SMITH & WESSON BRANDS, INC. 10-K

Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of April 30, 2021, the end of the period covered by this Annual Report on Form-10-K. Based on that evaluation, we have concluded that, as of the end of the period covered by this Annual Report on Form-10-K, our disclosure controls and procedures were effective to provide such reasonable assurance. 45 Management’s Annual Report on Internal Control Over Financial Reporting Evaluation of Disclosure Controls and Procedures Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Based on that evaluation, management believes that our internal control over financial reporting was effective as of April 30, 2021. The effectiveness of our internal control over financial reporting as of April 30, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which also audited our consolidated financial statements for the year ended April 30, 2021. Deloitte & Touche LLP's report on our internal control over financial reporting is included herein. Previously Disclosed Material Weakness We disclosed in Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the year ended April 30, 2020 that we had identified a material weakness in internal controls related to the preparation and review of the goodwill impairment analysis. The material weakness resulted in audit adjustments to goodwill pertaining to our former Outdoor Products & Accessories reporting unit that were recorded in our consolidated financial statements as of and for the year ended April 30, 2020 prior to the issuance of those financial statements. Remediation of Material Weakness in Internal Control over Financial Reporting Due to our remediation actions, management has concluded that the material weakness identified as of April 30, 2020 has been eliminated as of April 30, 2021. We will continue to monitor and evaluate the effectiveness of these remedial actions and make further changes as deemed appropriate. We devoted considerable effort to remediate the material weakness that was identified as of April 30, 2020, which is evidenced by the following actions which were completed during fiscal 2021: • evaluated policies and procedures related to calculating deferred taxes associated with changes in goodwill; • assessed protocols around third-party service reliance; and • implemented changes in the controls around management review of third-party service providers credentials, and reliance. Inherent Limitations on the Effectiveness of Controls and Procedures In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and we are is required to apply judgment in evaluating the benefits of 46 possible controls and procedures relative to their costs. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Changes in Internal Control over Financial Reporting Other than described above, there have been no changes in our internal control over financial reporting during our most recent fiscal quarter ended April 30, 2021 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. Item 9B. Other Information Not applicable. 47 P ART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item relating to our directors and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2021 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, “Business — Executive Officers” of this report. Item 11. Executive Compensation The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2021 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2021 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2021 Annual Meeting of Stockholders. Item 14. Principal Accountant Fees and Services The information required by this Item is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2021 Annual Meeting of Stockholders. 48 P ART IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements and Financial Statement Schedules (1) Consolidated Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report. (2) All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because of the absence of the conditions under which they are required or because the information required is shown in the financial statements or notes above. (b) Exhibits Exhibit Number Exhibit 2.12 Plan of Merger, dated May 29, 2020, by and between American Outdoor Brands Corporation and Smith & Wesson Brands, Inc. (1) 2.13*** Separation and Distribution Agreement, dated as of August 21, 2020, by and between the Registrant and American Out Brands, Inc. (2) 3.1 Amended and Restated Bylaws (3) 3.4 Second Amended and Restated Articles of Incorporation (4) 3.9(a) Certificate of Withdrawal of Certificate of Designation (5) 3.10 Articles of Merger (1) 4.1 Form of Common Stock Certificate (6) 4.2 Description of Securities 10.51** Agreement with Respect to Defense of Smith & Wesson: Firearms Litigation, dated as of November 11, 2004 (7) 10.72* Form of Indemnity Agreement entered into with the following directors and executive officers: As of June 4, 2007 with Deana L. McPherson; and as of June 29, 2009 with Barry M. Monheit, Michael F. Golden, Robert L. Scott and John B. Furman; as of December 14, 2011 with Mark P. Smith; as of April 24, 2013 with Robert J. Cicero; as of February 5, 2016 with Anita Britt; as of June 23, 2020 with Susan J. Cupero; and as of May 3, 2021 with Fred M. Diaz and Denis G. Suggs (8) 10.100* Amended and Restated 2011 Employee Stock Purchase Plan (9) 10.107(a)* Smith & Wesson Brands, Inc. Executive Severance Pay Plan (10) 10.108* Adoption Agreement to the Smith & Wesson Nonqualified Supplemental Deferred Compensation Plan (11) 10.109* Smith & Wesson Nonqualified Supplemental Deferred Compensation Plan Document (11) 10.110* 2013 Incentive Stock Plan (12) 10.111(b)* Form of Restricted Stock Unit Award Grant Notice and Agreement to the 2013 Incentive Stock Plan for awards made beginning in April 2015 (13) 49 Exhibit Number Exhibit 10.111( c )* Form of Restricted Stock Unit Award Grant Notice and Agreement to the 2013 Incentive Stock Plan for awards made beginning in April 2020 10.112(b)* Form of Performance Stock Unit Award Grant Notice and Agreement to the 2013 Incentive Stock Plan for awards made in 2020 10.112(c)* Form of Performance Stock Unit Award Grant Notice and Agreement to the 2013 Incentive Stock Plan for awards made beginning in 2021 10.114 Lease Agreement, dated October 26, 2017, by and between Ryan Boone County, LLC and Smith & Wesson Corp. (14) 10.115 Guaranty, dated October 26, 2017, entered into by the Registrant (14) 10.117* Separation Agreement and Release, dated February 26, 2020, by and between the Registrant and P. James Debney (15) 10.119* Employment Agreement, executed April 4, 2020 and effective as of January 15, 2020, by and between Mark P. Smith and the Registrant (16) 10.120* Agreement, dated as of August 5, 2020, by and between Jeffrey D. Buchanan and the Registrant (17) 10.121 Transition Services Agreement dated as of August 21, 2020, by and between the Registrant and American Outdoor Brands, Inc (2) 10.122 Tax Matters Agreement, dated as of August 21, 2020, by and between the Registrant and American Outdoor Brands, Inc. (2) 10.123 Employee Matters Agreement, dated as of August 21, 2020, by and between the Registrant and American Outdoor Brands, Inc. (2) 10.124*** Trademark License Agreement, dated as of August 24, 2020, by and between Smith & Wesson Inc. and AOB Products Company (2) 10.125*** Sublease, dated as of August 24, 2020, by and between the Smith & Wesson Sales Company and American Outdoor Brands, Inc. (2) 10.126*** Supply Agreement, dated as of August 24, 2020, by and between Crimson Trace Corporation, as Supplier, and Smith & Wesson Inc. (2) 10.127*** Supply Agreement, dated as of August 24, 2020, by and between AOB Products Company, as Supplier, and Smith & Wesson Inc. (2) 10.128*** Amended and Restated Credit Agreement, dated as of August 24, 2020, by and among the Registrant, Smith & Wesson Sales Company, Smith & Wesson, Inc., the Guarantors, the Lenders, and TD Bank, N.A. (2) 10.129* Separation and Release Agreement, dated as of May 24, 2021, by and between Robert J. Cicero and the Registrant (18) 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP, an Independent Registered Public Accounting Firm 31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer 32.1 Section 1350 Certification of Principal Executive Officer 32.2 Section 1350 Certification of Principal Financial Officer 50 Exhibit Number Exhibit 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document) * Management contract or compensatory arrangement. ** An application has been submitted to the Securities and Exchange Commission for confidential treatment, pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, of portions of this exhibit. These portions have been omitted from this exhibit. *** Certain schedules and exhibits have been omitted from this filing pursuant to Item 601(a) (5) of the Regulation S-K. We agree to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request. ( 1 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on June 1, 2020. ( 2 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on August 26, 2020. ( 3 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on April 12, 2019. ( 4 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on April 8, 2019. ( 5 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on October 1, 2013. ( 6 ) Incorporated by reference to the Registrant’s Form 10-K filed with the SEC on June 19, 2020. ( 7 ) Incorporated by reference to the Registrant’s Form 10-Q filed with the SEC on March 10, 2005. ( 8 ) Incorporated by reference to the Registrant’s Form 10-K filed with the SEC on June 30, 2009. ( 9 ) Incorporated by reference to the Registrant’s Form 10-K filed with the SEC on June 28, 2012. ( 1 0 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on June 9, 2020. ( 1 1 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on December 20, 2013. ( 12 ) Incorporated by reference to the Registrant’s Form S-8 filed with the SEC on December 20, 2013. (13) Incorporated by reference to the Registrant’s Form 10-K filed with the SEC on June 22, 2015. ( 1 4 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on October 31, 2017. ( 1 5) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on February 28, 2020. ( 1 6 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on April 9, 2020. (1 7 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on August 11, 2020. (1 8 ) Incorporated by reference to the Registrant’s Form 8-K filed with the SEC on May 24, 2021. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SMITH & WESSON BRANDS, INC. /s/ Mark P. Smith Mark P. Smith President and Chief Executive Officer Date: June 17, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Capacity Date /s/ Mark P. Smith President, Chief Executive Officer, and Director (Principal Executive Officer) June 17, 2021 Mark P. Smith /s/ Deana L. McPherson Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary (Principal Financial and Accounting Officer) June 17, 2021 Deana L. McPherson /s/ Robert L. Scott Chairman of the Board June 17, 2021 Robert L. Scott /s/ Michael F. Golden Vice Chairman of the Board June 17, 2021 Michael F. Golden /s/ Anita D. Britt Director June 17, 2021 Anita D. Britt Director June 17, 2021 Fred M. Diaz /s/ John B. Furman Director June 17, 2021 John B. Furman /s/ Barry M. Monheit Director June 17, 2021 Barry M. Monheit Director June 17, 2021 Denis G. Suggs 52 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of April 30, 2021 and 2020 F-4 Consolidated Statements of Income/(Loss) and Comprehensive Income/(Loss) for the years ended April 30, 2021, 2020, and 2019 F-5 Consolidated Statements of Changes in Stockholders’ Equity for the years ended April 30, 2021, 2020, and 2019 F-6 Consolidated Statements of Cash Flows for the years ended April 30, 2021, 2020, and 2019 F-7 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Smith & Wesson Brands, Inc. Springfield, Massachusetts Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Smith & Wesson Brands, Inc. and subsidiaries (the "Company") as of April 30, 2021 and 2020, the related consolidated statements of income/(loss) and comprehensive income/(loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended April 30, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of April 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become F-2 inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Tax-Free Determination of the Divestiture of American Outdoor Brands, Inc. (“AOUT”) Business – Refer to Note 3 to the financial statements. Critical Audit Matter Description As described in Note 3 to the consolidated financial statements, on August 10, 2021, the Company completed the spin-off of its AOUT business into an independent, publicly traded company. The spin-off was affected through a stock distribution to the Company’s shareholders. As disclosed by management, the divestiture of the AOUT business was determined to qualify for U.S. Federal tax-free treatment under certain sections of the Internal Revenue Code. The determination of the transaction as tax-free requires management to make significant judgments about the interpretation of tax laws and regulations. We identified the determination by management of the spin-off as a tax-free transaction for US Federal income tax purposes to be a critical audit matter because of the complexity of the interpretation and application of the Internal Revenue Code (“Code”), the materiality of the potential tax consequences, and the need to involve our income tax specialists when performing audit procedures to evaluate the U.S. Federal taxability of the spin-off. