Stock based Compensation

9 Months Ended

12 Months Ended

Sep. 30, 2015

Dec. 31, 2014

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

Stock based Compensation

11.

Stock-Based Compensation

A summary of the Company’s stock option activity and related information is as follows:


				Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
											(In thousands)
Balance at December 31, 2014		295,101			4,248,519		$	0.76		7.7	$	8,343
Additional authorized (unaudited)		4,708,447
Granted (unaudited)		(1,911,137	)		1,911,137			5.04		—		—
Exercised (unaudited)		—			(26,555	)		0.73		—		—
Cancelled (unaudited)		121,941			(121,941	)		1.30		—		—

Balance at September 30, 2015 (unaudited)		3,214,352			6,011,160		$	2.11		7.8	$	18,755

Vested and exercisable at September 30, 2015 (unaudited)					2,911,734		$	0.82		6.5	$	12,702
Vested and expected to vest at September 30, 2015 (unaudited)					4,576,826		$	1.88		7.6	$	15,329

The weighted-average grant date fair value of options granted to employees was $3.13 per share during the nine months ended September 30, 2015. The grant date fair value of options vested was $390 thousand during nine months ended September 30, 2015.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options.

At September 30, 2015, total unrecognized compensation cost related to stock-based awards granted to employees, net of estimated forfeitures, was $5.6 million which is expected to be recognized over a weighted-average period of 3.5 years.

Determination of Fair Value

The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the estimated fair value of the Company’s common stock, as well as assumptions regarding a number of complex and subjective variables. The variables used to calculate the fair value of stock options using the Black-Scholes option-pricing model include actual and projected employee stock option exercise behaviors, expected price volatility of the Company’s common stock, the risk-free interest rate and expected dividends. Each of these inputs is subjective and generally requires significant judgment to determine.

Fair Value of Common Stock

Prior to the Merger, the fair value of the common stock underlying the stock-based awards was determined by ViewRay Technologies, Inc.’s board of directors, with input from management and third-party valuations. Post-Merger, our common stock shares are listed on the OTC Bulletin Board. Fair value of the common stock is the adjusted closing price of the Company’s common stock on the trading date.

Expected Term

The expected term represents the period that the Company’s option awards are expected to be outstanding. The Company considers several factors in estimating the expected term of options granted, including the expected lives used by a peer group of companies within the Company’s industry that the Company considers to be comparable to its business and the historical option exercise behavior of its employees, which the Company believes is representative of future behavior.

Expected Volatility

As the Company does not have a sufficient trading history for its common stock, the expected stock price volatility for the Company’s common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the Company’s industry which were the same as the comparable companies used in the common stock valuation analysis. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-Free Interest Rate

The risk-free interest rate is based on the zero coupon U.S. Treasury notes, with maturities similar to the expected term of the options.

Expected Dividend Yield

The Company does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero in the Black-Scholes option-valuation model.

In addition to the Black-Scholes assumptions discussed immediately above, the estimated forfeiture rate also has a significant impact on the related stock-based compensation. The forfeiture rate of stock options is estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for those awards that are expected to vest.

For the nine months ended September 30, 2015, the weighted average fair value of employee stock options was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions. 1,911,137 shares were granted during the nine months ended September 30, 2015.


	Nine Months Ended September 30, 2015
	(Unaudited)
Expected term (in years)		6.0
Expected volatility%		68.7	%
Risk-free interest rate%		1.8	%
Expected dividend yield%		0.0	%

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations is classified as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(Unaudited)
Research and development	$	95	$	14	$	143	$	70
Selling and marketing		16		3		26		11
General and administrative		272		41		362		181

Total stock-based compensation expense	$	383	$	58	$	531	$	262

During the three months and nine months ended September 30, 2015 and 2014, there were no stock-based compensation expenses capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants was insignificant for the three months and nine months ended September 30, 2015 and 2014.

13.

