2. STOCK-BASED COMPENSATION

9 Months Ended

Feb. 28, 2017

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, restricted stock units, or RSUs, and employee stock purchase plan, or ESPP, purchase rights. Stock-based compensation cost for stock options and ESPP purchase rights are 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. For RSUs, stock-based compensation cost is based on the fair value of the Company’s common stock at the grant date. All of the Company’s stock-based compensation is accounted for as equity instruments. See Notes 10 and 11 in the Company’s Annual Report on Form 10-K for fiscal 2016 filed on August 29, 2016 for further information regarding the 2006 Equity Incentive Plan and the 2006 Employee Stock Purchase Plan.

In October 2016, the Company’s 2016 Equity Incentive Plan and the Amended and Restated Employee Stock Purchase Plan were approved by the Company’s shareholders. The 2016 Equity Incentive Plan replaces our 2006 Equity Incentive Plan, which was scheduled to expire in October 2016, and will continue in effect until 2026. A total of 2,238,467 shares of common stock have been reserved for issuance under the Company’s 2016 Equity Incentive Plan. The Amended and Restated 2006 Employee Stock Purchase Plan extends the term of the ESPP indefinitely. See the Registration Statement on Form S-8 filed on November 14, 2016 for further information regarding the 2016 Equity Incentive Plan and the ESPP.

The following table summarizes the stock-based compensation expense related to the Company’s stock-based incentive plans for the three and nine months ended February 28, 2017 and February 29, 2016 (in thousands):

	Three Months Ended				Nine Months Ended
	Feb. 28,		Feb. 29,		Feb. 28,		Feb. 29,
	2017		2016		2017		2016
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	22	$	20	$	69	$	62
Selling, general and administrative		187		145		575		569
Research and development		48		48		147		155
Total stock-based compensation	$	257	$	213	$	791	$	786

As of February 28, 2017 and February 29, 2016, there were no stock-based compensation costs capitalized as part of inventory.

During the three months ended February 28, 2017 and February 29, 2016, the Company recorded stock-based compensation related to stock options and RSUs of $232,000 and $190,000, respectively. During the nine months ended February 28, 2017 and February 29, 2016, the Company recorded stock-based compensation related to stock options and RSUs of $695,000 and $708,000, respectively.

As of February 28, 2017, the total compensation cost related to unvested stock-based awards under the Company’s 2006 and 2016 Equity Incentive Plans, but not yet recognized, was approximately $1,081,000, 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 2.4 years.

During the three months ended February 28, 2017 and February 29, 2016, the Company recorded stock-based compensation related to the ESPP of $25,000 and $23,000, respectively. During the nine months ended February 28, 2017 and February 29, 2016, the Company recorded stock-based compensation related to the ESPP of $96,000 and $78,000, respectively.

As of February 28, 2017, the total compensation cost related to purchase rights under the ESPP but not yet recognized was approximately $52,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.8 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.

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.

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.

Fair Value. The fair value of the Company’s stock options granted to employees for the three months ended February 29, 2016 and nine months ended February 28, 2017 and February 29, 2016 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,
	2016			2017			2016
Expected term (in years)		4			4			4
Volatility		0.80			0.81			0.86
Risk-free interest rates		1.23	%		1.02	%		1.21	%
Weighted average grant date fair value	$	0.80		$	1.09		$	1.31

There were no stock options granted to employees for the three months ended February 28, 2017.

During the three and nine months ended February 28, 2017, RSUs were granted for 19,000 and 157,000 shares, respectively. The weighted average market value per share of the RSUs issued for the three and nine months ended February 28, 2017 was $2.46 and $1.78, respectively.

There were no ESPP purchase rights granted during the three and nine months ended February 28, 2017 and February 29, 2016. Total ESPP shares issued during the nine months ended February 28, 2017 and February 29, 2016 were 65,000 and 36,000 shares, respectively. As of February 28, 2017, there were 467,000 ESPP shares available for issuance.

The following tables summarize the Company’s stock option and RSU transactions during the three and nine months ended February 28, 2017 (in thousands):

	Available
	Shares
Balance, May 31, 2016		1,847
Options granted		(318	)
RSUs granted		(138	)
Shares cancelled		46
Balance, August 31, 2016		1,437
Additional shares reserved		2,238
Options granted		(50	)
Shares cancelled		1
2006 Plan available shares expired		(1,438	)
Balance, November 30, 2016		2,188
RSUs granted		(19	)
Balance, February 28, 2017		2,169

The following table summarizes the stock option transactions during the three and nine months ended February 28, 2017 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2016	3,201		$	1.66	$	189
Options granted	318		$	1.68
Options cancelled	(46	)	$	1.40
Options exercised	(91	)	$	1.32
Balances, August 31, 2016	3,382		$	1.67	$	2,694
Options granted	50		$	2.81
Options cancelled	(1	)	$	2.08
Options exercised	(202	)	$	1.22
Balances, November 30, 2016	3,229		$	1.72	$	4,099
Options exercised	(72	)	$	1.60
Balances, February 28, 2017	3,157		$	1.72	$	11,101
Options fully vested and expected to vest at February 28, 2017	3,113		$	1.72	$	10,961

The options outstanding and exercisable at February 28, 2017 were in the following exercise price ranges (in thousands, except per share data):

			Options Outstanding						Options Exercisable
			at February 28, 2017						at February 28, 2017
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		514		2.03	$	0.66		514		2.03	$	0.66
	$	1.09-$1.40		847		2.66	$	1.28		796		2.60	$	1.28
	$	1.68-$2.06		546		5.38	$	1.77		264		4.40	$	1.86
	$	2.10-$2.81		1,250		4.78	$	2.44		792		4.68	$	2.45
	$	0.59-$2.81		3,157		3.87	$	1.72		2,366		3.37	$	1.60	$	8,608

The total intrinsic value of options exercised during the three and nine months ended February 28, 2017 was $154,000 and $564,000, respectively. 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 weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 28, 2017 was 3.85 years.