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the evaluation of the U.S Federal taxability of the spin-off included the following, among others: • We tested the effectiveness of controls over management’s evaluation of the spin-off as tax free for U.S. Federal income tax. • We inspected the opinion from the Company’s outside legal counsel and external tax advisor that management utilized in forming their conclusions on U.S. Federal taxability of the spin-off, including certain interpretations of the Code and related statutes. • We inspected meeting minutes of the Board of Directors and its committees, income tax filings, support from external advisors, historical financial results of the Company and AOUT, and contracts associated with the spin-off for corroborating or contradictory evidence. • We obtained written representations from management concerning management’s intent associated with future transactions that could affect U.S. Federal taxability and we obtained representations made by AOUT management that it does not intend to cause any transactions that could affect the Company’s U.S. Federal taxability. • We assessed the key facts and assumptions in the opinion from the Company’s outside legal counsel and external tax advisor detailing the requirements under the Code and specifying how such requirements were met. • With the assistance of our income tax specialists, we evaluated management’s conclusion that the requirements were met to qualify the spin-off as tax free for U.S. Federal income tax purposes. /s/ Deloitte & Touche LLP Boston, Massachusetts June 17, 2021 We have served as the Company’s auditor since 2014. F-3 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of: April 30, 2021 April 30, 2020 (In thousands, except par value and share data) ASSETS Current assets: Cash and cash equivalents $ 113,017 $ 125,011 Accounts receivable, net of allowances for credit losses of $ 107 on April 30, 2021 and $ 1,038 on April 30, 2020 67,442 60,879 Inventories 78,477 103,741 Prepaid expenses and other current assets 8,408 7,556 Current assets of discontinued operations — 94,673 Income tax receivable 909 1,595 Total current assets 268,253 393,455 Property, plant, and equipment, net 141,612 147,739 Intangibles, net 4,417 4,375 Goodwill 19,024 19,024 Other assets of discontinued operations — 148,485 Other assets 13,082 16,437 $ 446,388 $ 729,515 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 57,337 $ 31,476 Accrued expenses and deferred revenue 33,136 57,678 Accrued payroll and incentives 17,381 12,448 Accrued income taxes 1,157 5,503 Accrued profit sharing 14,445 2,197 Accrued warranty 2,199 3,297 Current liabilities of discontinued operations — 17,372 Total current liabilities 125,655 129,971 Deferred income taxes 904 457 Notes and loans payable, net of current portion — 159,171 Finance lease payable, net of current portion 38,786 39,873 Other non-current liabilities of discontinued operations — 2,299 Other non-current liabilities 14,659 10,626 Total liabilities 180,004 342,397 Commitments and contingencies (Note 17) Stockholders’ equity: Preferred stock, $ .001 par value, 20,000,000 shares authorized, no shares issued or outstanding — — Common stock, $ .001 par value, 100,000,000 shares authorized, 74,222,127 issued and 49,937,329 shares outstanding on April 30, 2021 and 73,526,790 shares issued and 55,359,928 shares outstanding on April 30, 2020 74 74 Additional paid-in capital 273,431 267,630 Retained earnings 325,181 341,716 Accumulated other comprehensive income 73 73 Treasury stock, at cost ( 24,284,798 shares on April 30, 2021 and 18,166,862 on April 30, 2020) ( 332,375 ) ( 222,375 ) Total stockholders’ equity 266,384 387,118 $ 446,388 $ 729,515 The accompanying notes are an integral part of these consolidated financial statements. F-4 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE INCOME/(LOSS) For the Year Ended April 30, 2021 2020 2019 (In thousands, except per share data) Net sales $ 1,059,195 $ 529,618 $ 481,336 Cost of sales 610,212 363,929 335,052 Gross profit 448,983 165,689 146,284 Operating expenses: Research and development 7,480 7,364 8,008 Selling, marketing, and distribution 42,603 41,987 27,693 General and administrative 79,268 66,033 67,066 Total operating expenses 129,351 115,384 102,767 Operating income from continuing operations 319,632 50,305 43,517 Other income/(expense), net: Other income/(expense), net 2,252 495 477 Interest expense, net ( 3,919 ) ( 11,625 ) ( 9,790 ) Total other income/(expense), net ( 1,667 ) ( 11,130 ) ( 9,313 ) Income from continuing operations before income taxes 317,965 39,175 34,204 Income tax expense 74,394 11,522 9,284 Income from continuing operations 243,571 27,653 24,920 Discontinued operations: Income/(loss) from discontinued operations, net of tax 8,478 ( 88,883 ) ( 6,510 ) Net income/(loss) 252,049 ( 61,230 ) 18,410 Comprehensive income/(loss): Other comprehensive loss, net of tax — ( 547 ) ( 1,069 ) Comprehensive income/(loss): $ 252,049 $ ( 61,777 ) $ 17,341 Net income/(loss) per share: Basic - continuing operations $ 4.46 $ 0.50 $ 0.46 Basic - net income/(loss) $ 4.62 $ ( 1.11 ) $ 0.34 Diluted - continuing operations $ 4.40 $ 0.50 $ 0.45 Diluted - net income/(loss) $ 4.55 $ ( 1.10 ) $ 0.33 Weighted average number of common shares outstanding: Basic 54,613 54,983 54,483 Diluted 55,352 55,665 55,216 The accompanying notes are an integral part of these consolidated financial statements. F-5 SMITH & WESSON BRANDS, INC . AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Accumulated Common Additional Other Total Stock Paid-In Retained Comprehensive Treasury Stock Stockholders’ (In thousands) Shares Amount Capital Earnings Income/(Loss) Shares Amount Equity Balance at April 30, 2018 72,434 $ 72 $ 253,616 $ 389,146 $ 1,689 18,167 $ ( 222,375 ) $ 422,148 Proceeds from exercise of employee stock options 48 — 304 — — — — 304 Stock-based compensation - continuing operations — — 6,947 — — — — 6,947 Stock-based compensation - discontinued operations — — 1,045 — — — — 1,045 Shares issued under employee stock purchase plan 231 — 1,918 — — — — 1,918 Change in unrealized loss on interest rate swap, net of tax effect — — — — ( 1,069 ) — — ( 1,069 ) Impact of adoption of accounting standard updates — — — ( 4,610 ) — — — ( 4,610 ) Issuance of common stock under restricted stock unit awards, net of shares surrendered 151 1 ( 650 ) — — — — ( 649 ) Net income — — — 18,410 — — — 18,410 Balance at April 30, 2019 72,864 73 263,180 402,946 620 18,167 ( 222,375 ) 444,444 Proceeds from exercise of employee stock options 67 — 254 — — — — 254 Stock-based compensation - continuing operations — — 2,357 — — — — 2,357 Stock-based compensation - discontinued operations — — 564 — — — — 564 Shares issued under employee stock purchase plan 380 — 1,873 — — — — 1,873 Change in unrealized loss on interest rate swap, net of tax effect — — — — ( 547 ) — — ( 547 ) Issuance of common stock under restricted stock unit awards, net of shares surrendered 216 1 ( 598 ) — — — — ( 597 ) Net loss — — — ( 61,230 ) — — — ( 61,230 ) Balance at April, 2020 73,527 74 267,630 341,716 73 18,167 ( 222,375 ) 387,118 Proceeds from exercise of employee stock options 201 — 1,540 — — — — 1,540 Stock-based compensation - continuing operations — — 4,706 — — — — 4,706 Stock-based compensation - discontinued operations 184 184 Shares issued under employee stock purchase plan 205 — 1,614 — — — — 1,614 Issuance of common stock under restricted stock unit awards, net of shares surrendered 289 — ( 2,243 ) — — — — ( 2,243 ) Repurchase of treasury stock — — — — — 6,118 ( 110,000 ) ( 110,000 ) Dividends issued — — — ( 8,223 ) — — — ( 8,223 ) Spin-off of outdoor products and accessories business — — — ( 260,361 ) — — — ( 260,361 ) Net income — — — 252,049 — — — 252,049 Balance at April, 2021 74,222 $ 74 $ 273,431 $ 325,181 $ 73 24,285 $ ( 332,375 ) $ 266,384 The accompanying notes are an integral part of these consolidated financial statements. F-6 SMITH & WESSON BRANDS, INC . AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended April 30, 2021 2020 2019 (In thousands) Cash flows from operating activities: Income from continuing operations $ 243,571 $ 27,653 $ 24,920 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,575 31,972 29,046 (Gain)/loss on sale/disposition of assets 154 419 ( 460 ) Provision for losses on notes and accounts receivable ( 739 ) ( 585 ) 1,027 Deferred income taxes 447 ( 260 ) 409 Change in fair value of contingent consideration — 100 — Stock-based compensation expense 4,706 2,357 6,947 Changes in operating assets and liabilities: Accounts receivable ( 5,824 ) ( 198 ) ( 29,075 ) Inventories 25,264 ( 911 ) 7,670 Prepaid expenses and other current assets ( 852 ) ( 3,124 ) 1,436 Income taxes ( 3,643 ) 6,196 1,781 Accounts payable 25,540 4,043 4,566 Accrued payroll and incentives 4,933 ( 5,831 ) 10,075 Accrued profit sharing 12,248 ( 355 ) 1,386 Accrued expenses and deferred revenue ( 24,633 ) 21,755 ( 6,528 ) Accrued warranty ( 1,098 ) ( 1,126 ) ( 680 ) Other assets 1,579 1,131 ( 967 ) Other non-current liabilities 4,032 ( 2,401 ) ( 455 ) Cash provided by operating activities - continuing operations 317,260 80,835 51,098 Cash (used in)/provided by operating activities - discontinued operations ( 1,926 ) 13,901 6,001 Net cash provided by operating activities 315,334 94,736 57,099 Cash flows from investing activities: Refunds on machinery and equipment 310 — — Receipts from note receivable — 786 74 Payments to acquire patents and software ( 632 ) ( 429 ) ( 211 ) Proceeds from sale of property and equipment 113 — 1,336 Payments to acquire property and equipment ( 22,052 ) ( 12,441 ) ( 30,895 ) Cash used by investing activities - continuing operations ( 22,261 ) ( 12,084 ) ( 29,696 ) Cash used by investing activities - discontinued operations ( 1,143 ) ( 1,874 ) ( 5,131 ) Net cash used in investing activities ( 23,404 ) ( 13,958 ) ( 34,827 ) Cash flows from financing activities: Proceeds from loans and notes payable 25,000 228,225 50,000 Cash paid for debt issuance costs ( 450 ) ( 875 ) — Payments on finance lease obligation ( 996 ) ( 900 ) ( 741 ) Payments on notes and loans payable ( 185,000 ) ( 224,600 ) ( 81,300 ) Distribution to discontinued operations ( 25,000 ) — — Payments to acquire treasury stock ( 110,000 ) — — Dividend distribution ( 8,223 ) — — Proceeds from exercise of options to acquire common stock, including employee stock purchase plan 3,154 2,127 2,222 Payment of employee withholding tax related to restricted stock units ( 2,243 ) ( 597 ) ( 649 ) Cash (used in)/provided by financing activities - continuing operations ( 303,758 ) 3,380 ( 30,468 ) Cash used in financing activities - discontinued operations ( 166 ) — — Net cash (used in)/provided by financing activities ( 303,924 ) 3,380 ( 30,468 ) Net (decrease)/increase in cash and cash equivalents ( 11,994 ) 84,158 ( 8,196 ) Cash and cash equivalents, beginning of period 125,011 40,853 49,049 Cash and cash equivalents, end of period $ 113,017 $ 125,011 $ 40,853 Supplemental disclosure of cash flow information Cash paid for: Interest $ 3,306 $ 11,103 $ 9,473 Income taxes $ 80,874 $ 6,935 $ 10,567 The accompanying notes are an integral part of these consolidated financial statements. F-7 SMITH & WESSON BRANDS, INC . AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) Supplemental Disclosure of Non-cash Investing and Financing Activities: For the Year Ended April 30, 2021 2020 2019 (In thousands) Purchases of property and equipment included in accounts payable $ 746 $ 436 $ 565 Change in fair value of interest rate swap — — 1,393 Purchase of property and equipment funded by capital lease — — 24,271 Capital lease obligation — — 24,271 Changes in note receivable — — 1,007 Machinery and equipment on deposit placed into service 1,855 — — Adoption of ASU 2016-02: Changes in other assets for operating lease obligations — 11,821 — Change in property and equipment — 3,276 — Changes in finance lease liabilities — ( 4,245 ) — Changes in lease liabilities for operating lease obligations — 12,790 — The accompanying notes are an integral part of these consolidated financial statements. F-8 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization We are one of the world’s leading manufacturers and designers of firearms. We manufacture a wide array of handguns (including revolvers and pistols), long guns (including modern sporting rifles, bolt action rifles, and muzzleloaders), handcuffs, suppressors, and other firearm-related products for sale to a wide variety of customers, including firearm enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, law enforcement and security agencies and officers, and military agencies in the United States and throughout the world. We sell our products under the Smith & Wesson, M&P, Thompson/Center Arms, and Gemtech brands. We manufacture our products at our facilities in Springfield, Massachusetts; Houlton, Maine; and Deep River, Connecticut. We also sell our manufacturing services to other businesses to level-load our factories. We sell those services under our Smith & Wesson and Smith & Wesson Precision Components brands. On November 13, 2019, we announced that we were proceeding with a plan to spin-off our outdoor products and accessories business and create an independent publicly traded company to conduct that business, or the Separation. On August 24, 2020, or the Distribution Date, we completed the previously announced Separation. See also Note 3 — Discontinued Operations , for more information. 