STOCK-BASED COMPENSATION

9 Months Ended

Feb. 28, 2023

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 nine months ended February 28, 2023 and 2022 (in thousands):

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2023		2022		2023		2022
Stock-based compensation in the form of stock options, RSUs, restricted shares and ESPP purchase rights, included in:
Cost of sales	$	75	$	90	$	252	$	248
Selling, general and administrative		359		487		1,330		1,259
Research and development		158		303		513		679
Total stock-based compensation	$	592	$	880	$	2,095	$	2,186

As of February 28, 2023, there were $110,000 stock-based compensation expenses capitalized as part of inventory. As of February 28, 2022, there were no stock-based compensation expenses capitalized as part of inventory.

During the three months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to stock options, RSUs, PRSUs, performance restricted shares and restricted shares under the 2016 Plan of $424,000 and $516,000, respectively. During the nine months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to stock options, RSUs and restricted shares of $1,536,000 and $1,416,000, respectively. For Performance RSUs and performance restricted shares, the Company evaluates compensation expense quarterly and recognizes expense for performance-based awards only if it determines it is probable that performance criteria for the awards will be met.

As of February 28, 2023, the total compensation expense related to unvested stock-based awards under the 2016 Plan, but not yet recognized, was approximately $3,348,000, which is net of estimated forfeitures of $8,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 2.1 years.

During the three months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to the ESPP of $168,000 and $364,000, respectively. During the nine months ended February 28, 2023 and 2022, the Company recorded stock-based compensation expense related to the ESPP of $559,000 and $770,000, respectively.

As of February 28, 2023, the total compensation expense related to purchase rights under the ESPP but not yet recognized was approximately $261,000. 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, 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 values of the Company’s stock options granted to employees for the three and nine months ended February 28, 2023 and 2022, was estimated using the following weighted average assumptions in the Black-Scholes option valuation model:

	Three Months Ended						Nine Months Ended
	February 28,						February 28,
	2023			2022			2023			2022
Expected term (in years)		5			5			5			6
Volatility		90	%		117	%		116	%		77	%
Risk-free interest rate		3.58	%		1.56	%		3.11	%		1.03	%
Weighted average grant date fair value	$	24.30		$	9.43		$	7.24		$	2.56

The fair values of the ESPP purchase rights granted for the nine months ended February 28, 2023 and 2022 were estimated using the following assumptions:

	Nine Months Ended			Nine Months Ended
	February 28, 2023			February 28, 2022
Expected term (in years)	0.5-2.0			0.5-2.0
Volatility	90%-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

There were no ESPP purchase rights granted to employees for the three months ended February 28, 2023 and 2022. During the nine months ended February 28, 2023 and 2022, ESPP purchase rights of 43,000 and 103,000 were granted, respectively. Total ESPP shares issued during the nine months ended February 28, 2023 and 2022 were 109,000 and 75,000 shares, respectively. There were 499,000 ESPP shares available for issuance as of February 28, 2023.

The following tables summarize the Company’s stock option and RSU transactions during the three and nine months ended February 28, 2023 and shows the shares available to be issued at the end of each period (in thousands):

	Available
	Shares
Balance, May 31, 2022		1,826
Options granted		(103	)
RSUs granted		(323	)
Options cancelled and adjusted		6
Balance, August 31, 2022		1,406
Options granted		(5	)
RSUs granted		(14	)
Balance, November 30, 2022		1,387
Options granted		(1	)
RSUs cancelled		--
Options cancelled		8
Balance, February 28, 2023		1,394

The following table summarizes the stock option transactions during the three and nine months ended February 28, 2023 (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 granted		1		$	34.00
Options cancelled		(8	)	$	7.40
Options exercised		(360	)	$	2.36
Balances, February 28, 2023		1,061		$	3.54	$	31,629
Options fully vested and expected to vest on February 28, 2023		1,045		$	3.53	$	31,177

The options outstanding and exercisable on February 28, 2023 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at February 28, 2023						at February 28, 2023
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		41		4.64	$	1.34		41		4.64	$	1.34
$1.64-$1.86			413		3.57	$	1.72		298		3.43	$	1.70
$2.03-$2.40			196		2.85	$	2.15		184		2.71	$	2.15
$2.76-$2.93			167		4.98	$	2.92		50		4.07	$	2.89
$3.46-$3.93			47		1.42	$	3.83		47		1.42	$	3.83
$8.00-$34.00			197		6.22	$	9.63		32		6.14	$	10.17
$1.34-$34.00			1,061		4.10	$	3.54		652		3.33	$	2.46	$	20,151

The total intrinsic value of options exercised during the three and nine months ended February 28,2023 was $10,827,000 and $14,183,000, respectively. The total intrinsic value of options exercised during the three and nine months ended February 28, 2022 was $867,000 and $11,902,000, respectively. The weighted average remaining contractual life of the options exercisable and expected to be exercisable on February 28, 2023 was 4.09 years. The weighted average remaining contractual life of the options exercisable and expected to be exercisable on February 28, 2022 was 4.04 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 nine months ended February 28, 2023 and 2022:

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2023		2022		2023		2022
Employees:
Annual RSUs granted		--		--		151,800		120,000
Weighted average market value on the date of the grant of annual RSUs		-		-	$	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
Maximum PRSUs to be vested if all revenue goals are achieved		--		--		80,400		270,000
Maximum Performance restricted shares to be vested if all revenue goals are achieved		--		--		23,700		--
Weighted average market value on the date of the grant of PRSUs, performance restricted shares		-		-	$	8.00	$	3.41
Members of Board of Directors:
RSUs granted		-		--		44,000		43,000
Weighted average market value on the date of the grant of RSUs		-		-	$	11.35	$	8.02
Maximum PRSUs granted to be vested if all revenue goals are achieved		-		-		30,000		--
Weighted average market value on the date of the grant of PRSUs		--		--	$	8.00		--

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 nine months ended February 28, 2023 and 2022:

	Three Months Ended				Nine Months Ended
	February 28,				February 28,
	2023		2022		2023		2022
Net RSUs and PRSUs vested		19,000		21,000		221,000		83,000
Shares withheld to settle payroll taxes		16,000		--		165,000		--
RSUs and PRSUs unvested		406,000		485,000		406,000		485,000
Intrinsic value of unvested RSUs and PRSUs (in thousands)	$	13,540	$	6,596	$	13,540	$	6,596