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STOCK-BASED COMPENSATION | 9 Months Ended
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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 |

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