Stock Based Compensation

6 Months Ended

Jun. 30, 2011

Stock Based Compensation [Abstract]

Stock Based Compensation

4. Stock Based Compensation

     The Company follows the provisions of the FASB ASC Topic 718, “Compensation — Stock Compensation” (“ASC 718”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, non-employee directors, and consultants, including employee stock options. Stock compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is recognized as an expense over the requisite service period.

     For stock options granted as consideration for services rendered by non-employees, the Company recognizes compensation expense in accordance with the requirements of FASB ASC Topic 505-50, “Equity Based Payments to Non- Employees.”

     Non-employee option grants that do not vest immediately upon grant are recorded as an expense over the vesting period of the underlying stock options. At the end of each financial reporting period prior to vesting, the value of these options, as calculated using the Black-Scholes option-pricing model, will be re-measured using the fair value of the Company’s common stock and the non-cash compensation recognized during the period will be adjusted accordingly. Since the fair market value of options granted to non-employees is subject to change in the future, the amount of the future compensation expense will include fair value re-measurements until the stock options are fully vested.

     The Company is currently using the Black-Scholes option-pricing model to determine the fair value of all its option grants. For option grants issued in the three and six months periods ended June 30, 2011 and 2010, the following assumptions were used:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011			2010
Weighted average risk-free interest rate		2.53	%		3.21	%		2.35	%		3.06	%
Weighted average expected volatility		99.18	%		124.03	%		111.78	%		120.84	%
Weighted average expected lives (years)		6.00			9.29			5.78			7.26
Weighted average expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%

The weighted average fair value of options granted during the six month period ended June 30, 2011 and 2010 was $1.18 and $4.34 per share, respectively.

The weighted average fair value of options granted during the three month period ended June 30, 2011 and 2010 was $1.01 and $4.87 per share, respectively.

     RXi’s expected common stock price volatility assumption is based upon the volatility of a basket of comparable companies. The expected life assumptions for employee grants were based upon the simplified method provided for under ASC 718-10. The expected life assumptions for non-employees were based upon the contractual term of the option. The dividend yield assumption of zero is based upon the fact that RXi has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each grant was also based upon prevailing short-term interest rates. RXi has estimated an annualized forfeiture rate of 15.0% for options granted to its employees, 8.0% for options granted to senior management and no forfeiture rate for the directors. RXi will record additional expense if the actual forfeitures are lower than estimated and will record a recovery of prior expense if the actual forfeiture rates are higher than estimated.

     The following table summarizes stock option activity from January 1, 2011 through June 30, 2011:

			Weighted
			Average		Aggregate
	Total Number		Exercise		Intrinsic
	of Shares		Price		Value
Outstanding at January 1, 2011		4,333,136	$	5.10	$	137,000
Granted		2,002,500		1.42		—
Exercised		—		—		—
Cancelled		730,947		3.65		—
Outstanding at June 30, 2011		5,604,689	$	3.75	$	—
Options exercisable at June 30, 2011		3,949,672	$	4.43	$	—

     The aggregate intrinsic values of outstanding and exercisable options at June 30, 2011 were calculated based on the closing price of the Company’s common stock on June 30, 2011 of $0.98 per share less the exercise price of those shares. The aggregate intrinsic values of options exercised was calculated based on the difference, if any, between the exercise price of the underlying awards and the quoted price of the Company’s common stock on the date of exercise.