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STOCK-BASED COMPENSATION

6 Months Ended

Nov. 30, 2021

Stock-based compensation expense consists of expenses for stock options, RSUs including performance - based grants, 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 2021 filed on August 27, 2021 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 six months ended November 30, 2021 and 2020 (in thousands):

	Three Months Ended November 30,				Six Months Ended November 30,
	2021		2020		2021		2020
Stock-based compensation in the form of stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	76	$	15	$	158	$	31
Selling, general and administrative		377		194		772		399
Research and development		265		48		376		97
Total stock-based compensation	$	718	$	257	$	1,306	$	527

As of November 30, 2021, and November 30, 2020, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense related to stock options and RSUs of $416,000 and $238,000, respectively. During the six months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense related to stock options and RSUs of $900,000 and $483,000, respectively.

As of November 30, 2021, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $1,797,000, which is net of estimated forfeitures of $5,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.8 years.

During the three months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense related to the ESPP of $302,000 and $19,000, respectively. During the six months ended November 30, 2021 and 2020, the Company recorded stock-based compensation expense related to the ESPP of $406,000 and $44,000, respectively.

As of November 30, 2021, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $1,012,000. 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, 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, 2021 and 2020 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended November 30,						Six Months Ended November 30,
	2021			2020			2021			2020

Expected term (in years)		6			6			6			6
Volatility		0.85			0.73			0.76			0.72
Risk-free interest rate		1.32	%		0.43	%		1.02	%		0.39	%
Weighted average grant date fair value	$	14.16		$	0.91		$	2.50		$	1.09

The fair values of the ESPP purchase rights granted for the three and six months ended November 30, 2021 and 2020 were estimated using the following assumptions:

	Three and Six Months Ended			Three and Six Months Ended
	November 30, 2021			November 30, 2020

Expected term (in years)	0.5-2.0			0.5-2.0
Volatility	1.01-1.43			0.74-0.82
Expected dividend	$	0.00		$	0.00
Risk-free interest rates	0.05%-0.27		%	0.10%-0.14		%
Estimated forfeiture rate		0	%		0	%
Weighted average grant date fair value	$	9.57		$	0.42

During the three and six months ended November 30, 2021, ESPP purchase rights of 103,000 were granted. During the three and six months ended November 30, 2020, ESPP purchase rights of 72,000 were granted. Total ESPP shares issued during the three and six months ended November 30, 2021 and 2020 were 75,000 and 72,000 shares, respectively. As of November 30, 2021 and 2020, there were 361,000 and 161,000 ESPP shares available for issuance, respectively.

The following tables summarize the Company’s stock option and RSU transactions during the three and six months ended November 30, 2021 (in thousands):

	Available Shares
Balance, May 31, 2021		1,137

Options granted		(206	)
RSUs granted		(238	)
Options cancelled and adjusted		(8	)

Balance, August 31, 2021		685
Options reserved		1,414
Options granted		(10	)
RSUs granted		(14	)
RSUs - performance grants		(270	)
Options cancelled		51

Balance, November 30, 2021		1,856

The following table summarizes the stock option transactions during the three and six months ended November 30, 2021 (in thousands, except per share data):

	Outstanding Options
	Number of			Weighted Average		Aggregate
	Shares			Exercise Price		Intrinsic Value
Balances, May 31, 2021		2,766		$	2.16	$	807

Options granted		206		$	2.93
Options cancelled		(6	)	$	1.95
Options exercised		(641	)	$	2.46

Balances, August 31, 2021		2,325		$	2.14	$	12,365

Options granted		10		$	19.85
Options cancelled		(51	)	$	1.73
Options exercised		(571	)	$	2.14

Balances, November 30, 2021		1,713		$	2.26	$	25,997

Options fully vested and expected to vest at November 30, 2021		1,685		$	4.22	$	25,250

The options outstanding and exercisable at November 30, 2021 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding at November 30, 2021						Options Exercisable at November 30, 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		97		5.60	$	1.28		54		5.86	$	1.33
$	1.64-$1.86		682		4.51	$	1.71		356		4.05	$	1.69
$	2.03-$2.46		594		3.18	$	2.23		453		2.87	$	2.22
$	2.63-$2.93		226		6.12	$	2.92		38		3.67	$	2.84
$	3.46-$3.93		104		2.67	$	3.84		104		2.67	$	3.84
$	9.94-19.85		10		6.89	$	19.85		-		6.89	$	19.85
$	1.22-19.85		1,713		4.23	$	2.26		1,005		3.46	$	2.18	$	15,314

The total intrinsic value of options exercised during the three and six months ended November 30, 2021 was $9,133,000 and $11,035,000, respectively. The total intrinsic value of options exercised during the three and six months ended November 30, 2020 was $3,000 and $95,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2021 was 4.22 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2020 was 3.93 years.

During the three months ended November 30, 2021, RSUs for 1,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $24.57 per share. During the six months ended November 30, 2021, RSUs for 49,000 shares, net of 40,000 shares withheld for payroll taxes at the time of settlement, were granted to employees to pay bonuses in lieu of cash and another RSUs for 120,000 shares were granted to employees. The weighted average market value on the dates of the grant of these RSUs was $2.98 per share. During the three and six months ended November 30, 2021, 18,000 and 29,000 RSUs became fully vested, respectively. As of November 30, 2021, 237,000 RSUs were unvested which had an intrinsic value of $4,129,000. There were no RSUs granted to employees during the three months ended November 30, 2020. During the six months ended November 30, 2020, RSUs for 161,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $1.86 per share. During the three and six months ended November 30, 2020, 11,000 and 14,000 RSUs became fully vested, respectively. As of November 30, 2020, 155,000 RSUs were unvested which had an intrinsic value of $256,000.

Early in fiscal 2022 the Board of Directors approved the granting of performance based RSUs to key officers based upon revenue thresholds for the year ended May 31, 2022. The total maximum amount of RSUs to be vested if all revenue goals are achieved will be approximately 270,000. As of November 30, 2021 none of the revenue goals have been achieved and thus none of the RSUs are vested. The Company expects that by year end all the revenue goals will be achieved. During the quarter and six months ended November 30, 2021, the Company recognized approximately $246,000 in stock-based compensation expense for these performance RSUs.

During the three months ended November 30, 2021, RSUs for 13,000 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 $19.85 per share. During the six months ended November 30, 2021, RSUs for 43,000 shares were granted to members of the Company’s Board of Directors. The weighted average market value on the dates of the grant of these RSUs was $8.02 per share. There were no RSUs vested during the three months ended November 30, 2021. During the six months ended November 30, 2021, 30,000 RSUs to the members of the Company’s Board of Directors became fully vested. During the three months ended November 30, 2020, RSUs for 57,000 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 $1.34 per share. During the six months ended November 30, 2020, RSUs for 92,000 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 $1.54 per share. All of these RSUs were immediately fully vested.