensation cost related to PNQs.



Nonvested PNQs:	Number of PNQs		Weighted Average Exercise Price ($)		Weighted Average Grant Date Fair Value ($)		Weighted Average Remaining Life (Years)
Outstanding at June 30, 2014	112,442		21.27		10.49		6.5
Granted	121,024		23.44		10.16		6.6
Vested	(34,959	)	21.27		10.49		—
Forfeited	(9,399	)	21.33		10.52		—
Outstanding at June 30, 2015	189,108		$	22.66	$	10.28	6.2

Restricted Stock

During fiscal 2015, 2014 and 2013 the Company granted a total of 13,256 shares, 9,200 shares and 51,177 shares of restricted stock under the Amended Equity Plan, respectively, with a weighted average grant date fair value of $23.64, $20.48 and $11.67 per share, respectively, to eligible employees and directors. Shares of restricted stock generally vest at the end of three years for eligible employees. Shares of restricted stock generally vest ratably over a period of three years for directors. During the fiscal year ended June 30, 2015, 53,402 shares of restricted stock vested, of which 4,297 shares were withheld to meet the employees’ minimum statutory tax withholding and retired.

Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Compensation expense recognized in general and administrative expenses was $0.3 million, $0.5 million, and $0.6 million, for the fiscal years ended June 30, 2015, 2014 and 2013, respectively. As of June 30, 2015, 2014 and 2013, there was approximately $0.5 million, $0.6 million and $1.0 million, respectively, of unrecognized compensation cost related to restricted stock.

The following table summarizes restricted stock activity for the three most recent fiscal years:



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 June 30, 2012	175,947		10.16	1.9	1,401
Granted	51,177		11.67	—	597
Exercised/Released	(64,668	)	11.27	—	832
Cancelled/Forfeited	(23,096	)	12.21	—	—
Outstanding at June 30, 2013	139,360		9.87	1.9	1,959
Granted	9,200		20.48	—	188
Exercised/Released	(38,212	)	11.59	—	820
Cancelled/Forfeited	(14,136	)	9.38	—	—
Outstanding at June 30, 2014	96,212		10.27	1.5	2,079
Granted	13,256		23.64	—	313
Exercised/Released	(53,402	)	8.43	—	1,377
Cancelled/Forfeited(1)	(8,984	)	8.36	—	—
Outstanding at June 30, 2015	47,082		16.48	1.2	1,106
Expected to vest, June 30, 2015	44,936		16.32	1.2	1,056

(1) Includes 4,297 shares that were withheld to meet the employees' minimum statutory tax withholding and retired.

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 $23.50 at June 30, 2015, $21.61 at June 30, 2014 and $14.06 at June 28, 2013, representing the last trading day of the respective fiscal years. Restricted stock that is expected to vest is net of estimated forfeitures.