10.	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, 2015		3,166,968			6,053,672		$	2.13		7.6	$	20,605
Granted (unaudited)		(1,127,703	)		1,127,703			4.25
Exercised (unaudited)		—			(547,211	)		0.70
Cancelled (unaudited)		293,284			(293,284	)		4.39
RSUs granted (unaudited)		(112,578	)		—			—
Balance at September 30, 2016 (unaudited)		2,219,971			6,340,880		$	2.53		7.4	$	13,726
Vested and exercisable at September 30, 2016 (unaudited)					3,574,359		$	1.52		6.4	$	11,091
Vested and expected to vest at September 30, 2016 (unaudited)					6,090,787		$	2.48		7.4	$	13,461

The weighted-average grant date fair value of options granted to employees was $2.42 and $3.13 per share during the nine months ended September 30, 2016 and 2015, respectively. The grant date fair value of options vested was $1.9 million and $390 thousand during nine months ended September 30, 2016 and 2015, 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.

At September 30, 2016, total unrecognized compensation cost related to stock-based awards granted to employees, net of estimated forfeitures, was $5.5 million which is expected to be recognized over a weighted-average period of 3.0 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 and up through March 30, 2016, our common stock shares were listed on the OTC Bulletin Board. Beginning March 31, 2016, our common stock shares were listed on The NASDAQ Global Market, or NASDAQ. Fair value of the common stock is the adjusted closing price of the Company’s common stock on the trading date on these stock exchanges.

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.

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

	Nine Months Ended September 30,
	2016		2015
	(Unaudited)
Expected term (in years)		6.0		6.0
Expected volatility%		59.9%		68.7%
Risk-free interest rate%		1.3%		1.8%
Expected dividend yield%		0.0%		0.0%

Restricted Stock Units

In September 2016, the Company granted 112,578 shares of Restricted Stock Units, or RSUs, to its board of directors for their past services. These RSUs were fully vested upon issuance and had a grant date fair value of $3.58 per share. For the three and nine months ended September 30, 2016, stock-based compensation expense related to RSUs were $403 thousand, which was included in general and administrative expenses in the accompanying condensed consolidated statements of operations.

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,
	2016		2015		2016		2015
	(Unaudited)
Research and development	$	111	$	95	$	467	$	143
Selling and marketing		40		16		78		26
General and administrative		803		272		1,654		362
Total stock-based compensation expense	$	954	$	383	$	2,199	$	531

During the three months and nine months ended September 30, 2016 and 2015, 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 were insignificant during the three months and nine months ended September 30, 2016 and 2015.