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13. STOCK-BASED COMPENSATION

9 Months Ended

Feb. 29, 2020

Share-based Payment Arrangement [Abstract]

Stock-based compensation expense consists of expenses for stock options, restricted stock units (“RSUs”), and 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 2019 filed on August 28, 2019 for further information regarding the 2016 Plan and the ESPP.

The following table summarizes the stock-based compensation expense for the three and nine months ended February 29, 2020 and February 28, 2019 (in thousands):

	Three Months Ended				Nine Months Ended
	February 29,		February 28,		February 29,		February 28,
	2020		2019		2020		2019
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	19	$	24	$	58	$	83
Selling, general and administrative		137		137		401		421
Research and development		51		64		152		201
Total stock-based compensation	$	207	$	225	$	611	$	705

As of February 29,2020 and February 28, 2019, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended February 29, 2020 and February 28, 2019, the Company recorded stock-based compensation expense related to stock options and RSUs under 2016 Plan of $166,000 and $166,000, respectively. During the nine months ended February 29, 2020 and February 28, 2019, the Company recorded stock-based compensation expense related to stock options and RSUs of $480,000 and $505,000, respectively.

As of February 29, 2020, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $1,244,000, which is net of estimated forfeitures of $3,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.7 years.

During the three months ended February 29, 2020 and February 28, 2019, the Company recorded stock-based compensation expense related to the ESPP of $41,000 and $59,000, respectively. During the nine months ended February 29, 2020 and February 28, 2019, the Company recorded stock-based compensation expense related to the ESPP of $131,000 and $200,000, respectively.

As of February 29, 2020, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $77,000. This expense 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 based on weighted average of the expected term of 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 nine months ended February 29, 2020 and February 28, 2019, were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended						Nine Months Ended
	February 29,			February 28,			February 29,			February 28,
	2020			2019			2020			2019

Expected term (in years)		5			5			5			5
Volatility		0.72			0.69			0.71			0.72
Risk-free interest rate		1.57	%		2.77	%		1.85	%		2.83	%
Weighted average grant date fair value	$	1.37		$	1.01		$	0.98		$	1.34

The fair values of the ESPP purchase rights granted for the nine months ended February 29, 2020 were estimated using the following weighted-average assumptions:

	Nine Months Ended
	February 29, 2020

Expected term (in years)		0.5-2.0
Volatility		0.62-0.71
Expected dividend	$	0.00
Risk-free interest rates		1.56%-1.81	%
Estimated forfeiture rate		0	%
Weighted average grant date fair value	$	0.80

There were no ESPP purchase rights granted to employees for the three months ended February 29, 2020 and February 28, 2019. During the nine months ended February 29, 2020 and February 28, 2019, ESPP purchase rights of 38,000 and 327,000 were granted, respectively. Total ESPP shares issued during the nine months ended February 29, 2020 and February 28, 2019 were 71,000 and 64,000 shares, respectively. As of February 29, 2020, there were 299,000 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 29, 2020 (in thousands):

	Available
	Shares
Balance, May 31, 2019		1,147

Options granted		(527	)
Options cancelled		151
Options expired		(119	)

Balance, August 31, 2019		652

Options reserved		1,196
Options granted		(58	)
Options cancelled		280
Options expired		(256	)

Balance, November 30, 2019		1,814

Options granted		(6	)
Options cancelled		11
Options expired		(8	)

Balance, February 29, 2020		1,811

The following table summarizes the stock option transactions during the three and nine months ended February 29, 2020 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2019		3,107		$	2.20	$	282

Options granted		527		$	1.64
Options cancelled		(151	)	$	1.50
Options exercised		(49	)	$	1.27

Balances, August 31, 2019		3,434		$	2.16	$	41

Options granted		58		$	1.77
Options cancelled		(280	)	$	2.19
Options exercised		(85	)	$	1.06

Balances, November 30, 2019		3,127		$	2.18	$	358

Options granted		6		$	2.30
Options cancelled		(11	)	$	2.42
Options exercised		(98	)	$	1.34

Balances, February 29, 2020		3,024		$	2.21	$	544

Options fully vested and expected to vest at February 29, 2020		2,989		$	2.21	$	536

The options outstanding and exercisable at February 29, 2020 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at February 29, 2020						at February 29, 2020
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
$	1.09-$1.28	177			0.32	$	1.28	177			0.32	$	1.28
$	1.64-$2.06		1,183		5.30	$	1.76		520	4.28		$	1.80
$	2.10-$2.81		1,436		2.90	$	2.43		1,166		2.31	$	2.43
$	3.46-$3.93		228		4.41	$	3.85		162		4.44	$	3.81
$	1.09-$3.93		3,024		3.80	$	2.21		2,025		2.81	$	2.28	$	301

The total intrinsic value of options exercised during the three and nine months ended February 29, 2020 was $92,000 and $159,000, respectively. The total intrinsic value of options exercised during the three and nine months ended February 28, 2019 was $160,000 and $322,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 29, 2020 was 3.78 years.

There were no RSUs granted to employees during the three and nine months ended February 29, 2020 and February 28, 2019. During the three and nine months ended February 29, 2020, 3,000 and 10,000 RSUs became fully vested, respectively. During the three and nine months ended February 28, 2019, 4,000 and 13,000 RSUs became fully vested, respectively. As of February 29, 2020, 13,000 RSUs remain unvested which had an intrinsic value of $27,000. As of February 28, 2019, 34,000 RSUs remain unvested which had an intrinsic value of $50,000.