STOCK-BASED COMPENSATION

12 Months Ended

May 31, 2023

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

13. STOCK-BASED COMPENSATION:

Stock-based compensation expense consists of expenses for stock options, restricted stock units (“RSUs”), performance RSUs, or PRSUs, restricted shares, performance restricted shares and employee stock purchase plan, or 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, PRSUs, restricted shares and performance restricted shares, stock-based compensation expense 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 equity instruments.

The following table summarizes the stock-based compensation expense for the fiscal years ended May 31, 2023, 2022 and 2021 (in thousands, except per share data):

	Year Ended May 31,
	2023		2022		2021
Stock-based compensation in the form of stock options,
RSUs, and ESPP purchase rights, included in:
Cost of sales	$	331	$	234	$	70
Selling, general and administrative		1,711		1,721		816
Research and development		706		968		215
Net effect on net income (loss)	$	2,748	$	2,923	$	1,101
Effect on earnings (net loss) per share:
Basic	$	0.10	$	0.11	$	0.05
Diluted	$	0.09	$	0.11	$	0.05

As of the years ended May 31, 2023, 2022 and 2021, stock-based compensation totaling $120,000, $83,000 and $0, respectively, was capitalized as part of inventory.

During fiscal 2023, 2022 and 2021, the Company recorded stock-based compensation related to stock options, RSUs, PRSUs, performance restricted shares and restricted shares of $1,988,000, $2,071,000 and $993,000, respectively. For PRSUs 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 May 31, 2023, the total compensation expense related to unvested stock-based awards under the Company’s 2016 Equity Incentive Plan, but not yet recognized, was $3,102,000 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 2.3 years.

During fiscal 2023, 2022 and 2021, the Company recorded stock-based compensation related to its ESPP of $760,000, $935,000 and $108,000, respectively.

As of May 31, 2023, the total compensation expense related to purchase rights under the ESPP but not yet recognized was $715,000. This expense will be amortized on a straight-line basis over a weighted average period of approximately 1.1 years.

Valuation Assumptions

Valuation and Amortization Method. The Company estimates the fair value of stock options granted using the Black-Scholes option valuation method 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 five to six 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 method 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 in fiscal 2023, 2022 and 2021 were estimated using the following weighted average assumptions in the Black-Scholes option valuation method:

	Year Ended May 31,
	2023			2022			2021
Expected term (in years)	5 - 6			5 - 6				6
Volatility		86	%		88	%		72	%
Risk-free interest rates		3.12	%		1.50	%		0.44	%
Weighted average grant date fair value	$	6.29		$	4.01		$	1.12

The fair value of our ESPP purchase rights for the fiscal 2023, 2022 and 2021 was estimated using the following weighted average assumptions:

	Year Ended May 31,
	2023			2022			2021
Expected term (in years)	0.5 – 2.0			0.5 – 2.0			0.5 – 2.0
Volatility	91% – 203		%	101% – 272		%	74% – 88		%
Risk-free interest rates	3.97%–4.94		%	0.05%–2.44		%	0.04%–0.17		%
Weighted average grant date fair value	$	13.60		$	9.68		$	1.03

EQUITY INCENTIVE PLAN:

In October 2006, the Company’s 2006 Equity Incentive Plan was approved by the shareholders, which provides for granting of incentive stock options, non-statutory stock options, restricted shares, RSUs, stock appreciation rights, PRSUs, performance restricted shares and other stock or cash awards as the Company’s Board of Directors may determine.

In October 2016, the Company’s 2016 Equity Incentive Plan was approved by the Company’s shareholders. The 2016 Equity Incentive Plan replaced our 2006 Equity Incentive Plan, which was scheduled to expire in October 2016, and will continue in effect until 2026. The exercise price of each stock option equals the market value of the Company's common stock on the date of grant. Options typically vest over four years, subject to the grantee’s continued service with the Company through the scheduled vesting date, and expire in seven years from the grant date. A total of 4,848,000 shares of common stock have been reserved for issuance under the Company’s 2016 Equity Incentive Plan, which includes 2,248,000 shares that remained available for issuance under the 2006 Equity Incentive Plan. Full value awards, which are equity awards other than options, stock appreciation rights or other awards that are based solely on an increase in value of the shares following the grant date, when granted or forfeited will be counted as two times the number of shares added or deducted to the remaining available shares for issuance under 2016 Equity Incentive Plan. See the Company’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on November 16, 2021 for further information regarding the 2016 Equity Incentive Plan.

The following tables summarize the Company’s stock option and RSU transactions during fiscal 2023, 2022 and 2021 (in thousands):

	Available
	Shares
Balance, May 31, 2020		1,416
Options granted		(297	)
RSUs granted		(680	)
RSUs cancelled		2
Shares withheld for taxes and not issued		18
Options terminated		455
Options expired		(341	)
Balance, May 31, 2021		573
Additional shares reserved		1,414
Options granted		(303	)
RSUs granted		(1,044	)
RSUs cancelled		20
Shares withheld for taxes and not issued		(30	)
Options terminated		105
Balance, May 31, 2022		735
Options granted		(110	)
RSUs granted		(674	)
RSUs cancelled		60
Options terminated		16
Balance, May 31, 2023		27

The following table summarized the stock option transactions during fiscal 2023, 2022 and 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		297		$	1.78
Options terminated		(455	)	$	2.31
Options exercised		(229	)	$	1.54
Balances, May 31, 2021		2,766		$	2.16	$	807
Options granted		303		$	5.37
Options terminated		(105	)	$	1.59
Options exercised		(1,367	)	$	2.28
Balances, May 31, 2022		1,597		$	2.70	$	9,290
Options granted		110		$	9.06
Options terminated		(16	)	$	5.42
Options exercised		(730	)	$	2.32
Balances, May 31, 2023		961		$	3.67	$	28,211
Options fully vested and expected to vest at May 31, 2023		947		$	3.66	$	27,796

