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14. STOCK-BASED COMPENSATION

9 Months Ended

Feb. 28, 2021

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 and nine months ended February 28, 2021 and February 29, 2020 (in thousands):

	Three Months Ended				Nine Months Ended
	February 28,		February 29,		February 28,		February 29,
	2021		2020		2021		2020
Stock-based compensation in the form of employee stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	14	$	19	$	45	$	58
Selling, general and administrative		194		137		593		401
Research and development		63		51		160		152
Total stock-based compensation	$	271	$	207	$	798	$	611

As of February 28, 2021 and February 29, 2020, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended February 28, 2021 and February 29, 2020, the Company recorded stock-based compensation expense related to stock options and RSUs under the 2016 Plan of $253,000 and $166,000, respectively. During the nine months ended February 28, 2021 and February 29, 2020, the Company recorded stock-based compensation expense related to stock options and RSUs of $736,000 and $480,000, respectively.

As of February 28, 2021, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $1,151,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.6 years.

During the three months ended February 28, 2021 and February 29, 2020, the Company recorded stock-based compensation expense related to the ESPP of $18,000 and $41,000, respectively. During the nine months ended February 28, 2021 and February 29, 2020, the Company recorded stock-based compensation expense related to the ESPP of $62,000 and $131,000, respectively.

As of February 28, 2021, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $29,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.0 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 values of the Company’s stock options granted to employees for the three and nine months ended February 28, 2021 and February 29, 2020, 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,
	2020			2021			2020

Expected term (in years)		5			6			5
Volatility		0.72			0.72			0.71
Risk-free interest rate		1.57	%		0.39	%		1.85	%
Weighted average grant date fair value	$	1.37		$	1.09		$	0.98

There were no stock options granted during the three months ended February 28, 2021.

The fair values of the ESPP purchase rights granted for the nine months ended February 28, 2021 and February 29, 2020 were estimated using the following assumptions:

	Nine Months Ended
	February 28,			February 29,
	2021			2020

Expected term (in years)		0.5-2.0			0.5-2.0
Volatility		0.74-0.82			0.62-0.71
Expected dividend	$	0.00		$	0.00
Risk-free interest rate		0.10%-0.14	%		1.56%-1.81	%
Weighted average grant date fair value	$	0.44		$	0.80

There were no ESPP purchase rights granted to employees for the three months ended February 28, 2021 and February 29, 2020. During the nine months ended February 28, 2021 and February 29, 2020, ESPP purchase rights of 81,000 and 38,000 were granted, respectively. Total ESPP shares issued during the nine months ended February 28, 2021 and February 29, 2020 were 72,000 and 71,000 shares, respectively. As of February 28, 2021, there were 511,000 ESPP shares available for issuance. 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 three and nine months ended February 28, 2021 (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

Options granted		(73	)
RSUs granted		(57	)
Options cancelled		185
Options expired		(162	)

Balance, November 30, 2020		1,212

RSUs granted		(42	)
Shares withheld for taxes and not issued		4
Options cancelled		21

Balance, February 28, 2021		1,195

The following table summarizes the stock option transactions during the three and nine months ended February 28, 2021 (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 granted	73		$	1.44
Options cancelled	(185	)	$	2.42
Options exercised	(19	)	$	1.67

Balances, November 30, 2020	2,886		$	2.16	$	56

Options cancelled	(21	)	$	1.86
Options exercised	(61	)	$	2.07

Balances, February 28, 2021	2,804		$	2.16	$	1,994

Options fully vested and expected to vest at February 28, 2021	2,769		$	2.17	$	1,967

The options outstanding and exercisable at February 28, 2021 were in the following exercise price ranges (in thousands, except per share data):

			Options Outstanding						Options Exercisable
			at February 28, 2021						at February 28, 2021
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-$1.34		133		6.30	$	1.27		36		6.36	$	1.28
	$	1.64-$1.86		1,047		5.04	$	1.70		589		4.50	$	1.69
	$	2.03-$2.46		1,017		3.25	$	2.21		781		2.86	$	2.19
	$	2.63-$2.81		405		0.66	$	2.71		404		0.65	$	2.71
	$	3.46-$3.93		202		3.41	$	3.86		184		3.41	$	3.85
	$	1.22-$3.93		2,804		3.70	$	2.16		1,994		3.01	$	2.28	$	1,224

The total intrinsic value of options exercised during the three and nine months ended February 28, 2021 was $57,000 and $151,000, respectively. 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 weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 28, 2021 was 3.68 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at February 29, 2020 was 3.78 years.

During the three months ended February 28, 2021, RSUs for 4,000 shares, net of 4,000 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 $2.25 per share. During the nine months ended February 28, 2021, RSUs for 165,000 shares, net of 4,000 shares withheld to settle payroll taxes, were granted to employees. The weighted average market value on the date of the grant of these RSUs was $1.87 per share. During the three and nine months ended February 28, 2021, 19,000 and 34,000 RSUs became fully vested, respectively. As of February 28, 2021, 143,000 RSUs remain unvested which had an intrinsic value of $400,000. There were no RSUs granted to employees during the three and nine months ended February 29, 2020. During the three and nine months ended February 29, 2020, 3,000 and 10,000 RSUs became fully vested, respectively. As of February 29, 2020, 13,000 RSUs remain unvested which had an intrinsic value of $27,000.

During the three months ended February 28, 2021, RSUs for 34,000 shares were granted to members of the Company’s Board of Directors for Board fees. The market value on the date of the grant of these RSUs was $2.25 per share. During the nine months ended February 28, 2021, RSUs for 126,000 shares were granted to members of the Company’s Board of Directors for Board fees. The weighted average market value on the date of the grant of these RSUs was $1.73 per share. All of these RSUs were immediately fully vested. There were no RSUs granted to members of the Company’s Board of Directors during the three and nine months ended February 29, 2020.