2. Significant Accounting Policies Use of Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement dates and the reported amounts of revenue and expenses during the reporting periods. Our significant estimates include the accrual for warranty, reserves for excess and obsolete inventory, rebates and other promotions, and valuation of intangible assets. Actual results could differ from those estimates. Principles of Consolidation — The accompanying consolidated financial statements include the accounts of Smith & Wesson Brands, Inc. and its wholly owned subsidiaries, including Smith & Wesson Inc., Smith & Wesson Sales Company, and SWPC Plastics, LLC. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at April 30, 2021 and 2020 and for the periods presented, have been included. All intercompany accounts and transactions have been eliminated in consolidation. Fair Value of Financial Instruments — Unless otherwise indicated, the fair values of all reported assets and liabilities, which represent financial instruments not held for trading purposes, approximate the carrying values of such amounts because of their short-term nature or market rates of interest. Cash and Cash Equivalents — We consider all highly liquid investments purchased with original maturities of three months or less at the date of acquisition to be cash equivalents. We maintain our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. As of April 30, 2021, all of our accounts exceeded federally insured limits. Financial Instruments — We account for derivative instruments under Accounting Standards Codification (“ASC”) 815-10, Fair Value Measurements and Disclosure Topic , which establishes accounting and reporting standards for derivative instruments and hedging activities and requires us to recognize these instruments as either assets or liabilities on the balance sheet and measure them at fair value. As of April 30, 2021, we did no t have any Level 2 financial instruments within the hierarchy. See Note 6 – Notes, Loans Payable, and Financing Arrangements for more information regarding our financial instruments. Trade Receivables — We extend credit to our domestic customers and some foreign distributors based on their financial condition. We sometimes offer discounts for early payment on invoices. When we believe the extension of credit is not advisable, we rely on either a prepayment or a letter of credit. We write off balances deemed uncollectible by us against our allowance for doubtful accounts. We estimate our allowance for doubtful F-9 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) accounts through current past due balances, knowledge of our customers’ financial situations, and past payment history. Concentrations of Credit Risk — Financial instruments that potentially subject us to concentration of credit risk consist principally of cash, cash equivalents, and trade receivables. We place our cash and cash equivalents in overnight U.S. government securities. Concentrations of credit risk with respect to trade receivables are limited by the large number of customers comprising our customer base and their geographic and business dispersion. We perform ongoing credit evaluations of our customers’ financial condition and generally do not require collateral. For the year ended April 30, 2021, four of our customers exceeded 10 % of our net sales and accounted for approximately 45.0 % of our net sales. Two of these customers each accounted for more than 10 % of our accounts receivable for a total of 28.4 %. For the fiscal year ended April 30, 2020, four of our customers accounted for more than 10 % of our net sales and accounted for approximately 43.9 % of our net sales and three customers accounted for approximately 45.3 % of our accounts receivable. For the fiscal year ended April 30, 2019, one of our customers accounted for 10.4 % of our net sales and one of our customers accounted for 23.1 % of our accounts receivable. Inventories — We value inventories at the lower cost, using the first-in, first-out, or FIFO method, or net realizable value. An allowance for potential non-saleable inventory due to excess stock or obsolescence is based upon a detailed review of inventory, past history, and expected future usage. Property, Plant, and Equipment — We record property, plant, and equipment, consisting of land, building, improvements, machinery, equipment, software, hardware, furniture, and fixtures, at cost and depreciate them using the straight-line method over their estimated useful lives. We charge expenditures for maintenance and repairs to earnings as incurred, and we capitalize additions, renewals, and betterments. Upon the retirement or other disposition of property and equipment, we remove the related cost and accumulated depreciation from the respective accounts and include any gain or loss in operations. We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements, and we recognize expenses under our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. The depreciable life of assets and leasehold improvements are based on the expected life of the lease. A summary of the estimated useful lives is as follows: Description Useful Life Building and improvements 10 to 40 years Software and hardware 2 to 7 years Machinery and equipment 2 to 10 years We include tooling, dies, and fixtures as part of machinery and equipment and depreciate them over a period generally not exceeding ten years . Intangible Assets — We record intangible assets at cost or based on the fair value of the assets acquired. Intangible assets consist of developed technology, customer relationships, trademarks, trade names, and patents. We amortize intangible assets over their estimated useful lives or in proportion to expected yearly revenue generated from the intangibles that were acquired. Revenue Recognition — We recognize revenue in accordance with the provisions of Accounting Standards Update, or ASU, Revenue from Contracts with Customers (Topic 606) , which became effective for us on May 1, 2018. Generally, all performance obligations are satisfied and revenue is recognized when the risks and rewards of ownership have transferred to the customer, which is generally upon shipment but could be delayed until the receipt of customer acceptance. In some instances, sales include multiple performance obligations. The most common of these instances relates to sales promotion programs under which customers are entitled to receive free goods based upon their purchase of our products, which we have identified as a material right. The fulfillment of these free goods is our responsibility. In such instances, we allocate the revenue of the promotional sales based on the estimated level of participation in the sales promotional program and the timing of the shipment of all of the products included in the F-10 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) promotional program, including the free goods. We recognize r evenue related to the material right proportionally as each performance obligation is satisfied. The net change in contract liabilities for a given period is reported as an increase or decrease to sales. We generally sell our products free on board, or FOB, shipping point and provide payment terms to most commercial customers ranging from 20 to 90 days of product shipment with a discount available to some customers for early payment. Generally, framework contracts define the general terms of sales, including payment terms, freight terms, insurance requirements, and cancelation provisions. Purchase orders define the terms for specific sales, including description, quantity, and price of each product purchased. We estimate variable consideration relative to the amount of cash discounts to which customers are likely to be entitled. In some instances, we provide longer payment terms, particularly as it relates to our fall dating programs for hunting sales, which represent payment terms due in the fall for certain orders of hunting products received in the spring and summer. As a result of utilizing practical expedience upon the adoption of ASC 606, we do not consider these extended terms to be a significant financing component of the contract because the payment terms are less than one year. In all cases, we consider our costs related to shipping and handling to be a cost of fulfilling the contract with the customer. Research and Development — We engage in both internal and external research and development, or R&D, in order to remain competitive and to exploit possible untapped market opportunities. We approve prospective R&D projects after analysis of the cost and benefits associated with the potential product. Costs in R&D expense include, among other items, salaries, materials, utilities, and administrative costs. Earnings/(Loss) per Share — We calculate basic and diluted earnings/(loss) per common share in accordance with the provisions of ASC 260-10, Earnings Per Share . Basic earnings/(loss) per common share equals net income/(loss) divided by the weighted average number of common shares outstanding during the period. Diluted earnings/(loss) per common share equals net income/(loss) divided by the weighted average number of common shares outstanding during the period, including the effect of outstanding stock options and other stock-based instruments if their effect is dilutive. The following table provides a reconciliation of the net income/(loss) amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings/(loss) per common share (in thousands, except per share data): For the Year Ended April 30, 2021 2020 2019 Net income/(loss) Income from continuing operations $ 243,571 $ 27,653 $ 24,920 Income/(loss) from discontinued operations 8,478 ( 88,883 ) ( 6,510 ) Net income/(loss) $ 252,049 $ ( 61,230 ) $ 18,410 Weighted average shares outstanding — Basic 54,613 54,983 54,483 Effect of dilutive stock awards 739 682 733 Weighted average shares outstanding — Diluted 55,352 55,665 55,216 Earnings/(loss) per share — Basic Income from continuing operations $ 4.46 $ 0.50 $ 0.46 Income/(loss) from discontinued operations $ 0.16 $ ( 1.62 ) $ ( 0.12 ) Net income/(loss) $ 4.62 $ ( 1.11 ) $ 0.34 Earnings/(loss) per share — Diluted Income from continuing operations $ 4.40 $ 0.50 $ 0.45 Income/(loss) from discontinued operations $ 0.15 $ ( 1.60 ) $ ( 0.12 ) Net income/(loss) $ 4.55 $ ( 1.10 ) $ 0.33 F-11 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) All of our outstanding stock options and restricted stock units, or RSUs, were included in the computation of diluted earnings per share for the years ended April 30, 20 21 and 20 20 . Valuation of Long-lived Tangible and Intangible Assets — We evaluate the recoverability of long-lived assets, or asset groups, whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. When such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values are reduced to fair value and this adjusted carrying value becomes the asset’s new cost basis. We determine fair value primarily using future anticipated cash flows that are directly associated with and are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved. We have significant long-lived tangible and intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. The most significant long-lived tangible and intangible assets, other than goodwill, are property, plant, and equipment, developed technology, customer relationships, patents, trademarks, and trade names. We amortize all finite-lived intangible assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. We initially determine the values of intangible assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following: • significant underperformance relative to historical or projected future operating results; • significant changes in the manner or use of the assets or the strategy for our overall business; • significant negative industry or economic trends; • a significant decline in our stock price for a sustained period; and • a decline in our market capitalization below net book value. Future adverse changes in these or other unforeseeable factors could result in an impairment charge that could materially impact future results of operations and financial position in the reporting period identified. In accordance with ASC 350, Intangibles-Goodwill and Other, we test goodwill for impairment on an annual basis on February 1 and between annual tests if indicators of potential impairment exist. The impairment test compares the fair value of the operating units to their carrying amounts to assess whether impairment is present. We have reviewed the provisions of ASC 350-20, with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on this review, following the Separation, we had concluded that we have one operating unit when reviewing ASC 350-20. We review the fair value of our goodwill based on financial performance annually. As of our last valuation date, February 1, 2021, we had $ 19.0 million of goodwill and its fair value significantly exceeded its carrying value, based on EBITDAS, cashflow, and market capitalization. Our assumptions related to the development of fair value could deviate materially from actual results and forecasts used to support asset carrying values may change in the future, which could result in non-cash charges that would adversely affect our financial results of operations . The re-measurement of goodwill is classified as a Level 3 fair value assessment as described in Note 13 - Fair Value Measurement, due to the significance of unobservable inputs developed using company-specific information. Income Taxes — We use the asset and liability approach for financial accounting and reporting income taxes. The provision for income taxes is based upon income reported in the accompanying consolidated financial statements as required by ASC 740-10, Accounting for Income Taxes. We determine deferred tax assets and liabilities based on temporary differences between financial reporting and tax bases in assets and liabilities and measure them by applying enacted rates and laws expected to be in place when the deferred items become subject to income tax or deductible for income tax purposes. We recognize the effect on deferred taxes and liabilities of a change in tax rates in the period that includes the enactment date. