Share-Based Compensation

6 Months Ended

Jun. 30, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Note 11— Share-Based Compensation

The Company accounts for its share-based compensation based on an estimate of fair value of the grant on the date of grant.

In determining the fair value of stock options, the Company uses the Black-Scholes option pricing model. The following key weighted average assumptions were employed in the calculation for the six month period ended June 30, 2019 and the three and six month periods ended June 30, 2018. There were no stock option grants during the three month period ended June 30, 2019:



	Three Months Ended June 30,	Six Months Ended June 30,
	2018	2019	2018
Risk-free interest rate	2.85%	2.47%	2.85%
Expected dividend yield	—%	—%	—%
Volatility	48.93%	48.04%	48.93%
Expected life	4.0 years	4.0 years	4.0 years
Weighted average Black-Scholes value of options granted	$11.13	$9.05	$11.13

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The Company does not anticipate declaring dividends in the foreseeable future. Volatility is based on historical data. The expected life of an option is based on the assumption that options will be exercised, on average, about two years after vesting occurs. The Company recognizes compensation expense for only the portion of options that are expected to vest. Therefore, management applies an estimated forfeiture rate that is derived from historical employee termination data and adjusted for expected future employee turnover rates. The estimated forfeiture rate applied to the Company’s stock option grants during the three and six months ended June 30, 2019 and 2018 was 8.0%. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods. The Company’s stock price volatility, option lives and expected forfeiture rates involve management’s best estimates at the time of such determination, which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the vesting period or requisite service period of the option. The Company typically issues stock options with a four year vesting period (the requisite service period) and amortizes the fair value of stock options (stock compensation cost) ratably over the requisite service period.

A summary of the Company’s year-to-date stock option activity and related information follows:



	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2018	1,877,602		$	18.81
Grants	20,000		$	22.62
Exercises	(260,232	)	$	6.03
Canceled and forfeited	(5,006	)	$	14.61
Outstanding at June 30, 2019	1,632,364		$	20.90	5.5
Exercisable at June 30, 2019	1,326,280		$	20.29	4.9
Available for grant at June 30, 2019 (1)	2,958,018


(1)	Using the plan’s fungible ratio of 1.55:1 for full-value awards, 1,908,399 shares were available for restricted stock awards, stock bonus awards, restricted stock units, performance shares or performance units.

As of June 30, 2019, there was $22.9 million of aggregate intrinsic value of outstanding stock options, including $19.5 million of aggregate intrinsic value of exercisable stock options. Intrinsic value represents the total pretax intrinsic value for all “in-the-money” options (i.e., the difference between the Company’s closing stock price on the last trading day of its second quarter of 2019 and the exercise price, multiplied by the number of shares of common stock underlying the stock options) that would have been received by the option holders had all option holders exercised their options on June 30, 2019. During the three and six months ended June 30, 2019, stock options covering 65,332 and 260,232 shares of common stock, respectively, with a total intrinsic value of $1.1 million and $4.7 million, respectively, were exercised. During the three and six months ended June 30, 2018, stock options covering 20,699 and 192,814 shares of common stock, respectively, with a total intrinsic value of $0.3 million and $2.7 million, respectively, were exercised.

The fair value of unvested restricted stock and unvested restricted stock units is based on the market price of a share of the Company’s common stock on the date of grant and is amortized over the vesting period.

A summary of the Company’s unvested restricted stock grants and changes during the six months ended June 30, 2019 is as follows:



	Service Vesting Restricted Shares
	Shares		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2018	34,269		$	27.64
Granted	32,208		$	34.69
Forfeited	—		$	—
Vested	(34,269	)	$	27.64
Outstanding at June 30, 2019	32,208		$	34.69

The estimated forfeiture rate applied to the Company’s restricted stock grants during the three and six months ended June 30, 2019 and 2018, was 8.0%. The aggregate fair value of restricted stock vested during the three and six months ended June 30, 2019, was $0.9 million and $0.9 million, respectively. The aggregate fair value of restricted stock vested during the three and six months ended June 30, 2018, was $1.9 million and $2.0 million, respectively.

A summary of the Company’s unvested restricted stock unit grants and changes during the six months ended June 30, 2019 is as follows:



	Service Vesting Restricted Stock Units				Performance Vesting Restricted Stock Units			Total Restricted Stock Units
	Units		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value		Units		Weighted Average Grant Date Fair Value
Outstanding at December 31, 2018	1,166,308		$	23.07	482,485	$	30.13	1,648,793		$	25.14
Granted	544,700		$	26.28	—	$	—	544,700		$	26.28
Forfeited	(28,039	)	$	22.21	—	$	—	(28,039	)	$	22.21
Vested	(242,050	)	$	23.84	—	$	—	(242,050	)	$	23.84
Outstanding at June 30, 2019	1,440,919		$	24.17	482,485	$	30.13	1,923,404		$	25.66

The estimated forfeiture rate applied to the Company’s service vesting restricted stock unit grants during the three and six months ended June 30, 2019 and 2018, was 8.0%. The aggregate fair value of restricted stock units vested during the three and six months ended June 30, 2019, was $5.4 million and $5.8 million, respectively. The aggregate fair value of restricted stock units vested during the three and six months ended June 30, 2018, was $4.7 million and $5.1 million, respectively. Restricted stock units are not outstanding shares and do not have any voting or dividend rights. At the time of vesting, a share of common stock representing each restricted stock unit vested will be issued by the Company. The performance vesting restricted stock units are subject to performance measures that are currently not considered “probable” of attainment and as such, no compensation cost has been recorded for these units. The period for which the performance measures of the performance vesting restricted stock units can be satisfied ends at the end of 2019. Under certain conditions, the performance vesting restricted shares vest upon a change in control. Based on the size of the Company’s merger with HPE, approximately 241 thousand performance vesting restricted stock units will ultimately vest, the majority of which require a one year service period by the holders subsequent to the close of our merger with HPE.

Including performance-based equity awards, the Company had $41.5 million of total unrecognized compensation cost related to unvested stock options, unvested restricted stock and unvested restricted stock units as of June 30, 2019. Excluding the $14.5 million of unrecognized compensation cost related to unvested restricted stock units that are subject to performance measures that are currently not considered “probable” of attainment, unrecognized compensation cost is $27.0 million. No compensation expense is recognized for unvested restricted stock units subject to performance measures that are not considered “probable” of attainment. Unrecognized compensation cost related to unvested stock options and unvested non-performance-based restricted stock is expected to be recognized over a weighted average period of 3.1 years.

The following table sets forth the gross share-based compensation cost resulting from stock options, unvested restricted stock and unvested restricted stock units that were recorded in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Cost of product revenue	$	139	$	110	$	264	$	216
Cost of service revenue	115		103		223		200
Research and development, net	1,354		1,101		2,523		1,961
Sales and marketing	1,044		744		1,833		1,478
General and administrative	1,449		1,134		2,924		2,279
Total	$	4,101	$	3,192	$	7,767	$	6,134

CRAY INC 10-Q