13. STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED COMPENSATION

6 Months Ended

Nov. 30, 2018

Equity [Abstract]

13. STOCKHOLDERS' EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED COMPENSATION

13. STOCKHOLDERS’ EQUITY, COMPREHENSIVE INCOME AND STOCK-BASED COMPENSATION

ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in the components of AOCI, net of tax, were as follows (in thousands):

	Cumulative Translation Adjustments			Unrealized Loss on Investments, Net		Total
Balance at May 31, 2018	$	2,292		$	--	$	2,292
Other comprehensive (loss) income before reclassifications		(51	)		--		(51	)
Amounts reclassified out of AOCI		--			--		--
Other comprehensive (loss) income, net of tax		(51	)		--		(51	)
Balance at November 30, 2018	$	2,241		$	--	$	2,241

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 expense for stock options and ESPP purchase rights 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. 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 Note 10 in the Company’s Annual Report on Form 10-K for fiscal 2018 filed on August 28, 2018 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 and six months ended November 30, 2018 and 2017 (in thousands):

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2018		2017		2018		2017
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	23	$	57	$	59	$	79
Selling, general and administrative		136		218		284		368
Research and development		65		89		137		133
Total stock-based compensation	$	224	$	364	$	480	$	580

As of November 30, 2018 and 2017, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended November 30, 2018 and 2017, the Company recorded stock-based compensation expense related to stock options and RSUs of $166,000 and $207,000, respectively. During the six months ended November 30, 2018 and 2017, the Company recorded stock-based compensation expense related to stock options and RSUs of $339,000 and $408,000, respectively.

As of November 30, 2018, the total compensation expense related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plan, but not yet recognized, was approximately $1,582,000, which is net of estimated forfeitures of $4,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 3.2 years.

During the three months ended November 30, 2018 and 2017, the Company recorded stock-based compensation expense related to the ESPP of $58,000 and $157,000, respectively. During the six months ended November 30, 2018 and 2017, the Company recorded stock-based compensation expense related to the ESPP of $141,000 and $172,000, respectively.

As of November 30, 2018, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $217,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.3 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 expense 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 and six months ended November 30, 2018 and 2017 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended						Six Months Ended
	November 30,						November 30,
	2018			2017			2018			2017
Expected term (in years)		5			4			5			4
Volatility		0.70			0.74			0.72			0.77
Risk-free interest rate		3.01	%		1.92	%		2.84	%		1.77	%
Weighted average grant date fair value	$	1.21		$	1.93		$	1.38		$	2.22

The fair values of the ESPP purchase rights granted for the three and six months ended November 30, 2018 were estimated using the following weighted-average assumptions:

	Three and Six Months Ended
	November 30, 2018
Expected term (in years)	0.5-2.0
Volatility	0.48-0.64
Expected dividend	$0.00
Risk-free interest rates	2.40%-2.82%
Estimated forfeiture rate	0%
Weighted average grant date fair value	$1.15

There were no ESPP purchase rights granted to employees for the three and six months ended November 30, 2017. During the three and six months ended November 30, 2018, ESPP purchase rights of 327,000 were granted. Total ESPP shares issued during the three and six months ended November 30, 2018 and 2017 were 64,000 and 116,000 shares, respectively. As of November 30, 2018, there were 430,000 ESPP shares available for issuance.

The following tables summarize the Company’s stock option and RSU transactions during three and six months ended November 30, 2018 (in thousands):

	Available
	Shares
Balance, May 31, 2018		1,812
Options granted		(441	)
RSUs granted		--
Shares cancelled		13
Shares expired		(11	)
Balance, August 31, 2018		1,373
Options granted		(248	)
RSUs granted		--
Shares cancelled		45
Shares expired		(33	)
Balance, November 30, 2018		1,137

The following table summarizes the stock option transactions during the three and six months ended November 30, 2018 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2018		2,859		$	2.04	$	1,987
Options granted		441		$	2.40
Options cancelled		(13	)	$	1.64
Options exercised		(98	)	$	1.12
Balances, August 31, 2018		3,189		$	2.12	$	1,757
Options granted		248		$	2.03
Options cancelled		(45	)	$	2.70
Options exercised		(19	)	$	1.09
Balances, November 30, 2018		3,373		$	2.11	$	679
Options fully vested and expected to vest at November 30, 2018		3,337		$	2.11	$	678

The options outstanding and exercisable at November 30, 2018 were in the following exercise price ranges (in thousands, except per share data):

	Options Outstanding at November 30, 2018					Options Exercisable at November 30, 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		249	0.27	$	0.66		249	0.27	$	0.66
$1.09-$1.28		498	1.22	$	1.28		498	1.22	$	1.28
$1.68-$2.06		713	4.87	$	1.84		344	3.53	$	1.77
$2.10-$2.81		1,651	4.13	$	2.43		1,143	3.13	$	2.45
$3.46-$3.93		262	5.66	$	3.86		114	5.72	$	3.76
$0.59-$3.93		3,373	3.69	$	2.11		2,348	2.61	$	1.98	$	653

The total intrinsic value of options exercised during the three and six months ended November 30, 2018 was $23,000 and $162,000, respectively. The total intrinsic value of options exercised during the three and six months ended November 30, 2017 was $269,000 and $745,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2018 was 3.67 years.

There were no RSUs granted to employees during the three and six months ended November 30, 2018, and during the three months ended November 30, 2017. During the six months ended November 30, 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. During the three and six months ended November 30, 2018, 4,000 and 9,000 RSUs became fully vested, respectively. During the three and six months ended November 30, 2017, 4,000 and 7,000 RSUs became fully vested respectively. As of November 30, 2018, 38,000 RSUs remain unvested which had an intrinsic value of $72,000. 89,000 RSUs were unvested at November 30, 2017 which had an intrinsic value of $227,000.