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the F-12 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) periods in which our temporary differences become deductible and before our net operating loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, we establish a valuation allowance against some or all of our deferred income tax assets. Recording or reversing a valuation allowance could have a significant effect on our future results of operations and financial position. Warranty — We generally provide a limited one-year warranty and a lifetime service policy to the original purchaser of our new firearm products. We either provide a limited one-year, or a limited-lifetime warranty to the original purchaser of most of our products. We will also repair or replace certain products or parts found to be defective under normal use and service with an item of equivalent value, at our option, without charge during the warranty period. We quantify and record an estimate for warranty-related costs based on our actual historical claims experience and current repair costs. We adjust accruals as warranty claims data and historical experience warrant. Should we experience actual claims and repair costs that are higher than the estimated claims and repair costs used to calculate the provision, our operating results for the period or periods in which such returns or additional costs materialize would be adversely impacted. From time to time, we have experienced certain manufacturing and design issues with respect to some of our firearms and have initiated some product recalls and safety alerts. In October 2020, we initiated a recall for certain models of our M&P Shield EZ pistols manufactured between March 1, 2020 and October 31, 2020 because some hammers manufactured by our supplier were cracked and could potentially cause a discharge without depressing the trigger. The remaining estimated cost of all recalls, safety alerts, and consumer advisories is $ 323,000 , which is recorded in accrued warranty on our consolidated balance sheet. The remaining balance relates to a general accrual related to standard warranty costs for products shipped in the ordinary course of business. Warranty expense for the fiscal years ended April 30, 2021, 2020, and 2019 amounted to $ 5.2 million, $ 1.8 million, and $ 2.7 million, respectively. The following table sets forth the change in accrued warranties, a portion of which is recorded as a non-current liability, in the fiscal years ended April 30, 2021, 2020, and 2019 (in thousands): Balance as of April 30, 2019 5,026 Warranties issued and adjustments to provisions 1,757 Warranty claims ( 2,887 ) Balance as of April 30, 2020 3,896 Warranties issued and adjustments to provisions 5,163 Warranty claims ( 3,366 ) Balance as of April 30, 2021 $ 5,693 Sales and Promotional Related Expenses — We present product sales in our consolidated financial statements, net of customer promotional program costs that depend upon the volume of sales. For promotional program costs that do not depend on the volume of sales, we record promotional costs in cost of goods sold. The total of all our promotional programs amounted to $ 10.5 million, $ 43.6 million, and $ 39.2 million for the fiscal years ended April 30, 2021, 2020, and 2019, respectively. We have a co-op advertising program at the retail level. We expensed costs amounting to $ 15.2 million, $ 9.2 million, and $ 8.0 million for fiscal 2021, 2020, and 2019, respectively, as selling and marketing expenses. Shipping and Handling — In the accompanying consolidated financial statements, we included amounts billed to customers for shipping and handling in net sales. Beginning in fiscal 2020, inbound freight charges and internal transfer costs are included in cost of goods sold; however, costs incurred to distribute products to customers is included in selling, marketing, and distribution expenses. As a result of this change, we recorded $ 4.4 million of costs in selling, marketing, and distribution expenses that would have been recorded in cost of sales in fiscal 2019. Prior to fiscal 2020, we included costs relating to shipping and handling charges, including inbound freight charges, internal transfer costs, and the other costs of our distribution network, in cost of goods sold. F-13 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Insurance Reserves — In January 2020, we formed a wholly owned captive insurance company, which provides product liability insurance to us and our subsidiaries. This captive insurance company was recorded in our consolidated financial statements for the fiscal year ended April 30, 2021 and 2020. We are self-insured through retentions or deductibles for the majority of our workers’ compensation, automobile, general liability, product liability, and group health insurance programs. Self-insurance amounts vary up to $ 10.0 million per occurrence; however, we believe the likelihood of reaching the maximum per occurrence limit is remote. We record our liability for estimated premiums and incurred losses in the accompanying consolidated financial statements on an undiscounted basis. Recently Issued Accounting Standards — In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, Leases (Topic 842), or ASU 2016-02, which amends the existing guidance to require lessees to recognize right-of-use assets and lease liabilities in a classified balance sheet. The most prominent among the changes in the standard is the requirement for lessees to recognize right-of-use assets and lease liabilities for those leases classified as operating leases under current GAAP. The requirements of ASU 2016-02 are effective for financial statements for annual periods beginning after December 15, 2018, and early adoption is permitted. We used the optional transitional method allowed by ASU 2018-11, Leases (Topic 842): Targeted Improvements. Under this method, we applied the standard using the modified retrospective method with an adoption date of May 1, 2019. We elected to use the package of practical expedients, which permits us to not reassess certain lease contract provisions. We adopted ASU 2016-02 effective May 1, 2019 and recognized right-of-use assets of $ 11.5 million and lease liabilities of $ 12.8 million. The difference between the right-of-use assets and the lease liabilities of $ 1.3 million is a result of the reclassification of deferred rent and lease incentive liabilities primarily relating to our real estate operating leases into the right-of use assets, which had no impact to retained earnings. See also Note 4 — Leases, for more information. In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. The requirements of ASU 2016-13 are effective for financial statements for annual periods beginning after December 15, 2019, and early adoption is permitted. We adopted ASU 2016-13 on May 1, 2020, and the adoption of ASU 2016-13 did not have a material impact on our consolidated financial statements. In December 2019, the FASB issued ASU No. 2019-12, " Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", an update that amends and simplifies the accounting for income taxes by removing certain exceptions in existing guidance and providing new guidance to reduce complexity in certain areas. The guidance will be effective in the first quarter of the year ending April 30, 2022 with early adoption permitted. We are evaluating the impact that adopting this guidance will have on our consolidated financial statements. 3. Discontinued Operations On November 13, 2019, we announced the Separation. On the Distribution Date, at 12:01 a.m. Eastern Time, we completed the Separation of our wholly owned subsidiary, American Outdoor Brands, Inc., a Delaware corporation, or AOUT, from our company. The Separation was treated as tax-free for U.S. federal income tax purposes and was achieved through the transfer of all the assets and legal entities, subject to any related liabilities, associated with our outdoor products and accessories business to AOUT, or the Transfer, and the distribution of 100 % of the AOUT outstanding capital stock to holders of our common stock, or the Distribution, as of the close of business on August 10, 2020, or the Record Date. In connection with the Distribution, our stockholders received one share of AOUT common stock for every four shares of our common stock held as of the close of business on the Record Date. Following the Distribution, AOUT became an independent, publicly traded company, and we retain no ownership interest in AOUT. During the fiscal year ended April 30, 2021, we recorded $ 8.4 million in general and administrative expenses related to the Separation and there was no gain/(loss) recognized for the Separation. In connection with the Separation, we distributed $ 25.0 million in cash to AOUT. F-14 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Our common stock continues to trade on the Nasdaq Global Select Market under the new ticker symbol “SWBI,” and AOUT common stock is now trading on the Nasdaq Global Select Market under the ticker symbol “AOUT.” The outdoor products and accessories business historical financial data is recorded as discontinued operations. Please refer to our Current Report on Form 8-K filed on August 26, 2020 for more information regarding the Separation. As a result of the Separation, we divested net assets of $ 260.4 million, which included the $ 25.0 million cash distribution to AOUT. The results of AOUT were previously reported in our Outdoor Products & Accessories segment. The historical financial data of the outdoor products and accessories business through August 23, 2020 is recorded as discontinued operations in income/(loss) from discontinued operations in the condensed consolidated financial statements. During the fiscal year ended April 30, 2021, 2020, and 2019, income/(loss) from discontinued operations, net of tax was $ 8.5 million, ($ 88.9 ) million, and ($ 6.5 ) million, respectively. In connection with the Separation, we entered into several agreements with AOUT that govern the relationship of the parties following the Separation, including the Separation and Distribution Agreement, the Tax Matters Agreement, the Transition Services Agreement, and the Employee Matters Agreement. Under the terms of the Transition Services Agreement, both companies agreed to provide each other certain transitional services, including information technology, information management, human resources, employee benefits administration, facilities, and other limited finance and accounting related services, for periods up to 24 months. Payments for transition services are recorded in other income/(expense) in our condensed consolidated financial statements. The following table summarizes the major line items for the outdoor products and accessories business that are included in income/(loss) from discontinued operations, net of tax, in the condensed consolidation statements of income/(loss) and comprehensive income/(loss): For the Years Ended April 30, 2021 2020 2019 (In thousands) Net revenues $ 61,249 $ 148,776 $ 156,942 Cost of sales 27,147 79,760 76,994 Operating expenses 23,458 168,140 85,408 Interest income/(expense), net 112 21 ( 6 ) Other income/(expense), net — ( 21 ) — Income/(loss) from discontinued operations before income taxes $ 10,756 $ ( 99,124 ) $ ( 5,466 ) Income tax expense/(benefit) 2,278 ( 10,241 ) 1,044 Income/(loss) from discontinued operations, net of tax $ 8,478 $ ( 88,883 ) $ ( 6,510 ) F-15 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the carrying amounts of major classes of assets and liabilities of discontinued operations for each of the periods presented: As of: April 30, 2021 April 30, 2020 (In thousands) Cash and cash equivalents $ — $ 387 Accounts receivable, net — 32,554 Inventories — 60,450 Prepaid expenses and other current assets — 1,282 Property, plant, and equipment, net — 9,678 Intangible assets, net — 69,379 Goodwill — 64,581 Deferred income taxes — 2,950 Other assets — 1,897 Total assets of discontinued operations $ — $ 243,158 Current liabilities $ — $ 17,372 Other non-current liabilities — 2,299 Total liabilities of discontinued operations $ — $ 19,671 4. Leases We lease certain of our real