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14. STOCK-BASED COMPENSATION

3 Months Ended

Aug. 31, 2020

Share-based Payment Arrangement [Abstract]

Stock-based compensation expense consists of expenses for stock options, 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 11 in the Company’s Annual Report on Form 10-K for fiscal 2020 filed on August 28, 2020 for further information regarding the 2016 Equity Incentive Plan (the “2016 Plan”) and the ESPP.

The following table summarizes the stock-based compensation expense for the three months ended August 31, 2020 and 2019 (in thousands):

	Three Months Ended
	August 31,
	2020		2019
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	16	$	19
Selling, general and administrative		205		130
Research and development		49		50
Net effect on net income (loss)	$	270	$	199

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

During the three months ended August 31, 2020 and 2019, the Company recorded stock-based compensation expenses related to stock options and RSUs of $245,000 and $150,000, respectively.

As of August 31, 2020, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $1,434,000, 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 2.9 years.

During the three months ended August 31, 2020 and 2019, the Company recorded stock-based compensation expense related to the ESPP of $25,000 and $49,000, respectively.

As of August 31, 2020, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $34,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 0.7 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 months ended August 31, 2020 and 2019 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended
	August 31,
	2020		2019

Expected term (in years)		6		5
Volatility		0.71		0.71
Risk-free interest rate		0.38%		1.88%
Weighted average grant date fair value	$	1.16	$	0.97

There were no ESPP purchase rights granted to employees for the three months ended August 31, 2020 and 2019. There were no ESPP shares issued during the three months ended August 31, 2020 and 2019. As of August 31, 2020, there were 233,000 ESPP shares available for issuance.

The following tables summarize the Company’s stock option and RSU transactions during the three months ended August 31, 2020 (in thousands):

	Available
	Shares
Balance, May 31, 2020		1,650

Options granted		(200	)
RSUs granted		(196	)
Options cancelled		188
RSUs cancelled		2
Options expired		(125	)

Balance, August 31, 2020		1,319

The following table summarizes the stock option transactions during the three months ended August 31, 2020 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2020	3,153		$	2.17	$	102

Options granted	200		$	1.86
Options cancelled	(188	)	$	2.18
Options exercised	(148	)	$	1.30

Balances, August 31, 2020	3,017		$	2.19	$	148

Options fully vested and expected to vest at August 31, 2020	2,981		$	2.19	$	145

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

	Options Outstanding						Options Exercisable
	at August 31, 2020						at August 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		75		6.54	$	1.22		8		6.54	$	1.22
$1.64-$1.86		1,105		5.47	$	1.70		546		4.72	$	1.68
$2.03-$2.46		1,162		3.49	$	2.21		846		2.92	$	2.19
$2.63-$2.81		464		1.04	$	2.70		462		1.03	$	2.70
$3.46-$3.93		211		3.90	$	3.86		171		3.91	$	3.85
$1.22-$3.93		3,017		3.94	$	2.19		2,033		3.07	$	2.31	$	59

The total intrinsic value of options exercised during the three months ended August 31, 2020 and 2019 was $92,000 and $17,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at August 31, 2020 was 3.93 years.

During the three months ended August 31, 2020, RSUs for 161,000 shares were granted to employees, and RSUs for 35,000 shares were granted to non-employee directors, which were immediately fully vested. The market value on the date of the grant of these RSUs was $1.86 per share. During the three months ended August 31, 2020, 3,000 RSUs granted to employees became fully vested. As of August 31, 2020, 166,000 RSUs were unvested which had an intrinsic value of $296,000. During the three months ended August 31, 2019, there were no RSUs granted to employees or non-employee directors. During the three months ended August 31, 2019, 3,000 RSUs granted to employees became fully vested. As of August 31, 2019, 20,000 RSUs were unvested which had an intrinsic value of $26,000.