Stock-Based Compensation

9 Months Ended

Dec. 27, 2020

Stock-Based Compensation

Stock-Based Compensation

Note 4. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter and nine months ended December 27, 2020 includes $331,000 and $959,600, 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 29, 2019 includes $212,700 and $943,400, 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), Restricted Stock, 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”), the latter of 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 2021:

	Nine Months	Weighted
	Ended	Average Fair
	December 27,	Value at Grant
	2020	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	68,355	$	15.00
PSUs Vested	(21,690)		14.21
PSUs Forfeited/Cancelled	(33,116)		15.69
Unvested shares available for issue under outstanding PSUs, end of period	13,549	$	14.57

The PSUs cancelled during fiscal 2021 related primarily to the fiscal 2020 grant of PSUs, which had a one-year measurement period (fiscal 2020). These PSUs were cancelled because the applicable fiscal 2020 performance targets were not attained. Per the provisions of the 2019 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 2019 Plan and became available for future issuance under the 2019 Plan.

If all unvested PSUs earned and outstanding as of December 27, 2020 are assumed to have then vested (and the underlying shares issued) in accordance with terms of the applicable award agreement, total unrecognized compensation costs on these PSUs would be less than $0.1 million as of December 27, 2020, and would be expensed through fiscal 2022.

Restricted Stock Units: On May 15, 2020, July 24, 2020 and November 12, 2020, the Compensation Committee, with the concurrence of the full Board of Directors, granted an aggregate of 30,000 RSUs under the 2019 Plan to non-employee directors of the Company. These awards provide for the issuance of shares of the Company’s common stock in accordance with a vesting schedule that generally provides for the vesting of 25% of the award on or about each of May 15 of 2021, 2022, 2023 and 2024, provided that the participant remains associated with the Company (or meets other criteria as prescribed in the applicable agreement) on each such date.

Changes in the composition of our Board during the third quarter of fiscal 2021, in connection with or occurring during the term of a consent solicitation initiated by certain of our stockholders towards the end of 2021 second fiscal quarter resulted in the accelerated vesting of 30,000 current and prior year RSUs and the issuance of a corresponding number of shares of Common Stock to departing directors,  during the third quarter.

Restricted Stock: On May 15, 2020 and July 24, 2020, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 65,821 shares of the Company’s common stock as restricted stock under the 2019 Plan to certain non-employee directors of the Company in lieu of their annual cash retainer for fiscal 2021. The value of the restricted shares at the time of issue to each director was determined by the Compensation Committee to approximate the cash amount of the 2021 fiscal year board retainer per director. These shares of restricted stock were issued subject to a risk of forfeiture that will lapse in whole or in part on July 1, 2021, generally depending on the length of continued service of the recipient on the Board for fiscal 2021. Dividends accruing in respect of the shares of restricted stock, if any, will accrue but will not be paid until July 1, 2021 and only in respect of those shares for which the risk of forfeiture has then lapsed.

As of December 27, 2020, there was approximately $0.2 million of total unrecognized compensation cost related to all outstanding RSUs and restricted stock, 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: On April 30, 2020 and May 15, 2020, stock options for an aggregate of 160,000 shares of common stock were granted under the 2019 Plan. These stock options have exercise prices equal to the market price of the Company’s common 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 or termination upon the occurrence of certain events, as described in the applicable award agreement.

In addition, on May 15, 2020, performance-based stock options for an aggregate of 65,000 shares of common

stock were granted under the 2019 Plan to certain officers of the Company. These stock options also had exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof also provide for 25% vesting after one year and then 1/36 per month over the following three years, but these stock options also imposed two shorter term performance-based milestones, with the satisfaction of each milestone imposed as an additional condition to vesting of one-half of each option award. The performance metrics associated with these stock options were not met and therefore, no net expense is being recognized in fiscal 2021. Half of the 65,000 options were cancelled as of October 1, 2020, and the underlying shares were returned to the 2019 Plan and became available for future issuance under the 2019 Plan. The other half of the options will be cancelled as of December 31, 2020, and the underlying shares will then be returned to the 2019 Plan, and become available for future issuance under the 2019 Plan.

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 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 27,	Value at Grant
	2020	Date (per unit)
Unvested options, beginning of period	465,374	$	2.38
Options Granted	225,000		2.00
Options Forfeited/Cancelled	(95,125)		3.52
Options Vested	(165,188)		3.28
Unvested options, end of period	430,061		1.58

				December 27, 2020
Grant Fiscal Year	Options Granted		Option Exercise Price	Options Outstanding	Options Exercisable
2021	225,000	$	4.52	182,500	-
2020	405,000	$	13.54	341,000	117,084
2019	66,500	$	16.31	35,000	21,561
2018	230,000	$	15.12	80,000	69,791
2017	410,000	$	12.57	263,958	263,961
2016	100,000	$	22.42	40,000	40,000
Total				942,458	512,397

Grant Fiscal Year	Expected Stock Price Volatility		Risk-Free Interest Rate		Expected Dividend Yield		Average Expected Term	Resulting Black Scholes Value
2021	46.68	%	1.16	%	0.00	%	4.0	$	2.00
2020	35.88	%	2.00	%	5.82	%	4.0	$	2.53
2019	35.59	%	3.11	%	4.99	%	4.0	$	3.38

The above tables do not reflect the cancellation as of December 31, 2020 of the remaining one half of the 65,000 performance-based options, as discussed above. As of December 27, 2020, there was approximately $0.8 million of total unrecognized compensation costs related to these options, assuming all shares are earned. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years.