estate, machinery, photocopiers, and vehicles under non-cancelable operating lease agreements. We recognize expenses for our operating lease assets and liabilities at the commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit interest rate. We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. Our lease agreements do not require material variable lease payments, residual value guarantees, or restrictive covenants. For operating leases, we recognize expense on a straight-line basis over the lease term. Tenant improvement allowances are recorded as an offsetting adjustment included in our calculation of the respective right-of-use asset. Many of our leases include renewal options that enable us to extend the lease term. The execution of those renewal options is at our sole discretion and renewals are reflected in the lease term when they are reasonably certain to be exercised. The depreciable life of assets and leasehold improvements are limited by the expected lease term. F-16 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The amounts of assets and liabilities related to our operating and financing leases as of April 30, 2021 were as follows (in thousands): Balance Sheet Caption April 30, 2021 Operating Leases Right-of-use assets $ 7,126 Accumulated amortization ( 2,363 ) Right-of-use assets, net Other assets $ 4,763 Current liabilities Accrued expenses and deferred revenue $ 1,309 Non-current liabilities Other non-current liabilities 3,630 Total operating lease liabilities $ 4,939 Finance Leases Right-of-use assets $ 40,986 Accumulated depreciation ( 4,231 ) Right-of-use assets, net Property, plant, and equipment, net $ 36,755 Current liabilities Accrued expenses and deferred revenue $ 1,087 Non-current liabilities Finance lease payable, net of current portion 38,786 Total finance lease liabilities $ 39,873 During the fiscal year ended April 30, 2021, we recorded $ 1.8 million of operating lease costs, of which $ 216,000 related to short-term leases that were not recorded as right-of-use assets. We recorded $ 2.1 million of finance lease amortization and $ 2.0 million of financing lease interest expense during fiscal 2021. As of April 30, 2021, our weighted average lease term and weighted average discount rate for our operating leases was 4.1 years and 4.5 %, respectively. As of April 30, 2021, our weighted average lease term and weighted average discount rate for our financing leases were 17.5 years and 5.0 %, respectively, and consisted primarily of our distribution center located in Columbia, Missouri. The building is pledged to secure the amounts outstanding. The depreciable lives of right-of-use assets are limited by the lease term and are amortized on a straight-line basis over the life of the lease . With the completion of the Separation, we entered into a sublease under which AOUT subleases from us 59.0 % of our distribution center under the same terms applicable to us under the master lease. During the fiscal year ended April 30, 2021, we recorded $ 1.7 million of income related to this sublease agreement, which is recorded in other income/(expense) in our condensed consolidated statements of income/(loss) and comprehensive income/(loss). The following table represents future expected undiscounted cashflows, based on the sublease agreement to AOUT, to be received on an annual basis for the next five years and thereafter, as of April 30, 2021 (in thousands): Fiscal Amount 2022 $ 1,864 2023 1,897 2024 1,930 2025 1,964 2026 1,998 Thereafter 28,546 Total future sublease receipts 38,199 Less amounts representing interest ( 13,335 ) Present value of sublease receipts $ 24,864 F-17 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Future lease payments for all our operating and finance leases for succeeding fiscal years is as follows (in thousands): Operating Financing Total 2022 $ 1,549 $ 3,056 $ 4,605 2023 1,557 3,071 4,628 2024 1,549 3,125 4,674 2025 330 3,180 3,510 2026 311 3,235 3,546 Thereafter 404 45,548 45,952 Total future lease payments 5,700 61,215 66,915 Less amounts representing interest ( 761 ) ( 21,342 ) ( 22,103 ) Present value of lease payments 4,939 39,873 44,812 Less current maturities of lease liabilities ( 1,309 ) ( 1,087 ) ( 2,396 ) Long-term maturities of lease liabilities $ 3,630 $ 38,786 $ 42,416 During the fiscal year ended April 30, 2021, the cash paid for amounts included in the measurement of the liabilities and the operating cash flows was $ 4.7 million . 5. Revenue Recognition and Contracts with Customers We record our outstanding performance obligations related to sales promotions in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , which we adopted on May, 1, 2018. When evaluating our performance obligations, we disaggregate revenue based on major product lines, which are disclosed in Note 7 — Net Sales. Domestic sales account for 98 % of our total net sales. There are no significant judgments or estimates used in the determination of performance obligations, and the transaction price for the performance obligations are allocated on a pro-rata basis. There are no other contract costs that need to be considered based on the nature of our performance obligations. The following table outlines changes in the balance of our outstanding performance obligations during the year ended April 30, 2021, and 2020 (in thousands): 2021 2020 Outstanding performance obligations at beginning of period $ 14,744 $ 12,213 Revenue recognized ( 14,957 ) ( 48,576 ) Revenue deferred 3,120 51,107 Outstanding performance obligations at end of period $ 2,907 $ 14,744 During fiscal 2021, we recognized $ 15.0 million of deferred revenue, of which $ 13.7 million was previously deferred as of April 30, 2020, as the performance obligations relating to sales promotions were satisfied. This recognition of revenue was partially offset by $ 3.1 million of additional deferred revenue for outstanding performance obligations incurred during fiscal 2021. This resulted in a $ 11.8 million net increase in revenue recognized during fiscal 2021. We estimate that the majority of the revenue from outstanding performance obligations as of April 30, 2021 will be recognized during our first half of fiscal 2022. During fiscal 2020, we recognized $ 48.6 million of deferred revenue, of which $ 10.5 million was previously deferred as of April 30, 2019, as the performance obligations relating to sales promotions were satisfied. This recognition of revenue was partially offset by $ 51.1 million of additional deferred revenue for outstanding performance obligations incurred during fiscal 2020. This resulted in a $ 2.5 million net decrease in revenue recognized during fiscal 2020. F-18 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 6. Notes, Loans Payable, and Financing Arrangements Credit Facilities — On August 24, 2020, we and certain of our subsidiaries entered into an amended and restated credit agreement, or the Amended and Restated Credit Agreement, with certain lenders; including TD Bank, N.A., as administrative agent; TD Securities (USA) LLC and Regions Bank, as joint lead arrangers and joint bookrunners; and Regions Bank, as syndication agent. The Amended and Restated Credit Agreement amended and restated out former credit agreement dated as of June 15, 2015. The Amended and Restated Credit Agreement is currently unsecured; however, should any Springing Lien Trigger Event (as defined in the Amended and Restated Credit Agreement) occur, we and certain of our subsidiaries would be required to enter into certain documents that create in favor of TD Bank, N.A., as administrative agent, and the lenders party to such documents a legal, valid, and enforceable ‎first priority Lien on the Collateral described therein. The Amended and Restated Credit Agreement provides for a revolving line of credit of $ 100.0 million at any one time, or the Revolving Line. The Revolving Line bears interest at either the Base Rate or LIBOR rate, plus an applicable margin based on our consolidated leverage ratio. The Amended and Restated Credit Agreement also provides a swingline facility in the maximum amount of $ 5.0 million at any one time (subject to availability under the Revolving Line). Each Swingline Loan (as defined in the Amended and Restated Credit Agreement) bears interest at the Base Rate, plus an applicable margin based on our consolidated leverage ratio. Subject to the satisfaction of certain terms and conditions described in the Amended and Restated Credit Agreement, we have an option to increase the Revolving Line by an aggregate amount not exceeding $ 50.0 million. The Revolving Line matures on the earlier of August 24, 2025 , or the date that is six months in advance of the earliest maturity of any Permitted Notes under the Amended and Restated Credit Agreement. As of April 30, 2021, we did no t have any borrowings outstanding on the Revolving Line. Had there been borrowings, they would have borne an interest rate of 1.61 %, which is equal to the LIBOR rate plus an applicable margin. The Amended and Restated Credit Agreement contains customary limitations, including limitations on indebtedness, liens, fundamental changes to business or organizational structure, investments, loans, advances, guarantees, and acquisitions, asset sales, dividends, stock repurchases, stock redemptions, and the redemption or prepayment of other debt, and transactions with affiliates. We are also subject to financial covenants, including a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio, all of which were met as of April 30, 2021. Letters of Credit – At April 30, 2021, we had outstanding letters of credit aggregating $ 2.7 million, which included a $ 1.5 million letter of credit to collateralize our captive insurance company . Debt Issuance Costs — We recorded, in notes payable, $ 450,000 of debt issuance costs during the fiscal year ended April 30, 2021 and wrote off $ 689,000 of debt issuance costs remaining from the $ 875,000 of debt issuance costs incurred during the fiscal year ended April 30, 2020. We did no t record any debt issuance costs during the fiscal year ended April 30, 2019. These remaining costs are being amortized to expense over the life of the credit facility. In total, we amortized $ 890,553 , $ 687,000 , and $ 431,000 to interest expense for all debt issuance costs in fiscal 2021, 2020, and 2019, respectively, including write-offs related to extinguishment. 7. Net Sales The following table sets forth the breakdown of net sales for the fiscal years ended April 30, 2021, 2020, and 2019 (in thousands): For the Years Ended April 30, 2021 2020 2019 Handguns $ 755,735 $ 390,711 $ 336,901 Long Guns 253,340 101,540 107,717 Other Products & Services 50,120 37,367 36,718 Total Net Sales $ 1,059,195 $ 529,618 $ 481,336 F-19 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We sell our products and services under our Smith & Wesson, M&P, Gemtech, Thompson/Center Arms, and Smith & Wesson Precision Components brands. Depending upon the product or service, our customers primarily include distributors; federal, state, and municipal law enforcement agencies and officers; government and military agencies; businesses; and retailers. We sell our products worldwide. The following table sets forth the breakdown of export net sales included in the above table. Our export net sales accounted for 2 %, 4 %, and 5 % of total net sales for the fiscal years ended April 30, 2021, 2020, and 2019, respectively (in thousands): For the Years Ended April 30, Region 2021 2020 2019 Europe $ 5,742 $ 6,280 $ 9,724 Asia 7,255 6,022 3,441 Latin America 4,473 2,284 3,105 All others international 4,382 5,129 10,012 Total international net sales $ 21,852 $ 19,715 (a) $ 26,282 (a) Our international sales were negatively impacted in our fourth fiscal quarter of 2020 as a result of the COVID-19 pandemic. 8. Advertising Costs We expense advertising costs, primarily consisting of magazine advertisements, printed materials, and television advertisements, either as incurred or upon the first occurrence of the advertising. Advertising expense, included in selling and marketing expenses, for the fiscal years ended April 30, 2021, 2020, and 2019, amounted to $ 12.5 million, $ 13.6 million, and $ 13.4 million, respectively. 9. Property, Plant, and Equipment The following table summarizes property, plant, and equipment as of April 30, 2021 and 2020 (in thousands): April 30, 2021 April 30, 2020 Machinery and equipment $ 284,947 $ 266,018 Software and hardware 46,648 45,710 Building and improvements 36,525 34,132 Land and improvements 2,817 3,787 Right of use assets 40,986 40,986 411,923 390,633 Less: Accumulated depreciation and amortization ( 277,862 ) ( 249,621 ) 134,061 141,012 Construction in progress 7,551 6,727 Total property, plant, and equipment, net $ 141,612 $ 147,739 Depreciation of tangible assets and amortization of software expense amounted to $ 30.1 million, $ 30.5 million, and $ 28.1 million for the fiscal years ended April 30, 2021, 2020, and 2019, respectively. F-20 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes depreciation and amortization expense, which includes amortization of intangibles and debt financing costs, by line item for the fiscal years ended April 30, 2021, 2020, and 2019 (in thousands): For the Years Ended April 30, 2021 2020 2019 Cost of sales $ 21,026 $ 21,142 $ 20,760 Research and development 519 584 545 Selling and marketing 533 446 530 General and administrative (a) 8,606 9,113 6,780 Interest expense 891 687 431 Total depreciation and amortization $ 31,575 $ 31,972 $ 29,046 (a) General and administrative expenses included $ 330,644 , $ 344,527 , and $ 286,261 of amortization for the fiscal years ended April 30, 2021, 2020, and 2019, respectively, which were recorded as a result of our acquisitions. 