Note 13. Shareholders’ Equity and Share-Based Compensation

Common stock: Our 120,000 authorized shares consist of 115,000 shares of common stock and 5,000 shares of “undesignated stock.” Our Board of Directors has the power to authorize and issue any or all of the shares of undesignated stock without shareholder approval, including the authority to establish the rights and preferences of the undesignated stock.

Each outstanding share of our common stock includes one preferred share purchase right. Each right entitles the registered holder to purchase from us one one-thousandth of one share of our Series A Junior Participating Preferred Stock at an initial exercise price of $25 per right, subject to adjustment and the terms of the shareholder rights agreement under which the dividend was declared and paid. The rights become exercisable immediately after the earlier of (i) 10 business days following a public announcement that a person or group has acquired beneficial ownership of 20 percent or more of our outstanding common shares (subject to certain exceptions) or (ii) 10 business days following the commencement or announcement of an intention to make a tender offer or exchange offer for our common shares, the consummation of which would result in the beneficial ownership by a person or group of 20 percent or more of our outstanding common shares. The rights expire on November 19, 2021, which date may be extended by our Board of Directors subject to certain additional conditions.

Stock incentive plans: During fiscal 2016, we established the Daktronics, Inc. 2015 Stock Incentive Plan (“2015 Plan”) and ceased granting options under the 2007 Stock Incentive Plan ("2007 Plan"). The 2015 Plan provides for the issuance of stock-based awards, including stock options, restricted stock, restricted stock units and deferred stock, to employees, directors and consultants. Stock options issued to employees under the 2007 Plan and 2015 Plan generally have a 10-year life, an exercise price equal to the market value on the grant date and a five-year annual vesting period. Stock options granted to independent directors under these plans have a seven-year life and an exercise price equal to the fair market value on the date of grant. Stock options granted to independent directors vest in one year, provided that the directors remain on the Board. The restricted stock granted to independent directors vests in one year, provided that the directors remain on the Board. Restricted stock units are granted to employees and have a five-year annual vesting period. As with stock options, restricted stock and restricted stock unit ownership cannot be transferred during the vesting period.

At May 2, 2020, the aggregate number of shares available for future grants under the 2015 Plan for stock options and restricted stock awards was 1,176 shares. Shares of common stock subject to all stock awards granted under the 2015 Plan are counted as one share of stock for each share of stock subject to the award. Although the 2007 Plan remains in effect for options outstanding that were granted under the 2007 Plan until the earlier of the exercise of the options or their expiration or termination without being exercised, no new options can be granted under the 2007 Plan.

Restricted stock and restricted stock units: We issue restricted stock to our non-employee directors and restricted stock units to employees. Restricted stock issued to non-employee directors are participating securities and receive dividends prior to vesting. Unvested restricted stock will terminate and be forfeited upon termination of employment or service. The fair value of restricted stock and our restricted stock unit awards are measured on the grant date based on the market value of our common stock. The related compensation expense as calculated under ASC 718, net of estimated forfeitures, is recognized over the applicable vesting period. Unrecognized compensation expense related to the restricted stock and restricted stock unit awards was approximately $2,197 at May 2, 2020, which is expected to be recognized over a weighted-average period of 2.7 years. The total fair value of restricted stock vested was $1,415, $1,530, and $1,274 in fiscal years 2020, 2019, and 2018, respectively.

A summary of nonvested restricted stock and restricted stock units for fiscal years 2020, 2019, and 2018 is as follows:



	Year Ended
	May 2, 2020				April 27, 2019				April 28, 2018
	Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share		Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share		Number of Nonvested Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at beginning of year	444		$	7.58	437		$	8.48	402		$	8.69
Granted	186		7.03		181		6.79		178		8.46
Vested	(173	)	8.10		(169	)	9.05		(141	)	9.06
Forfeited	(8	)	7.37		(5	)	7.74		(2	)	8.93
Outstanding at end of year	449		$	7.16	444		$	7.58	437		$	8.48

Stock Options: We issue incentive stock options to our employees and non-qualified stock options to our independent directors. A summary of stock option activity under our 2007 Plan and 2015 Plan during the fiscal year ended May 2, 2020 is as follows:



	Stock Options		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at April 27, 2019	2,202		$	10.03	4.41	$	—
Granted	182		7.47		—	—
Canceled or forfeited	(263	)	8.85		—	—
Exercised	—		—		—	—
Outstanding at May 2, 2020	2,121		$	9.96	4.38	$	—

