Note 3. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter ended June 25, 2017 includes $247,600 of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter ended June 26, 2016 included $115,800 non-cash stock-based compensation expense. Stock-based compensation expense is primarily related our Performance Stock Units (PSUs), Restricted Stock Units (RSUs), and Stock Options, granted or outstanding under our Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”).

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the 1994 Plan, for the first three months of fiscal 2018:


	Three Months	Weighted
	Ended	Average Fair
	June 25,	Value at Grant
	2017	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	170,100	$	11.17
PSU’s Granted	81,000		12.69
PSU’s Vested	(7,600)		19.58
PSU’s Forfeited/Cancelled	(162,500)		10.77
Unvested shares available for issue under outstanding PSUs, end of period	81,000	$	12.71

During the first quarter of fiscal 2018, the Compensation Committee of our 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 81,000 shares of the Company’s common stock in the aggregate, depending upon whether and to the extent which 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 2018), and assuming the performance metrics are met to a sufficient extent, any shares earned at the end of fiscal 2018 will vest and be issued ratably on or about May 1 of 2018, 2019, 2020 and 2021, provided that the respective employees remain employed by or associated with the Company on each such date.

The PSUs cancelled during fiscal 2018 related to the fiscal 2017 grant of PSUs, which had a one year measurement period (fiscal 2017). The PSUs were cancelled because the minimum applicable fiscal 2017 performance targets were not attained. Per 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 under the 1994 Plan.

If all PSUs granted thus far in fiscal 2018 are assumed to be earned on account of the applicable performance metrics being fully met, total unrecognized compensation costs on these PSUs would be approximately $0.9 million, as of June 25, 2017, and would be expensed through fiscal 2021. To the extent the maximum number of PSUs granted in fiscal 2018 is not earned, stock-based compensation related to these awards will differ from this amount.

Restricted Stock Units: The Company has made annual restricted stock unit (RSU) awards under the 1994 Plan to its non-employee directors over recent years. Most recently, RSU awards have also been made to Robert B Barnhill, Jr., our former President and Chief Executive Officer and current Executive Chairman and Chairman of the Board. These RSUs have been awarded to Mr. Barnhill in lieu of PSU awards, as provided for under the Amended and Restated Employment Agreement between us and Mr. Barnhill. On May 10, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 18,000 RSUs, ratably to the five non-employee directors of the Company, and to Mr. Barnhill. 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 June 25, 2017, there was approximately $0.5 million of total unrecognized compensation cost related to all outstanding RSUs, including the May 10, 2017 grants. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately three 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.

As discussed in Note 2, the Company will now account for forfeitures as they occur rather than estimate expected forfeitures. To the extent that forfeitures occur, stock based compensation related to the restricted awards will be different from the Company’s expectations.

Stock Options: Following the initiation of our PSU award program for fiscal 2005, our Compensation Committee occasionally employed stock options as an element of incentive compensation, but after more recently revaluating its approach to executive compensation, has concluded that grants or awards of stock options are appropriate as a retention and recruiting tool, and beginning in fiscal 2016 has increased the number and frequency of stock option awards, primarily to senior management. As summarized below, in the first quarter of fiscal 2018, stock options for an aggregate of 200,000 shares of common stock were awarded, all under the 1994 Plan. These stock options have exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof provide for 25% vesting after one year and then 1/36 per month over the following three years. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

The value of each option at the date of grant is amortized as compensation expense over the service period. This occurs without regard to subsequent changes in stock price, volatility, or interest rates over time, provided the option remains outstanding.

The following tables summarize pertinent information for outstanding options.


	Three Months	Weighted
	Ended	Average Fair
	June 25,	Value at Grant
	2017	Date (per unit)
Unvested options, beginning of period	395,000	$	1.96
Options Granted	200,000		2.38
Options Vested	(3,750)		3.55
Option’s Forfeited/Cancelled	—		—
Unvested options, end of period	591,250	$	2.11


				June 25, 2017
Grant Fiscal Year	Options Granted		Option Exercise Price	Options Outstanding	Options Exercisable
2018	200,000	$	14.63	200,000
2017	410,000	$	12.57	360,000	-
2016	100,000	$	22.42	60,000	28,750
Total				620,000	28,750


Grant Fiscal Year	Expected Stock Price Volatility		Risk-Free Interest rate		Expected Dividend Yield		Average Expected Term	Resulting Black Scholes Value
2018	32.26	%	1.93	%	5.47	%	4.0	$	2.38
2017	32.85	%	1.32	%	6.30	%	4.0	$	1.85
2016	26.40	%	1.67	%	3.50	%	4.0	$	3.43

As of June 25, 2017, there was approximately $1.1 million of total unrecognized compensation costs, related to these awards. Unrecognized compensation costs related to these awards are expected to be recognized ratably over a period of approximately four years.