2. STOCK-BASED COMPENSATION

9 Months Ended

Feb. 29, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

2. STOCK-BASED COMPENSATION

2.  STOCK-BASED COMPENSATION

    Stock-based compensation expense consists of expenses for stock options and employee stock purchase plan, or ESPP, shares. Stock-based compensation cost is measured at each grant date, based on the fair value of the award using the Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period.  This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable.  The Company’s employee stock options have characteristics significantly different from those of publicly traded options.  All of the Company’s stock-based compensation is accounted for as an equity instrument.  See Notes 12 and 13 in the Company’s Annual Report on Form 10-K for fiscal 2015 filed on August 28, 2015 for further information regarding the stock option plan and the ESPP.

    The following table summarizes compensation costs related to the Company’s stock-based compensation for the three and nine months ended February 29, 2016 and February 28, 2015 (in thousands):

	Three Months Ended				Nine Months Ended
	Feb. 29,		Feb. 28,		Feb. 29,		Feb. 28,
	2016		2015		2016		2015
Stock-based compensation in the form of  employee stock options and ESPP shares, included in:
Cost of sales	$	20	$	17	$	62	$	47
Selling, general and administrative		145		148		569		508
Research and development		48		54		155		138
Total stock-based compensation	$	213	$	219	$	786	$	693

    As of February 29, 2016, there were no stock-based compensation costs capitalized as part of inventory.  As of February 28, 2015, stock-based compensation costs of $53,000 were capitalized as part of inventory.

    During the three months ended February 29, 2016 and February 28, 2015, the Company recorded stock-based compensation related to stock options of $190,000 and $182,000, respectively.  During the nine months ended February 29, 2016 and February 28, 2015, the Company recorded stock-based compensation related to stock options of $708,000 and $589,000, respectively.

    As of February 29, 2016, the total compensation cost related to unvested stock-based awards under the Company’s 1996 Stock Option Plan and 2006 Equity Incentive Plan, but not yet recognized, was approximately $1,270,000, which is net of estimated forfeitures of $3,000.  This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.2 years.

    During the three months ended February 29, 2016 and February 28, 2015, the Company recorded stock-based compensation related to the ESPP of $23,000 and $37,000, respectively.  During the nine months ended February 29, 2016 and February 28, 2015, the Company recorded stock-based compensation related to the ESPP of $78,000 and $104,000, respectively.

    As of February 29, 2016, the total compensation cost related to purchase rights under the ESPP but not yet recognized was approximately $51,000.  This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.9 years.

Valuation Assumptions

    Valuation and Amortization Method.  The Company estimates the fair value of stock options granted using the Black-Scholes option valuation model and a single option award approach.  The fair value under the single option approach is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

    Expected Term.  The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as evidenced by changes to the terms of its stock-based awards.

    Expected Volatility.  Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period.  The Company uses the historical volatility for the past four or five years, which matches the expected term of most of the option grants, to estimate expected volatility. Volatility for each of the ESPP’s four time periods of six months, twelve months, eighteen months, and twenty-four months is calculated separately and included in the overall stock-based compensation cost recorded.

    Dividends.  The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.  Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

    Risk-Free Interest Rate.  The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield in effect at the time of option grant on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the stock awards including the ESPP.

    Estimated Forfeitures.  When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.

    Fair Value.  The fair value of the Company’s stock options granted to employees for the three and nine months ended February 29, 2016 and February 28, 2015 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended						Nine Months Ended
	Feb. 29,			Feb. 28,			Feb. 29,			Feb. 28,
	2016			2015			2016			2015
Option plan shares
Expected term (in years)		4			4			4			4
Volatility		0.80			0.90			0.86			0.91
Expected dividend	$	0.00		$	0.00		$	0.00		$	0.00
Risk-free interest rates		1.23	%		1.16	%		1.21	%		1.25	%
Estimated forfeiture rate		0.25	%		0.25	%		0.25	%		0.25	%
Weighted average grant date fair value	$	0.80		$	1.62		$	1.31		$	1.64

    There were no Restricted Stock Units (RSUs) granted to employees for the three months ended February 29, 2016.  During the nine months ended February 29, 2016, RSUs were granted for 35,000 shares.  The market value on the date of the grant was $2.16 per share.  The RSUs are performance based and immediately vest upon attainment of goals established.

    The fair values of the ESPP purchase rights granted for the nine months ended February 28, 2015 were estimated using the following weighted-average assumptions:

	Nine Months Ended
	February 28,
	2015
Expected term (in years)		0.5-2.0
Volatility		0.55-0.83
Expected dividend	$	0.00
Risk-free interest rates		0.04%-0.53	%
Estimated forfeiture rate		0	%
Weighted average grant date fair value	$	1.47

    There were no ESPP purchase rights granted during the three and nine months ended February 29, 2016, and three months ended February 28, 2015.  During the nine months ended February 28, 2015, ESPP purchase rights of 170,000 were granted.  Total ESPP shares issued during the nine months ended February 29, 2016 and February 28, 2015 were 36,000 and 43,000 shares, respectively.  As of February 29, 2016, there were 232,000 ESPP shares available for issuance.

    The following table summarizes the stock option transactions during the three and nine months ended February 29, 2016 (in thousands, except per share data):

				Outstanding Options
							Weighted
				Number			Average		Aggregate
	Available			of			Exercise		Intrinsic
	Shares			Shares			Price		Value
Balances, May 31, 2015		845			3,686		$	1.66	$	2,946
Options granted		--			--			--
Options terminated		122			(122	)	$	2.04
Options exercised		--			(130	)	$	1.72
Balances, August 31, 2015		967			3,434		$	1.63	$	2,587
Additional shares reserved		800			--
Options granted		(82	)		82		$	2.22
Options terminated		15			(15	)	$	1.61
Options exercised		--			(116	)	$	0.91
Balances, November 30, 2015		1,700			3,385		$	1.67	$	1,643
Options granted		(11	)		11		$	1.36
Options terminated		110			(110	)	$	2.19
Options exercised		--			--			--
Balances, February 29, 2016		1,799			3,286		$	1.66	$	294
Options fully vested and expected to vest at February 29, 2016					3,220		$	1.66	$	288
Options exercisable at February 29, 2016					2,339		$	1.47	$	293

    The options outstanding and exercisable at February 29, 2016 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at February 29, 2016						at February 29, 2016
Range of Exercise Prices		Number Outstanding Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Aggregate Intrinsic Value
$	0.59-$0.97		578		3.07	$	0.68		577		3.07	$	0.68
$	1.09-$1.40		1,214		3.37	$	1.28		1,001		3.18	$	1.28
$	1.73-$2.06		248		4.95	$	1.88		216		5.02	$	1.90
$	2.10-$2.71		1,246		5.70	$	2.43		545		5.55	$	2.47
$	0.59-$2.71		3,286		4.32	$	1.66		2,339		3.87	$	1.47	$	293

    The total intrinsic value of options exercised during the nine months ended February 29, 2016 was $185,000.  There were no options exercised in the three months ended February 29, 2016.  The total intrinsic value of options exercised during the three and nine months ended February 28, 2015 was $30,000 and $466,000, respectively.  The weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 29, 2016 was 4.32 years.