Prior to the Separation, our employees participated in two of our former parent’s sponsored incentive stock plans. All grants made prior to the Separation covering all participants were issued under those plans.

Certain of our employees have participated in our former parent’s 2013 Incentive Stock Plan. The following disclosures of stock-based compensation expense recognized by us, prior to the Separation, are based on grants related directly to our employees and an allocation of our former parent’s corporate and shared employee stock-based compensation expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that we would have experienced as an independent company for the periods presented.

In connection with the Separation, outstanding and vested awards granted to employees under our former parent’s incentive stock plans were converted into our stock-based awards. Unvested awards held by our employees were converted into our stock-based awards. The ratio used to convert our former parent incentive plan awards was intended to preserve the aggregate intrinsic value of each award immediately after the Separation when compared to the aggregate intrinsic value immediately prior to the Separation. All performance-based restricted share units, or PSUs, outstanding on the Distribution Date were converted to PSUs using payout metrics based on a combination of actual performance through the Distribution Date and the target for the remainder of the performance period. Due to the conversion, we expect to incur $711,000 of incremental stock-based compensation expense for our employees to be recognized over the awards' remaining 1.3 year vesting period.

Post-Separation, we have a separate stock incentive plan, or the 2020 Incentive Compensation Plan, under which we can grant new awards to our employees and directors. The 2020 Incentive Compensation Plan authorizes the issuance of awards covering up to 1,397,510 shares of our common stock. The plan permits the grant of options to acquire common stock, restricted stock awards, restricted stock units, or RSUs, performance stock units, or PSUs, stock appreciation rights, bonus stock and awards in lieu of obligations, and dividend equivalents. Our board of directors, or a committee established by our board, administers the incentive plan, selects recipients to whom awards are granted, and determines the grants to be awarded. Stock options granted under the plan are exercisable at a price determined by our board of directors or a committee thereof at the time of grant, but in no event, less than fair market value of our common stock on the date granted. Grants of options may be made to employees and directors without regard to any performance measures. All options issued pursuant to the incentive plan are generally nontransferable and subject to forfeiture.

Unless terminated earlier by our Board of Directors, the 2020 Incentive Compensation Plan will terminate at the earlier of (1) the tenth anniversary of the effective date of the 2020 Incentive Compensation Plan, or (2) such time as no shares of common stock remain available for issuance under the plan and we have no further rights or obligations with respect to outstanding awards under the plan. The date of grant of an award is deemed to be the date upon which our board of directors or a committee thereof authorizes the granting of such award.

Except in specific circumstances, grants generally vest over a period of three or four years and grants of stock options are exercisable for a period of 10 years. The 2020 Incentive Compensation Plan also permits the grant of awards to non-employees.

We recognized $2.9 million of stock-based compensation expense for the fiscal year ended April 30, 2021. Of the total stock-based compensation we recognized for the period prior to the Separation, $224,000 related to allocations of our former parent’s corporate and shared employee stock-based compensation expense.

We recognized $850,000 and $2.3 million of stock-based compensation expense for the fiscal year ended April 30, 2020 and 2019, respectively. Of the total stock-based compensation recognized by us, $607,000 and $1.1 million related directly to our employees, and $244,000 and $1.2 million related to allocations of our former parent’s corporate and shared employee stock-based compensation for the fiscal year ended April 30, 2020 and 2019, respectively.

Stock-based compensation expense is included in the cost of sales, sales and marketing, research and development, and general and administrative expenses.

We grant RSUs to employees and directors. The awards are made at no cost to the recipient. An RSU represents the right to receive one share of our common stock and does not carry voting or dividend rights. Except in specific circumstances, RSU grants to employees generally vest over a period of four years with one-fourth of the units vesting on each anniversary of the grant date. The aggregate fair value of our RSU grants is amortized to compensation expense over the vesting period. Awards that do not vest are forfeited.

We grant PSUs to our executive officers and certain employees from time to time. At the time of grant, we calculate the fair value of our PSUs using the Monte-Carlo simulation. We incorporate the following variables into the valuation model:

	For the Year Ended April 30,
	2021
Grant date fair market value
American Outdoor Brands, Inc.	$	13.30
Russell 2000 Index	$	1,504.59
Volatility (a)
American Outdoor Brands, Inc.		47.54	%
Russell 2000 Index		27.70	%
Correlation coefficient (b)		0.48
Risk-free interest rate (c)		0.17	%
Dividend yield (d)		0	%

The PSUs vest, and the fair value of such PSUs will be recognized, over the corresponding three-year performance period. Our PSUs have a maximum aggregate award equal to 200% of the target unit amount granted. Generally, the number of PSUs that may be earned depends upon the total stockholder return, or TSR, of our common stock compared with the TSR of the Russell 2000 Index, or RUT, over the three-year performance period. For PSUs, our stock must outperform the RUT by 5% in order for the target award to vest. In addition, there is a cap on the number of shares that can be earned under our PSUs, which is equal to six times the grant-date value of each award.

