STOCK-BASED COMPENSATION

6 Months Ended

Nov. 30, 2022

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

16. STOCK-BASED COMPENSATION

Stock-based compensation expense consists of expenses for stock options, RSUs, PRSUs, restricted shares, performance restricted shares 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 and restricted shares, 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 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 and six months ended November 30, 2022 and 2021 (in thousands):

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2022		2021		2022		2021
Stock-based compensation in the form of stock options, RSUs, restricted shares and ESPP purchase rights, included in:
Cost of sales	$	85	$	76	$	177	$	158
Selling, general and administrative		507		377		971		772
Research and development		201		265		355		376
Total stock-based compensation	$	793	$	718	$	1,503	$	1,306

As of November 30, 2022, there were $101,000 stock-based compensation expenses capitalized as part of inventory. As of November 30, 2021, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended November 30, 2022 and 2021, the Company recorded stock-based compensation expense related to stock options, RSUs and restricted shares of $577,000 and $416,000, respectively. During the six months ended November 30, 2022 and 2021, the Company recorded stock-based compensation expense related to stock options, RSUs and restricted shares of $1,112,000 and $900,000, respectively.

As of November 30, 2022, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $3,999,000, which is net of estimated forfeitures of $10,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.2 years.

During the three months ended November 30, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $216,000 and $302,000, respectively. During the six months ended November 30, 2022 and 2021, the Company recorded stock-based compensation expense related to the ESPP of $391,000 and $406,000, respectively.

As of November 30, 2022, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $527,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.0 year.

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 and six months ended November 30, 2022 and 2021 were estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended						Six Months Ended
	November 30,						November 30,
	2022			2021			2022			2021
Expected term (in years)		6			6			5			6
Volatility		112.45	%		85	%		116.41	%		76	%
Risk-free interest rate		4.07	%		1.32	%		3.10	%		1.02	%
Weighted average grant date fair value	$	18.06		$	14.16		$	7.07		$	2.50

The fair values of the ESPP purchase rights granted for the three and six months ended November 30, 2022 and 2021 were estimated using the following assumptions:

	Three and Six Months Ended			Three and Six Months Ended
	November 30, 2022			November 30, 2021
Expected term (in years)	0.5-2.0			0.5-2.0
Volatility	91%-203		%	101%-143		%
Risk-free interest rates	3.97%-4.12		%	0.05%-0.27		%
Weighted average grant date fair value	$	11.17		$	9.57

During the three and six months ended November 30, 2022, ESPP purchase rights of 43,000 were granted. During the three and six months ended November 30, 2021, ESPP purchase rights of 103,000 were granted. Total ESPP shares issued during the three and six months ended November 30, 2022 and 2021 were 109,000 and 75,000 shares, respectively. As of November 30, 2022 and 2021, there were 499,000 and 361,000 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, 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
Options granted		(5	)
RSUs granted		(14	)
Balance, November 30, 2022		1,434

The following table summarizes the stock option transactions during the three and six months ended November 30, 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 granted		4		$	21.22
Options exercised		(168	)	$	2.31
Balances, November 30, 2022		1,428		$	3.23	$	32,614
Options fully vested and expected to vest at November 30, 2022		1,409		$	3.23	$	32,190

The options outstanding and exercisable at November 30, 2022 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at November 30, 2022						at November 30, 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		4.89	$	1.34		51		4.89	$	1.34
$1.64-$1.86			542		3.76	$	1.71		385		3.61	$	1.69
$2.03-$2.40			341		2.96	$	2.21		328		2.87	$	2.21
$2.76-$2.93			197		5.05	$	2.91		65		3.89	$	2.88
$3.46-$3.93			93		1.67	$	3.83		93		1.67	$	3.83
$8.00-$24.83			204		6.47	$	9.52		23		6.38	$	10.24
$1.34-$24.83			1,428		4.04	$	3.23		945		3.32	$	2.36	$	22,412

The total intrinsic value of options exercised during the three and six months ended November 30, 2022 was $2,592,000 and $3,356,000, respectively. 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 weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2022 was 4.02 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable at November 30, 2021 was 4.22 years.

The following table summarizes RSUs, PRSUs, restricted shares and performance restricted shares granted to employees and members of the Company’s Board of Directors during the three and six months ended November 30, 2022 and 2021:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2022		2021		2022		2021
Employees:
Annual RSUs granted		-		1,000		151,800		120,000
Weighted average market value on the date of the grant of annual RSUs		-	$	24.57	$	8.03	$	3.17
Annual restricted shares granted		-		-		7,500		-
Weighted average market value on the date of the grant of annual restricted shares		-		-	$	8.00		-
RSUs granted in lieu of cash payment for salary reductions		-		-		-		89,000
Weighted average market value on the date of the grant of RSU in lieu of cash payment		-		-		-	$	2.50
PRSUs granted based on revenue target thresholds maximum		-		-		80,400		270,000
Performance restricted shares granted based on revenue target thresholds maximum		-		-		23,700		-
Weighted average market value on the date of the grant of PRSUs, performance restricted shares		-		-	$	8.00	$	3.41
Stock-based compensation expense	$	179,000	$	-	$	283,000	$	246,000
Members of Board of Directors:
RSUs granted		14,000		13,000		44,000		43,000
Weighted average market value on the date of the grant of RSUs	$	18.50	$	19.85	$	11.35	$	8.02
PRSUs granted based on revenue target thresholds maximum		-		-		30,000		-
Weighted average market value on the date of the grant of PRSUs		-		-	$	8.00		-
Stock-based compensation expense	$	245,000	$	-	$	490,000	$	-

PRSUs were granted to key officers and members of Board of Directors based upon revenue target thresholds for fiscal 2023 and 2022.

The following table summarizes the RSUs and PRSUs vested and unvested during the three and six months ended November 30, 2022 and 2021:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2022		2021		2022		2021
Net RSUs and PRSUs vested		60,000		18,000		202,000		29,000
Shares withheld to settle payroll taxes		2,000		-		150,000		-
RSUs and PRSUs unvested		394,000		237,000		394,000		237,000
Intrinsic value of unvested RSUs and PRSUs (in thousands)	$	10,272	$	4,129	$	10,272	$	4,129