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.