STOCK-BASED COMPENSATION

2008 Stock Option and Incentive Plan

The Company’s 2008 Stock Option and Incentive Plan, or the 2008 Plan, provides for the grant of stock and stock-based awards to employees, officers, directors, advisors and consultants, including stock options, nonqualified stock options, restricted stock awards, restricted stock units and stock appreciation rights. The purpose of the 2008 Plan is to promote the interests of the Company by providing the opportunity to purchase or receive shares or to receive compensation that is based upon appreciation in the value of the shares to eligible recipients, as defined, in order to attract and retain employees and provide additional incentive to work to increase the value of shares and a stake in the future of the Company. During 2008, the Company issued to an officer a stock option for 38,059 shares outside of the 2008 Plan with an exercise price of $0.80 per share which vested over three years. These options were unexercised and expired in September 2014. The compensation expense related to stock options outside of the 2008 Plan were insignificant during the years ended December 31, 2013 and 2014.

Options granted may be either incentive stock options or nonstatutory stock options. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock on the grant date and nonstatutory options may be granted to employees or consultants at exercise prices of no less than 85% of the fair value of the common stock on the grant date, as determined by the board of directors. If, at the time of grant, the optionee owns stock representing more than 10% of the voting power of all classes of stock of the Company, a 10% shareholder, the exercise price must be at least 110% of the fair value of the common stock on the grant date as determined by the board of directors. Options become exercisable generally ratably over four years. Options granted under the 2008 Plan expire in 10 years from the date of grant, or five years from the date of grant for 10% shareholders.

A summary of the Company’s stock option activity and related information is as follows:


				Options Outstanding
	Shares Available for Grant			Number of Stock Options Outstanding			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
											(in thousands)
Balance at January 1, 2013		306,097			1,907,644		$	0.71		6.3	$	28
Additional shares authorized		2,359,662
Granted		(1,190,349	)		1,190,349			0.70
Exercised		—			(1,463	)		0.68
Cancelled		372,957			(372,957	)		0.69

Balance at December 31, 2013		1,848,367			2,723,573			0.71		7.7		138
Granted		(1,642,799	)		1,642,799			0.84
Exercised		—			(28,320	)		0.73
Cancelled		89,533			(89,533	)		0.74

Balance at December 31, 2014		295,101			4,248,519		$	0.76		7.7	$	8,343

Vested and exercisable at December 31, 2013					1,360,757		$	0.71		6.4	$	67
Vested and expected to vest at December 31, 2013					2,333,655		$	0.71		7.4	$	118
Vested and exercisable at December 31, 2014					2,379,076		$	0.72		6.8	$	4,764
Vested and expected to vest at December 31, 2014					3,777,913		$	0.78		7.5	$	7,452

The weighted-average grant date fair value of options granted to employees for the years ended December 31, 2013 and 2014 was $0.35 and $0.42 per share, respectively. The grant date fair value of options vested during the years ended December 31, 2013 and 2014 was $72 thousand and $339 thousand, respectively.

Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The aggregate intrinsic value of options exercised was insignificant during the years ended December 31, 2013 and 2014.

At December 31, 2014, total unrecognized compensation cost related to stock-based awards granted to employees, net of estimated forfeitures, was $682 thousand, which is expected to be recognized over a weighted-average period of 2.9 years.

Determination of Fair Value

Fair Value of Common Stock

The fair value of the common stock underlying the stock-based awards was determined by the Company’s board of directors, with input from management and third-party valuations.

Expected Term

Expected Volatility

As the Company does not have a trading history for its common stock, the expected stock price volatility for the Company’s common stock was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of several public companies in the Company’s industry which were the same as the comparable companies used in the common stock valuation analysis. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of its own share price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be used in the calculation.

Risk-Free Interest Rate

The risk-free interest rate is based on the zero coupon U.S. Treasury notes, with maturities similar to the expected term of the options.

Expected Dividend Yield

The Company does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero in the Black-Scholes option-valuation model.

The fair value of employee stock options was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions:


	December 31,
	2013			2014
Expected term (in years)		6.2			5.7
Expected volatility		52.4	%		50.7	%
Risk-free interest rate		1.2	%		1.8	%
Expected dividend yield		0	%		0	%

Stock-Based Compensation Expense

Total stock-based compensation expense recognized in the Company’s statements of operations is classified as follows (in thousands):


	Year Ended December 31,
	2013		2014
Research and development	$	29	$	85
Selling and marketing		9		15
General and administrative		181		218

Total stock-based compensation expense	$	219	$	318

During the years ended December 31, 2013 and 2014, there were no stock-based compensation expenses capitalized as a component of inventory or recognized in cost of revenue. Stock-based compensation relating to stock-based awards granted to consultants was insignificant for the years ended December 31, 2013 and 2014.