Note 3. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 30, 2018 includes $274,100 and $979,400, 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 24, 2017 included $243,500 and $745,400, 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, granted or outstanding under the Company’s 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 nine months of fiscal 2019:


	Nine Months	Weighted
	Ended	Average Fair
	December 30,	Value at Grant
	2018	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	67,000	$	12.65
PSU’s Granted	71,000		15.58
PSU’s Vested	(14,257)		12.66
PSU’s Forfeited/Cancelled	(25,437)		13.46
Unvested shares available for issue under outstanding PSUs, end of period	98,306	$	14.55

During the first quarter of fiscal 2019, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved the grant of PSUs to select key employees, providing them with the opportunity to earn up to 71,000 shares of the Company’s common stock in the aggregate, depending initially 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 2019), and assuming the performance metrics are met to a sufficient extent, any shares earned at the end of fiscal 2019 will vest 25% and be issued ratably on or about each of May 1 of 2019, 2020, 2021 and 2022, provided that the respective employees remain employed by the Company on each such date (or meets certain other criteria as prescribed in the applicable award agreement, and unless accelerated in accordance with the terms of the applicable award agreement).

The PSUs cancelled during fiscal 2019 primarily related to the fiscal 2018 grant of PSUs, which had a one-year measurement period (fiscal 2018). These PSUs were cancelled because the applicable fiscal 2018 performance targets were not fully satisfied. 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 under the 1994 Plan.

If all PSUs granted thus far in fiscal 2019 are assumed to be earned on account of the applicable performance metrics being fully met, or otherwise in accordance with terms of the applicable award agreement, total unrecognized compensation costs on these PSUs plus all earned but unvested PSU’s would be approximately $0.8 million, as of December 30, 2018, and would be expensed through fiscal 2022. To the extent the maximum number of PSUs granted in fiscal 2019 are not earned, stock-based compensation related to these awards will differ from this amount.

Pursuant to the typical PSU award agreement performance metrics are deemed met upon the occurrence of a change in control, and shares earned are issued earlier upon the occurrence of a change in control, or death or disability of the participant, or upon termination of the participant’s employment without cause or by the participant for good reason, as those terms are defined in the agreement.

Restricted Stock Units: The Company has made annual RSU awards under the 1994 Plan to its non-employee directors over recent years. On May 10, 2018, the Compensation Committee approved the grant of an aggregate of 18,000 RSUs, ratably to the then five non-employee directors of the Company, and to Robert B. Barnhill, Jr. In addition to this, effective June 6, 2018, Paul J. Gaffney was appointed to the Board of Directors and was granted 3,000 RSUs. These RSU awards to non-employee directors and to Mr. Barnhill provide for the issuance of shares of the Company’s common stock in four equal installments, beginning on May 1 of the year following the award and continuing on May first of each of the following three years, provided that the director remains associated with the Company (or meets other criteria as prescribed in the applicable award agreement) on each date, and subject to acceleration upon the occurrence of certain events, as described in the applicable award agreement.

On August 8, 2017, the Compensation Committee approved the grant of an aggregate of up to 56,000 RSUs to several senior executives. The number of shares earned by a recipient will be determined by multiplying the number of RSUs covered by the award by a fraction, the numerator of which is the cumulative amount of dividends (regular, ordinary and special) declared and paid, per share, on the Common Stock, over an earnings period of up to four years, and the denominator of which is $3.20. Subject to earlier issuance upon the occurrence of certain events (as described in the applicable award agreement), any earned shares are issued and distributed to the recipient upon the fourth anniversary of the award date. On October 23, 2018, the Compensation Committee approved the grant of an additional 2,000 RSUs to a recently promoted senior executive. These RSUs have terms comparable to the 56,000 previously issued RSUs, but have an earnings period that coincides with the remainder of the earnings period applicable to the initially issued 56,000 RSUs, and reflect other corresponding adjustments. As of December 30, 2018, 8,000 of these 58,000 RSUs have been canceled due to employee departures, leaving 50,000 of these RSUs outstanding.

As of December 30, 2018, there was approximately $0.8 million of total unrecognized compensation cost related to all outstanding RSUs, assuming all shares are earned. 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.

The Company now accounts for forfeitures as they occur rather than estimate expected forfeitures. To the extent that forfeitures occur, stock-based compensation related to the restricted awards may be different from the Company’s expectations.

Stock Options: As summarized below, in the first nine months of fiscal 2019, stock options for an aggregate of 66,500 shares of common stock were granted, 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, subject, however, to acceleration upon the occurrence of certain events, as described in the applicable award agreement. 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 the pertinent information for outstanding options.


	Nine Months	Weighted
	Ended	Average Fair
	December 30,	Value at Grant
	2018	Date (per unit)
Unvested options, beginning of period	392,500	$	2.21
Options Granted	66,500		3.38
Options Vested	(127,292)		2.20
Options Forfeited/Cancelled	(15,000)		4.57
Unvested options, end of period	316,708	$	2.35


				December 30, 2018
Grant Fiscal Year	Options Granted		Option Exercise Price	Options Outstanding	Options Exercisable
2019	66,500	$	16.31	61,500	-
2018	230,000	$	15.12	160,000	59,167
2017	410,000	$	12.57	330,000	181,458
2016	100,000	$	22.42	40,000	34,167
Total				591,500	274,792


Grant Fiscal Year	Expected Stock Price Volatility		Risk-Free Interest rate		Expected Dividend Yield		Average Expected Term	Resulting Black Scholes Value
2019	35.59	%	3.11	%	4.99	%	4.0	$	3.38
2018	32.63	%	1.96	%	5.34	%	4.0	$	2.57
2017	32.85	%	1.32	%	6.30	%	4.0	$	1.85
2016	26.40	%	1.67	%	3.50	%	4.0	$	3.43

As of December 30, 2018, there was approximately $0.8 million of total unrecognized compensation costs, related to these awards. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years.