Note 3. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 25, 2016 includes $98,700 and $291,100, respectively, of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 27, 2015 include $110,900 and $510,600, respectively, of non-cash stock-based compensation expense. Stock-based compensation expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs), and Stock Options. In addition, the Company recorded an excess tax benefit directly to shareholders’ equity of $510,400, primarily related to the PSUs that vested during the nine months ended December 27, 2015. No excess tax benefit related to PSU vesting was recorded during the nine months ended December 25, 2016.

On July 26, 2016, the Company’s shareholders approved the Third Amended and Restated 1994 Stock and Incentive Plan (the Amended and Restated 1994 Plan), which amended and restated the Company’s Second Amended and Restated 1994 Stock and Incentive Plan, as previously amended (the 1994 Plan), in its entirety. The material amendments to the 1994 Plan reflected by the Amended and Restated 1994 Plan are as follows:

Extension of Plan Term. The date through which awards may be granted was extended to July 21, 2021. Prior to this extension, the 1994 Plan was scheduled to expire on July 21, 2016.

Increase in Aggregate Share Limit. The Amended and Restated 1994 Plan increased the number of shares available for awards by 650,000 shares. The 1994 Plan had previously limited the aggregate number of shares of the Company's common stock that may have been delivered pursuant to all awards granted under the 1994 Plan to 3,553,125 shares. The Amended and Restated 1994 Plan increased the number of shares available for awards to 4,203,125 shares.

Elimination of Liberal Share Recycling. The Amended and Restated 1994 Plan, at Section 5(a)(iii), now prohibits liberal share recycling in respect of shares tendered by participants in payment of the exercise price for awards, or for payroll tax withholding obligations, and provides that such tendered shares shall not be available for purposes of the Amended and Restated 1994 Plan. Although the 1994 Plan could have been construed to permit it, the Company has not historically included such tendered shares as shares available for awards under the 1994 Plan.

On September 1, 2016, the Company appointed Murray Wright to serve as the Company’s President and Chief Executive Officer. In connection with Mr. Wright’s appointment, he was granted a stock option to purchase 250,000 shares of the Company’s common stock and 10,000 PSUs with a fiscal 2017 measurement year. The disclosures below for PSUs and stock options include these grants.

During the quarter ended December 25, 2016, the Compensation Committee of the Board of Directors with concurrence of the full Board of Directors, granted stock options to select key employees to purchase an aggregate of 130,000 shares of the Company’s common stock. The disclosure below for stock options includes these grants.

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the Amended and Restated 1994 Plan, for the first nine months of fiscal 2017:


	Nine Months	Weighted
	Ended	Average Fair
	December 25,	Value at Grant
	2016	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	138,925	$	21.46
PSU’s Granted	207,000		10.77
PSU’s Vested	(26,736)		19.40
PSU’s Forfeited/Cancelled	(123,654)		21.72
Unvested shares available for issue under outstanding PSUs, end of period	195,535	$	11.16

Of the 195,535 unvested shares available for issue under outstanding PSUs as of December 25, 2016, 8,535 shares were previously earned in respect of the applicable measurement year, and will vest and be issued on or about May 1, 2017, assuming the respective participants remain employed by or associated with the Company on this date.

During fiscal 2017, the Compensation Committee of the Board of Directors with concurrence of the full Board of Directors, granted PSUs to select key employees, providing them with the opportunity to earn up to 207,000 shares of the Company’s common stock in the aggregate, depending upon whether and to the extent that certain earnings per share targets and other Company and individual performance metrics are met. These not-yet-earned PSUs have a one-year measurement period (fiscal 2017), and assuming the performance metrics are met to a sufficient extent, any shares earned at the end of fiscal 2017 will vest and be issued ratably on or about May 1 of 2017, 2018, 2019 and 2020, provided that the respective employees remain employed by or associated with the Company on each such date. Due to employee departures, 20,000 of these shares were subsequently canceled, leaving 187,000 unvested shares available for issue under PSUs granted under the Amended and Restated 1994 Plan during the current fiscal year, as of December 25, 2016. For the nine months ending December 25, 2016, the Company has not recognized any expense related to these awards as the Company’s current estimate of fiscal 2017 earnings is below the minimum threshold set for these awards.

The additional PSUs cancelled during fiscal 2017 related to the fiscal 2016 grant of PSUs, which had a one year measurement period (fiscal 2016). The PSUs were cancelled because the applicable fiscal 2016 performance targets were not attained to any extent. Per the provisions of the 1994 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 1994 Plan and became available for future issuance, now under the Amended and Restated 1994 Plan.

If all PSUs granted in fiscal 2017 that now remain outstanding are assumed to be earned on account of the applicable performance metrics being fully met, total unrecognized compensation costs on these PSUs, together will all previously earned but unvested PSUs, net of estimated forfeitures, would be approximately $2.0 million, as of December 25, 2016, and would be expensed through fiscal 2020. To the extent the actual forfeiture rate is different from what is anticipated or the maximum number of PSUs granted in fiscal 2017 is not earned, stock-based compensation related to these awards will differ from this amount.

Restricted Stock Units: The Company has over recent years made annual restricted stock unit (RSU) awards to its non-employee directors. On May 11, 2016, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 10,000 RSUs, ratably to the non-employee directors of the Company. These awards provide for the issuance of shares of the Company’s common stock in accordance with a four-year annual vesting schedule, following from the date of grant, provided that the director remains associated with the Company (or meets other criteria as prescribed in the applicable award agreement) on each such anniversary date. As of December 25, 2016, there was approximately $0.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to all outstanding RSUs, including the May 11, 2016 grant. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately two years.

PSUs and RSUs are expensed based on the grant date fair value, calculated as the closing price of TESSCO common stock as reported by NASDAQ on the date of grant minus the present value of dividends expected to be paid on the common stock before the award vests, because dividends or dividend-equivalent amounts do not accrue and are not paid on unvested PSUs and RSUs.

To the extent the actual forfeiture rates are different from what is estimated, stock-based compensation related to the restricted awards will be different from the Company’s expectations.

Stock Options: As of December 25, 2016, there were 440,000 stock options outstanding, and there was approximately $0.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to these outstanding stock options. As of December 25, 2016, 21,250 of the outstanding stock options were vested.