2. STOCK-BASED COMPENSATION

3 Months Ended

Aug. 31, 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 an equity instrument. See Notes 11 and 12 in the Company’s Annual Report on Form 10-K for fiscal 2017 filed on August 29, 2017 for further information regarding the 2016 Equity Incentive Plan and the Amended and Restated 2006 ESPP.

  The following table summarizes the stock-based compensation expense for the three months ended August 31, 2017 and 2016 (in thousands):

	Three Months Ended
	August 31,
	2017		2016
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	22	$	24
Selling, general and administrative		150		247
Research and development		44		48
Total stock-based compensation	$	216	$	319

    As of August 31, 2017 and 2016, there were no stock-based compensation costs capitalized as part of inventory.

    During the three months ended August 31, 2017 and 2016, the Company recorded stock-based compensation related to stock options and RSUs of $201,000 and $279,000, respectively.

    As of August 31, 2017, the total compensation cost related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plans, but not yet recognized, was approximately $1,444,000, which is net of estimated forfeitures of $4,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

    During the three months ended August 31, 2017 and 2016, the Company recorded stock-based compensation related to the ESPP of $15,000 and $40,000, respectively.

    As of August 31, 2017, the total compensation cost related to purchase rights under the ESPP but not yet recognized was approximately $18,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.5 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 August 31, 2017 and 2016 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended
	August 31,
	2017			2016
Expected term (in years)		4			4
Volatility		0.78			0.82
Risk-free interest rate		1.75	%		1.01	%
Weighted average grant date fair value	$	2.27		$	1.00

    There were no ESPP purchase rights granted to employees for the three months ended August 31, 2017 and 2016. There were no ESPP shares issued during the three months ended August 31, 2017 and 2016. As of August 31, 2017, there were 381,000 ESPP shares available for issuance.

    The following tables summarize the Company’s stock option and RSU transactions during three months ended August 31, 2017 (in thousands):

	Available
	Shares
Balance, May 31, 2017		2,169
Options granted		(224	)
RSUs granted		(64	)
Shares cancelled		--
Balance, August 31, 2017		1,881

    The following table summarizes the stock option transactions during the three months ended August 31, 2017 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2017		3,074		$	1.73	$	8,763
Options granted		224		$	3.93
Options cancelled		--		$	--
Options exercised		(189	)	$	1.23
Balances, August 31, 2017		3,109		$	1.92	$	4,612
Options fully vested and expected to vest at August 31, 2017		3,072		$	1.92	$	4,577

    The options outstanding and exercisable at August 31, 2017 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at August 31, 2017						at August 31, 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		454		1.54	$	0.67		454		1.54	$	0.67
$	1.09-$1.36		688		2.32	$	1.27		688		2.32	$	1.27
$	1.68-$2.06		516		4.90	$	1.75		285		4.10	$	1.81
$	2.10-$2.81		1,227		4.27	$	2.44		914		4.24	$	2.46
$	3.93		224		6.86	$	3.99		5		6.86	$	3.99
$	0.59-$3.93		3,109		3.73	$	1.92		2,346		3.14	$	1.69	$3,919

    The total intrinsic value of options exercised during the three months ended August 31, 2017 was $476,000. The total intrinsic value of options exercised during the three months ended August 31, 2016 was $52,000. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at August 31, 2017 was 3.72 years.

    During the three months ended August 31, 2017, RSUs for 64,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $3.93 per share. 2,000 RSUs became fully vested during the three months ended August 31, 2017, and 93,000 RSUs were unvested at August 31, 2017. The intrinsic value of the unvested RSUs at August 31, 2017 was $314,000.