Note 4. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 29, 2019 includes $212,700 and $943,400, 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 30, 2018 includes $274,100 and $979,400, respectively, of non-cash stock-based compensation expense. Non-cash 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”) and 2019 Stock and Incentive Plan (the “2019 Plan” and together with the 1994 Plan, the “Plans”), which was approved at the Annual Meeting of Shareholders held on July 25, 2019. No additional awards may be granted under the 1994 Plan, although awards outstanding under the 1994 Plan remain outstanding and governed by its terms.

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the Plans, for the first nine months of fiscal 2020:


	Nine Months	Weighted
	Ended	Average Fair
	December 29,	Value at Grant
	2019	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	98,306	$	14.55
PSUs Granted	51,616		15.93
PSUs Vested	(29,036)		14.09
PSUs Forfeited/Cancelled	(40,719)		15.69
Unvested shares available for issue under outstanding PSUs, end of period	80,167	$	15.02

During the first quarter of fiscal 2020, 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 45,500 shares of the Company’s common stock in the aggregate, depending upon whether certain earnings per share targets, and individual performance metrics, are satisfied, for fiscal year 2020. These not-yet-earned PSUs have only one measurement year (fiscal 2020), and assuming the performance metrics are met to a sufficient extent, the shares earned at the end of fiscal 2020 on the basis of that performance will vest in four equal installments beginning on or about May 15, 2020 and continuing on the same date in calendar 2021, 2022 and 2023, provided that the respective employee remains employed by the Company on each such date. Pursuant to the typical PSU award agreement, however, 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 employee, or upon termination of the employee’s employment without cause or by the employee for good reason, as those terms are defined in the applicable PSU award agreement. In connection with his hiring as President and Chief Executive Officer on August 20, 2019, the Compensation Committee, with concurrence of the full Board of Directors, granted an additional PSU to Mr. Mukerjee, providing him with the opportunity to earn up to 6,116 shares of the Company’s common stock. This PSU was granted on the same terms as the PSUs granted in May 2019, except that this PSU was granted under the 2019 Plan and any shares earned pursuant to it on the basis of fiscal 2020 performance will vest in four equal installments beginning on the first anniversary of the commencement of the employment of Mr. Mukerjee and continue in calendar 2021, 2022 and 2023 on the same date as the other PSUs vest, provided that Mr. Mukerjee remains employed by the Company on each such date.

The PSUs cancelled during fiscal 2020 primarily related to the fiscal 2019 grant of PSUs, which also had a one-year measurement period (fiscal 2019). The PSUs were cancelled because the applicable fiscal 2019 performance targets were not fully attained. 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 (or its successor 2019 plan).

If all PSUs granted thus far in fiscal 2020 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 PSUs would be approximately $0.8 million as of December 29, 2019, and would be expensed through fiscal 2023. To the extent the maximum number of PSUs granted in fiscal 2020 are not earned, stock-based compensation related to these awards will differ from this amount.

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, 2019, the Compensation Committee approved the grant of an aggregate of 21,000 RSUs, ratably to the six non-employee directors, including the Chairman of the Board of the Company. These RSU awards provide for the issuance of shares of the Company’s common stock in four equal installments beginning on May 10, 2020 and continuing on the same date in 2021, 2022 and 2023, provided that the director remains associated with the Company on each such date (or meets other criteria as prescribed in the applicable award agreement).

On August 8, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, approved the grant of an aggregate of up to 56,000 RSUs to several senior executives. The number of shares earned by a recipient is 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. As of December 29, 2019, 15,000 of these 56,000 RSUs have been canceled due to employee departures, leaving 41,000 of the 56,000 RSUs outstanding. An additional 2,000 RSU’s with similar terms (but with a shorter earnings period) were awarded in fiscal 2019, and in connection with his hiring as our new President and Chief Executive Officer, the Company issued an additional RSU grant to Mr. Mukerjee under the 2019 Plan for 19,000 shares and with similar terms (a four-year earning period and a denominator of $3.20). As a result, an aggregate of 62,000 dividend-based RSUs currently remain outstanding.

As of December 29, 2019, there was approximately $0.9 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 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 2020, stock options for an aggregate of 385,000 shares of common stock, including an option for 250,000 shares issued to the Company’s new President and Chief Executive Officer, were granted, under the Plans. These stock options have exercise prices equal to the market price of the Company’s stock on the grant date, and except for the option granted to Mr. Mukerjee (which vests and becomes exercisable for 80,308 shares on November 30, 2020 and continues to vest on the last day of each consecutive month following, at a rate of approximately 5,142 shares monthly, until becoming fully exercisable on August 31, 2023), 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 or termination 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 29,	Value at Grant
	2019	Date (per unit)
Outstanding, beginning of period	591,500	$	2.30
Options Granted	385,000		2.50
Options Forfeited/Cancelled	(71,792)		3.10
Options Exercised	(48,125)		2.25
Outstanding, end of period	856,583		2.33
Vested and exercisable, end of period	366,458	$	2.21


				December 29, 2019
Grant Fiscal Year	Options Granted		Option Exercise Price	Options Outstanding	Options Exercisable
2020	385,000	$	13.80	358,000	-
2019	66,500	$	16.31	44,000	13,749
2018	230,000	$	15.12	114,583	70,001
2017	410,000	$	12.57	300,000	242,708
2016	100,000	$	22.42	40,000	40,000
Total				856,583	366,458


Grant Fiscal Year	Expected Stock Price Volatility		Risk-Free Interest Rate		Expected Dividend Yield		Average Expected Term	Resulting Black Scholes Value
2020	35.76	%	2.02	%	6.07	%	4.0	$	2.50
2019	35.59	%	3.11	%	4.99	%	4.0	$	3.38
2018	32.63	%	1.96	%	5.34	%	4.0	$	2.57

As of December 29, 2019, there was approximately $1.0 million of total unrecognized compensation costs related to these options. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years.