The options outstanding and exercisable at May 31, 2023 were in the following exercise price ranges (in thousands, except per share data):

		Options Outstanding						Options Exercisable
		at May 31, 2023						at May 31, 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		4.39	$	1.34		41		4.39	$	1.34
$1.64-$1.86			365		3.53	$	1.72		291		3.45	$	1.70
$2.03-$2.40			185		2.61	$	2.14		175		2.48	$	2.14
$	2.93		139		5.12	$	2.93		35		5.12	$	2.93
$3.46-$3.93			37		1.11	$	3.93		37		1.11	$	3.93
$8.00-34.00			194		5.97	$	9.77		41		5.90	$	10.18
$1.34-34.00			961		4.02	$	3.67		620		3.35	$	2.56	$	18,895

The total intrinsic values of options exercised were $17,088,000, $12,542,000 and $152,000 during fiscal 2023, 2022 and 2021, respectively. The weighted average contractual life of the options exercisable and expected to be exercisable at May 31, 2023 was 4.01 years.

Options to purchase 620,000, 1,042,000 and 2,045,000 shares were exercisable at May 31, 2023, 2022 and 2021, respectively. These exercisable options had weighted average exercise prices of $2.56, $2.22 and $2.26 as of May 31, 2023, 2022 and 2021, respectively.

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 fiscal 2023, 2022 and 2021:

	Year Ended May 31,
	2023		2022		2021
Employees:
Annual RSUs granted		152,000		120,000		161,000
Weighted-average grant-date fair value of annual RSUs	$	8.03	$	3.17	$	1.86
Annual restricted shares granted		8,000		-		-
Weighted-average grant-date fair value of annual restricted shares	$	8.00		-		-
RSUs granted in lieu of cash payment for salary reductions and bonus		-		89,000		18,000
Weighted-average grant-date value of RSU in lieu of cash payment		-	$	2.50	$	2.21
Maximum PRSUs to be vested if all revenue goals are achieved		80,000		270,000		-
Maximum Performance restricted shares to be vested if all revenue goals are achieved		24,000		-		-
Weighted-average grant-date fair value of PRSUs and performance restricted shares	$	8.00	$	3.41		-
Members of Board of Directors:
RSUs granted		44,000		43,000		161,000
Weighted-average grant-date fair value of RSUs	$	11.35	$	8.02	$	1.81
Maximum PRSUs granted to be vested if all revenue goals are achieved		25,000		-		-
Weighted-average grant-date fair value 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 fiscal 2023, 2022 and 2021:

	Year Ended May 31,
	2023		2022		2021
Net RSUs and PRSUs vested		240,000		96,000		207,000
Shares withheld to settle payroll taxes		178,000		62,000		9,000
Weighted average grant-date fair value of vested RSUs and PRSUs	$	4.47	$	3.12	$	1.90
RSUs and PRSUs cancelled		30,000		10,000		1,000
Weighted average grant-date fair value of cancelled RSUs and PRSUs	$	8.56	$	2.93	$	3.46
RSUs and PRSUs unvested		345,000		185,000		132,000
Weighted average grant-date fair value of unvested RSUs and PRSUs	$	6.40	$	3.00	$	1.88
Intrinsic value of unvested RSUs and PRSUs (in thousands)	$	11,392	$	1,554	$	297

EMPLOYEE STOCK PURCHASE PLAN:

In October 2006, the Company’s shareholders approved the 2006 Employee Stock Purchase Plan. In October 2016, the Company’s shareholders approved the Company’s Amended and Restated 2006 Employee Stock Purchase Plan (the “Purchase Plan”), which amended and restated the 2006 Employee Stock Purchase Plan. The Purchase Plan extended the term of the 2006 Employee Stock Purchase Plan indefinitely. See the Company’s Registration Statements on Form S-8 filed with the Securities and Exchange Commission on November 18, 2020 and November 16, 2022 for further information regarding the Purchase Plan. The Purchase Plan has consecutive, overlapping, twenty-four month offering periods. Each twenty-four-month offering period includes four six-month purchase periods. The offering periods generally begin on the first trading day on or after April 1 and October 1 each year. All employees who work a minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five months per calendar year are eligible to participate. Under the Purchase Plan, shares are purchased through employee payroll deductions at exercise prices equal to 85% of the lesser of the fair market value of the Company’s common stock at either the first day of an offering period or the last day of the purchase period. If a participant’s rights to purchase stock under all employee stock purchase plans of the Company accrue at a rate which exceeds $25,000 worth of stock for a calendar year, such participant may not be granted an option to purchase stock under the Purchase Plan. The maximum number of shares a participant may purchase during a single purchase period is 3,000 shares. In October 2022, the Company’s shareholders approved an amendment to the Purchase Plan to increase the number of shares authorized for issuance thereunder by an additional 350,000 shares of the Company’s common stock. After such amendment, a total of 2,550,000 shares of the Company’s common stock have been authorized for issuance under the Purchase Plan. During the fiscal years ended May 31, 2023, 2022 and 2021, ESPP purchase rights of 77,000, 101,000, and 279,000 shares, respectively, were granted. For the fiscal years ended May 31, 2023, 2022 and 2021, approximately 211,000, 178,000 and 147,000 shares of common stock, respectively, were issued under the Purchase Plan. As of May 31, 2023, a total of 2,152,000 shares have been issued under the Purchase Plan, and 398,000 ESPP shares remain available for issuance.