STOCKBASED COMPENSATION

3 Months Ended

Aug. 31, 2022

STOCKBASED COMPENSATION

STOCK-BASED COMPENSATION

14. STOCK-BASED COMPENSATION

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 and is recognized as expense over the employee’s requisite service period. 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 2022 filed on August 26, 2022 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, 2022 and 2021 (in thousands):

	Three Months Ended
	August 31,
	2022		2021
Stock-based compensation in the form of stock options, RSUs and ESPP purchase rights, included in:
Cost of sales	$	91	$	82
Selling, general and administrative		465		395
Research and development		154		111
Total stock-based compensation	$	710	$	588

As of August 31, 2022, there were $85,000 stock-based compensation expenses capitalized as part of inventory. As of August 31, 2021, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended August 31, 2022 and 2021, the Company recorded stock-based compensation expenses related to stock options and RSUs under the 2016 Plan of $535,000 and $484,000, respectively.

As of August 31, 2022, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $4,249,000, which is net of estimated forfeitures of $11,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.3 years.

During the three months ended August 31, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $175,000 and $104,000, respectively.

As of August 31, 2022, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $241,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 0.6 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, 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, 2022 and 2021 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended
	August 31,
	2022			2021
Expected term (in years)		5			6
Volatility		117	%		76	%
Risk-free interest rate		3.06	%		1.01	%
Weighted average grant date fair value	$	6.57		$	1.93

There were no ESPP purchase rights granted to employees for the three months ended August 31, 2022 and 2021. There were no ESPP shares issued during the three months ended August 31, 2022 and 2021. As of August 31, 2022, there were 258,000 ESPP shares available for issuance.

The following tables summarize the Company’s stock option and RSU transactions during the three months ended August 31, 2022 (in thousands):

	Available
	Shares
Balance, May 31, 2022		1,826
Options granted		(103	)
RSUs granted		(276	)
Options cancelled and adjusted		6
Balance, August 31, 2022		1,453

The following table summarizes the stock option transactions during the three months ended August 31, 2022 (in thousands, except per share data):

	Outstanding Options
				Weighted
	Number			Average		Aggregate
	of			Exercise		Intrinsic
	Shares			Price		Value
Balances, May 31, 2022		1,597		$	2.70	$	9,290
Options granted		103		$	8.00
Options cancelled		(6	)	$	2.41
Options exercised		(102	)	$	2.00
Balances, August 31, 2022		1,592		$	3.08	$	18,287
Options fully vested and expected to vest at August 31, 2022		1,569		$	3.08	$	18,030

The options outstanding and exercisable at August 31, 2022 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at August 31, 2022						at August 31, 2022
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
$	1.34		51		5.14	$	1.34		51		5.14	$	1.34
$1.64-$1.86			586		3.89	$	1.71		387		3.67	$	1.70
$2.03-$2.42			451		3.06	$	2.25		428		2.97	$	2.25
$2.76-$2.93			204		5.32	$	2.91		60		4.00	$	2.88
$3.46-$3.93			100		1.92	$	3.84		100		1.92	$	3.84
$8.00-$19.85			200		6.71	$	9.24		11		6.56	$	11.13
$1.34-$19.85			1,592		4.11	$	3.08		1,037		3.33	$	2.29	$	12,715

The total intrinsic value of options exercised during the three months ended August 31, 2022 and 2021 was $764,000 and $1,902,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at August 31, 2022 was 4.10 years.

During the three months ended August 31, 2022, RSUs for 159,000 shares were granted to employees. The weighted average market value on the date of the grant of these RSUs was $8.03 per share. During the three months ended August 31, 2022, performance RSUs were granted to key officers based upon revenue target thresholds for the year ending May 31, 2023. The total maximum number of RSUs to be vested if all revenue goals are achieved will be approximately 114,000. The weighted average market value on the date of the grant of these performance RSUs was $8.00 per share. As of August 31, 2022 none of the revenue goals have been achieved and thus none of the RSUs are vested. During the three months ended August 31, 2022 the Company recognized approximately $22,000 in stock-based compensation expense for these performance RSUs. The Company will adjust its expense when expected revenue changes.

During the three months ended August 31, 2021, RSUs for 119,000 shares were granted to employees. The market value on the date of the grant of these RSUs was $2.93 per share. During the three months ended August 31, 2021, performance RSUs were granted to key officers based upon revenue target thresholds for the year ended May 31, 2022. The total maximum number of RSUs to be vested if all revenue goals were achieved would be approximately 316,000. The weighted average market value on the date of the grant of these performance RSUs was $2.93 per share. As of August 31, 2021 none of the revenue goals had been achieved and thus none of the RSUs were vested. As of August 31, 2021 the Company did not expect that by year end the target revenue goals would be achieved and did not recognize stock-based compensation expense for these performance RSUs. During the three months ended August 31, 2021, RSUs for 240,000 shares, net of 40,000 shares withheld to settle payroll taxes, were granted to officers in lieu of cash payment for salary reductions taken as part of prior cost reduction initiatives. These RSUs were fully vested and the market value on the date of the grant of these RSUs was $2.50 per share.

During the three months ended August 31, 2022, RSUs for 30,000 shares were granted to members of the Company’s Board of Directors. The market value on the date of the grant of these RSUs was $8.00 per share. During the three months ended August 31, 2022, performance RSUs were granted to the Company’s Board of Directors based upon revenue target thresholds for the year ended May 31, 2023. The total maximum amount of RSUs to be vested if all revenue goals are achieved will be approximately 30,000. The weighted average market value on the date of the grant of these performance RSUs was $8.00 per share. As of August 31, 2022 none of the revenue goals have been achieved and thus none of the RSUs are vested. The Company expects that by year end the target revenue goal will be achieved. During the three months ended August 31, 2022 the Company recognized approximately $60,000 in stock-based compensation expense for these performance RSUs. During the three months ended August 31, 2021, RSUs for 30,000 shares were granted to members of the Company’s Board of Directors in lieu of cash payment of board fees and were fully vested. The market value on the date of the grant of these RSUs was $2.93 per share.

During the three months ended August 31, 2022, RSUs for 142,000 shares, net of 147,000 shares withheld to settle payroll taxes, became fully vested. As of August 31, 2022, 442,000 RSUs and performance were unvested which had an intrinsic value of $6,423,000. During the three months ended August 31, 2021, RSUs for 90,000 shares, net of 40,000 shares withheld to settle payroll taxes, became fully vested. As of August 31, 2021, 240,000 RSUs were unvested which had an intrinsic value of $1,790,000.