NOTE 6 – STOCK-BASED COMPENSATION

In September 2021, the Transcat, Inc. 2021 Stock Incentive Plan (the “2021 Plan”) was approved by shareholders and became effective. The 2021 Plan provides for, among other awards, grants of restricted stock units and stock options to directors, officers and key employees at the fair market value at the date of grant. At March 28, 2026, 0.4 million shares of common stock were available for future grant under the 2021 Plan.

The Company receives an excess tax benefit related to restricted stock vesting and stock options exercised and redeemed. The discrete benefits related to share-based compensation and stock option activity in fiscal years 2026, 2025 and 2024 were $0.7 million, $1.3 million and $0.6 million, respectively.

Restricted Stock Units: The Company grants time-based and performance-based restricted stock units as a component of executive and key employee compensation. Expense for restricted stock unit grants is recognized on a straight-line basis for the service period of the stock award based upon fair value of the award on the date of grant. The fair value of the restricted stock unit grants is the quoted market price for the Company’s common stock on the date of grant. These restricted stock units are either time vested, or vest following the third fiscal year from the date of grant subject to cumulative diluted earnings per share (ending with fiscal year 2025) or cumulative Adjusted EBITDA targets over the eligible period.

During fiscal year 2026, on the date of the annual meeting of shareholders, the Company’s non-employee directors received an annual grant of restricted stock units valued at $120,000 that vests after one year.  During fiscal years 2025 and 2024, the Company's non-employee directors received an annual grant of restricted stock units valued at $85,000 and $50,000, respectively, that vested after one year. 

Compensation cost ultimately recognized for performance-based restricted stock units will equal the grant date fair market value of the unit that coincides with the actual outcome of the performance conditions. On an interim basis, the Company records compensation cost based on the estimated level of achievement of the performance conditions. The expense relating to the time vested restricted stock units is recognized on a straight-line basis less estimate for forfeitures over the requisite service period for the entire award. Performance-based restricted stock units can be earned up to a maximum of 150% of shares awarded.

On  January 6, 2026, the Compensation Committee (the "Committee") of the Board of Directors of the Company granted a special one-time equity award to certain members of the executive team under the 2021 Plan (the “Retention Awards”). The Committee granted approximately 56,000 restricted stock units with a grant date fair value of approximately $3.4 million. The Retention Awards will vest on  January 6, 2028, subject to continued employment and except as otherwise described in the form of award agreement.

The following table summarizes the non-vested restricted stock units outstanding as of March 28, 2026 (in thousands, except per unit data):

Total expense relating to restricted stock units, based on grant date fair value and the achievement criteria, was $6.8 million, $2.4 million and $3.2 million in fiscal years 2026, 2025 and 2024, respectively. As of March 28, 2026, unearned compensation, to be recognized over the grants’ respective service periods, totaled $12.0 million based on estimated achievement levels as of March 28, 2026.  If the maximum performance levels were achieved, the unearned compensation could be a maximum of $12.6 million.

Stock Options: The Company grants stock options to employees and directors with an exercise price equal to the quoted market price of the Company’s stock at the date of the grant. The fair value of stock options is estimated using the Black-Scholes option pricing formula that requires assumptions for expected volatility, expected dividends, the risk-free interest rate and the expected term of the option. Expense for stock options is recognized on a straight-lined basis over the requisite service period for each award. Options vest over a period of up to five years either in annual tranches or cliff vesting and expire either five years or ten years from the date of grant.

The following weighted-average assumptions were used to value options granted during fiscal years 2026, 2025 and 2024:

The Company calculates expected volatility for stock options by taking an average of historical volatility over the expected term. The computation of expected term was determined based on safe harbor rules, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield in effect at the time of grant. We assume no expected dividends. 

The expense related to all stock option awards was $0.7 million, $0.8 million and $1.3 million in fiscal years 2026, 2025 and 2024, respectively.

The following table summarizes the Company’s options for fiscal year 2026 (amounts in thousands, except per option data):

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal year 2026 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all holders exercised their options on March 28, 2026. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Total unrecognized compensation cost related to non-vested stock options as of March 28, 2026 was $0.7 million, which is expected to be recognized over a period of three years. The aggregate intrinsic value of stock options exercised in fiscal years 2026, 2025 and 2024 was less than $0.1 million, $3.2 million and $1.3 million, respectively. Cash received from the exercise of options in fiscal years 2026, 2025 and 2024 was less than $0.1 million, $1.3 million and $1.5 million, respectively.