10. Inventories The following table sets forth a summary of inventories, net of reserves, stated at lower of cost or market, as of April 30, 2021 and 2020 (in thousands): April 30, 2021 April 30, 2020 Finished goods $ 21,528 $ 60,400 Finished parts 41,738 29,619 Work in process 7,918 6,787 Raw material 7,293 6,935 Total inventories $ 78,477 $ 103,741 11. Accrued Expenses and Deferred Revenue The following table sets forth other accrued expenses as of April 30, 2021 and 2020 (in thousands): April 30, 2021 April 30, 2020 Accrued taxes other than income (a) $ 12,210 $ 21,256 Accrued employee benefits 4,780 4,407 Accrued other 3,451 5,456 Deferred revenue (b) 2,907 14,744 Accrued professional fees 2,804 3,675 Accrued distributor incentives 2,414 2,253 Accrued rebates and promotions 2,174 3,335 Current portion of operating lease obligation 1,309 1,506 Current portion of finance lease obligation 1,087 1,046 Total accrued expenses and deferred revenue $ 33,136 $ 57,678 (a) Decrease in accrued taxes other than income is due to the deferral of federal excise tax payments allowed by the Tax and Trade Bureau as a result of the COVID-19 pandemic as of April 30, 2020 . (b) Decrease in deferred revenue due to the fulfillment of performance obligations related to promotional activity. F-21 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) 12. Fair Value Measurement We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic , or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. Financial assets and liabilities recorded on the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows: Level 1 — Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities). Our cash and cash equivalents, which are measured at fair value on a recurring basis, totaled $ 113.0 million and $ 125.0 million as of April 30, 2021 and 2020, respectively. We utilized Level 1 of the value hierarchy to determine the fair values of these assets. Level 2 — Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following: • quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and municipal bonds which trade infrequently); • inputs other than quoted prices that are observable for substantially the full term of the asset or liability (such as interest rate and currency swaps); and • inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives). Level 3 — Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 2 or Level 3 financial assets or liabilities as of April 30, 2021. 13. Self-Insurance Reserves As of April 30, 2021 and 2020, we had reserves for workers’ compensation, product liability, municipal liability, and medical/dental costs totaling $ 9.5 million and $ 9.0 million, respectively, of which $ 5.0 million and $ 4.5 million, respectively, was classified as other non-current liabilities. As of April 30, 2021 and 2020, $ 4.5 million and $ 4.5 million, respectively, were included in accrued expenses on the accompanying consolidated balance sheets. In addition, as of April 30, 2021 and 2020, $ 614,000 and $ 620,000 , respectively, of workers’ compensation recoverable was classified as other assets. While we believe these reserves to be adequate, it is possible that the ultimate liabilities will exceed such estimates. F-22 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table summarizes the activity in the workers’ compensation, product liability, municipal liability, and medical/dental reserves in the fiscal years ended April 30, 2021 and 2020 (in thousands): For the Year Ended April 30, 2021 2020 Beginning balance $ 9,011 $ 8,423 Additional provision charged to expense 2,484 19,608 Payments ( 2,026 ) ( 19,020 ) Ending balance $ 9,469 $ 9,011 It is our policy to provide an estimate for loss as a result of expected adverse findings or legal settlements on product liability, municipal liability, workers’ compensation, and other matters when such losses are probable and are reasonably estimable. It is also our policy to accrue for reasonable estimable legal costs associated with defending such litigation. While such estimates involve a range of possible costs, we determine, in consultation with counsel, the most likely cost within such range on a case-by-case basis. We also record receivables from insurance carriers relating to these matters when their collection is probable. As of April 30, 2021 and 2020, we had accrued reserves for product and municipal litigation liabilities of $ 4.0 million and $ 3.7 million, respectively (of which $ 2.9 million and $ 2.6 million, respectively, was non-current), consisting entirely of expected legal defense costs. In addition, as of April 30, 2021, we did no t record any receivables from insurance carriers related to these liabilities. During fiscal 2020, we had recorded receivables from insurance carriers related to these liabilities of $ 1.9 million, nearly all of which has been classified as other assets. 14. Stockholders’ Equity Treasury Stock During fiscal 2021, our board of directors authorized the repurchase of up to $ 50.0 million of our common stock, subject to certain conditions, in the open market, or privately negotiated transactions until December 14, 2021. During fiscal 2021, we completed this stock repurchase program by purchasing 2,737,489 shares of common stock for $ 50.0 million utilizing cash on hand. On March 2, 2021, our board of directors authorized the repurchase of an additional $ 100.0 million of our common stock, subject to certain condition, in the open market, or in privately negotiated transaction until March 1, 2022. Pursuant to the second authorization, during fiscal 2021, we purchased 3,380,447 shares of our common stock for $ 60.0 million using cash on hand. Subsequent to fiscal 2021, we completed the second stock repurchase program by purchasing 1,967,420 of our common stock for $ 40.0 million utilizing cash on hand. Incentive Stock and Employee Stock Purchase Plans We have two stock incentive plans, or SPs: the 2004 Incentive Stock Plan and the 2013 Incentive Stock Plan. New grants under the 2004 Incentive Stock Plan have not been made since the approval of the 2013 Incentive Stock Plan at our September 23, 2013 annual meeting of stockholders. All new grants covering all participants are issued under the 2013 Incentive Stock Plan. The remaining grants under the 2004 Incentive Stock Plan were exercised in the fiscal year ended, April 30, 2021. The 2013 Incentive Stock Plan authorizes the issuance of 3,000,000 shares, plus any shares that were reserved and remained available for grant and delivery under the 2004 Incentive Stock Plan as of September 23, 2013, the effective date of the 2013 Incentive Stock Plan. The plan permits the grant of options to acquire common stock, restricted stock awards, RSUs, stock appreciation rights, bonus stock and awards in lieu of obligations, performance awards, and dividend equivalents. Our board of directors, or a committee established by our board, administers the SPs, selects recipients to whom awards are granted, and determines the grants to be awarded. Options granted under the SPs are exercisable at a price determined by our board or committee 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 SPs are generally nontransferable and subject to forfeiture. F-23 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Unless terminated earlier by our board of directors, the 2013 Incentive Stock Plan will terminate at the earliest of (1) the tenth anniversary of the effective date of the 2013 Stock 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 board committee authorizes the granting of such award. Except in specific circumstances, grants vest over a period of four years and grants of stock options are exercisable for a period of 10 years. The plan also permits the grant of awards to non-employees, which our board of directors or committee has authorized in the past. The number of shares and weighted average exercise prices of options for the fiscal years ended April 30, 2021, 2020, and 2019 are as follows: For the Year Ended April 30, 2021 2020 2019 Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price Options outstanding, beginning of year 200,667 $ 7.70 267,761 $ 6.76 316,160 $ 6.69 Exercised during the period ( 200,667 ) 7.67 ( 67,094 ) 3.97 ( 48,399 ) 6.28 Canceled/forfeited during period — — — — — Options outstanding, end of period — — 200,667 $ 7.70 267,761 $ 6.76 Weighted average remaining contractual life — 0.43 years 2.35 years Options exercisable, end of period — — 200,667 $ 7.70 267,761 $ 6.76 Weighted average remaining contractual life — 0.43 years 2.35 years As of April 30, 2021, there were 3,967,603 shares available for grant under the 2013 Incentive Stock Plan. We use our unissued share pool for all shares issued for options, restricted stock awards, or RSUs, performance share units, performance-based restricted stock units, or PSUs, and shares issued under our Employee Stock Purchase Plan, or ESPP. In connection with the spin-off of AOUT, as of August 24, 2020, there was one option award outstanding that could be converted into 10,000 shares of SWBI common stock . Under the terms of the Employee Matters Agreement between us and AOUT, the holder of the outstanding SWBI options was granted a pro rata number of AOUT options with the price of the SWBI options reduced at a pro rata value to the amount of awards granted of AOUT options. Incremental compensation expense associated with this change in the award was immaterial and recognized fully in fiscal 2021. There were no outstanding and exercisable stock options as of April 30, 2021. The aggregate intrinsic value of outstanding and exercisable stock options as of April 30, 2020 and 2019 was $ 356,000 , $ 826,000 , respectively. The aggregate intrinsic value of the options exercised for the years ended April 30, 2021, 2020, and 2019 was $ 2.9 million, $ 260,000 , and $ 285,000 , respectively. The following table summarizes stock compensation expense by line item for the fiscal years ended April 30, 2021, 2020, and 2019 (in thousands): For the Years Ended April 30, 2021 2020 2019 Cost of sales $ 740 $ 667 $ 694 Research and development 71 79 62 Selling and marketing 767 155 337 General and administrative 3,128 1,456 5,854 Total stock-based compensation $ 4,706 $ 2,357 (a) $ 6,947 F-24 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (a) The decrease in general and administrative stock-based compensation expense from fiscal 2019 was because of the separation of our former President and Chief Executive Officer. We grant service-based RSUs to employees, consultants, and directors. The awards are made at no cost to the recipient. An RSU represents the right to acquire 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 three or four years with one-third or one-fourth of the units vesting, respectively, on each anniversary date of the grant date. RSU grants to directors generally vest over a period of one year with one-twelfth of the units vesting each month. The aggregate fair value of our RSU grants is amortized to compensation expense over the applicable vesting period. In connection with the spin-off of AOUT, we adjusted outstanding RSU awards in accordance with the terms of the Employee Matters Agreement between us and AOUT. For directors and certain executives, a pro rata number of RSUs were issued of AOUT RSUs with terms that matched original SWBI RSU. For all other employees, we adjusted the underlying shares of outstanding RSUs to preserve the intrinsic value of the awards immediately before the spin-off. The adjustment of the underlying shares was determined using a ratio based on the relative values of the SWBI pre-distribution stock value and the SWBI post-distribution stock value. The outstanding awards continue to vest over their original vesting periods. We will recognize $ 380,000 of incremental compensation expense costs related to the adjustment of PSUs, and $ 740,000 of compensation expense related to the adjustment of RSUs, for a total of $ 1.1 million. During the fiscal year, we recognized expense of $ 738,000 relating to total incremental compensation cost. We grant PSUs to our executive officers. 