2. STOCK-BASED COMPENSATION

9 Months Ended

Feb. 28, 2018

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 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 Employee Stock Purchase Plan.

    The following table summarizes the stock-based compensation expense for the three and nine months ended February 28, 2018 and 2017 (in thousands):

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2018		2017		2018		2017
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	28	$	22	$	107	$	69
Selling, general and administrative		162		187		530		575
Research and development		52		48		185		147
Total stock-based compensation	$	242	$	257	$	822	$	791

    As of February 28, 2018 and 2017, there were no stock-based compensation costs capitalized as part of inventory.

    During the three months ended February 28, 2018 and 2017, the Company recorded stock-based compensation related to stock options and RSUs of $206,000 and $232,000, respectively. During the nine months ended February 28, 2018 and 2017, the Company recorded stock-based compensation related to stock options and RSUs of $614,000 and $695,000, respectively.

    As of February 28, 2018, the total compensation cost related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plan, but not yet recognized, was approximately $1,120,000, 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, 2018 and 2017, the Company recorded stock-based compensation related to the ESPP of $36,000 and $25,000, respectively. During the nine months ended February 28, 2018 and 2017, the Company recorded stock-based compensation related to the ESPP of $208,000 and $96,000, respectively. The increase in the three and nine months ended February 28, 2018 is primarily due to employees increasing their ESPP elections during the current fiscal year.

    As of February 28, 2018, the total compensation cost related to purchase rights under the ESPP but not yet recognized was approximately $13,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 0.1 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 28, 2018 and nine months ended February 28, 2018 and 2017 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended			Nine Months Ended
	February 28,			February 28,
	2018			2018			2017
Expected term (in years)		4			4			4
Volatility		0.73			0.77			0.81
Risk-free interest rates		2.31	%		1.81	%		1.02	%
Weighted average grant date fair value	$	1.53		$	2.17		$	1.09

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

    There were no ESPP purchase rights granted during the three and nine months ended February 28, 2018 and 2017. Total ESPP shares issued during the nine months ended February 28, 2018 and 2017 were 116,000 and 65,000 shares, respectively. As of February 28, 2018, there were 265,000 ESPP shares available for issuance.

    The following table summarizes the Company’s stock option and RSU transactions during the three and nine months ended February 28, 2018 (in thousands):

	Available
	Shares
Balance, May 31, 2017		2,169
Options granted		(224	)
RSUs granted		(64	)
Balance, August 31, 2017		1,881
Options granted		(41	)
Balance, November 30, 2017		1,840
Options granted		(19	)
RSUs granted		--
Shares cancelled		13
Plan shares expired		(2	)
Balance, February 28, 2018		1,832

    The following table summarizes the stock option transactions during the three and nine months ended February 28, 2018 (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 exercised		(189	)	$	1.23
Balances, August 31, 2017		3,109		$	1.92	$	4,612
Options granted		41		$	3.46
Options exercised		(132	)	$	1.46
Balances, November 30, 2017		3,018		$	1.96	$	2,230
Options granted		19		$	2.76
Options cancelled		(13	)	$	2.71
Options exercised		(141	)	$	0.89
Balances, February 28, 2018		2,883		$	2.01	$	1,486
Options fully vested and expected to vest at February 28, 2018		2,849		$	2.01	$	1,480

    The options outstanding and exercisable at February 28, 2018 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at February 28, 2018						at February 28, 2018
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		324		1.02	$	0.66		324		1.02	$	0.66
$	1.09-$1.36		605		1.88	$	1.28		605		1.88	$	1.28
$	1.68-$2.06		486		4.48	$	1.74		295		3.89	$	1.79
$	2.10-$2.81		1,204		3.79	$	2.45		1,012		3.74	$	2.47
$	3.46-$3.93		264		6.41	$	3.86		46		6.45	$	3.79
$	0.59-$3.93		2,883		3.43	$	2.01		2,282		2.93	$	1.83	$	1,351

    The total intrinsic value of options exercised during the three and nine months ended February 28, 2018 was $214,000 and $959,000, respectively. 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 weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 28, 2018 was 3.42 years.

    There were no RSUs granted to employees for the three months ended February 28, 2018 or 2017. During the nine months ended February 28, 2018, RSUs for 64,000 shares were granted. The market value on the date of the grant of these RSUs was $3.93 per share. During the nine months ended February 28, 2017, RSUs for 157,000 shares were granted. The market value on the date of the grant of these RSUs was $1.78 per share. 4,000 and 11,000 RSUs became fully vested during the three and nine months ended February 28, 2018, respectively. 85,000 RSUs were unvested at February 28, 2018. The intrinsic value of the unvested RSUs at February 28, 2018 was $194,000.