Shares vested and expected to vest	2,098		$	9.98	4.34	$	—
Exercisable at May 2, 2020	1,593		$	10.50	3.17	$	—

The aggregate intrinsic value of stock options represents the difference between the exercise price of stock options and the fair market value of the underlying common stock for all in-the-money options. We define in-the-money options at May 2, 2020 as options having exercise prices lower than the $4.45 per share market price of our common stock on that date. There were in-the-money options to purchase 0 shares exercisable at May 2, 2020. The total intrinsic value of options exercised during fiscal years 2020, 2019, and 2018 was $0, $98, and $65, respectively. The total fair value of stock options vested was $566, $667, and $977 for fiscal years 2020, 2019, and 2018, respectively.

We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We recognize the fair value of the stock options on a straight-line basis as compensation expense. All options are recognized over the requisite service periods of the awards, which are generally the vesting periods.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. ASC 718 requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards expected to vest. The following factors are the significant assumptions used in the computation of the fair value of options:

Expected life. The expected life of options granted represents the period of time they are expected to be outstanding. We estimate the expected life of options granted based on historical exercise patterns, which we believe are representative of future behavior. We have examined our historical pattern of option exercises in an effort to determine if there were any discernible patterns of activity based on certain demographic characteristics. Demographic characteristics tested included age, salary level, job level and geographic location. We have determined there were no meaningful differences in option exercise activity based on the demographic characteristics tested.

Expected volatility. We estimate the volatility of our common stock at the date of grant based on historical volatility consistent with ASC 718 and Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 107, Share Based Payments.

Risk-free interest rate. The rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a term similar to the expected life of the options.

Dividend yield. We use an expected dividend yield consistent with our historical dividend yield pattern.

The following table provides the weighted-average fair value of options granted and the related assumptions used in the Black-Scholes model:



	Year Ended
	May 2, 2020			April 27, 2019			April 28, 2018
Fair value of options granted	$	1.99		$	2.16		$	2.82
Risk-free interest rate	1.51		%	2.83		%	1.95		%
Expected dividend rate	3.50		%	3.37		%	3.27		%
Expected volatility	37.55		%	38.58		%	42.51		%
Expected life of option	6.94 years			6.83 years			6.83 years

Employee stock purchase plan: We have an employee stock purchase plan (“ESPP”), which enables employees after six months of continuous employment to elect, in advance and semi-annually, to contribute up to 15 percent of their compensation, subject to certain limitations, toward the purchase of our common stock at a purchase price equal to 85 percent of the lower of the fair market value of the common stock on the first or last day of the participation period. The ESPP requires participants to hold any shares purchased under the ESPP for a minimum period of one year after the date of purchase. Compensation expense recognized on shares issued under our ESPP is based on the value of a traded option to purchase shares of our stock at a 15 percent discount to the stock price. The total number of shares reserved under the ESPP is 4,000. The number of shares of common stock issued under the ESPP totaled 453, 241, and 223 shares in fiscal 2020, 2019, and 2018, respectively. The number of shares of common stock reserved for future employee purchases under the ESPP totaled 979 shares at May 2, 2020. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986 (the "Code").

Total share-based compensation expense: As of May 2, 2020, there was $3,096 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize the cost over a weighted-average period of 2.9 years.

The following table presents a summary of the share-based compensation expense by equity type as follows:



	Year Ended
	May 2, 2020		April 27, 2019		April 28, 2018
Stock options	$	492	$	593	$	763
Restricted stock and stock units	1,341		1,446		1,442
Employee stock purchase plans	432		440		430
	$	2,265	$	2,479	$	2,635

A summary of the share-based compensation expense for stock options, restricted stock, restricted stock units and shares issued under the ESPP for fiscal years 2020, 2019, and 2018 is as follows:



	Year Ended
	May 2, 2020		April 27, 2019		April 28, 2018
Cost of sales	$	514	$	578	$	619
Selling	572		625		644
General and administrative	717		772		851
Product design and development	462		504		521
	$	2,265	$	2,479	$	2,635

We received $0 in cash from option exercises under all share-based payment arrangements for the fiscal year ended May 2, 2020. The tax (expense) benefit related to non-qualified options and restricted stock units under all share-based payment arrangements totaled $(92), $(52), and $9 for fiscal years 2020, 2019, and 2018, respectively.