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”), which 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 for the three months ended September 30, 2014 and 2013 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")

The following table summarizes NQO activity for the three months ended September 30, 2014:



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, 2014	412,454		12.44	5.30	4.4	3,782
Granted	—		—	—	—	—
Exercised	(39,616	)	14.67	5.70	—	351
Cancelled/Forfeited	(11,138	)	10.18	4.85	—	—
Outstanding at September 30, 2014	361,700		12.27	4.14	4.3	6,034
Vested and exercisable, September 30, 2014	205,040		13.48	3.42	3.7	3,173
Vested and expected to vest, September 30, 2014	356,567		12.28	4.12	4.2	5,943

The aggregate intrinsic value outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $28.95 at September 30, 2014 and $21.61 at June 30, 2014, representing the last trading day of the applicable fiscal period, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of that date.

No shares underlying NQOs vested during the three months ended September 30, 2014. During the three months ended September 30, 2014, the Company received $0.6 million in proceeds from exercises of vested NQOs.

As of September 30, 2014 and 2013, there was $0.5 million and $1.2 million, respectively, of unrecognized compensation cost related to NQOs. Total compensation expense for NQOs was $0.1 million and $0.2 million in the three months ended September 30, 2014 and 2013, respectively.

Non-Qualified Stock Options With Performance-Based and Time-Based Vesting ("PNQs")

The following table summarizes PNQ activity for the three months ended September 30, 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, 2014	112,442		21.27	10.49	6.5	38
Granted	—		—	—	—	—
Exercised	—		—	—	—	—
Cancelled/Forfeited	(7,519	)	21.33	10.52	—	—
Outstanding at September 30, 2014	104,923		21.27	10.49	6.2	806
Vested and exercisable, September 30, 2014	—		—	—	—	—
Vested and expected to vest, September 30, 2014	97,251		21.27	10.49	6.2	746

The aggregate intrinsic value outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $28.95 at September 30, 2014 and $21.61 at June 30, 2014, representing the last trading day of the applicable fiscal period, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of that date.

The PNQs shown in the table above 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. As of September 30, 2014, the Company expects that it will achieve the performance targets set forth in the PNQ agreements.

Compensation expense for PNQs recognized in operating expenses in the three months ended September 30, 2014 was $0.1 million, and as of September 30, 2014 there was $0.7 million in unrecognized compensation cost related to PNQs. No comparable compensation expense was recognized in operating expenses in the three months ended September 30, 2013 and there was no unrecognized compensation cost related to PNQs at September 30, 2013.

Restricted Stock

The following table summarizes restricted stock activity for the three months ended September 30, 2014:



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, 2014	96,212		10.27	1.5	2,079
Granted	—		—	—	—
Exercised/Released	—		—	—	—
Cancelled/Forfeited	(8,527	)	8.18	—	—
Outstanding at September 30, 2014	87,685		10.47	1.4	2,538
Expected to vest, September 30, 2014	83,489		13.02	1.5	2,417

The aggregate intrinsic value of shares outstanding at the end of each period in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $28.95 at September 30, 2014 and $21.61 at June 30, 2014, representing the last trading day of the applicable fiscal period. No restricted stock vested during the three months ended September 30, 2014.

Shares of restricted stock generally vest at the end of three years for eligible employees and officers who are employees. Shares of restricted stock generally vest ratably over a period of three years for directors.

Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Total compensation expense recognized in the three months ended September 30, 2014 and 2013 was $30,000 and $0.1 million, respectively. As of September 30, 2014 and June 30, 2014, there was approximately $0.5 million and $0.8 million, respectively, of unrecognized compensation cost related to restricted stock.