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 Years Ended April 30, 2021 2020 2019 Grant date fair market value Smith & Wesson Brands, Inc $ 16.99 - 17.27 $ 7.80 $ 9.85 Russell 2000 Index $ 1,526.46 - 1,571.21 $ 1,138.78 $ 1,591.21 Volatility (a) Smith & Wesson Brands, Inc 59.09% - 61.34% 54.02 % 45.19 % Russell 2000 Index 27.62% - 29.27% 24.66 % 15.65 % Correlation coefficient (b) 0.1242 - 0.1302 0.11 0.14 Risk-free interest rate (c) 0.16% - 0.22% 0.35 % 2.23 % Dividend yield (d) 0.95 % 0 % 0 % (a) Expected volatility is calculated over the most recent period that represents the remaining term of the performance period as of the valuation date, or three years . (b) The correlation coefficient utilizes the same historical price data used to develop the volatility assumptions. (c) The risk-free interest rate is based on the yield of a zero-coupon U.S. Treasury bill, commensurate with the three-year performance period. (d) We did not pay dividends in fiscal 2020 and 2019. The PSUs vest, and the fair value of such PSUs are recognized, over the corresponding three-year performance period. Our PSUs have a maximum aggregate award equal to 200 % of the target 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. F-25 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) In connection with the spin-off of AOUT and in accordance with the terms of the Employee Matters Agreement between us and AOUT, all outstanding PSU awards were adjusted such that the performance criteria relative to SWBI share price was modified to compare the market cap of SWBI for the 90 days subsequent to the original grant date to the combined market cap of SWBI and AOUT for the 90 days preceding the original vest date. The change in the market cap will be compared to the change in the value of the Russell 2000 index for the same period. In addition, a pro rata number of AOUT PSUs were granted at the time of the spin to each SWBI PSU recipient with the same terms as the underlying original SWBI PSU. In connection with the retirement of our former chief financial officer, 50,200 PSUs were converted to RSUs for immediate delivery during the fiscal year. In certain circumstances, the vested awards will be delivered on the first anniversary of the applicable vesting date. We have applied a discount 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 36,308 PSUs to certain of our executive officers. We also granted 234,007 service-based RSUs during the year ended April 30, 2021, including 68,461 RSUs to certain of our executive officers, 25,570 RSUs to our directors, and 139,976 RSUs to non-executive officer employees. Compensation expense recognized related to grants of RSUs and PSUs was $ 3.4 million for the fiscal year ended April 30, 2021. During the fiscal year ended April 30, 2021, we canceled 88,365 service-based RSUs, of which 57,547 RSUs was a result of the spin-off, and 30,818 RSUs was as a result of the service period condition not being met. We canceled 92,500 PSUs of which 28,800 PSUs was a result of the spin-off and 63,700 was a result of the three-year stock performance targets were not being achieved. We delivered 50,200 shares of common stock to our former chief financial officer under vested PSUs with a total market value of $ 1.3 million, under the terms of his retirement. We delivered 357,345 shares of common stock to current employees under vested RSUs with a total market value of $ 5.8 million. During the fiscal year ended April 30, 2020, we granted 105,767 PSUs to certain of our executive officers and 32,050 PSUs to non-executive officer employees. We also granted 400,483 service-based RSUs during the year ended April 30, 2020, including 113,770 RSUs to certain of our executive officers, 115,600 RSUs to our directors, and 211,073 RSUs to non-executive officer employees. Compensation expense recognized related to grants of RSUs and PSUs was $ 2.3 million for the fiscal year ended April 30, 2020. During the fiscal year ended April 30, 2020, we canceled 232,793 service-based RSUs as a result of the service period condition not being met and 367,025 PSUs as the three-year stock performance targets were not achieved. We delivered 296,139 shares of common stock to current employees under vested RSUs with a total market value of $ 2.6 million. During the year ended April 30, 2019, we granted 181,600 PSUs to certain of our executive officers. We also granted 360,185 service-based RSUs during the year ended April 30, 2019, including 167,818 RSUs to certain of our executive officers, 49,509 RSUs to our directors, and 142,858 RSUs to non-executive officer employees. Compensation expense recognized related to grants of RSUs and PSUs was $ 7.3 million for the fiscal year ended April 30, 2019. During the fiscal year ended April 30, 2019, we canceled 33,899 service-based RSUs as a result of the service period condition not being met and 112,000 PSUs as the three-year stock performance targets were not achieved. We delivered 206,572 shares of common stock to current employees under vested RSUs with a total market value of $ 2.5 million. The grant date fair value of RSUs and PSUs that vested in fiscal 2021, 2020, and 2019 was $ 5.9 million, $ 5.0 million, and $ 3.9 million, respectively. F-26 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) A summary of activity for unvested RSUs and PSUs for fiscal years 2021, 2020, and 2019 is as follows: For the Year Ended April 30, 2021 2020 2019 Weighted Weighted Weighted Total # of Average Total # of Average Total # of Average RSUs and Grant Date RSUs and Grant Date RSUs and Grant Date PSUs Fair Value PSUs Fair Value PSUs Fair Value RSUs and PSUs outstanding, beginning of period 1,313,974 $ 10.86 1,631,631 $ 15.44 1,442,317 $ 17.80 Awarded 270,315 16.54 578,300 5.75 541,785 10.65 Vested ( 407,545 ) 14.57 ( 296,139 ) 17.05 ( 206,572 ) 19.11 Forfeited ( 180,865 ) 15.18 ( 599,818 ) 15.34 ( 145,899 ) 16.11 RSUs and PSUs outstanding, end of period 995,879 $ 11.14 1,313,974 $ 10.86 1,631,631 $ 15.44 As of April 30, 2021, there was $ 2.7 million of unrecognized compensation cost related to unvested RSUs and PSUs. This cost is expected to be recognized over a weighted average remaining contractual term of 1.4 years. On September 26, 2011, our stockholders approved our 2011 ESPP, which authorizes the sale of up to 6,000,000 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, or FMV, per share of our common stock on any purchase date is less than the FMV 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 FMV on the first day of the offering period or the FMV on the exercise date. The maximum number of shares that a participant may purchase during any purchase period is 12,500 shares, or a total of $ 25,000 in shares, based on the FMV 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) March 31, 2022. 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 2021, 2020, and 2019, 204,482 , 380,209 , and 230,282 shares, respectively, 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 calculate the fair value of our stock options issued to employees using the Black-Scholes model at the time the options were granted. That amount is then amortized over the vesting period of the option. With our 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 our ESPP purchases during the years ended April 30, 2021, 2020, and 2019: For the Years Ended April 30, 2021 2020 2019 Risk-free interest rate 0.08 % 1.24 % 2.21 % Expected term (a) 6 months 4 & 6 months 6 months Expected volatility (b) 70.93 % 63.6 % 45.3 % Dividend yield (c) 1.17 % 0 % 0 % F-27 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (a) The 2 nd purchase period of 2020 was abbreviated because of the timing of the spin-off of our outdoor products and accessories business. (b) We believe our expected volatility increased in fiscal 2020 primarily due to market and stock price fluctuations as a result of the COVID-19 pandemic. (c) We did not pay dividends in fiscal 2020 and 2019. 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). The total stock-based compensation expense, including stock options, purchases under our ESPP, and RSU and PSU awards, was $ 4.7 million, $ 2.4 million, and $ 6.9 million, for fiscal years 2021, 2020, and 2019, respectively. 15. Employer Sponsored Benefit Plans Contributory Defined Investment Plan — We offer two contributory defined investment plans covering substantially all employees, subject to service requirements. Employees may contribute up to 100 % of their annual pay, depending on the plan. We generally make discretionary matching contributions of up to 50 % of the first 6 % of employee contributions to the plan. We contributed $ 2.9 million, $ 2.3 million, and $ 2.5 million for the fiscal years ended April 30, 2021, 2020, and 2019, respectively. Non-Contributory Profit Sharing Plan — We have a non-contributory profit sharing plan covering substantially all of our employees. Employees become eligible on May 1 following the completion of a full fiscal year of continuous service. Our contributions to the plan are discretionary. For fiscal 2021, we plan to contribute approximately $ 14.4 million, which has been recorded in general and administrative costs. We contributed $ 2.2 million and $ 2.6 million for the fiscal years ended April 30, 2020 and 2019, respectively. Contributions are funded after the fiscal year-end. 16. Income Taxes Income tax expense/(benefit) from continuing operations consisted of the following (in thousands): For the Year Ended April 30, 2021 2020 2019 Current: Federal $ 64,417 $ 9,877 $ 5,567 State 9,530 1,841 1,918 Total current 73,947 11,718 7,485 Deferred: Deferred federal 358 ( 164 ) 1,665 Deferred state 89 ( 32 ) 134 Total deferred 447 ( 196 ) 1,799 Total income tax expense/(benefit) $ 74,394 $ 11,522 $ 9,284 F-28 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The following table presents a reconciliation of the provision for income taxes from continuing operations at statutory rates to the provision (benefit) in the consolidated financial statements (in thousands): For the Year Ended April 30, 2021 2020 2019 Federal income taxes expected at the statutory rate (a) $ 66,773 $ 8,233 $ 7,183 State income taxes, less federal income tax benefit 7,685 1,628 1,737 Stock compensation ( 578 ) 1,077 646 Business meals and entertainment 115 257 144 Research and development tax credit ( 297 ) ( 496 ) ( 460 ) Non-deductible Separation expenses 195 688 — Other 501 135 105 Federal tax rate change on deferred taxes — — ( 71 ) Total income tax expense/(benefit) $ 74,394 $ 11,522 $ 9,284 (a) We had a statutory rate of 21 % in fiscal 2021, 2020 and 2019. Deferred tax assets (liabilities) related to temporary differences are the following (in thousands): For the Years Ended April 30, 2021 2020 Non-current tax assets (liabilities): Net operating loss carryforwards and tax credits $ 3,189 $ 3,158 Inventories 4,508 6,082 Accrued expenses, including compensation 4,952 4,063 Product liability 263 434 Accrued promotions 139 69 Workers' compensation 497 486 Warranty reserve 1,303 987 Stock-based compensation 1,517 2,319 State bonus depreciation 888 1,287 Property taxes ( 250 ) ( 254 ) Property, plant, and equipment ( 13,994 ) ( 15,889 ) Intangible assets ( 914 ) ( 633 ) Right-of-use assets ( 1,091 ) ( 1,685 ) Right-of-use liabilities 1,131 1,734 Pension 293 241 Other ( 38 ) 331 Less valuation allowance ( 3,297 ) ( 3,187 ) Net deferred tax asset/(liability) — total $ ( 904 ) $ ( 457 ) We had no federal net operating loss carryforwards in fiscal 2021. There were $ 17.7 million and $ 17.7 million in state net operating loss carryforwards as of April 30, 2021 and 2020, respectively. The state net operating loss carryforwards will expire between April 30, 2027 and April 30, 2040 . There were $ 2.9 million of state tax credit carryforwards as of April 30, 2021 and 2020. The state tax credit carryforwards will expire between April 30, 2023 and April 30, 2025 or have no expiration date. F-29 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) As of both April 30, 2021 and 2020, valuation allowances of $ 904,000 and $ 2.3 million were provided on our deferred tax assets for those state net operating loss carryforwards, and state tax credits, respectively, that we do not anticipate using prior to their expiration. Additional valuation allowances of $ 79,000 were provided on our deferred income tax assets as of April 30, 2021, as we believe that it is more likely than not that all such assets will not be realized. These allowances related to IRC Section 162(m) limitations on the deductibility of certain executive compensation. Recording a valuation allowance or reversing a valuation allowance could have an effect on our future results of operations and financial position. The income tax provisions represent effective tax rates of 23.4 % and 29.4 % for the fiscal year ended April 30, 2021 and 2020, respectively. At April 30, 2021 and 2020, we did no t have any gross tax-effected unrecognized tax benefits. With limited exception, we are subject to U.S. federal, state, and local, or non-U.S. income tax audits by tax authorities for fiscal years subsequent to April 30, 2017. 