In certain circumstances, the vested awards will be delivered on the first anniversary of the applicable vesting date. A discount rate has been applied to the grant date fair value when determining the amount of compensation expense to be recorded for these RSUs and PSUs.

During the fiscal year ended April 30, 2021, we granted an aggregate of 166,319 service-based RSUs to executive officers, non-executive officer employees, and directors, and 78,045 PSUs to certain executive officers and employees under our 2020 Incentive Compensation Plan. During the fiscal year ended April 30, 2021, we cancelled 2,994 service-based RSUs as a result of the service condition not being met. In connection with the vesting of RSUs, during the fiscal year ended April 30, 2021, we delivered common stock to employees and directors under our 2020 Incentive Compensation Plan with a total market value of $891,000.

During the fiscal year ended April 30, 2020, our employees were granted an aggregate of 81,416 service-based RSUs, and 44,871 PSUs under our former parent’s 2013 Incentive Stock Plan. During the fiscal year ended April 30, 2020, 37,417 service-based RSUs and 14,400 PSUs were cancelled a result of the service condition not being met. In connection with the vesting of RSUs, during the fiscal year ended April 30, 2020, our former parent delivered common stock to our employees under our former parent’s 2013 Incentive Stock Plan with a total market value of $494,000.

During the fiscal year ended April 30, 2019, our employees were granted an aggregate of 64,191 service-based RSUs, and 28,800 PSUs under our former parent’s 2013 Incentive Stock Plan. During the fiscal year ended April 30, 2019, 11,462 service-based RSUs were cancelled as a result of the service condition not being met. In connection with the vesting of RSUs, during the fiscal year ended April 30, 2019, our former parent delivered common stock to our employees under our former parent’s 2013 Incentive Stock Plan with a total market value of $519,000.

A summary of activity for unvested RSUs and PSUs under our 2020 Incentive Compensation Plan for the fiscal year ended April 30, 2021 is as follows:



	For the Year Ended April 30,
	2021
				Weighted
	Total # of			Average
	Restricted			Grant Date
	Stock Units			Fair Value
RSUs and PSUs outstanding, beginning of period	—			—
Shares granted as a result of conversion and employee transition		237,587			9.23
Awarded		244,364			14.10
Vested		(51,438	)		11.89
Forfeited		(2,994	)		11.82
RSUs and PSUs outstanding, end of period		427,519		$	11.67

As of April 30, 2021, there was $2.4 million of unrecognized compensation expense related to unvested RSUs and PSUs. This expense is expected to be recognized over a weighted average contractual term of 1.7 years.

Post-Separation, our employees participate in our Employee Stock Purchase Plan, or the ESPP, which authorizes the sale of up to 419,253 shares of our common stock to employees. All options and rights to participate in our ESPP are nontransferable and subject to forfeiture in accordance with our ESPP guidelines. Our current ESPP will be implemented in a series of successive offering periods, each with a maximum duration of 12 months. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of a 12-month offering period, then that offering period will automatically terminate, and a new 12-month offering period will begin on the next business day. Each offering period will begin on April 1 or October 1, as applicable, immediately following the end of the previous offering period. Payroll deductions will be on an after-tax basis, in an amount of not less than 1% and not more than 20% (or such greater percentage as the committee appointed to administer our ESPP may establish from time to time before the first day of an offering period) of a participant’s compensation on each payroll date. The option exercise price per share will equal 85% of the lower of the fair market value on the first day of the offering period or the fair market value on the exercise date. The maximum number of shares that a participant may purchase during any purchase period is 2,500 shares, or a total of $25,000 in shares, based on the fair market value on the first day of the offering period. Our ESPP will remain in effect until the earliest of (a) the exercise date that participants become entitled to purchase a number of shares greater than the number of reserved shares available for purchase under our ESPP, (b) such date as is determined by our board of directors in its discretion, or (c) the tenth anniversary of the effective date. In the event of certain corporate transactions, each option outstanding under our ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. During fiscal year ended April 30, 2021, 34,947 shares were purchased by our employees under our ESPP.

We measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. We amortize the fair value of the award over the vesting period of the option. Under the ESPP, fair value is determined at the beginning of the purchase period and amortized over the term of each exercise period.

The following assumptions were used in valuing ESPP purchases under our ESPP during the year ended April 30, 2021:

	For the Year Ended April 30,
	2021
Risk-free interest rate	0.04% - 0.10%
Expected term	6 months - 12 months
Expected volatility	52.4% - 60.6%
Dividend yield		0	%

We estimate expected volatility using historical volatility for the expected term. The fair value of each stock option or ESPP purchase was estimated on the date of the grant using the Black-Scholes option pricing model (using the risk-free interest rate, expected term, expected volatility, and dividend yield variables, as noted in the above table).