Share-based Compensation

Farmer Bros. Co. 2017 Long-Term Incentive Plan

As of December 31, 2019, there were 565,112 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans for future issuance.

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 six months ended December 31, 2019:



	Six Months Ended December 31, 2019
Weighted average fair value of NQOs	$	4.65
Risk-free interest rate	1.7		%
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, 2019:



Outstanding NQOs:	Number of NQOs		Weighted Average Exercise Price ($)	Weighted Average Remaining Life (Years)	Aggregate Intrinsic Value ($ in thousands)
Outstanding at June 30, 2019	198,049		27.35	5.25	40
Granted	431,344		14.48	—	—
Exercised	(10,360	)	12.48	—	28
Forfeited	(104,288	)	27.28	—	—
Expired	(27,970	)	31.66	—	—
Outstanding at December 31, 2019	486,775		16.03	6.54	432
Exercisable at December 31, 2019	30,074		28.96	3.76	—

The weighted-average grant-date fair value of options granted during the six months ended December 31, 2019 was $4.65. The aggregate intrinsic values outstanding at the end of period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $15.06 at December 31, 2019 and $16.37 at June 28, 2019, representing the last trading day of the respective 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, 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 $0.1 million and $0.3 million in proceeds from exercises of vested NQOs during the six months ended December 31, 2019 and 2018, respectively.

At December 31, 2019 and June 30, 2019, respectively, there were $2.1 million and $1.1 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at December 31, 2019 is expected to be recognized over the weighted average period of 2.7 years. Total compensation expense for NQOs was $178.1 thousand and $185.0 thousand for the three months ended December 31, 2019 and 2018, respectively. Total compensation expense for NQOs was $277.2 thousand and $283.0 thousand for the six months ended December 31, 2019 and 2018, respectively.

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

The following table summarizes PNQ activity for the six months ended December 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, 2019	229,961		26.21	1.23	—
Granted	—		—	—	—
Exercised	—		—	—	—
Forfeited	(6,212	)	32.85	—	—
Expired	(202,753	)	25.67	—	—
Outstanding at December 31, 2019	20,996		29.39	1.92	—
Exercisable at December 31, 2019	12,730		27.95	1.78	—

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 $15.06 at December 31, 2019 and $16.37 at June 28, 2019, 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, 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.

There were no options exercised during the six months ended December 31, 2019. The Company received $0.1 million in proceeds from exercises of vested PNQs during the six months ended December 31, 2018.

At December 31, 2019 and June 30, 2019, there were zero and $39.7 thousand, respectively, of unrecognized PNQ compensation cost. Total compensation expense related to PNQs in the three months ended December 31, 2019 and 2018 were $4.6 thousand and $146.4 thousand, respectively. Total compensation expense related to PNQs in the six months ended December 31, 2019 and 2018 were $18.3 thousand and $324.5 thousand, respectively.

Restricted Stock

The following table summarizes restricted stock activity for the six months ended December 31, 2019:



Outstanding and Nonvested Restricted Stock Awards:	Shares Awarded		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2019	32,056		21.10
Granted	48,654		15.05
Vested/Released	(18,298	)	23.98
Cancelled/Forfeited	(1,704	)	31.70
Outstanding and nonvested at December 31, 2019	60,708		15.66

The total grant-date fair value of restricted stock granted during the six months ended December 31, 2019 was $0.7 million.

At December 31, 2019 and June 30, 2019, there were $0.7 million and $0.4 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at December 31, 2019 is expected to be recognized over the weighted average period of 0.8 years. Total compensation expense for restricted stock were $0.2 million and $0.1 million, respectively, in the three months ended December 31, 2019 and 2018. Total compensation expense for restricted stock in the six months ended December 31, 2019 and 2018 were $0.4 million and $0.2 million, respectively.

Performance-Based Restricted Stock Units (“PBRSUs”)

The following table summarizes PBRSU activity for the six months ended December 31, 2019:



Outstanding and Nonvested PBRSUs:	PBRSUs Awarded(1)		Weighted Average Grant Date Fair Value ($)
Outstanding and nonvested at June 30, 2019	51,237		27.69
Granted(1)	76,256		14.42
Vested/Released	—		—
Cancelled/Forfeited	(36,049	)	27.92
Outstanding and nonvested at December 31, 2019	91,444		16.54

_____________

(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 200% 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 six months ended December 31, 2019 was $1.1 million.

At December 31, 2019 and June 30, 2019, there were $1.1 million and $0.3 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at December 31, 2019 is expected to be recognized over the weighted average period of 2.6 years. Total compensation expense for PBRSUs were $77.2 thousand and $117.0 thousand, respectively, for the three months ended December 31, 2019 and 2018. Total compensation expense for PBRSUs were $0.1 million and $0.2 million, respectively, for the six months ended December 31, 2019 and 2018.

Performance Cash Awards (“PCAs”)

In November 2019, the Company granted PCAs under the 2017 Plan to certain employees. The PCAs 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, 2019 through June 30, 2022, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan. At the end of the three-year performance period, the amount of PCAs that actually vest will be 0% to 200% 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.

The PCAs are measured initially based on a fixed amount of the awards at the date of grant and are required to be re-measured based on the probability of achieving the performance conditions at each reporting date until settlement. Compensation expense for PCAs is recognized over the applicable performance periods. The Company records a liability equal to the cost of PCAs for which achievement of the performance condition is deemed probable. As of December 31, 2019, the Company had recognized accrued liabilities of $16.9 thousand.

At December 31, 2019, there was $0.4 million of unrecognized PCA compensation cost. The unrecognized PCA compensation cost at December 31, 2019 is expected to be recognized over the weighted average period of 2.9 years. Total compensation expense for PCAs was $16.9 thousand for the three and six months ended December 31, 2019.