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

12 Months Ended

May 31, 2020

Equity [Abstract]

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

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

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 expense 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.

    The following table summarizes the stock-based compensation expense for the fiscal years ended May 31, 2020, 2019 and 2018 (in thousands, except per share data):

	Year Ended May 31,
	2020		2019		2018
Stock-based compensation in the form of stock options, RSUs, and ESPP purchase rights, included in:
Cost of sales	$	80	$	104	$	148
Selling, general and administrative		631		545		592
Research and development		199		256		256
Net effect on net (loss) income	$	910	$	905	$	996
Effect on net (loss) income per share:
Basic	$	0.04	$	0.04	$	0.05
Diluted	$	0.04	$	0.04	$	0.04

    As of May 31, 2020, 2019 and 2018, there were no stock-based compensation expenses capitalized as part of inventory.

   During fiscal 2020, 2019 and fiscal 2018, the Company recorded stock-based compensation related to stock options and restricted stock units of $751,000, $650,000 and $706,000, respectively.

    As of May 31, 2020, the total compensation expense related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plan, but not yet recognized, was $1,131,000 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 2.6 years.

    During fiscal 2020, 2019 and fiscal 2018, the Company recorded stock-based compensation related to its ESPP of $159,000, $255,000 and $290,000, respectively. The increase in fiscal 2018 is primarily due to employees increasing their ESPP elections during the fiscal year.

    As of May 31, 2020, the total compensation expense related to purchase rights under the ESPP but not yet recognized was $59,000. 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 method 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 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 method 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 values of the Company’s stock options granted to employees in fiscal 2020, 2019 and 2018 were estimated using the following weighted average assumptions in the Black-Scholes option valuation method:

	Year Ended May 31,
	2020			2019			2018
Expected term (in years)		5			5			4
Volatility		0.72			0.72			0.77
Risk-free interest rates		1.56	%		2.83	%		1.95	%
Weighted-average grant date fair value	$	0.95		$	1.33		$	2.07

    The fair value of our ESPP purchase rights for the fiscal 2020, 2019 and 2018 was estimated using the following weighted-average assumptions:

	Year End May 31,
	2020		2019		2018
Expected term (in years)		0.5 – 2.0		0.5 – 2.0		0.5 – 2.0
Volatility		0.62 – 0.77		0.48 – 0.78		0.56 – 0.81
Risk-free interest rates		0.14%–1.81%		2.33%–2.82%		1.92%–2.25%
Weighted-average grant date fair value	$	0.79	$	1.14	$	1.01

EQUITY INCENTIVE PLAN:

    In October 2006, the Company’s 2006 Equity Incentive Plan was approved by the shareholders, which provides for granting of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, performance shares and other stock or cash awards as the Company’s Board of Directors may determine.

    In October 2016, the Company’s 2016 Equity Incentive Plan was approved by the Company’s shareholders. The 2016 Equity Incentive Plan replaced our 2006 Equity Incentive Plan, which was scheduled to expire in October 2016, and will continue in effect until 2026. A total of 3,435,000 shares of common stock have been reserved for issuance under the Company’s 2016 Equity Incentive Plan, which includes 1,835,000 shares that remained available for issuance under the 2006 Equity Incentive Plan. See the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 22, 2019 for further information regarding the 2016 Equity Incentive Plan.

    As of May 31, 2020, out of the 4,813,000 shares authorized for grant under the 2016 Equity Incentive Plan, 3,163,000 stock options and RSUs were outstanding. As of May 31, 2019, out of the 4,277,000 shares authorized for grant under the 2016 Equity Incentive Plan, 3,129,000 stock options and RSUs were outstanding.

    The following tables summarize the Company’s stock option and RSU transactions during fiscal 2020, 2019 and 2018 (in thousands):

	Available
	Shares
Balance, May 31, 2017		2,169
Options granted		(338	)
RSUs granted		(64	)
RSUs cancelled		33
Options terminated		16
Options expired		(4	)
Balance, May 31, 2018		1,812
Options granted		(804	)
RSUs cancelled		8
Options terminated		195
Options expired		(64	)
Balance, May 31, 2019		1,147
Additional shares reserved		1,196
Options granted		(738	)
RSUs granted		(25	)
Shares withheld for taxes and not issued		6
Options terminated		457
Options expired		(393	)
Balance, May 31, 2020		1,650

    The following table summarized the stock option transactions during fiscal 2020, 2019 and 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		338		$	3.56
Options terminated		(16	)	$	2.72
Options exercised		(537	)	$	1.17
Balances, May 31, 2018		2,859		$	2.04	$	1,987
Options granted		804		$	2.19
Options terminated		(195	)	$	2.32
Options exercised		(361	)	$	0.85
Balances, May 31, 2019		3,107		$	2.20	$	283
Options granted		738		$	1.61
Options terminated		(457	)	$	1.98
Options exercised		(235	)	$	1.22
Balances, May 31, 2020		3,153		$	2.17	$	102
Options fully vested and expected to vest at May 31, 2020		3,115		$	2.17	$	101