17. Commitments and Contingencies Litigation In January 2018, Gemini Technologies, Incorporated, or Gemini, commenced an action against us in the U.S. District Court for the District of Idaho, or the District Court. The complaint alleges, among other things, that we breached the earn-out and other provisions of the Asset Purchase Agreement and ancillary agreements between the parties in connection with our acquisition of the Gemtech business from Gemini. The complaint seeks a declaratory judgment interpreting various terms of the Asset Purchase Agreement and damages in the sum of $ 18.6 million. In May 2018, the District Court dismissed the complaint on the grounds of forum non conveniens . In June 2018, Gemini appealed the decision dismissing its complaint to the U.S. Court of Appeals for the Ninth Circuit, or the Ninth Circuit. On July 24, 2019, the Ninth Circuit reversed the dismissal and remanded the case to the District Court to perform a traditional forum non conveniens analysis. On September 6, 2019, the parties stipulated that they do not contest that the venue is proper in the District of Idaho. On November 4, 2019, we filed an answer to Gemini’s complaint and a counterclaim against Gemini and its stockholders at the time of the signing of the Asset Purchase Agreement. Plaintiffs amended their complaint to add a claim of fraud in the inducement. We believe the claims asserted in the complaint have no merit, and we intend to aggressively defend this action. We are a defendant in four product liability cases and are aware of one other product liability claim, primarily alleging defective product design, defective manufacturing, or failure to provide adequate warnings. In addition, we are a co-defendant in a case filed on August 27, 1999 by the city of Gary, Indiana, or the City, against numerous firearm manufacturers, distributors, and dealers seeking to recover monetary damages, as well as injunctive relief, allegedly arising out of the misuse of firearms by third parties. In January 2018, the trial court granted defendants’ Motion for Judgment on the Pleadings, dismissing the case in its entirety. In February 2018, plaintiffs appealed the dismissal to the Indiana Court of Appeals. On May 23, 2019, the Indiana Court of Appeals issued a decision, which affirmed in part and reversed in part and remanded for further proceedings, the trial court’s dismissal of the City’s complaint. On July 8, 2019, defendants filed a Petition to Transfer jurisdiction to the Indiana Supreme Court. Briefing was completed in the Indiana Supreme Court on August 5, 2019. On November 26, 2019, the Indiana Supreme Court denied our petition to transfer. The case was returned to the trial court. In May 2018, we were named in an action related to the Parkland, Florida shooting, filed in the Circuit Court, Broward County, Florida, seeking a declaratory judgment that a Florida statute that provides firearm manufacturers and dealers immunity from liability when their legally manufactured and lawfully sold firearms are later used in criminal acts only applies to civil actions commenced by governmental agencies not private litigants. In August 2018, we moved to dismiss the complaint on the grounds that it seeks an impermissible advisory opinion. On December 6, 2018, the court granted defendants’ motion to dismiss without prejudice and granted plaintiffs leave to amend their complaint. On December 10, 2018, plaintiffs filed a Second Amended Complaint for Declaratory Relief. On December 13, 2018, defendants filed a Motion to Dismiss Plaintiffs’ Second Amended Complaint. On November 21, 2019, the court granted defendants’ motion to dismiss plaintiffs’ second amended complaint, with prejudice. On June 15, 2021, upon plaintiffs’ motion, the Fourth District Court of Appeal of the State of Florida, or F-30 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) the Court of Appeal, ruled that the Circuit Court’s November 21, 2019 order dismissing the case was not “final and appealable,” and ordered the Circuit Court to enter a final order of dismissal. We are a defendant in a putative class proceeding before the Ontario Superior Court of Justice in Toronto, Canada. The action was filed on December 16, 2019 . The action claims CAD$ 50 million in aggregate general damages, CAD$ 100 million in aggregate punitive damages, special damages in an unspecified amount, together with interest and legal costs. The named plaintiffs are two victims of a shooting that took place in Toronto on July 22, 2018 and their family members. One victim was shot and injured during the shooting. The other suffered unspecified injuries while fleeing the shooting. The plaintiffs are seeking to certify a claim on behalf of classes that include all persons who were killed or injured in the shooting and their immediate family members. The plaintiffs allege negligent design and public nuisance. The case has not been certified as a class action. On July 13, 2020, we filed a Notice of Motion for an order striking the claim and dismissing the action in its entirety. On February 11, 2021, the court granted our motion in part, and dismissed the plaintiffs’ claims in public nuisance and strict liability. The court declined to strike the negligent design claim, and ordered that the claim proceed to a certification motion. The certification motion is scheduled to be heard in March of 2022. On March 2, 2021, we filed a motion for leave to appeal the court’s refusal to strike the negligent design claim with the Divisional Court, Ontario Superior Court of Justice. No hearing date for that motion has yet been set. In May 2020, we were named in an action related to the Chabad of Poway synagogue shooting that took place on April 27, 2019. The complaint was filed in the Superior Court of the State of California, for the County of San Diego – Central, and asserts claims against us for product liability, unfair competition, negligence, and public nuisance. The plaintiffs allege they were present at the synagogue on the day of the incident and suffered physical and/or emotional injury. The plaintiffs seek compensatory and punitive damages, attorneys’ fees, and injunctive relief. On September 3, 2020, we filed a demurrer and motion to strike, seeking to dismiss plaintiffs’ complaint. The plaintiffs filed an opposition to our motion on December 18, 2020. Our reply to plaintiffs’ opposition was filed on January 15, 2021. On February 16, 2021 several law professors with First Amendment expertise filed an amicus brief in support of our demurrer. Plaintiffs responded to the law professors’ brief on March 8, 2021. On March 23, 2021, Public Citizen, a consumer advocacy organization, filed an amicus brief in response to the law professors’ amicus brief. We responded to Public Citizen’s brief on May 10, 2021. The hearing on our motion was held on June 8, 2021. No decision has been issued to date. We believe that the various allegations as described above are unfounded, and, in addition, that any incident and any results from them or any injuries were due to negligence or misuse of the firearm by the claimant or a third party. John Pidcock, as trustee of the ASPC Creditor Trust (appointed under the plan of reorganization of AcuSport Corp., or AcuSport, as debtor in possession under chapter 11 of the U.S. Bankruptcy Code), is the plaintiff in two separate actions against us in the U.S. Bankruptcy Court for the Southern District of Ohio. The first seeks recovery of alleged preferential transfers received by us from AcuSport in the aggregate amount of $ 4.2 million. The second seeks turnover of goods allegedly owed to AcuSport by us under one or more of our promotional programs in the amount of $ 1.5 million. We have filed answers to both complaints denying all material allegations and asserting affirmative defenses. Mediation was held on December 10, 2020, and was unsuccessful in resolving these cases. We believe we have strong defenses to these actions and intend to continue to vigorously defend them. A second mediation is scheduled for June 23, 2021. We believe that the various allegations as described above are unfounded. In addition, from time to time, we are involved in lawsuits, claims, investigations, and proceedings, including commercial, environmental, premises and employment matters, which arise in the ordinary course of business. The relief sought in individual cases primarily includes compensatory and, sometimes, punitive damages. Certain of the cases and claims seek unspecified compensatory or punitive damages. In others, compensatory damages sought may range from less than $ 75,000 to approximately $ 50.0 million. In our experience, initial demands do not generally bear a reasonable relationship to the facts and circumstances of a particular matter. We believe that our accruals for product liability cases and claims are a reasonable quantitative measure of the cost to us of product liability cases and claims. F-31 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) We are vigorously defending ourselves in the lawsuits to which we are subject. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive, time consuming, and diverts the time and attention of our management. We monitor the status of known claims and the related product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. After consultation with litigation counsel and a review of the merit of each claim, we have concluded that we are unable to reasonably estimate the probability or the estimated range of reasonably possible losses related to material adverse judgments related to such claims and, therefore, we have not accrued for any such judgments. In the future, should we determine that a loss (or an additional loss in excess of our accrual) is at least reasonably possible and material, we would then disclose an estimate of the possible loss or range of loss, if such estimate could be made, or disclose that an estimate could not be made. We believe that we have provided adequate accruals for defense costs. For the fiscal years ended April 30, 2021, 2020, and 2019, we paid $ 606,000 , $ 584,000 , and $ 322,000 , respectively, in defense and administrative costs relative to product liability and municipal litigation. In addition, we spent an aggregate of $ 65,000 , $ 3,000 , and $ 180,000 , respectively, in those fiscal years in settlement fees related to product liability cases. We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets. We recognize gains and expenses for changes in our product liability provisions and municipal litigation liabilities. In fiscal 2021, we recorded expense of $ 388,000 ; in fiscal 2020, we recorded expense of $ 892,000 ; and in fiscal 2019, we recorded expense of $ 293,000 . At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made. Environmental Remediation We are subject to numerous federal, state, and local laws and regulations that regulate the health and safety of our workforce, including, but not limited to, those regulations monitored by the Occupational Health and Safety Administration, or OSHA, the National Fire Protection Association, and the Department of Public Health. Though not exhaustive, examples of applicable regulations include confined space safety, walking and working surfaces, machine guarding, and life safety. We are also subject to numerous federal, state, and local environmental laws and regulations concerning, among other things, emissions in the air; discharges to land, surface, subsurface strata and water; and the generation, handling, storage, transportation, treatment, and disposal of hazardous wastes and other materials. These laws have required us to make significant expenditures of both a capital and expense nature. Several of the more significant federal laws applicable to our operations include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act. We have in place programs and personnel to monitor compliance with various federal, state, and local environmental regulations. In the normal course of our manufacturing operations, we are subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. We fund our environmental costs through cash flows from operations. We believe that we are in compliance with applicable environmental regulations in all material respects. We are required to remediate hazardous waste at our facilities. Currently, we own a designated site in Springfield, Massachusetts that contains two release areas, which are the focus of remediation projects as part of the Massachusetts Contingency Plan, or MCP. The MCP provides a structured environment for the voluntary remediation of regulated releases. We may be required to remove hazardous waste or remediate the alleged effects F-32 SMITH & WESSON BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) of hazardous substances on the environment associated with past disposal practices at sites not owned by us. We have received notice that we are a potentially responsible party from the Environmental Protection Agency and/or individual states under CERCLA or a state equivalent at two sites. As of April 30, 2021, and 2020, we do no t have an open environmental reserve recorded in our consolidated balance sheet. When the available information is sufficient to estimate the amount of liability, that estimate has been used. When the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. We may not have insurance coverage for our environmental remediation costs. We have not recognized any gains from probable recoveries or other gain contingencies. Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. However, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or the cost of resolving of future environmental health and safety proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that additional or changing environmental regulation will not become more burdensome in the future and that any such development would not have a material adverse effect on our company. Contracts Employment Agreements — We have employment, severance, and change of control agreements with certain officers and managers. 18. Subsequent Events Dividends On June 15, 2021 , our board of directors authorized a regular quarterly dividend for stockholders of $ 0.08 per share. The dividend will be for stockholders of record as of market close on July 1, 2021 and is payable on July 6, 2021 . Treasury Stock On June 15, 2021, our board of directors authorized the repurchase of up to $ 50.0 million of our common stock, subject to certain conditions, in the open market or in privately negotiated transactions, valid through August 15, 2022. F-33