    The options outstanding and exercisable at May 31, 2020 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at May 31, 2020						at May 31, 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
$	1.22-$1.28		248		2.10	$	1.26		176		0.19	$	1.28
$	1.64-$1.77		945		5.35	$	1.66		487		4.66	$	1.68
$	2.03-$2.46		1,223		3.70	$	2.21		858		3.03	$	2.19
$	2.63-$2.81		511		1.29	$	2.70		510		1.28	$	2.70
$	3.46-$3.93		226		4.16	$	3.84		172		4.18	$	3.82
$	1.22-$3.93		3,153		3.71	$	2.17		2,203		2.85	$	2.25	$	67

    The total intrinsic values of options exercised were $160,000, $338,000 and $1,058,000 during fiscal 2020, 2019 and 2018, respectively. The weighted average contractual life of the options exercisable and expected to be exercisable at May 31, 2020 was 3.69 years.

    Options to purchase 2,203,000, 2,314,000 and 2,312,000 shares were exercisable at May 31, 2020, 2019 and 2018, respectively. These exercisable options had weighted average exercise prices of $2.25, $2.14 and $1.89 as of May 31, 2020, 2019 and 2018, respectively.

    During the fiscal year ended May 31, 2020, RSUs for 10,000 shares, net of 6,000 shares withheld to settle payroll taxes, were granted and fully vested to employees. The market value on the date of the grant of these RSUs was $1.64 per share. During the fiscal year ended May 31, 2020, 13,000 RSUs became fully vested and there was no cancellation. 10,000 RSUs were outstanding and unvested at May 31, 2020. The intrinsic value of the outstanding and unvested RSUs at May 31, 2020 was $16,000. During the fiscal year ended May 31, 2019, there were no RSUs granted to employees. During the fiscal year ended May 31, 2019, 16,000 RSUs became fully vested and 8,000 RSUs were cancelled. 23,000 RSUs were outstanding and unvested at May 31, 2019. The intrinsic value of the outstanding and unvested RSUs at May 31, 2019 was $40,000. During the fiscal year ended May 31, 2018, 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 fiscal year ended May 31, 2018, 16,000 RSUs became fully vested and 33,000 RSUs were cancelled. 47,000 RSUs were outstanding and unvested at May 31, 2018. The intrinsic value of the outstanding and unvested RSUs at May 31, 2018 was $122,000.

    During the fiscal year ended May 31, 2020, RSUs for 9,000 shares were granted and fully vested to members of the Company’s Board of Directors. The weighted average market value on the date of the grant of these RSUs was $1.64 per share. There were no RSUs granted to members of the Board of Directors during fiscal 2019 and 2018.

EMPLOYEE STOCK PURCHASE PLAN:

    In October 2006, the Company’s shareholders approved the 2006 Employee Stock Purchase Plan. In October 2016, the Company’s shareholders approved the Company’s Amended and Restated 2006 Employee Stock Purchase Plan (the “Purchase Plan”), which amended and restated the 2006 Employee Stock Purchase Plan. The Purchase Plan extended the term of the 2006 Employee Stock Purchase Plan indefinitely. See the Company’s Registration Statements on Form S-8 filed with the Securities and Exchange Commission on November 14, 2016 and November 21, 2018 for further information regarding the Purchase Plan. The Purchase Plan has consecutive, overlapping, twenty-four month offering periods. Each twenty-four-month offering period includes four six-month purchase periods. The offering periods generally begin on the first trading day on or after April 1 and October 1 each year. All employees who work a minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five months per calendar year are eligible to participate. Under the Purchase Plan, shares are purchased through employee payroll deductions at exercise prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of an offering period or the last day of the purchase period. If a participant’s rights to purchase stock under all employee stock purchase plans of the Company accrue at a rate which exceeds $25,000 worth of stock for a calendar year, such participant may not be granted an option to purchase stock under the Purchase Plan. The maximum number of shares a participant may purchase during a single purchase period is 3,000 shares. In October 2018, the Company’s shareholders approved an amendment to the Purchase Plan to increase the number of shares authorized for issuance thereunder by an additional 350,000 shares of the Company’s common stock. After such amendment, a total of 1,850,000 shares of the Company’s common stock have been authorized for issuance under the Purchase Plan. During the fiscal years ended May 31, 2020, 2019 and 2018, ESPP purchase rights of 55,000, 379,000, and 359,000 shares, respectively, were granted. For the fiscal years ended May 31, 2020, 2019 and 2018, approximately 136,000, 125,000 and 237,000 shares of common stock, respectively, were issued under the Purchase Plan. As of May 31, 2020, a total of 1,617,000 shares have been issued under the Purchase Plan, and 233,000 ESPP shares remain available for issuance.